Motley Fool Hidden Gems Investing - 2023: The Year of Cautious Guidance

Episode Date: February 21, 2023

If the management teams from Home Depot and Walmart had anything in common today, it was their guidance for the year ahead. (0:21) Jason Moser discusses: - Home Depot shares falling 5% after its first revenue miss since 2019 - The capital allocation flex of raising wages and HD's dividend - Walmart crushing its holiday quarter thanks to groceries (11:15) Alison Southwick and Robert Brokamp answer your questions about investment fees, insurance, and saving in a Roth IRA. Companies discussed: HD, WMT Host: Chris Hill Guests: Jason Moser, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder?

I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. It's a big week for retail earnings, and we're starting with two of the biggest. Motley Fool Money starts now. I'm Chris Hill. Joining me after the long weekend,

Motley Fool Senior Analyst Jason Moser. Thanks for being here. Hey, thanks for having me. Let's start with Home Depot. Fourth quarter revenue came in a little bit lower than Wall Street was expecting. It wasn't by much, but it was the first time since late 2019 that Home Depot missed on the top line. Their guidance for 2023 was pretty conservative and shares down 5%. What do you think when you look at Home Depot's results, their guidance and the whole picture? Yeah, I mean, I think big picture, it was a good quarter. That said, I think this quarter more or less confirmed some of the fears that maybe are out there, that consumer spending is still challenged. Perhaps there's

a recession around the corner. Everybody continues to talk about whether we'll run into a recession in 2023 or not. I think for me, one of the things that really stood out is just inflation, still here. That's still something these companies are contending with, particularly when you talk about just operating expenses in general. They are absolutely seeing price sensitivity, which impacted those comp sales. They are therefore seeing demand headwinds, which clearly is impacting those comp sales. When you put that all together, it just led management to offer, I think, fair but tepid guidance for the coming year. It's not like they see 2023 is being some awful year where they have to hit the reset button. But I do think they

see this as an opportunity to get their ducks in a row. One of the big moves they're making, they're going to be investing around $1 billion in their employees, the frontline employees and wages, which I think makes a lot of sense. Because when you think about Home Depot and one of its advantages, one of its advantages is its people. When you go into a Home Depot, you're looking for someone with a level of expertise who can help you. That's just not Home improvement is not something that is typically common knowledge among the masses. One of the reasons you're going to Home Depot is for the education and the guidance. They need to make sure that their people are able to offer that guidance and really make you

feel like, well, I'm going in there and I'm getting something from this. You don't want someone telling you they don't really know or they have to go to their manager. That one manager doesn't scale very well, because that one manager is probably dealing with many different questions. I think it's a good move that they're making that investment in their workforce. I think at the end of the day, when you look at the guidance, you call the guidance here, they see earnings per share falling in the mid-single percentage range, but let's call it $16 a share. That value shares today at less than 20 times full-year projections. You get a serious chunk of change, too, for hanging on to those shares in the

processes. I think the dividend raise puts it at $8.36 per year for hanging on to those shares. Listen, I'm a shareholder, I feel really good about that. History shows that this is not a bad price to pay for this stock. I think investors who can look further out in 2023 might want to put this on their radar. Like you, I'm a Home Depot shareholder. I don't love these results, but I completely understand them. We'll touch more on the guidance when we talk about Walmart. You mentioned the billion dollars that they're going to put towards increasing wages. Raising the dividend 10%, I really like how Home Depot is choosing to allocate capital, between those two things. Yes, selfishly, I would always

love to see the dividend going higher, but 10% is a pretty significant raise. In terms of employee turnover, presumably, raising wages helps reduce that. Well, you would hope, and certainly the longer that you're with a place, they really do want to capitalize on that loyalty. And one way to do that is to offer a little bit more money. And not everybody can do that to the extent that Home Depot can, thanks to its scale. And again, looking at the guidance, when you look at the results for the quarter, for the year, I mean, they did talk about lumber was one of the big factors that really played in to the actual misses, right? I mean, the challenges in revenue and those comp sales,

lumber had a lot to do that. Over the last year, lumber prices on average are down 50%, and that hit their comp sales to the tune of about 70 basis points. So, it's worth remembering, there were some external factors at play there that aren't really necessarily a testament to Home Depot's business as much as it is just a testament to the external forces that a company like this has to deal with on an ongoing basis in their supply chain. Walmart's holiday quarter went quite nicely, thank you very much. Fourth quarter profits and revenue came in higher than expected. Same-store sales in the U.S. for Walmart were just north of 8%. Even though it was the holiday quarter, and I and a lot of other people

think in terms of people buying gifts for the holidays, the story for Walmart really seems to be their grocery dominance. Yeah. I think that's probably the biggest takeaway from the quarter. You're looking at Walmart over the course of the coming five years and what's the big opportunity here. As a mega retailer, there are all sorts of opportunities. But I do think investors, well, investors probably know better than not, most people I don't think realize Walmart's presence in the grocery space. It is the leading grocer by market share in the United States. That's no accident. I think it's really interesting to see the juxtaposition between something like a Walmart and a Home Depot. These results,

