Motley Fool Hidden Gems Investing - A Stock To Spice Things Up

Episode Date: February 13, 2024

Love can be stubborn and so can inflation. (00:21) Ricky Mulvey and Nick Sciple discuss: - Wall Street’s reaction to the latest inflation print. - Shopify acting like a growth stock. - A new partnership for Tiger Woods. Plus, (15:20) Jason Moser and Bill Mann join Alison Southwick and Robert Brokamp to share some Valentine’s Day themed stories about stocks. Stocks discussed: SHOP, GOLF, NKE, CSCO, COST, MKC Get Exclusive NordVPN deal here: www.nordvpn.com/motleyfool It’s risk- free with Nord’s 30-day money back guarantee. Host: Ricky Mulvey Guests: Nick Sciple, Alison Southwick, Robert Brokamp, Bill Mann, Jason Moser Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Ricky Mulvey, joined today by Nick Seipel. Nick, good to see you. Great to be back here with you, Ricky. On Mardi Gras, as a Mobile, