In this podcast, Motley Fool analyst Jim Gillies and host Ricky Mulvey discuss the surge in short-term speculation over meme stocks, and the long-term investment story at Home Depot. Motley Fool host Alison Southwick and personal finance expert Robert Brokamp discuss how investors can evaluate exchange-traded funds.
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 May 14, 2024.
Ricky Mulvey: Welcome to the Mania. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, meme stocks are back. How are you celebrating?
Jim Gillies: I'm not. Thanks for the invite.
Ricky Mulvey: Happy to have you on this show. Because if I say good to see you, then you say good to be seen and occasionally I got to throw in a little bit of a curveball to get us started. There is like one topic we have to talk about today and that is the meme stocks Jim, GameStop. It's up more than 200% over the past five days. At the time of this writing, it could be anywhere between -302 to +2,000. [laughs] The rally kicked off from a tweet from Keith Gill, aka Roaring Kitty, aka another screen name. I'm not going to say on the show, of a man sitting forward in a chair to play a video game. If you don't know, Roaring Kitty, he's the retail trader, Redditor ring leader who kicked off the first rally with videos and tweets and memes, had a book and movie made about him, gave a congressional testimony and this meme that kicked off this rally came after a three-year hiatus and at one point added $4 billion to the market cap of GameStop. That's a lot of setup. Jim, what do you make of the comeback?
Jim Gillies: If you had any doubts that we are living in the stupidest timeline this should erase them. I remember well the GameStop saga because I'm actually the Fool who recommended GameStop about two months before the original meme stock craze took hold and it's funny because if you go back and look at the thesis that I had at the time and I'll build it out in a minute. But then you go look at Roaring Kitty stuff on Reddit and what he talked about in his congressional testimony. There's a lot of similarities to what I was talking about at the time. In other words, I'm not saying he stole it and he doesn't know who I am and I didn't know he was but there was enough investing things here. There was a legit investment case for GameStop in the autumn of 2020, that doesn't exist now but because it's a meme stock, doesn't matter if there's an investing case, doesn't matter if this is a thesis. This is bro, culture going and bidding. It's utterly asinine and silly. Look having a bit of silly fun occasionally is fine. You got a couple hundred bucks, you want to throw in a meme stock, have a good time. Do not convince yourself what you're doing is investing. Do not convince yourself that this ends in anything other than ash for the long-term holder of a meme, you're not sticking it to any man. Look, I literally had lunch with an old friend this weekend whose son made us some very good money like 50 bagged his own money in the original meme stock craze in AMC, oddly enough but went from 1,000 bucks to 50,000 bucks or whatever and that money spends just fine. That money spends like money. Like that's OK. But he at least had the good sense to get out. Again, this ends no way but ash and I think it's interesting that Roaring Kitty posted a picture. Posted a sketch. Why are we doing this? It is hilarious. But if you're coming at this from an investor standpoint. I'm going to take you back to September 2020. Here's why I recommended GameStop in 15 seconds or less, was a console refresh cycle GameStop but new consoles, new PlayStation or Xbox. Always a good time for GameStop. These consoles used physical media, which means that you still have a need for what GameStop sold. They had more cash than debt, they were cash flow positive and they had no fewer than four high-profile activists circling the company and they were trading at four times free cash flow. That's an investing thesis. That's why it made sense at that time. I said to my members, I said I'm expecting a double, maybe a triple in the next two years and then we'll be out. What we got was an AidEx in four months and I said see you because the meme stock idiots showed up and turned this into a casino and casinos are fun. We all like casinos but the house always wins in a casino and that's probably what ultimately happens here.
Ricky Mulvey: Well, there's a couple things. One is that Roaring Kitty is funny, like he's funny.
Jim Gillies: Hilarious. Yes.
Ricky Mulvey: He was due to congressional testimony, I was rewatching it this morning. First of all, he's doing this bit to a group of people who are allowed to buy and sell stocks for companies in which they legislate and that irony is not lost on the viewer and he's just, why did you buy it? I like the stock also I am not a kitten. [laughs] But you bring up something interesting, which is that what are the lessons that maybe retail traders are coming into this meme stock craze with? You have your friend's kid who made a lot of money on AMC but a lot of them got burned for holding on for too long and I wonder if you'll see more trading in and out this time and if that means this cycle is going to be a little bit quicker than the first one.