they make a lot of sense. Over the holiday quarter, people are more sensitive, economically sensitive these days. We have to be more careful about the money that we're spending and where we're spending it. Walmart continues to get a greater share of higher earners' wallets, which is a great thing. But to your point, they do continue to gain share in grocery. Now, the flip side of that is that the grocery segment is a lower margin segment. When you start to see inflationary costs pop up, that can be a headwind for a business like that in the short run. But again, you got to think about this in the longer run here, just holding the share that it holds in the grocery space, that's something that they can continue to maintain even well

beyond inflationary times when consumers become a little bit more free with the money that they spend. There's an opportunity here for Walmart to capitalize and keep a lot of those customers that they brought into their stores or that they brought into their website, that they got into their delivery ecosystem as far as grocery is concerned. I think for me, look at Walmart, they do a lot of things really well. Like Home Depot, scale really plays into it. You look at this business and the way that they're guiding, they're actually guiding for a little bit of earnings growth, which is nice to see. It does put shares at 24 times full-year projections. Now, that likely reflects, I think, the continued tailwinds

from value seekers, the grocery share gains, and getting a greater share of the higher earners' wallets. Let's not hold that against them, but it's just something worth keeping in mind when you're looking at whether this represents really a good opportunity for the stock, it feels like there's a little bit of optimism, understandably, baked into the share price today. Sam's Club comps rose more than 12%, so nice to see that increase in that part of their business. In terms of the guidance, it seems like Walmart and Home Depot are being a little conservative. But when you step back and think about it, Jason, doesn't it make sense? We're past the pandemic, and at this

point in 2023, it looks like we could be gearing up for our first normal, quote-unquote, year for businesses since 2019. But it's late February. It's not the middle of the year. So, I get the caution on the part of both management teams here. Yeah. I mean, I would take that same approach personally. I mean, I'm much more of an under-promise and over-deliver kind of guy. And you're right. I mean, it's only February. It's still very early in the year. We saw the market get off to a roaring start. Since then, it's pulled back a little bit. Still positive for the year, but I think we're starting to see conversations change a little bit. I think there was a lot of optimism early on. Talk about inflation being a theme with a company like

Home Depot. It absolutely is a theme with a company like Walmart, too. It was all over that conference call. It's something they believe will continue at least in the near term, the front half of the year. You have to acknowledge the fact that the consumer is in a tough spot from a credit position. Credit card balance is now hitting record highs. You put it all together. The consumer is just in a tough spot right now, which does play into Walmart's favor, but only to a certain extent. You're not looking at a business here that's really capitalizing on pricing power. They're capitalizing on their value offering, which is great. That's what they always do. and I think you keep that in mind. But yeah, I think I would rather set the table

conservatively and then see if I couldn't exceed those benchmarks as the year progresses. We're going to learn a whole heck of a lot more here in the coming months as far as how the interest rate policy is really shaking out, how the inflation numbers look. Let's hope for the best, but it it seems like these companies are preparing themselves accordingly. Jason Moser, thanks for being here! Thank you! You've got a lot of questions. Fortunately, they've got answers. Alison Southwick and Robert Brokamp respond to audience questions about investment fees, insurance, and saving in a Roth IRA. Today is part one of The Mailbag. Alison and Bro

we'll get to the rest of the questions on tomorrow's show. Our first question comes from Varun. I recently found out about universal indexed life insurance while researching investment options for my extremely conservative partner. One provider in particular basically says that they will give a pretty high rate of return, 6% to 7% annualized, while guaranteeing that money is never lost when the chosen index goes down. And we get tax rate withdraw loans for college. This is actually perfect for my partner who does not care about tracking the market, but cares a lot about not losing her money short-term or long-term. This sounds too good to be true. Even assuming we're willing to invest in this for the next 15

to 20 years, are there any gotchas that we need to be aware of? Well, you're hearing a lot more these days about life insurance as an investing vehicle, partially thanks to a lot of nonsense on social media, particularly on TikTok. So universal index life insurance can get pretty complex and the details vary from policy to policy, but here are the basics. So these are cash value life insurance policies, and the interest rate is tied to the performance of an index like the S&P 500. When it goes up, you earn a higher rate. And when it goes down, the rate doesn't drop below zero. So it sounds great, right? Except it's not so great because the upside is capped at a certain rate, like 8%, usually in the high single digits. So

if the index returns 15%, you only get 8% or whatever the cap is. And dividends usually aren't factored into the return of the index. Historically, dividends have accounted for 2% to 4% of the return of the stock market. Cap rates often aren't guaranteed, so the insurance company can actually lower them down the road. This has actually happened in the past. Then there are the fees. As insurance goes, these tend to be pricier policies and the fees can eat into the returns. In fact, the cash value can actually decline due to fees, despite insurance agents saying that you can't lose money. Because the premiums could be high, many policy owners end up not being able to afford them. You can borrow against the cash value to cover the

