Motley Fool Hidden Gems Investing - A Slow, Expensive Housing Market

Episode Date: July 23, 2024

Housing supply is slowly rising. So are prices. (00:21) David Meier and Ricky Mulvey discuss the state of home sales and earnings from UPS and Spotify. Then, (14:52) Alison Southwick and Brian Feroldi continue their summer school series with a language arts class for investors. Learn more about the Range Rover Sport at www.landroverusa.com Companies discussed: UPS, SPOT Host: Ricky Mulvey Guests: David Meier, Alison Southwick, Brian Feroldi Producer: Mary Long Engineers: Dan Boyd, Desiree Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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You're listening. to Motley Fool Money. I'm Ricky Mulvey, joined today by David Meyer. David, thanks for being here. Oh, it's awesome. Can't wait to do this. Let's talk some big macro. We got some fresh existing home sales data this morning. This is an interesting market because no one really wants to sell their home right now. The market is both slow and expensive, so less than 4 million homes sold annualized from the month, that's down 5% from last month, and down from more than 6 million annualized back in 2021.

This is a weird economic situation where, get out your graph, but the supply is rising and so are home prices. Yeah, what the heck's up with that? What is? You're the analyst. Yeah, break it down. What's going on? So, here's what's going on. And I think the NAR's Chief Economist, Lawrence Young,

made some interesting commentary that we can use to explain. Basically, he said, the market is starting to shift from a seller's market to a buyer's market. And the other thing along there, what he said is, the supply-demand curve is actually coming more into balance. So, yes, supply rising, home price rising doesn't necessarily makes sense, but in the short-term, you can get strange things like that. What's happening now is there are a few more homes coming onto the market, but they're actually sitting for a little bit longer. What that means is that if you're a patient buyer, you're not forced to buy, you've moved or something, you have to get a home, you might be able to get some

better prices. As you noted, they did increase again. The median price was up. It's going to be really interesting to see how this plays out. If prices lower, that might not be a good thing for overall GDP, but it will depend on what happens to prices. It's a good thing if you're trying to buy a house. It can be. One thing we have to remember, and you alluded to it in your opening comment, there are lots of homeowners right now that have absolutely no incentive to move because they're locked into an ultra-low mortgage that were available between 2019 and 2021. That could limit the amount of supply that actually comes onto the market. Because again, if you're at, let's say, two and seven-eighths, which is the mortgage I used to have,

why would you want to sell? I sold because I moved. I had to, but not everybody will do the same thing. Do you think this is just an interest rate story? Is it more than people just waiting on the Fed to see what they're going to do in September and maybe get lower mortgages? Yes and no. Okay. So clearly, if the Fed lowers interest rates, that will have an impact. It could bring more buyers to the market because affordability should improve. But in order for it to really impact the market, the Fed would have to cut rates considerably. Because again, think about what the, you know, what the anchor is. The anchor is somewhere between three and call it three and a half percent where it's, you know, six and seven eighths or we're around there

today. So the fed is not likely to make a huge cut, like a point or something like that. It's only going to do a quarter. So from that respect, no, uh, the fed is, is not really that big of a player. Is it more than just an interest rate story? Yes. And we have to remember, we still have actually a shortage of affordable entry-level houses. So, interest rates could help first-time buyers. But what we actually need, we need builders to construct more lower-priced homes for the market. That is not an interest rate story. That's about geographic and demographic issues, where you live, where are the jobs, is it a desirable location? So, that's a harder thing to shift, but with the trends changing from, you know, work from the office to work from anywhere,

we'll see how that plays over time. So it's a slow, expensive market that kind of has an interest rate story to it, but also has some demographics going on. Let's go to UPS, which I also count. I count UPS as a macro story. Totally. We got guidance from the shipper, which got volume up for the first time in a couple of years, but its customers are choosing cheaper shipping options. They lowered guidance for the rest of the year. That's driving the stock price. What's happening with UPS, especially with the shipping mix-up? Yes. In a nutshell, what's happening is they're getting hit by the most negative trifecta that you could experience in business. UPS is getting hit by lower overall volumes,

volumes increased in the United States, not internationally and not when you combined the whole world together. It's also having some difficulty with pricing, as you alluded to. Fewer shippers are asking for higher-priced options. They're willing to take ground versus air, that type of thing. And their costs are too high. So, there is nothing that goods, nothing good comes from that trio of metrics. And the other issue is, they're not expecting this to necessarily resolve anytime soon as they brought their guidance down slightly for the entire year. Another move is that UPS sold off a third-party logistics provider, Coyote, to RxO for a billion dollars. It seems that that money is kind of going straight to share buybacks.