Jim Gillies: Probably, can't believe I'm about to do this. But my advice to meme stock traders, do it. This is how I get fired Fools, Rick is going to egg me on. I would not own any of these things past and end-of-day. In other words, if I was going to play in this area and thankfully I cannot because the Motley Fool, our trading rules require us to own all stocks that we purchased a minimum of two weeks, so I'm immediately disqualified. Good. Very happy to be so. But if you don't have that type of restriction, I would not enter a position until after I saw the stock was actually going up in the day and I wouldn't own the position past four 'O' clock in the afternoon. I would not let myself because the fact it can be up 30, 40, 50% in the pre-market and out of the gate and tomorrow you might be down 30, 40, 50% in the pre-market and out of the gate. Easy come, easy go. I would only be playing with this during open-market hours myself. The other thing is never lose sight, have this tattooed on your forearm if you need to. This ends in ash. My favorite non-GameStop example and I've got a few more but is the aforementioned AMC and yes, my friend's son made some very nice money. But he was risking 1,000 bucks in Ballpark. He was risking a grand, he made good money because he got out.
I've another friend who made a bit of money on AMC as well. Neither one of them thought they were investing. But the long-term shareholder in AMC, if you bought it on some perception that stick it to big hedge funds just know this, over the past three years, the market is up 33%. That's roughly the timeline of the AMC meme-stock craze. The market's up 33%, AMC is down 95% and that's after a couple of big days. The insiders at AMC have gotten rich selling more shares to rubes and keeping this turkey afloat. The retail crowd that didn't time their exits have been grounded to pace and that's going to happen again. If you want to play speculative games, we all like a good lottery ticket. We all like a visit to the casino or at least most of us do but this is not investing.
Ricky Mulvey: Play speculative games, win speculative prizes, AMC might be doing something smart, which is that they're doing an at-the-market offering of shares, as the stock was going up. They raised, I think it was $250 million.
Jim Gillies: Like I said, selling more shares to rubes. If you don't know who the patsy seat at the table is, it's you. Have fun with it if that's your jam, it's not my job but it's fine. But again, realize that you're not making any societal statement. If you get the money out, that's great. But again, long term, this is death.
Ricky Mulvey: I think one key difference about this and I'm going back to GameStop than the first craze is to your point, the first one was really sticking it to big hedge funds that had very much overshorted the company. Well, I guess it was the pandemic but previously it had been profitable on an operating basis. Now the company is not making an operating profit and also, the mechanics are going to be different because a quarter of the GameStop shares outstanding are short compared to 140% at the time of the craze, in which case as the stock price rose, people had to cover their shorts. That's from Bloomberg columnist John Authers. I think that changes the dynamics of this rally but then again, I could be very wrong Jim, because the Internet does crazy things and I don't know.
Jim Gillies: The Internet does crazy things. I will say two things and we'll move on to the next more palatable story. Shorting, not wrong, not evil, not illegal. I have a soft spot in my heart for shorts, who get the thesis right. Ricky, if you come to me and you're going to short my stock, a stock that I own. God bless, I've no problem. Shorts are out price discovery and they're quite often, they teach you things that you didn't already know about a company. I think they are an excellent and a vital part of a functioning market. I will say though, I laid out my thesis at the time for GameStop, which I hope sounds like a reasonably intelligent way to think about a stock such as an actual business. I will say that none of what I put into my thesis at the time, with the exception of more cash than debt I suppose, none of those six things that I talked about in my thesis at the time.
Jim Gillies: Besides more cash than debt, are actual true today. The company is burning money, the activists are gone. Well, one took over, that'd be Ryan Cohen. There is no console refresh cycle, they're burden money hand over fist. The next console refresh cycle, which probably happens in about four or five years from now. That one probably doesn't have physical media. The folks who were erroneously calling GameStop the next Blockbuster, three, four and five years ago, might actually be right, three, four and five years from now.
Ricky Mulvey: That's the end of this segment that I like to call, let's bait Jim Gillies into going on a rant. Let's move on to a significantly more boring story, which is that Home Depot reported this morning, tough transition. Comp sales are down about 3%, net earnings down 7%. But the company reaffirmed guidance, the CFO, excuse me, Richard McPhail, said that customers are basically in a waiting game because of higher interest rates, they have the money to do these big renovations. They're just holding off because they want to see how the interest rate decreases or stays the same, how that shakes out. What's your headline takeaway from the quarter for Home Depot?
