Motley Fool Hidden Gems Investing - 2024 in Review: Financials

Episode Date: December 14, 2024

It’s been a banner year for banks. Even the worst performer among the big players is still up 40% year-to-date.  Motley Fool contributor Matt Frankel joins Ricky Mulvey for a look back at some of the biggest headlines in the financial sector from the past year. They also discuss: - Green shoots for the 2025 IPO market. - Alex Chriss’s first full year at PayPal. - Two promising payments processors. Companies discussed: GS, BAC, MS, JPM, PYPL, BOC, FOUR, TOST, SQ, SOFI Host: Ricky Mulvey Guests: Matt Frankel Producer: Mary Long Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Companies are more willing to take on debt when the economy's strong and interest rates are going down. So you're seeing a lot of debt underwriting revenue. Goldman Sachs' debt underwriting revenue was up 46%. So you're seeing a lot of positive tailwinds. And if the Fed keeps cutting rates, that could get even better. I'm Mary Long, and that's Motley Fool contributor Matt Frankel. As the year comes to a close, we're rounding up a number of analysts to look back on key industries and storylines from 2024.

This week, Matt joins Ricky Mulvey to take a look at some of the big stories coming out of the financial sector. They also discuss PayPal's new narrative, questions for the CEO of a company once likened to Berkshire Hathaway, and why Wall Street's warmed up to toast. So, Matt, as we look back on the year that was, what are your top financial headlines for 2024? Well, obviously, number one is that financial stocks have done really, really well. It doesn't seem like the banking crisis of mid-2023 was that long ago. But I mean, just to look at some of these numbers, the S&P is up 30% year to date. The worst performing bank stock on my radar is Bank of America, and that's up 40%. JPMorgan Chase is up 47%. Goldman Sachs

is up 57% just year to date. And there are some good reasons for that. And this is really what stood out to me. One, the consumer has been a lot more resilient than a lot of experts had thought. If you remember about a year ago when defaults started spiking after the post-COVID loan postponements and stuff like that. We started seeing consumer default spike. There was a worry that we were going to go into a recession. People weren't going to be able to pay their bills, et cetera, et cetera. That didn't end up happening. In just one example, Bank of America, the default, the net charge off rate has been flat for the past three quarters in a row. They're still adding checking accounts. They're still adding credit cards. JP Morgan Chase credit

card spending is up 7% year over year. Consumers are being resilient. I mean, you hear there's a lot of inflation. You hear consumers are being squeezed, but they're still paying their bills and spending money. And that's really been a big standout on the consumer banking side. Yeah. Goldman Sachs, Bank of America, and Morgan Stanley all up about half, if not more, for this year. When I see that, I see lower interest rates. I see more trading volume. You see that on the retail and on the institutional side. And you're starting to see some green shoots in the IPO market as companies go public again after that deep freeze of 2022, early 2023. What's standing out here for that big bank performance? Is this a lot of things

they're doing themselves or is this tailwinds happening to these companies? Well, one, to be fair, you're coming from a very low bar. There was essentially no one going public in 2023, for example. So investment banks weren't getting that revenue. But I don't want to really discount it because Goldman Sachs investment banking fee, you mentioned, up 20% year over year. JP Morgan investment banking revenue was up 29% year over year. I mean, you're starting to see, it's not just IPOs and things like that. You're seeing a lot of debt underwriting. You mentioned lower interest rates. Companies are more willing to take on debt when the economy's strong and interest rates are going down. So you're seeing a lot of debt underwriting revenue. Goldman Sachs

debt underwriting revenue was up 46%. So you're seeing a lot of positive tailwinds. And if the Fed keeps cutting rates, that could get even better. And a lot of these big banks are cyclical ish businesses. You see some exponential growth looking at these big banks that are mature. We're talking growth numbers for banks that in some cases are older than 100 years. Does this say anything to you about where we are in the business cycle? Is this information important for individual investors? Well, I've said the words normal business cycle and normal recession so many times in my 25 year investment career that I have no clue what a normal recession is. I don't know what a normal cycle is. It's really hard to time these things. You can't really say we're at the

peak of a cycle or the, you know, I thought we were at the peak of a cycle in 2014 and the market ended up, you know, tripling from there. So keep, take this with a grain of salt, but I do think it says that we are expecting things to be really, really strong for the next year or two. That's being priced into bank stocks. You're pricing in further interest rate cuts. You're pricing in a stronger economy. You're pricing in very, very good IPO activity and just really good conditions. So I do think it says where the market thinks we're toward the top of the business cycle. Let's look at some payment processors. And one that I care deeply about because it's a stock where I have my highest cost basis, if you want that for your conviction notes there, is PayPal.