We sold this company for a billion and we don't know what else to do with it. So we're going to buy our own stock. What do you think of that capital allocation move? Yeah. So they, in the, in the earnings announcement, they said they're going to allocate the first 500 million. Look, there is no doubt that the stock is a lot lower than it was before. But the thing we have to ask is, is it necessarily attractive yet? I don't think so. If you look at all the markets, not all the metrics, not just domestic volume, they need to start turning in the other direction before the stock at this level becomes attractive. So, if I was CEO, what I would be looking to do is, what productivity enhancement investment could I be making? That helps your business

not only in the relatively short term, because they can take some time to implement, but it puts it on a stronger foundation because this is a cyclical business. Shipping goes up and down. In good times, your business should be able to make more profit than if you didn't make these investments. To be clear, it's making investments internationally, opening up some shipping lanes from Taiwan to Europe, that kind of thing. Any other big takeaways from the quarter for UPS? Yes. The CEO did remark that adjusted operating profits should increase in the back half of the year. That could be good news. Maybe they have hit the inflection point, maybe things are going to start to turn up. But unfortunately, we'll have to wait and see because the shipping environment

is not easy right now. Clearly, she's confident that things should improve, but we got to have the proof in the pudding in terms of the numbers that come out. There's a part of my brain that's like, all right, we got a cyclical stock that's clearly in a down cycle right now. If you want to play that game, David, that's the time to start looking at it. But you're saying it maybe isn't worth a spot on our radar quite yet. Again, there's a lot of challenges going on right now. For me, this isn't a stock I necessarily follow very closely. But if you're an investor and you have some experience in the shipping market or some specific insights into how things might be changing for the better,

that could be a time where you would get excited about today's valuation metrics, because you actually can project forward and say, yes, this is actually a good price. One of the other things that we can consider, if you're a patient investor along the way, this company still generates tons of cash flow, pays a great dividend, and that dividend does not appear to be at risk at all right now. You could get paid to wait, if you will, but capital appreciation is still likely a little bit of a ways off until investor sentiment changes. It's not a stock that's had a ton of capital appreciation over the past five years. I think none to be exact. So if you like the dividend, maybe something to look at. Let's talk about

Spotify. Yes. And before we talk about Spotify, I want to note, because I got some bias coming into this, David, we got a content partnership with Spotify. Premium members can listen to the show Stock Advisor Roundtable. The Motley Fool recommends the company. And I also personally own shares of Spotify. So how about that? We got a trifecta of bias coming in, but the streamer added seven million new paid subscribers from just last quarter that was a million more than they forecasted yeah we can concern troll the monthly active user growth but i think that's that's pretty impressive and in just a year the company went from losing a quarter billion dollars in operating income for the quarter to flipping that to making a quarter billion so those are the

numbers what's the story behind that what shifted at spotify it's a simple story price increases pushed gross profits higher and cutting costs reduced their operating expenses. When you combine those two things, that drove the massive swing from a significant loss to a significant gain over the year. To CEO Daniel X credit, he did exactly what he promised to do. This puts the company in a much stronger position going forward. The profitability increase made its way all the way down to the cash flow statement. That gives the company options to make future investments, and more cash flow is always music to any investor's ears. This is something I've been thinking about where it's going on with Netflix and it's

going on with Spotify. Spotify has, I'm going to round, about 250 million paid subscribers. has about 280 million paid subscribers when you think about just the number of people in the world that can afford music and streaming subscriptions i feel like we're getting close there's got to be a limit right so i mean do you think we're getting close to a saturation point where those those millions and millions become harder to find so your logic is good uh let's say that but i give the but. But I would say no. Even more so than Netflix, Spotify is a global business. Its largest cohort of customers is actually in Europe and not the United States. Again, if you take that whole global market, and to your point,

there are demographics in terms of the income disparities around the world, but there still should be plenty of opportunities to grow listeners at all levels, not just the subscriber level, but you can do it at the ad-based level as well. I think there's still plenty more markets out there for them to go out and try and capture. I was thinking about this. This is from last quarter, but Daniel Ek trying to tamp down investor expectations, saying, basically, we had a standout year in 2023, but you shouldn't be expecting that going forward. Yeah. I actually love to hear statements like this from the CEO. Just like you said, it's working to tamp down expectations. That could be really important right now for Spotify

