Motley Fool Hidden Gems Investing - 3 Stocks Benefitting from China's 400 Million Millennials

Episode Date: May 25, 2022

As rough a year as it's been so far for stocks, there's one industry doing just fine. (0:25) Bill Mann discusses: - Why oil and gas stocks have done well in 2022 - How he expects industry giants like Chevron and Exxon Mobil to deploy capital - Reports that Airbnb is getting ready to exit China - A way U.S. investors can think about getting exposure to the 400 million millennials in China (13:26) Jason Moser and Matt Argersinger share some lessons from past bear markets and three investment ideas for anyone looking to keep things simple. Stocks discussed: XOM, CVX, ABNB, SBUX, MCD, YUMC, VYM, VIG, HD Host: Chris Hill Guests: Bill Mann, Jason Moser, Matt Argersinger Producer: Ricky Mulvey Engineer: Dan Boyd 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. Chris Hill. This episode is for fans of KISS, not the rock band, the design principle. Keep it simple, stupid. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst, Bill Mann. Thanks for being here. Hey, thank you, Chris, for having me. I want to talk about Airbnb in China. Okay. Because we've been talking a lot about U.S. companies leaving Russia. We'll get to that in a second. But we're nearing the halfway point

of 2022. And a lot of people in the financial media are starting, they're prepping for their mid-year review. And they're going to predict what's already happened. Is that what you're going to tell me? No. Look, I don't want to knock people in the financial media for this. I find comfort in things like mid-year reviews. We're probably going to do one on this show. But we're almost six months into the year, and people are starting to look back and say, okay, so overall, it hasn't done well. Many parts of the stock market have struggled. You can carve it up by sectors and be like, oh, who's doing worse than who? The one bright shining star appears to be oil and gas. I get the sense that you're not

surprised by this because early in the year, we had done something for Motley Fool members talking about a lot of different ideas, a lot of different industries. One of the things you said was a lot of talk about renewable energy. Understandably so, you might want to keep your eyes on oil and gas. Yeah. The reason I did so was that we have had this in this country, and I'll try not to be too political because we're not a political show, but it has been the case that oil and gas exploration and production in this country has been made very difficult to do in a lot of theaters. You can go into whether that's justified or not, but ultimately, we are at a point where demand outstrips supply,

and it doesn't have to outstrip by much. One of the things that's happened in the oil and gas industry, and I don't know, in fact, I know that people didn't pay attention to this, because if they did, energy would have been more than 2% of the S&P 500 by the end of 2021. Nobody was paying attention to the fact that these companies have gone from being incentivized to produce oil to actually being incentivized to produce cash flows. They've become much more cautious in where they spend their money and how. The two things coming together, And I'm not celebrating this by any stretch of the imagination, but it is important that we understand the whys for the things that are happening. And what you have is an oil and gas

industry that is much more cautious in its investment into drilling being met up with a with a political climate that has been pretty hostile to them actually doing the same until we're now at a point in which we, I hope, are going to be playing catch-up. So, when you look at Chevron and ExxonMobil, the two biggest players out there in the U.S., both with stocks that are up in the neighborhood of 50% year-to-date, where do you see them spending their capital? Because I remember us talking a decade ago, a little more than a decade ago, when the Great Recession hit. One of the things we talked about was, look, look at the energy industry, the big players are going to probably buy their time and selectively

make smaller acquisitions because they've got the cash, this is the benefit of being a huge company, and the smaller players, some of them are just going to get picked off. Do you expect that to happen again over the next year or so? It is always the case and has always been the case in the oil and gas exploration industry. They're called wildcatters for a reason. There are entities right now that see a tremendous opportunity, but the majors are going to be much more careful. They have been conditioned to be convinced that they may not be allowed to generate a return on their invested capital sufficient enough to go and drill. So, it's going to have to be from a societal basis,

from a demand basis, filled by somebody else. And that's the reality of the environment that we live in and that they exist in. I don't know whether it's a good thing or not. I mean, obviously, you can point to the fact that, well, part of the reason that oil and gas has been de-emphasized politically is that we would like to get to a green future. And that, I think, is 100% valid. But you still have to be aware of what the incentives are and how we fill those gaps. And right now, we're not in an environment in which those have been done sufficiently well. And so, that's why I'm in Williamsburg, Virginia today, Chris, and I basically needed to finance my gas tank on the way down. Do a little buy now, pay later

