In this podcast, Motley Fool host Ricky Mulvey and analysts Bill Mann and Asit Sharma discuss earnings from Charles Schwab and then, they draft their favorite CEOs in the following categories: capital allocation, growth stories, turnarounds, and wildcard picks.
Editor's note: The podcasters misspoke: The CEO of Kinsale Capital is Michael Kehoe.
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This video was recorded on July 16, 2024.
Ricky Mulvey: The Draft is live. You're listening to Motley Fool. I'm Ricky Mulvey. We are live at Fool Fest with a packed house. Thank you for being here, Motley Fool members. I'm also here with the mayor of Fool Fest himself. It is Bill Mann. He's going to help us out with the CEO draft and also here is Asit Sharma. Asit, hello.
Asit Sharma: Hello. I'm still waiting to be deputized as assistant.
Ricky Mulvey: The Vice Mayor of Fool Fest.
Asit Sharma: Assistant to the Vice Mayor.
Ricky Mulvey: It's been a great event so far, and Dylan did not have one day to talk about coming into his live show. We're lucky enough that we have a date to talk about. I'll start with Bill. What's a big takeaway from day one of Fool Fest?
Bill Mann: Well, I think it's such a delight and we were talking about this before we came on air, how great it is to be able to be face to face with the people that we actually communicate with every day. I really do want to say that a lot of you have become friends of ours, and my wife thinks it's really weird. You're like, wait, you've never really met in person? But it's true. We know you all. We really admire so many of you, and it's wonderful for us all to be here in very temperate Washington, DC.
Ricky Mulvey: Then, Asit, how about you?
Asit Sharma: Yeah, same for me. It's so exciting to meet with members. I realize we spend so much time on Zoom at home. I've become an introvert during the year. Because, as we were talking about earlier, at my kitchen table, trying to quaff down some coffee before Rick and I are talking and other colleagues meeting with them in Zoom. I meet with members, I realize, wait a minute, I used to be an extrovert. I used to be energized to see human beings within a few inches of me. Funny story yesterday. Many of you know Brian Feraldi is a great guy, super intelligent, has a nice learning class he gives for stocks, if you ever just Google him and a Fool contributor. After a long time I see Brian. He's three feet from me. I'm like, Brian, we should really catch up on Zoom sometime, buddy. [laughs] But it's just so wonderful to be here. I see colleagues. My colleague, Vicky is here on Stock Advisor team. She's on the West Coast. I'm on the East Coast, so we got to chat together last night. Super happy and ready to do this.
Ricky Mulvey: Then coming up, we got Brett Schulman here. We have Morgan Housel here, anything you're particularly excited about that you're eager for for the rest of Fool Fest? Now that we've got we've gotten the emotional stuff out of the way. The hard core Stock talk, Bill.
Bill Mann: Yeah, I am really interested to hear what Brad has to say. Morgan actually quoted me in his first book, so I like to call myself an uncredited co-author [laughs] of the best selling novel. But he's a fantastic speaker. I don't know if you all know this, but yesterday, Brian Haney was here, who is the President of Kinsale Capital. Is a long time Fool recommendation. The night before, he on his own accord, came to the bar here at the hotel with his wife just to meet Fools, just just to spend some time. I didn't know he was coming. It was a really neat thing for them to do. I just want you to know how energized people are by your presence.
Ricky Mulvey: Asit, anything before we go to Charles Schwab.
Asit Sharma: I'm looking forward to your questions today, in person on the app. I want anonymous. I want to see who you are. Let me know, I'm that person.
Ricky Mulvey: It's Ricky, actually. I'll never tell. We've got bank earnings this week. This morning, Charles Schwab reported, Bill, you've been on the Charles Schwab story for a while. Remember when everyone was panicked that everyone was gonna pull their deposits out of Charles Schwab. Maybe that didn't happen. Now Wall Street's a little upset because they wanted a million brokerage accounts, but they only got 955,000. How mad are you?
Bill Mann: I'm not that mad.
Ricky Mulvey: Okay.