premiums for a while, but that eats into the amount you were supposed to be saving for college. Now, here is the good news-ish, sort of. If you have enough cash value when your kid heads off to school, you can indeed borrow from the insurance company using your cash values collateral. And like all loans, this is tax-free. If you don't pay the money back and die while the policy is still in force, then the death benefit will be reduced by the loan plus the interest. But if you let the policy lapse, the gains and money that you borrowed could become taxable, which we'll get into into the next question. So I'm not in a position to say that every IUL policy is bad. I suppose they can make sense in some situations and at the right price. But my overall

impression is that there's a good deal of over-promising when these policies are sold. So I think most people are better off just saving for college in a 529 or a Coverdell, where the growth is tax-free if the money is used for qualified education expenses, If someone is very conservative, just invest in cash and bonds. Finally, depending on your state and the type of 529 you choose, you might be able to go with a prepaid tuition plan that guarantees you'll be able to cover the cost of tuition when your kid goes to college, which can also be a conservative strategy. As foreshadowed by Bro, our next question from Pat is also about life insurance. Pat writes, my father passed away. He left a whole

life policy on me that I inherited at his passing. At some point between now and my birth over 50 years ago, he borrowed against the policy. What would have been an asset is now an $80,000 debt. The insurance company is telling me that surrendering the policy will be a taxable event that will add to my income, even though I never saw a dime of this money. How can this be? Well, Pat, I'm sorry to hear about your father. And I'm sorry to hear that you have this problem because here's an example of how life insurance, which does have many tax benefits, can become a tax nightmare. So if the policy is surrendered, the gains in loans in excess of the premiums paid become taxed as ordinary income. But this situation is particularly tricky because

Pat is inheriting this nightmare. And I have to say, it kind of stumped me. Fortunately, there are some experts who give folks objective advice about their insurance. And one of those experts is Scott Witt of Witt Actuarial Services. I sent him Pat's question, and one suggestion Scott had was to see if the policy could be reformed in a way that would allow the policy to stay in force until the death of the insured, even if the amount is modest, because avoiding the taxable gain alone might make this strategy worthwhile. Also, I'll point out that generally, you don't have to inherit something you don't want. In legal speak, this is called disclaiming the inheritance.

And people usually do it because they don't need the money and they want it to go to other heirs, but can also be done because you don't want to inherit a hassle. However, it usually must be done within nine months of the person dying. So this might be something that Pat can explore if Pat's father died relatively recently. It would likely require talking to the insurance company about the process and also talking to an attorney. The bottom line here is that this is a tough situation and it requires the help of some pros, perhaps also including a tax expert.

Our next question comes from Greg. My wife lost her job about two years ago and she is now a stay-at-home dog mom. She's 55 and her old 401k is still at her previous employer. The custodian charges an annual 0.35% record keeping fee, which is about $1,300 based on her account size. I'd like to roll that over to an IRA to avoid that fee, but with everything that's happened in the market, is now a good time to do that? So 401ks costs money to operate, not only to administer the plan, but also to file all the legal documents that are required by the Department of Labor. And sometimes the employer covers most or all the costs,

But once someone leaves the company, the employer often makes the participant pay. So your wife is currently paying $1,300 a year, but is also missing out on the growth that money could have earned. So if she keeps that money in the 401k over the coming years, she's potentially shortchanging her account by several thousands of dollars. So I think it definitely makes sense to transfer that money to an IRA. You start by choosing an IRA provider, which could just be the same company that does the 401k. So if the 401k is with Fidelity, you could just choose an IRA with Fidelity, Vanguard to Vanguard, something like that. And they'll help you move the money. Ideally, you should do a trustee to trustee transfer so the money goes directly from one

account to the other without you getting a check in the mail, which can be a hassle and make the process take longer. Depending on what's in the 401k and where you're moving the money, you might have to first sell all the investments and just move cash. Or you might be able to move the investments over, especially if you're staying with the same company. But the process can take two to four weeks. So make sure that you're comfortable with what you own because you won't be able to make any changes while this is happening. Next question comes from Cody. I'm 25 and have a simple IRA through my employer and contributed $6,700 last year. Can I also contribute to a separate Roth IRA? If so, how much? The regulation I have been looking at shows

$6,000 total per year combined in all owned IRAs. The simple IRA is a lesser known employer sponsored account. And it was created in 1996 as an easy way for small businesses to set up a retirement plan. And when you read SIMPLE, it's all capped because it's an acronym and it stands for Savings Incentive Match Plan for Employees. Very clever. The appeal to employers is that it does not have all the filing requirements that a 401k does. So they're easier and cheaper to offer. The downside is that contribution limits aren't as high. And the rules with SIMPLES can be a bit quirky because they're kind of a hybrid of an employer plan and an IRA. The good news for Cody is that contributing to a simple IRA does not affect his ability to contribute to a regular

IRA. He can max out both. Now, he says that he read that the contribution limit for a Roth IRA is $6,000. That's true for 2022 contributions, which everyone can still make up until this year's tax filing deadline of April 18th. But the limit for 2023 contributions increased to $6,500 with an additional $1,000 for the 50 and better crowd. And finally, your ability to contribute to a Roth or a does depend on your income, and those income eligibility limits change every year. So look them up for the year you want to make your contribution. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, Thanks for listening. We'll see you tomorrow.