and this was the first full year under new CEO, Alex Chris. He was hired in late September of last year, but 2024 was really the year that he got sort of his feet under him and you're able to implement some things when you're in the job for a couple of months. He promised a more focused PayPal. We're not going to do these silly acquisitions and we're really going to focus on helping merchants sell more things to you, the consumer. When you look back on his first full year at PayPal, what are some of the highlights you've seen from year one? Well, he's been busy. And it's worth noting, it's not just him. Alex Chris isn't the only new one. PayPal's entire C-suite is new. He's the longest tenured person in their senior leadership team at this point. So a lot of new hires. He's been busy. His focus has been kind of twofold, on efficiency and on increasing engagement. On efficiency, we saw PayPal's revenue, it's only up about 6%. We saw its earnings per share up 22%,

which indicates efficiency is working. You're seeing them really allocate capital in shareholder friendly ways, very aggressive stock buybacks. They're buying back $5 to $6 billion of stock on an annual basis. And a lot of really interesting developments. I'm not sure if you're even, but PayPal went on its biggest ad campaign ever, ever in September. I don't know if you saw the Will Ferrell ads with PayPal, but they rolled out their PayPal Everywhere product, which is essentially the best cashback debit card that I know of anywhere in the market. It's a 5% cashback debit card, not a credit card that can just be used with your PayPal account wherever you go. The Fastlane checkout has gotten a lot of headlines. And more important

than the product itself is who they're partnering with. They got partnerships with people who are thought of as their competitors, like Adyen and Fiserv. PayPal is going to be an option for Shopify checkout in the US. Previously, that was just in France. They're rolling out a lot of new features, like the ability to pool money between different PayPal accounts. Let's say you're traveling with a group of friends. You'll be able to pool it in a separate basket. It's really interesting features and a lot of what they've been doing and building out the ad platform, which I almost forgot to mention. Advertising is a natural fit for a company that has spending data on 400 million people. They hired the former general manager of Uber's advertising business to lead it.

And everything I just mentioned is not reflected in PayPal's numbers yet. So that's one thing to keep in mind as an investor. they've been busy, but the numbers still show kind of flat revenue, flat account growth, things like that. So 2025 could be an exciting year for them. Yeah, I've certainly noticed more PayPal checkouts in online shopping and the advertising business makes sense. You think about it, not just sending it to outside parties, but for businesses that use PayPal, hey, we can have a more differentiated solution for you because we can see where people are abandoning their carts and maybe what kind of discounts things you can offer them in order to

get them to stick around. In Chris's first year, he's turned earnings around. And some of that, I think, has been one time because he cut people from the company. You're doing some disciplined things that you can't really rinse and repeat. But when you look at the multiples on this thing, and I'm trying to be a long-term buy and hold investor here because I see this as a critical infrastructure business. And I'm looking for two things. One is the narrative. Can he change the narrative? And then number two is, can he change the business? So what do you think could happen where Wall Street sees PayPal as a growth story again? Something where we're going for that like 40-ish earnings multiple instead of that 20-ish earnings multiple we

have right now? Or am I focused on the wrong thing as a PayPal shareholder? So far, like you mentioned, they got earnings per share growing again. Earnings growth was over 20% over the past year. The analysts think that that is just PayPal maximizing its existing business. All those things I just mentioned that they're doing over the past year need to really translate to growth for it to get back to a high multiple. You need to start seeing more accounts come on the platform. I mean, they have over 430 million active accounts. They added less than a million over the past year. So things like that need to change. So you really need to start building out, not just maximizing the efficiency of the current business, but really increasing

payment volumes, increasing the user base at a faster rate than we've seen. And that will be the inflection point. If all the things I mentioned start translating into growth. And very well, those things couldn't. Maybe people will go with other payments platforms. I could very well be wrong about this. This is certainly something I'm going to be watching in 2025. I'm a shareholder too. Yeah. Speaking of companies where you're a shareholder, i'm shoehorning this company in because i think it's one of the most interesting sort of dramatic stories of 2024 and that's boston omaha why are we doing it in a financials show that's a billboard and broadband business talked about that a little bit maybe but this also is an asset management