Bill Mann: Yeah. I'm not that mad because Schwab was the company that forgot to die. Last year when Silicon Valley Bank collapsed, people said, "Well, obviously, there'll be another bank that collapses." Schwab is actually, we think of it as a brokerage, but it is actually organized as a thrift and so people looked at Schwab and said, Well, Schwab has the same characteristics, it's obviously going to go away. It hasn't happened at all. There new accounts, which are people who have decided in the last year to trust Schwab. It's a little bit light, almost a million, but great earnings, and the company is doing absolutely fine.
Ricky Mulvey: Asit, this is a company with $9.4 trillion in assets under management. It's really hard to make that go away, Bill. Asit, any big takeaways from you from Schwab or the bank earnings before we get to the CEO Draft?
Asit Sharma: Yeah. I literally was introduced to this company today by Bill. I don't spend a lot of time in the banking industry. On first look, this looks like a stinker. I give my honest opinion here. Pin drop silence. This is a joke, 17% growth in net assets is pretty good. When you get to that scale, it's really difficult to drive net asset growth. Put assets on your balance sheet, past the high single digits. For a company to really be able to extrapolate out its base and defy the law of large numbers, not the mathematical law of large numbers, which is something different. But how we talk about investing. Microsoft can't get bigger, can it? Schwab can't add another few trillion dollar to its balance sheet, can it? I think it's impressive. The other thing I like just taking a look at the company is you don't have to worry as much about the fluctuation and net interest margin with this companies. They have a diversified base of revenue, they've got the wealth management piece. Many other nice parts of the business, acquisition of the other brokerages. I feel that if I had to choose a quasi brokerage type banking company, this would be such an interesting one to look at. I've watched Bill for many years. I've seen him zero in on tiny banks out of nowhere, but it's so interesting to see him continue to be positive on a larger company. It's the earnings power. It's the earnings growth I think that's so attractive here.
Bill Mann: I feel like we need to pour one out for the great recession of 2023. Do you all remember there were several economists who said, there is a 100% chance that there will be a recession by the end of 2023. Since the beginning of 2024, the big banks on aggregate are up about 33%. The Schwab experience to me, should suggest that for whatever reason, however we've managed to do it, recession is not coming, and a soft landing is being achieved as we speak.
Ricky Mulvey: Congratulations, Bill.
Bill Mann: I did it.
Ricky Mulvey: Bill Mann has achieved the soft landing.
Bill Mann: You're welcome.
Ricky Mulvey: That is the power of having a microphone behind a desk, Bill.
Asit Sharma: A powerful feeling. The investment bank that made that prediction, by the way, they've up their prediction. So 101% chance. That's for 2024. That's what I read.
Ricky Mulvey: The meat of this show is a CEO draft. We have four categories, CEOs that are good capital allocators, a growth story, a turnaround story, and then a wild card pick. Before we got recording, Frenshahi, was kind enough to shuffle and deal the cards. Bill got the Ace. Asit got the King, I got the seven so that means, I go last. Bill goes first.
Bill Mann: I believe we should do a snake draft.
Ricky Mulvey: Snake draft? I go twice? Applause for Snake draft. Anything Bill says gets applause. This is pretty spectacular.
Bill Mann: You're welcome.
Ricky Mulvey: Asit, you get to stay in the middle for each one.
Asit Sharma: I love it. Let's do it.
Ricky Mulvey: Let's start with a capital allocator.
Ricky Mulvey: Bill, first pick of the draft. Which CEO, which company are you picking for capital allocator?
Bill Mann: There's a Canadian company called Constellation Software, and the CEO has been there for a long time. If you've ever pulled up a picture of him, he looks like Santa incognito. His name is Mark Leonard. You would never see a constellation software product, but they do things like they buy software companies. They've bought hundreds of them, and so and they look for verticals where there's no competition. They run water treatment plants and bowling alleys and hair salons and places where there are plenty of return, there are a ton of customers, and they have returned about 23% per year over the last 20 years. They're very disciplined buyers of companies, which is a really hard thing to do. Usually, when companies acquire other companies, it is a net wealth destroyer for investors, but Mark Leonard has done it exactly right for a long period of time.