of my stop at Exxon. Last thing before we move on, it's a great reminder because I think, at least from a public narrative standpoint, we tend to give more attention to emerging technologies in other areas. We tend to talk more about the future of driving and self-driving cars, or the metaverse. When is that going to happen? We don't pay as much attention, as you just alluded to, to green energy and the timing of when it happens. Yes, that may absolutely be the future. We may be 40 years away from that being a mainstream thing. David Gardner had talked about, and I believe this wholeheartedly, that you should invest in the future that you want to see. That's a want to. There are still

is's that we need to consider. I don't know that the is's have been sufficiently considered in terms of what is a healthy amount of exploration and production of old-school oil and gas. Unfortunately, here we are. I'm really looking forward to the transcript of this conversation showing up on fool.com in a few days so I can see how the transcriber spells izzes. I'm looking forward to that. Just have two or three z's in it. You know what? Not my problem, not your problem either. As I said, Jason Moser and I have talked a lot over the last couple of weeks about McDonald's leaving Russia, Starbucks leaving Russia. We're now getting reports that Airbnb is planning to close up shop in China. They've

been there since 2016, trying to make it work. Competition from companies within China is on the rise. The pandemic certainly doesn't help. I guess my first question is, are you surprised by this? Not at all. First of all, China makes up 1% of Airbnb's revenues over the last year. But it is a massive, massive market. If you think about China, China has 400 million millennials, which is more than the population of the United States of America. They want to travel both internally and externally. But the laws in China have made it very difficult, not just for Airbnb, but for Western companies in general to operate. They are joining a long list of companies that have tried to go into China and have pulled out.

eBay was one. Amazon left China in 2019. Google left in 2010. Uber left in 2016. 2016, the list goes on. LinkedIn isn't even in China anymore. It doesn't surprise me at all to see another Western company hit upon the rocks of the realities of operating in the Chinese market. Not what do you think it does, but do you think that that does anything for other large companies? I mean, LinkedIn is owned by Microsoft, which has pockets as deep as pretty much anyone, do you think this, among other things, sends a signal like, hey, you can try this if you want, but you might be better off just sticking to your domestic operations and Europe?

Yeah, maybe. China, I think, is a special case, and I don't blame any company at all for giving it a go in China. I do give Airbnb some credit for saying, look, the regulations that we had to follow, like for example, we had very strict rules about providing the government the identities of the people who are staying at these properties, which here in the West, we don't love that very much. I've stayed in Airbnbs and had no idea what the name of the host was, and vice versa. So, those types of requirements in China were quite onerous for Airbnb. It is a disappointment that they are pulling out of the Chinese market. And it is important to note that Airbnb is maintaining an office in China because where they have

done quite well, maybe not now during the COVID lockdowns, but they have done quite well with Chinese people traveling outbound from China staying other places. Outbound travel in China has skyrocketed, more than 155 million outbound trips in 2018 and 2019 for tourists coming out of China. They are still in China, but they are giving up on competing with the Meituan's of the country and the requirements that they have found to be just a little too much in terms of trying to keep the lights on in Airbnbs throughout the country. One more thing and then I'll let you check out of your hotel room. room. I'm struck by your comment that China has 400 million millennials. What U.S. publicly

traded company do you think is poised, if any, to take advantage of that massive opportunity? I'm going to go with three very unsurprising ones. One is Starbucks, one is McDonald's, One is Yum, specifically Yum China, but Yum Brand still does have a stake in Yum China. Those are brands that have an incredible amount of credibility in China. They are already there. They've been there for a long, long time. I don't think that you have to be too fancy. I don't think that you really need to invest in China at all as a business or as an individual. But if you want to play in China, I think you need to look at, you've got to play the hits. You've got to play the hits. You've got to play the companies that are there and have been there

for a very long time. Bill Mann, really appreciate the time. Thanks for being here. Hey, thank you, Chris. If you've only been investing a couple of years, then this is your first real bear market. We thought it might be helpful to bring in some lessons from past bear markets and share some actionable ways to stay focused on the long-term. Jason Moser and Matt Argersinger have three specific investment ideas for anyone looking to keep things simple right now. I found some really fascinating data here just in regard to bear markets. I know we're in a weird Twilight Zone-ish area. We've got the Nasdaq in full-blown bear market,

we've got the S&P creeping in and out of bear markets here. But really, for all intents and purposes, we're in a bear market here. This is bear market territory. I saw that half of the S&P 500 index's strongest days over the last 20 years occurred during a bear market. To me, that's interesting to think about. Half of the strongest days over the last 20 years occurred during the bear market. This is a time where we get a lot of questions from people wondering, should they be selling everything and going to the sidelines and waiting until things bottom out? Very difficult to figure out when that might happen. In line with that statistic I just gave you there, another 34% of the market's best days took place in the first two months of the bull