business which it kind of threw out the window i was gonna say it was an asset management business was an asset management business it's still i think it still hasn't it still has insurance there So we got some financials there. You follow this company very closely. This is a very difficult company to follow. What is your 2024 recap for Boston Omaha? Well, talk about very difficult company to follow. You said PayPal is your biggest investment by cost basis. Boston Omaha is mine. So it's been a difficult 2024. It looks like they're finally turning it around a little bit. The biggest news was that one of their co-CEOs, you know, abruptly exited the business. Um, he was one of the biggest parts

of the thesis for a lot of people. Um, he was, you probably heard the connection that, you know, Warren Buffett's great, uh, or grandnephew or whatever was running it. Oh yeah. He's the one that left. Um, so, you know, that part of the thesis was out. No more Buffett comparison, which I would, didn't really buy that in the beginning anyway. Um, I'm pretty sure I'm like Genghis Khan's great, great, great, great, uh, nephew or something too. But yeah, please continue start a holding company and hype that up. Boston Omaha, you mentioned the asset management business. They finally admitted that that wasn't working until earlier this year, they were trying to raise third-party capital, essentially be like an early stage like Brookfield and raise

third-party capital to pursue built-for-rent housing, broadband infrastructure, a few opportunities they saw. They were able to get no traction on that. The asset management business existed for that reason. They ended up winding it down right now. The Build for Rent fund still has, I think, $6 million or so, but they're winding that down now. The business is kind of stagnant in a lot of ways. We'll get to insurance in a second because I know you want to talk about that. But the billboard revenue is up 6% year over year. Broadband revenue is up 5% year over year. The most exciting part of the business now is the Sky Harbor investment. They took a company called Sky Harbor Public by SPAC, still own a whole, I think, 20% or so of it. And that makes

up a third of their market cap because it's been doing well. But if I want to own Sky Harbor, I'll just buy Sky Harbor. So you mentioned insurance. And Boston Omaha, they write surety insurance. It's a very specific type of insurance. Back when I used to manage other people's money as a financial planner. I used to have to have a surety bond. So that is the best growing part of the business. Their revenue from surety insurance was up 67% year over year in the third quarter. Everything else was mid-single digits. They have a 13% net margin from the insurance business, which is very, very strong. A loss ratio of 17%. Most insurance companies run about 70. So it's a very profitable type of insurance, but it's small. And my question is,

can it continue to scale? And I mean, I'm not as excited about the company as I once was. The asset management division to me was the number one reason to be excited. I'm not saying it's a bad business. Billboard, the economics are fantastic. Broadband, the economics are great, great like 80 gross margins things like that surety insurance is a great business but i'm not as excited as i was yeah um what and and to be clear adam peterson who's the now sole ceo of boston omaha has an open invite to join us on motley fool money to answer some questions from from us shareholders um would love to see him on in 2025 but since he's not here we're going to ask questions into the void. Matt, what questions would you like to see him answer as a shareholder

of Boston Omaha? I mean, I'd really kind of just echo what I just said. Why should investors be excited at this point? I get what you're doing. You're building the billboard business, great economics, great economics throughout this business. The most exciting part of the company is a passive investment in Sky Harbor, which I could just buy on the open market. So now that asset management's gone. Why should investors be excited to buy this stock? What's the market beating potential here? And this was also when I hope they answer that question because recently this year, they also canceled the virtual version of their annual shareholders meeting. You could only go in person, which to be frank, I took that as an unnecessary shot at smaller investors like

me. I'm not going, you know, I'm not paying for a trip to Omaha to go hear from them. Put it on video. Let me see what the highlights are. I thought that was an unsavory move, even though I'm a shareholder. I agree. And I mean, they were only in person last year, but they did it the same weekend as the Berkshire meeting. So people were there anyway. So do that if you're going to do it in person. Do it on a weekend when I'm already in Omaha. I don't want to make a separate trip just for that. All right. Um, let's talk about some payment processors, uh, as they have had a pretty significant year. Have you been, have you been following shift for and or, or toast over the past year? Because those have had some pretty big years. These are companies shift for,

which we'll get to in a sec. Uh, if you're at a stadium and you buy a beer, you're probably using a shift for terminal. And if you've ever been in a restaurant where a, um, a server has to ask you a couple of quick questions on an iPad at the end of a meal, then you've used toast. um have you been following these over the past year yeah so that was a perfect description of both of these companies um no shift four is one of the more interesting stories in business in general uh i know we talked before the show their their um their their founder ceo jared isaacman uh left he's going to be the leader of nasa which i can't blame him for leaving uh he founded shift four in 1999 when he was 16 years old 16 um it's pretty impressive business they're they're not