Ricky Mulvey: First pit Constellation software. Up next, Asit Sharma.
Asit Sharma: I´ want to go in the opposite direction from acquiring companies on scale and talk about Arista Networks. It's got to be Jayshree Ullal. What a fantastic CEO when you think about capital allocation. We look at Arista Networks and see this great networking company that competed with Cisco and Juniper Networks and really outshone those companies. But we rarely talk about how lean and mean this company is. I mean, man, you look at this income statement. There's hardly any operating leases to be found. You would think with such a company of scale, they would have glamorous office space around the world, lots of R&D facilities. But they do so much with so little, and it's impressive. The balance sheets just bulking up over time, 6 billion bucks, rough numbers of retained earnings and super cash flow, no long term debt, working capital, six $7 billion, and they don't have a need for it. They're so interested in what they're doing that they've got fire power. Should they ever go the other way and say, "Look, we've reached the limits of our innovation, and we need to now start acquiring companies." I hate to see that as a tech investor. Ricky hooked me up with the Head of Product over there. Interviewed him a few weeks ago and they're so serious about the future competing with NVIDIA coming up in one part of their business. But I really like the way they look at a dollar and try to get the most efficiency out of it. It's not a company that skims on its employees on compensation. But they don't really have a desire to do frivolous things, extraneous things. That shows up in the books. I got to go with Jayshree for that one.
Ricky Mulvey: How mad are you going to be if I take Apple, Bill? Is that lame?
Bill Mann: It's lame. We should ask the audience.
Ricky Mulvey: Are you disappointed? You've shown up in person? Mary's giving up.
Asit Sharma: Mary's giving thumbs. She gave it thumbs down I think.
Ricky Mulvey: Thumbs down. We're going to do I'll take Brett Heffes at Winmark.
Bill Mann: It's like picking McDonald's as your favourite Scottish restaurant.
Ricky Mulvey: If you ask to be shamed by Bill, you will be shamed. I'll take Brett Heffes at Winmark in part because he doesn't think about capital allocation that much. He has a model for it. Winmark is a resale franchiser of companies like Played Against Sports, Plato's Closet. You may have heard of it if you've ever listened to Jim Gillies speak. But when Heffes was doing an interview with Jim, he explained he's like, we have a process. This is what it looks like, and this is the amount of time I'm going to spend thinking about it. I like that. You have a process, you have high inside ownership, and that's good enough for me. Let's move on to growth story. We've got a growth story. Since I get to go first in the Snake draft, Eric Devore. I'm calling up someone, because I'm going against analysts right now, so I need all the help I can get. I'm giving Eric Devore my pick for growth story.
Bill Mann: Did you just make the call to bring in a new pitcher?
Ricky Mulvey: Correct. Yes. Eric, can you come up for a CEO with a good growth story?
Bill Mann: Come on. Look at those pants.
Eric Devore: Somebody's got to do it.
Bill Mann: That's pants for radio.
Eric Devore: Yeah, absolutely. What a treat. Well, my pick via Ricky would be doctor Lisa Su from AMD. That's right, Bill. One of your favorites. I think her time at IBM, then Free Scale, her upbringing at MIT, the amount of well rounded, left brain plus right brain, in order to support the creative stuff that AI is going to bring that creatives bring with GPUs, I think that the backbone of this market is not just a winner take all with NVIDIA, and I think there's going to be more than one winner. I think that she's going to be great.
Ricky Mulvey: Thank you.
Asit Sharma: What a great pitch. By the way, we were fighting for Lisa Su in another category a few minutes ago.
Bill Mann: I mean, you want to think about AMD. It was a company that was basically kept around by Intel, so Intel wouldn't be declared a monopoly. So that's the level that she has brought to the table. Not only have they survived, but they're winning. it's really amazing.
Ricky Mulvey: Next up in the Snake draft, it would be Asit. Asit, what's your growth story?