Jim Gillies: I'm not sure I'd buy that to be honest with you. Look, if you have the money you will do it anyway because you don't need to borrow. But if you're going to borrow, like when I've done large renovations at my house or large projects at my house, we use our HELOC. We got to HELOC tied to the house. We've used that from time to time. If interest rate cuts indeed show up three, four, five months from now, guess what? My HELOC rate goes down. It's a floating-rate debt. I'm hearing what the CFO is saying and I'm going like, I don't know about that, dude.
Ricky Mulvey: I have the money, I just have some questions first.
Jim Gillies: He's got to talk his game but it was a perfectly fine quarter. HELOC was actually one of my case studies to give to folks about the power of long-term investing and the power of changing strategic choices and I suspect I might surprise you with some of what I think about those one. But if you go back to the early 2000s and right up to I think it's January 2007, for the first five or six years they had a terrible CEO named Bob Nardelli who came over from GE, he was going to bring the GE way and all he largely did, was he tried to basically reform a perfectly good company in his own image that was the GE way. We have enough examples of the GE way failing post Jack Welch that I think it ended the way we suspected it would. But don't worry about Bob, he got a quarter-billion dollars to go away. But following the Bob Nardelli fiasco, Home Depot did a really smart thing in my book. Home Depot said, you know what? I'm gonna make up the numbers here, but they're roughly right. 90 plus percent of the population of North America lives 15 minutes or less from Home Depot. We are saturated. Continental US, Mexico, Canada, we got stores. We should probably stop growing. We should embrace ourselves as a cash cow and so they did. I'm looking here at the end of fiscal 07 so it's February 2008 for those of you playing along at home. In fiscal year 07, they had 2,234 stores. Today, 16 years later, they have 2,337 stores. That is less than 5% growth total in about 16 years. They slashed their CapEx in fiscal 06, maybe it was fiscal 07, was 3.6 billion. Their CapEx today is still below that. They cut their CapEx by nearly three quarters in the next two years and they just embrace the cash cow story. No more stores but we make a lot of cash because everybody goes to Home Depot. Everybody knows Home Depot where doers get more done, or whatever the slogan is. They cut their CapEx by 73%, they turned into cash cow. This was a very good decision for Home Depot and its shareholders. They made a cumulative between fiscal 08 and fiscal 23, 16 years total, they made a cumulative 144 billion with a B dollars in free cash flow. They use roughly 64 billion to pay a dividend. Put that over there for a minute. They did about 96 billion to buy back shares. They reduce their share count by over 40% during that time period. Again, you pay dividends on the shares outstanding. Even if you can raise your per-share dividend because the total shares went down, the payout didn't rise as fast. That $64 billion cumulative paid out over the past 16 years and dividends meant that the per-share dividend went from 90 cents a year in fiscal 09 to nine dollars this year. It's tenfold, that's 15.5% annual growth. But this cash cow shift clobbered the market without dividends. Ignore dividends. Since the transition in the year post Nardelli, Home Depot's more than 10 bagged, it's up 1,070% or about 16.5% annually versus a market that's up 8.6% annually. If you factor in the dividends, which you should because again, the dividend is tenfold over the past 15 years, the dividend-adjusted total return, it's closest 1,700%, that's a 19.4% annualized return versus a total return on the S&P 500 by 10.7%. They are beating the market by 8.5, almost nine percentage points a year and it's still Home Depot. You're still going to go to Home Depot. You're not going to abandon them on Mars and go to Lowe's or Canadian Tire or whatever. Why would you give up cash cow status, which has done such sweet things for your investors and your executives as well, because stock price go up, why would you abandon that to return to empire-building? Doesn't make sense to me.
Ricky Mulvey: It wants to get that pro-market. That's why it's buying in a distribution company for $18 billion and delivering things like installation, straight to job sites. There's a lot of that pro-market they can go out and take Jim.
Jim Gillies: As an incremental business, that's fine. As long as they don't decide, you know what we need? We need our every American say, if you're within a 15 minute drive of a Home Depot, we don't need a new growth strategy, we want that to be every American within seven minute drive. We don't want the small mini stores like Best Buy did or little vending machines again, like Best Buy did.
Jim Gillies: Be tough with lumber.
Ricky Mulvey: You may be tough with lumber but maybe not a few other products like your light bulb source. But again, this has been one of the great. You could have bought Home Depot in the teeth of the credit crisis for $19 which is 340 today or whatever it is close to. Again with the dividends, imagine you'd bought Ricky, at 90 or 20 bucks, now you're getting nine bucks a share in dividends per year.