market. Oftentimes, those first couple of months, you're not really sure there's a bull market going on. It's like a recession. You don't really know you're in a recession until after the fact, but it really does feel like all of this data points to the difficulty in timing the market, ultimately. We talk about that a lot. This isn't your first radio, you've been investing for a while. Let's talk a little bit about bear markets, talk about how we deal with these situations, because I feel like some investors can make it very difficult when it doesn't necessarily have to be. But what are some of the things that go through your mind as an investor during market stretches like this one? First of all, and this is definitely

not my first rodeo, I know it's not yours, definitely not our first bear market. First off, I think it's okay to feel bad. I don't think as an investor you need permission to feel bad about the situation. Look, I've had some sleepless nights so far this year, I'm sure you have too, Jason. We're all thinking about how our portfolio looked six months ago and what it looks like today, and it's not a great feeling. I've had that feeling a lot lately. The key is, of course, and it gets to your point about the data you shared, which is not to get discouraged. You don't want to get to that point where you throw up your hands and say, I just can't take this anymore, I can't lose any more money, because that's when you start

to make rash decisions that cause real long-term harm. I know people probably have seen this data and it's been thrown in their face over the last few months. But historically, the market drops 20% about every three to four years. The thing is, Jason, the circumstances are always different. Because of that, every time feels worse than I think the previous bear market. But we even forget what the last bear market was even about. I think we all remember COVID in 2020 when the market dropped, I don't know what it was, 30% in a few weeks. That was pretty severe and then it bounced back. But we had a bear market in 2018. I think it was something to do with the Fed or maybe China slowing down, but honestly, I can't even remember what that one was about.

We had one in 2011. I think I remember the government shutting down or at least potentially shutting down. I think there was a European debt crisis at the time. Who knows? I guess the point I'm trying to make is in five years, we probably will forget what this bear market was even about. But I think it's times like this, it's the price we pay for getting outsized returns in the stock market. I was looking at some data this morning as well. And if you look at over the last 10 years, so even including this nasty stretch that we've had, so I took this data as of the end of last week, the stock market is still up 14% annualized over the last 10 years. And I think we've had basically three bear markets, including this one,

over the last 10 years. And yet it's still up 14% a year. So you almost have to go through periods like this to get returns like that. And to your point, you have to stay invested because even within a bear market, and especially coming out of a bear market, if you've made the rash decision to sell and not be invested, you're going to miss out on those incredible days. And that's how you miss out in the 14% annualized over the last 10 years by taking your lumps and realizing those cells and not staying in the market. Yeah. This is an exceptional period. I'm glad you pointed out those previous bear markets because when you look at everything in total, if we think about it, our journey

is lifetime investors. Essentially, you're going to go through somewhere in the neighborhood of 15 bear markets. Assuming you start investing as you get out of college and start working, and if you live that average life expectancy, you're investing for a lifetime. You're going to go through probably around 15 or so bear markets. I would argue, we actually may see, that number may go up here in the future just because of technology. Technology and the flow of information has changed everything such that markets move much more quickly today than ever before. It could be that in 10, 20 years, that number is more like 20 bear markets. I guess we'll just have to wait and see. But the point is, like you said, it's a cost of doing business. You

You either participate or you don't. But you have to go in with that expectation that this is going to be something that you have to endure. Figuring out how to endure that, I guess, is the trick. Looking back in your life thus far as an investor through these bear markets that we've witnessed, and understanding they happen for all sorts of different reasons, but maybe what's a lesson or two that you've learned from previous bear markets that you feel like make it easier for you today to cope with stretches like this? That's a great question. I was thinking about this before we did the show. I think it gets really easy. It gets back to the emotional fortitude we were talking about. It gets really

easy during times like this to be tempted. Not that you're leaving the market or selling your entire portfolio, but it gets really tempting to sell certain companies out of your portfolio. You know, ones that you bought, you know, obviously at much higher prices, you had great hopes for them, they've been huge disappointments. We can name a whole list of companies that probably fit that for everyone. And it's tempting to want to sell those and put them in the, quote, best companies in your portfolio, right? You're looking at your portfolio thinking, okay, I think I know this is going to be a

slam dunk, or I think I like this one, I'm going to sell these other guys over here and reallocate to these companies that I have more confidence in. I think what I've learned personally, painfully, is that when you do that portfolio optimization, it doesn't really work out. You're likely better off just doing nothing, holding on to all your positions. It doesn't feel good and it feels counterintuitive, but the problem is you don't really know which companies are going to bounce back and some won't bounce back and you'll regret not selling them. But you'll often be surprised at the ones that actually do bounce back. Jason, you know this, when you sell something to buy something else,