Asit Sharma: My growth story is Jeff Green at the Trade Desk. This guy I've been watching a long time. When Trade Desk was a very small company, he was talking smack about the Walled Gardens over Google. All the time, every conference call. I mean, half an hour, just talking about the monopoly power of advertising that they were going up against. I didn't take it very seriously. I watched this company grow. I started looking into their tech. I said, Man, these guys are serious. I'm against that Walled Garden. First, they brought their little helmeted heads, and they ran up and bopped up against that garden and fell back. Then they brought in a few crossbow archers. Started trying to shoot over.
Ricky Mulvey: Asit, you're on fire right now. Keep going.
Asit Sharma: Brought the trebuchet. They threw the dead horses over. Then they said, let's get a battering ram, and that was Unified ID 2.0 when the cookies started to crumble. So I really like this combination of fierce competitiveness, talking smack, but working on the tech and telling his team, let's just have a better tech. Let's play with other folks. They're very good at partnering up with other companies in that ecosystem. So, for me, that's what growth is about. It's having that goal. Going after it aggressively, having ambition, vision. He's got it all. He's a little long winded, but other than that, I like this guy.
Ricky Mulvey: This is a company that sells ads, and you've made it sound like Game of Thrones, Asit.
Bill Mann: I need to hear more about the dead horse trebuchet.
Ricky Mulvey: Dead horse trebuchet. Do you need to buy an ad on Netflix, Bill? That's where we've gone to. I'm glad you're following that one up. Is for the listeners. Bill has his hand against his forehead, and he's trying to get a good inference.
Bill Mann: I do want to leave it to the live audience here because I did call Apple a little bit lame, and you all agreed with me. If I were to say Elon Musk as a growth story, would you describe that as similarly lame and too obvious? Yes. Okay, good. I'm glad that I structured it so that I was going to lose. I am going to continue to be lame and semi-obvious and talk about the President and CEO Brian Haney, who we met yesterday here from Kinsale Capital. It is an insurance company. They do hard to place insurance and if you were in the room yesterday, that you learned about how they had a boat run into one of the hotels that they were insuring. Pretty impressive story. But this is a company that has turned a very small business into a very big one, and it is a commodity business. You can get insurance from anybody. I could write insurance from you for you. It would be a terrible mistake on your behalf to do so. But they have been fantastic at it. It's a 10-bagger over the last seven years, which is really hard to do in the financial space.
Ricky Mulvey: Then you're up next for turnaround as the Snake draft continues.
Bill Mann: So can you all name, top of your head, you can think of a number of AI companies. One of the oldest ones is a company that you wouldn't really think of, and it is a tremendous turnaround, and it's happening right now. The CEO is Arvind Krishna, and the company is IBM. If you remember Watson, you remember Deep Blue, the whole chest thing? That was AI before it got branded better. IBM has taken all of its hardware businesses, and it has gotten out of those businesses. It is a services business now. It is asset-light. It is very sneakily one of the companies that has one of the biggest leads in artificial intelligence, and you don't know about it because it doesn't have some huge multiple attached to it. Doesn't get talked about very much, because I think people are almost embarrassed to say, Oh, yeah, I'm really fond of IBM, because IBM has done nothing but disappoint for 20 years. But I am here to say that Arvind Krishna has done a bang up job turning this company around, and people are going to start to notice.
Ricky Mulvey: There was a murmur in the crowd, and then I heard pens clicking when you brought up IBM, Bill.
Bill Mann: Should I spell it? [laughs].
Ricky Mulvey: I think that's the best [laughs] reaction you can get in an investing conference, though I was like, got you. All right, Asit. What you got for a turnaround?