only growing really fast. I mean, their revenue has grown at a 50% annualized rate for the past three years, even at their current scale. You mentioned the sports vertical. That's been by far their most successful recent one. But they're also, if you go to a hotel, you're probably going to use a shift four terminal. That was their big vertical before that. Really a lot of potential here. And it's not only growing that fast, but it's a profitable business. I love that they specialize in vertical by vertical by vertical um you know the sports vertical the uh the non-profits vertical is another one that they're building right now um i i think the business has a lot of traction and at this point i mean i'm jared isaacman did a great job of getting it to

where it is but at this point i'm not sure that you know that his second in command who's been with him the whole time can't just can't continue this this trend yeah is an american i'm i'm happy to see jared isaacman go lead nasa if you read his post on x it'll get you fired up about space basically like we're gonna be a spacefaring civilization again and buckle up because i remember you know we're gonna get shuttles back on the moon that kind of thing um i wish i could do a space show with him maybe maybe he'd come back on he's been on motley fool money before um but now you just have the business of shift four without the charismatic leader that was something that investors were willing to pay for was you know this rock star ceo who was getting

big growth and also going up in space planes. Now that you just have the business and maybe it's a wait and see kind of thing, is the business of Shift4 still interesting to you as an investor in the financial space? Yeah. I mean, in the same way that if Elon Musk had become the leader of NASA and had to step down from Tesla, that Tesla would still be a great business. It's not impossible that happens. No. And the post you just read from X sounded like it could have been written by elon musk honestly it's so it's it's yes i think it's still a great business and i think they've scaled to the point and have the the recipe in place to the point where someone who's been kind of working under isaacman this whole time can can step in into

the role um also so a big year for payment processors i mentioned toast um a little bit earlier this is also one i own um more restaurants adopting them you're seeing those growthy growth double-digit revenue numbers. They're cutting their losses. I think you mentioned earlier, shift four makes a profit. Toast is kind of getting there. They're trying to. But it's a growth story that investors are now willing to pay for. Over the past year, why do you think sentiment has changed so much for the iPads? Asking you a couple of questions. Well, in the past month or two, one, their earnings completely knocked it out of the park in the third quarter. I mean, they beat on the top and bottom line. Their guidance was

fantastic. I mean, they're growing revenue at 28% year over year, and now they're profitable. I mean, they're not as profitable as Shift4, but they're profitable. And really, it's a business story. A pro-business administration is going to be in the White House next year. People are expecting corporate tax cuts. They're expecting people to be more excited about spending money. And, you know, just a stronger than expected economy is kind of what the expectation has shifted to. And that's why the market as a whole has really lifted over the past month or month and a half. And, you know, Toast is really doing a great job of being like the all in one. I mean, branded mobile apps for restaurants is something they just recently rolled out.

It's not just the little payment terminals, which I wish they would get a little more honest about. It's going to ask you a question and just ask for a tip. I just say, leave me a tip here. But they're doing a great job. They're everywhere. Somehow they continue to add thousands of new locations every quarter. So it's just a really impressive growth story. And they completely knocked it out of the park this year. Are there any other financial stories that we didn't hit that investors should have paid more attention to in 2024? I think Block is a big one. Block really got it back on track this year. They were kind of like how PayPal, where they were just trying to acquire everybody and try to

really disjoin it. I remember Jack Dorsey led his, I think it was the first quarter, but don't quote me on that. I think he led one of his shareholder letters with, we've been quiet because we've been focused. And they're really just doubling down on the core businesses. You remember they acquired Tidal a couple of years ago, they acquired Afterpay. Now they're really just focusing on the cash app and Square. So they're doing a great job of that. And SoFi has really surprised me. And a lot of people, they've doubled in the past like six months, the stock has. The banks really kept momentum going and all banks should pay attention to what's going on politically in 2025. Regardless of where you stand on the political spectrum,

The reality is there's a high probability that we'll see lower corporate taxes in the next four years than we otherwise would have. That disproportionately helps the banking industry because banks are one of the most heavily taxed industries when you look at taxes of percent of net income. This is what happened in 2017. That's why they were such good performers. It's something to keep an eye on as we go into 2025. five. So I think you answered the final question of other storylines to watch in addition to what storylines investors should pay attention to. Matt Frankel, appreciate you being here. Thank you for your time and your insight on Motley Fool Money. Always a pleasure.

As always, people on the program may have interests in the stocks we 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. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening. We'll see you tomorrow.