because its growth is solid and it has gone through that inflection point of profitability and cash flow generation. What you want is you want to rein in investors just a little bit, and the stock has done extraordinarily well this year, rein them in just a little bit such that the incremental improvements that are made can be rewarding for shareholders going forward. Let's zero in on the inflection point you were talking about. Just a couple of years ago, this was a company where a lot of people were worried that it's going to have a lot of trouble being profitable because even as you get more and more subscribers, you're paying all these royalties, you have an ad market to deal with, and maybe those margins won't expand quite like

management is hoping to. It seems like that story, that thesis has broken down a little bit when you look at just the cash flow generation that this company has been able to produce. Let's think about it this way. The company has made some price increases, but that's across a fixed cost base of royalties. The royalties aren't necessarily changing as frequently as the price increases that recently were enacted. So, they'll get the benefit, right? But at some point, the music owners will come back and say, hey, we want a little bit more, right? So, they're going to have to figure out how to deal with that. But at the same time, their user base is growing. So, we're not going to see the big leaps in margin expansion going

forward. The math works against that. But I think the company doesn't have to do that. It just has to keep making incremental improvements from here. And just about all those incremental improvements will drop to the earnings line as well as the cash flow line going forward. So I think Spotify is in a really good position here. That's a good place to end it. David Meyer, appreciate you coming on, and thanks for your time and your insight. Thank you for having me. You just found out that your sales team is at risk of missing quota.

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this time, a language arts class on the terms and animals for investors to know. All right. Welcome back to Language Arts, students. Yes, it is still summer school, and you might think that investing is just a bunch of mathy math numbers, but the truth is, the world of investing also has a language all its own. Just turn on CNBC, and you'll hear a number of idioms and jargon and a surprising amount of animal references. So today we're going to learn more about the vernacular of trading and define some commonly used idioms that you might hear on, I don't know, Bloomberg, CNBC, you know, the places. And joining me yet again is Professor Brian Feroldi. Not actually technically a real professor though, right?

Who's to say? Who's to say, Allison? No, but I'm not. Well, you're still teaching, so maybe that counts. I don't know. All right. Our first idiom is catch a falling knife. What this means is when you try to buy a stock that has been in free fall. So let's say a stock is trading at $100, it goes to $90, it goes to $80, it goes to $70, it goes to $60. And you think, I know, now is a great time to buy it. And you go in and buy it at $60, and then it goes to $50, and then it goes to $40, and then it goes to $30. So you are buying something that is in free fall, and you are getting hurt on the way down. That's where the idiom comes from. You know, I don't think I've ever heard the idiom used to successfully

describe someone catching a falling knife. Does that tell me just how hard it is? Yeah, it can be very hard. Generally speaking, if a company is in free fall, that is because there is something horribly wrong going on in the business. Of course, if you can catch the falling knife by the handle, there is a chance that you could actually make money, but that assumes that the stock does recover eventually. Our next idiom is sell in May and stay away. Yeah, this is one I've heard many times over the years. And what it effectively means is when May comes around, you want to sell your stocks. That's when huge swaths of Wall Street go on vacation and liquidity drives up. And essentially, nothing good happens over the summer because so many big money managers

are on vacation. So they say, sell in May and go away. And there have been studies that have shown that there is some validity to this kind of thinking, especially if you're a trader. Do you think traders started using this because they wanted to actually be like, listen, we need to go on vacation. Let's just tell everyone to just like, we're gone. Let's just agree to this. It feels like something they agreed to. That sounds extremely smart on their behalf to do so. And if I was a trader, I would absolutely be advocating, let's just sell and take the summer off. Right? Head to the Hamptons. All right. Next one is buy the rumor, sell the news. Yeah. The idea here is that when a rumor comes out about a company getting acquired or a

new product or a partnership or something good coming along, you want to buy when the rumor mill is swirling because the company tends to trade up as the rumor gains validity on Wall Street. And oftentimes, if there is a rumor that is later confirmed by an actual press release and the news coming out, it's actually fairly common for the stock to sell once that good news becomes confirmed and becomes public knowledge. For example, this happens a lot of times with acquisitions. Oftentimes, there's a rumor that a company is going to buy another, and then if that rumor proves to be true and an acquisition is actually announced, on the day of the announcement, the stock price actually falls because it had been bid up beforehand. So, for traders, again,

the idea here is, when there's a rumor, you buy, and as soon as the news comes out, you sell. All right. Our next one is, stocks take the stairs up and the elevator down. And if you've been an investor, this probably feels true. Bull markets grow slowly. The prices kind of gradually go up, meaning that stock prices increase on a step basis up the stairs. But when bad news comes along, and when a bear market hits, boy, do stocks fall extremely quickly. So, this is something that I have personally experienced many, many times. It seems that bull markets take forever, and they're kind of skeptical. But when something like COVID happens, or the 2008 financial crisis happened, stocks drop like a stone fast.