Asit Sharma: So, I don't think I'll hear any Pens click because this CEO is actually out of the CEOC, but Ricky said we can talk about past performance. But there was a time when Pepsi was really languishing against its rival. What kind of turnaround story could Pepsi be? But you're in a very tight band when you're a consumer goods multinational company. You've got to grow a little bit beyond the rate of inflation, but you can't grow too fast because at that scale, what happens, your only method is pricing power, and you'll price yourself out of the market. So ingenuity came to PepsiCo at a sort of a vulnerable time, and she really drew the strategic threads together. I noticed after she came on board. Suddenly, I walked into my sea store. finally, I'd see stacks of Mountain Dew besides Frito-Lay products. Why didn't they think of that before? But just a very strategic thinker, a very kind, compassionate CEO. I had a theme running through my choice as most of them are women. I think we need more women CEOs in the Fortune 500. Thank you. Maybe I'll hear some pens clicking for that. Because they tend to be very analytical, but also great listeners. Sometimes you need the opposite of all the testosterone I was describing before with Jeff Green, and you need leaders who can come in and figure out what needs to be done and get people to align that common goal. I thought she was great at that, and also introduce some more sustainable practices at PepsiCo. They issued a green bond for a billion bucks. Some of that is probably greenwashing to tell the truth with these big corporations, but at least they're trying a little bit. So great leader, she came and talked to us at the Motley Fool during the pandemic virtually via Zoom, and we got so much out of that conversation.
Bill Mann: Their stock would double if they renamed it FritoLay.
Ricky Mulvey: I'm going to take Bjorn Gulden, who is the CEO of Adidas. This CEO came into a really tough situation because Adidas had tied up a lot of inventory, sales, and profits to the rapper formerly known as Kanye West. It was because Adidas for a long time, was trying to look for the next Michael Jordan, the next big figure that can just sell a lot of shoes. What ends up happening is Kanye West broke down.
Bill Mann: He trebuchet himself.
Ricky Mulvey: He trebuchet himself. Not an easy person to work with. What Bjorn Gulden did when he came back in is he said, we're not going to look for the next big figure. We're going to try to get very specific across a lot of markets and distribute our bets a lot. I think that's working out for Adidas earnings getting back to hopefully positive territory. As a shareholder, I hope so. But I think he's doing a good job.
Asit Sharma: Can we take a quick digression here and talk about the process of investing?
Ricky Mulvey: Yes.
Asit Sharma: So I really like this about Ricky. Actually, I chat with you about Adidas. We had a comical podcast recording because the story was so incredible. It feels like a year and a half ago. Ricky tends out to bring the snark in me. I have a very little snark level, but sometimes when we get together, he can dial it up, and it's fun. I remember that being a really snarky podcast episode. I went back and looked at Adidas, and I was like, gosh, who would buy this? Look at all that inventory. Fast forward to a couple of weeks ago, and we're chatting about this, Rick and I were just chatting. He's like, I'm an Adidas investor now if I'm not mistaken. I thought that was so foolish. The ability to laugh at a company today and then return to it and let that smile fade a little bit into interest and curiosity and then take a position when you see the story turning around. So I thought that was great. I try to emulate that behavior in my own investing, but it's rare. It seems easy, but it's hard.
Ricky Mulvey: It's something I changed my mind about because what I originally took, when you look through an Adidas earnings call, it is a complete scattershot. I'm like, "What is going on here?" Then I realized, Oh, no, there's a plan. I see what Mr. Gulden is doing. So I got Wildcard. I want to take a true wildcard. I'm taking Peter Beck Rocket Lab. I feel like dude's putting rockets into space. He is not Elon Musk. He's putting more rockets into space. If you're assembling a team of CEOs, I want a wild one. I want Peter Beck.
Bill Mann: He almost got deported.
Ricky Mulvey: Yeah.
Bill Mann: When he showed up and he started, he's from New Zealand, and he was like this 19-year-old. So he started hanging around sensitive facilities in the US, because he was fascinated about rockets, and they're like, person not from here, [laughs] why are you hanging out of the gates at Vandenberg Air Force Base?
Ricky Mulvey: Asit, what's your wild card?