Ricky Mulvey: There's nothing I love doing more than imagining how much money I could've made by buying stocks 20 years ago. Today where's Home Depot's at? You talked about Berkshire Hathaway as a bedrock stock for a portfolio. Do you think Home Depot deserves a similar stock for an investor's portfolio?
Jim Gillies: Yes.
Ricky Mulvey: All right. Very good. Jim Gillies.
Jim Gillies: Very simple.
Ricky Mulvey: That's the shortest answer we've gotten and it's the last one, Jim Gillies. Thanks for your time and your insights.
Jim Gillies: No problem, take care.
Ricky Mulvey: Ricky Mulvey with Motley Fool Money here to tell you about a vehicle that is redefining sporting luxury, the Range Rover Sport. The first thing I noticed when I sat down in the driver's seat is that I felt like I was in a cockpit. You are up off the ground in a focused interior that promotes exhilarating driver engagement. I also really appreciated the overhead 360-degree camera view that let me know exactly where I was going; those backing out of the parking space. One for a drive in the Range Rover Sport out in Littleton, Colorado, tested the accelerator just a little bit and felt the performance and agility. It's an instinctive drive with engaging on-road dynamics and effortless composure. To put it plainly, the Range Rover Sport is powerful. It's also quiet and comfortable, advanced cabin technologies such as active noise cancellation and cabin air purification, offer new levels of comfort and refinement. The third-generation Range Rover Sport, is the most desirable, advanced, and dynamically capable yet. I'd like to invite you to visit landroverusa.com to learn more about the Range Rover Sport.
Ricky Mulvey: When's the last time you checked up on your ETFs? Alison Southwick and Robert Brokamp discuss how you can evaluate them and one major thing to look for.
Alison Southwick: Here are the steps to follow to evaluate a fund, whether it's one you're considering or one you already own. First-up, start with performance.
Robert Brokamp: We're going to start with the bottom line on this. I'm going to talk through how you evaluate performance and other criteria by using Morningstar, the fund research company that coincidentally celebrates its 40 year birthday this Thursday. Morningstar was founded by Joe Mansueto out of his one-bedroom apartment in Chicago. Today the company employs more than 100,000 people and is worth $12.7 billion. Which, it's like a fun little American success story. I'll be talking about how to use Morningstar's website a lot in this episode, but just know that most of the information is also available on the fund company's website. Also, many brokers and indicate providers have partnerships with Morningstar, so you may be able to find the same info on their websites. Here's how to evaluate a fund's performance. You go morningstar.com enter the funds ticker and click on the performance tab. When you scroll down and you'll see the year by year returns and further down you will see the trailing returns table. There you're going to see the returns over various time periods like five, 10, 15 years if the fund has been around that long. Most importantly, you'll see the fund's percentile rank, which compares its performance to other funds with similar objectives. For example, if you're checking up on your U.S. large-cap value fund, the percentile rank measures how it faired relative to all other U.S. large-cap value funds. This is crucial because it ensures you're making an apples-to-apples comparison. Now, the lower the number, the better. For example, if a fund's percentile rank as 25 than it has performed in the top 25% and outperformed 75% of those types of funds for that time period. I would say you should look beyond one year or even three. Every great investor hits a rough patch every once in a while. But after five years, certainly 10. You can expect a fun to be showing its true colors.
Alison Southwick: Your next step is to compare it with another index fund.
Robert Brokamp: You can have an actively managed fund that outperforms most of its peers, but still underperforms an index fund. In that case, it might be time to just ditch the actively managed fund for the index variety. If you already own index fund compared to others in its category to see if it's a leader or a laggard. You do this by finding comparable index funds or ETFs and measure your fund against. You could look at the options offered at verifies ETF database found at etfdb.com. Morningstar has a page that lists index funds and it has a whole page devoted to ETFs. You just scroll down to the bottom of that page, for links to list of all the ETFs in various categories.
Alison Southwick: Next step, it's time to look under the hood.