I think we see this a lot with our members at The Motley Fool too, especially if you're new to investing and you're probably coming into investing along with a wave of the market going up. That's kind of how it works often, right? Newbies like to get into the market when everyone's getting into the market. And then of course, inevitably, there's going to be some big precipice. And that is a lesson that I think everyone learns earlier on in their investing career and they can't take it to heart, right? Because you got to then get back on those stairs for the longterm. And a lot of these sort of idioms that we've thrown around here, um, you know, Brian, we were talking about, these are idioms that traders use, but this feels like a

good idiom for a longterm investor to remember. Or at least to keep in mind. Yeah. And this is going to happen to you if you invest over a period of years. And it's just an unfortunate thing of human psychology, Alison, which you just mentioned, people tend to be most interested in investing at the worst possible time, and they give up on investing at the worst possible time. But hey, that's what makes a market. Yeah. All right. Our last idiom to cover is the dead cat bounce. Yeah, this is a funny one. The idea here is that, again, we have a stock that is absolutely plummeting. It starts at $100. It goes to $90. It goes to $80. It goes to $70. It goes to $60. It goes all the way down to $10. And then from $10,

it recovers back to 15 or 20. In other words, a company that has experienced a catastrophic loss on the way down has a very small recovery at the end. The idiom there is that a dead cat, even a dead cat bounces. I love that one. It's so gross, but I just love it. All right. Speaking of animals, of course, you've heard of bulls and bears, but there is a lot more animal-related name-calling that happens in the Wall Street schoolyard. So, let's talk about a few animal names you might get thrown around. The first one we're going to cover are hawks and doves. What are hawks? Yeah, so hawks are, broadly speaking, referring to policymakers and specifically

central banks. And when the Federal Reserve, for example, is hawkish, that just means that their number one priority is controlling inflation. And when they're feeling hawkish, that means that they are likely to raise interest rates in the near term future. Now, the exact opposite of that is when they are feeling dovish. So, if the central bank is feeling dovish, that means that their number one priority becomes stimulating economic growth, and they are likely to be lowering interest rates in the future. So, if you hear the Fed is feeling hawkish or the Fed is feeling dovish, now you know

what that means. All right. Another animal you might hear about is a whale. Yeah, this is commonly used in gambling rings, too. A whale is just an individual or an entity that holds a significant amount of capital, so much capital that they actually have the ability to move market prices when they buy or when they sell. So, a whale just refers to a big investor.

For example, if Warren Buffett takes an interest in a stock, you can bet that that stock is going to move up or down in either direction. So, I think Warren Buffett qualifies as a whale. Whales? From whales, we're going to go to wolves. Yeah, the wolves is a term that was probably popularized by the term the wolf, by the great movie The Wolf of Wall Street. What a wolf means is when a trader or an investor is dealing with very aggressive or even unscrupulous trades, basically getting

high-risk, high-reward strategies and pushing those onto the market. These investors are known for creating opportunistic behavior and sometimes engaging in market manipulation. You don't want to be labeled as a wolf. You probably also don't want to be labeled as a lame duck either. So a lame duck is an investor that is in a very difficult financial situation. Perhaps they are unable to meet their obligations. Perhaps they use leverage and that leverage went against them. So this term can also be used sometimes to refer to companies that are in trouble. So a company that is on the brink of insolvency would be called a lame duck. And the last animal we're going to talk about, although there are others we could include here. But we're going to end with pigs.

Pigs are investors that take on very high levels of risk in pursuit of very high returns. So they tend to become overly greedy with their investing, and they keep their money in the market for too long. In fact, there's a famous saying on Wall Street that bulls make money, bears make money, and pigs get slaughtered. So you don't want to be a pig, meaning you don't want to be known as taking on an unusually high level of risk to get that extra bit of return. As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

Thank you.