you have to be right twice. I think that is really hard. I'm terrible at it. I think most investors are pretty terrible at it. Never resist, I guess, the urge to optimize your portfolio right now. You're almost better, as painful and silly as it seems, just to sit on your hands and really do nothing and hold on to all your positions. Well, and I think that really kind of lines up with the theme behind this segment. Something that I like to say it all the time, really investing is as easy or as difficult as you choose to make it. Folks love to get in there and try to make things really difficult. You jump into businesses that you don't fully understand or you want to sell something to buy something else and you're right, you have

to be right twice essentially on the sell and the buy and that's never a given either. think keeping it simple is ultimately what we're trying to do. What are one or two ways you feel like investors can just keep it simple? A couple of ideas for investors to be able to just step back and say, you know what, let me just focus on this, this, just get back to basics, get back to fundamentals. What are some ways we can keep it simple? I think you have to almost step back and just start by thinking about your own financial goals. Why are you investing in the first place? Is it to get wealthier? Of course. But is it because you're trying to grow your portfolio to a certain level, say 10 years from now, so maybe by the time you're 60 or so you can retire?

Is it to develop an income stream? I think stepping back and giving yourself that perspective is key right now, because I think there's so many things we're seeing in the news, financial headlines on the macro economy, it's hitting us all at the same time. We're looking at our portfolio, we're looking at all the stocks getting hit hard, and as investors, we're looking for opportunities, but you almost need to step back away from the market, away from stocks and say, okay, what am I actually investing for? Why am I here in the first place? I think that can give you a nice perspective on how you want to go forward. How do you want to approach the next bear market or your next stock that you buy? You almost have to step back and say,

how does this fit into my overall financial goal? I know that's something a lot of us don't like to do, that little self-reflection, but in times like this, I think that's something that's really important. Yeah, I agree. I think another thing I like to do is, at the very least, just in keeping it simple, if you have a job and if you contribute to a retirement plan, every paycheck, as we're fortunate enough to be able to do, at the very, very least, just keep that ball rolling. Don't stop contributing to that retirement plan. That's just money that's coming automatically out of your paycheck. It's going into an index fund or some type of fund that ultimately should keep it pretty simple. The entire purpose of really fun-style

investing is to smooth those bumps and make it a little bit less bumpy of a ride there. If you do nothing else, just keep that ball rolling. To me, that's one thing I focus on personally when I feel a little bit overwhelmed. I'm like, you know what, at the end of the day, even if I'm doing nothing, I'm still doing something because I'm doing that. But let's go ahead and wrap up. Let's wrap up today with just a couple of ideas for listeners as far as in markets like these, in trying to keep it simple, let's not overthink things. We want to keep investing. What are some of the ways, what are some of the ideas that you like for investors to keep that ball rolling? I'm talking specific names, funds, stocks,

whichever way you want to go. You bet. I've got three, and two of them are ETFs. One is called the Vanguard High Dividend Yield, ticker VYM. The other one is the Vanguard Dividend Appreciation, ticker VIG. I wouldn't necessarily invest in both of these, but I think each of them, if you haven't looked at dividend companies or you haven't looked at that part of the market in the past. I think these two ETFs are very simple, very efficient, very low-cost, ways for you to get access to companies that have wonderful track records, payout cash and dividends, have a lot less volatility than the overall market, and maybe that's something that your portfolio could use. These indexes have held up so much

better year-to-date than the rest of the market, and that's a real ballast for a portfolio. Think about having those ETFs, if you had them six to nine months ago, you'd have held on to a lot more of your capital, you could reinvest the dividends you're getting into other ideas that are much cheaper these days. I think having some of that in your portfolio is really good. Then for one stock, on the theme of keeping it simple, which I love, go with a good business that has a great track record that I know is going to be around for a very long time. Something like the Home Depot comes to mind. Trading for a below-market earnings multiple, everybody knows the business, everyone's probably listening to this, has been in a Home Depot before. The dividend yield is up

to 2.7%. I mentioned it's a relatively cheap stock, yet this is a company with probably a lot of growth still ahead. You can be confident it's going to be around, generating nice cash flow. That's one I would probably add to a watch list, just a simple idea for today's market. I love that. For folks who listen to the Friday edition of Motley Fool Money, then you'll certainly know that that's a position that I just recently opened myself, so thanks for the validation, Matty. I appreciate that. Well, Matty, if nothing else, I reckon we are one day closer to the bottom, so we can take a solace in that. But thanks again so much for taking the time to come on the show today. It was great catching up with you.

J. Mo, always a pleasure. Thank you. 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. See you tomorrow.