Asit Sharma: I'm going to ask for a show of hands. If you're listening, post this recording, raise your hand. I'll feel you, but who in this room has heard of Safra Catz? Not a person. She is the CEO, one of the largest companies in the world by market capitalization. She is the CEO of Oracle. She does an amazing job of managing that outsize personality. If I asked for a show of hands? Who's ever heard of Larry Ellison, raise your hands, like half the room. He's the chairman. Together, they're a wonderful team. He's a visionary. He's a wild guy still in his late 70s, acts like a much younger person, and he's very creative. But he needs someone who can execute alongside. About seven years ago, they realized that, again, snark, all this hand wringing and thumb waving they did at the Cloud wasn't helping Oracle's business. So instead of jumping in and saying we were wrong, we were the company that should have built the Cloud. We were the world's premier database company. They started from scratch. Let's let's pretend we were doing this today. How would we build this? They came up with a really nice architecture, it's called RDMA. Fast forward seven years, the youngest companies on the planet, the anthropics of the world, the mistrals. So many small start-ups want to work with Oracle. Why? Because the architecture allows for faster training, faster inference, it's lower cost. So if you've got to dole out the millions that some venture capitalist gave you, you want to be able to have more inference, more training, so you can figure this stuff out, get a leap on the competition. She's really great at that. Actually took over. Unfortunately, Mark Hurd was the CEO of Oracle, passed away untimely, I think in his early 50s. Since then, that duo of Safra Catz, Larry Ellison has been so powerful in the market. This is one reason why that stock has really taken off in the last couple of years. They found their place in the Cloud, and it's Cloud plus. It's really an AI place.
Ricky Mulvey: Bill.
Bill Mann: I'm going to go with the CEO Whisperer.
Ricky Mulvey: Okay.
Bill Mann: Jamie Dimon, in the middle of the last decade, took over a group that's called the CEO Round Table. One of the things the CEO Round table does every year is they survey all the CEOs. What do you think is going to happen with the economy? What do you think it's going to happen with your industry? So when he took over he goes, we have all this data. Why don't we see the people who know the most about their own businesses, how they did, and you're not going to believe this, but they did terribly. The CEOs of these companies are really not very good at prognosticating. No better than really anybody else.
Asit Sharma: Is anyone good at prognosticating?
Bill Mann: Well, I can tell you that on the list of people who aren't CEOs are on it. Jamie Dimon, I really would almost vote for him to be the CEO of America. He loves this country. His letters every year to JP Morgan shareholders go so far beyond what the bank is doing and he is such an inspirational person. He is for other CEOs, for sure. This is a banking guy. He doesn't have to do that. There are bankers, they would sell their grandmothers if they could make a profit at it, they will make a market in anything. Jamie Dimon is someone who has said, "No, these are the things that we ought to be doing, and these are the things that we ought not to be doing for the good of the country, for the good of society." I think that that is something that is worth our tipping our hats to.
Ricky Mulvey: It's a good place to wrap it up on. Bill's team. We got we're going to pick a winner. Raise your hand. Raise your hand if you think Bill won, you'll raise your hand if you think Asit won. Don't raise your hand for me.
Asit Sharma: Remember, I am the Deputy Mayor. He always gets the glory.
Ricky Mulvey: The Mayor of FoolFest.
Asit Sharma: I take out the trash.
Ricky Mulvey: The Mayor of Fool Fest, Bill Mann has picked Constellation Software, Kinsale Capital, IBM, and JP Morgan. You're allowed to raise your hand for Bill.
Asit Sharma: I like. Sorry. I didn't mean to depermission.
Bill Mann: Ricky, you didn't give them any instruction.
Ricky Mulvey: I said, raise your hand. Well, I was going to do applause, but I was like, I think hand raising is easier to measure.
Bill Mann: Everyone has their hand up.
Ricky Mulvey: Okay. Asit Sharma, Arista Networks, Trade Desk, PepsiCo, and Oracle. Someone back there has been voting twice, but you put up two hands. The gentleman the American flag shirt.
Asit Sharma: You're going to have to choose between us?
Ricky Mulvey: You put up two hands for Asit, so I'm counting your vote for Asit.
Bill Mann: Are you from Chicago by any chance?
Asit Sharma: I've got I've got Winmark, AMD, Adidas, and Rocket Lab. Thank you, Eric. I think Asit won.
Ricky Mulvey: No, I think. I think Asit won. I think Asit wins the CEO Draft. Thank you all so much for being here. This has been a lot of fun. As always, people on the program may have interests in the socks they talk about, and the Motley Fool may have formal recommendations for or against that don't buy yourself anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. Thanks viewers. Thank you guys.