Robert Brokamp: Now you'd likely bought a fund to get exposure to a certain type of investment. However, you maybe surprised at how much your fund holds other types of investment. For example, it's not uncommon for U.S. stock funds to be allowed to invest 10%-20% of their assets in international stocks. Another example is index funds that are supposedly dedicated to a certain type of company or investment, but actually have a good bit of exposure to others. For example, maybe you've heard that small caps are particularly cheap these days. They're like, I want to look for a good small-cap index fund. You find that among the top ones in terms of size is the iShares, S&P Small-Cap ETF ticker, ICJR is actually the biggest Small-Cap ETF and it has 99% of its assets and small caps, that's great. But then you look at the third biggest small-cap ETF, that is a Vanguard Small-Cap ETF ticker VB, and you find that actually a third of its assets are in mid-cap stocks. It's a mixture of small and mid-caps with they often call smid. If you're looking more for a pure-play small-cap, you might choose to go with the iShares ETF and you'll find all this info about your fund by looking up at Morningstar and clicking on the portfolio tab. For a stock fund, you'll see how it's holdings breakdown by size, sector, evaluation, other metrics including how much of the fund is invested domestically versus internationally. You could also review its top holdings. For a bond fund, the Morningstar portfolio tab will delineate the holdings by type of security, corporate versus treasuries versus asset-backed bonds. Credit rating and duration, which is related to maturity and indicates the fun sensitivity changes in interest rates. The higher the duration, the more of the fund will go up and down according to changes in interest rates. As you review what's in the fund, ask yourself whether it's investing according to your expectations and whether the funds holdings are significantly different from what you own elsewhere in your portfolio because of its not that different from everything else you own, you're not really getting any additional diversification. Why bother owning it? A final note about checking your funds innards, these days well, more than half a 401K participants invest in target date funds. I love the idea of target-date funds, but they're intended for investors with a moderate risk tolerance. They may be playing it to save for the typical Motley Fool podcast listener. If you're invested in a target date fund check out the stock-bond split and see if that's where you want to be. If it's too conservative for you, choose a target date fund which has a date that is 5-10 years later than when you actually plan to retire.
Alison Southwick: Your next step is to count the cost.
Robert Brokamp: Several years ago, Morningstar studied how well it stars rating system as well as costs predicted future fund performance. The verdict according to the report, and I'm just going to read a quote from it. "If there's anything in the whole world of visual funds that you can take to the bank, it's that expense ratios help you make a better decision. And every single time period and data point tested, low-cost funds beat high-cost funds". The fees charged by mutual fund are mostly captured in the expense ratio, which is the percentage of your investment taken by the fund each year to pay for operating costs. Now sometimes funds have higher expense ratios than others because it costs more to invest in those markets. According to the investment company institute, here are the asset-weighted average expense ratios for different categories. For U.S. stock funds, the average expense ratio is 0.44%. International stock funds, 0.58%, in sector stock funds, 0.63%. Stocks are going to be more than bonds because the average expense ratio for a bond fund is 0.37, money market fund 0.13% and for target-date funds, 0.32%. If you have a fund with an expense ratio that is higher than those averages, make sure you're getting above-average performance as well.
Finally, keep an eye on the cost of your index funds somewhere cheaper than others. As an example, the oldest and perhaps most well-known ETF is the SPDR S&P 500, ticker SPY. It has an expense ratio of 0.09%, which is pretty dang low. But Vanguard's S&P 500 ETF ticker VOO is even lower at 0.03%. That ever so slightly lower cost has contributed to slightly better returns. Both of those are ETFs are significantly better than the Nationwide S&P 500 mutual fund ticker GRMAX, which has an expense ratio of 0.58% and charges of 5.75% upfront commission just to get into the fund. There's just no reason to invest in this fund when significantly cheaper options are available.
Alison Southwick: The next step is to limit Uncle Sam's take.
Robert Brokamp: This is where the funds you own or are considering owning in a taxable brokerage account and not in a 401K or IRA. Because for funds you own in a brokerage account, you'll have to pay taxes on the interest dividends and capital gains distributed by the fund each year. Remember, even if you don't sell a single share of the fund, you may still owe taxes on the capital gains realized within the fund with the manager sells and investment for a profit.
Now to get an idea of how much you might pay, look up the fund on Morningstar and click on the price tab. Scroll down to where you can see what is called the tax cost ratio. That is the amount of return each year that would have been lost to taxes by someone in the highest tax bracket. You will see many funds that will lose 1%-2% of return each year to taxes. Now most people aren't in the highest tax bracket, so the actual tax costs will be lower for most people, but it's still an important consideration. What you'll find is very generally speaking, index funds have lower tax cost ratios and actively traded funds and ETFs have lower ratios than traditional open-end mutual funds. But it's not always the case so do your research.
Alison Southwick: There we have it. Steps for evaluating your funds. It's a fair amount of research. How often do you do this exercise, bro?
Robert Brokamp: Once a year. I think that's one of the benefits of owning a fund. I don't think you have to stay on top of them as much as maybe your individual stocks. But certainly, once a year is important.
Ricky Mulvey: 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 anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
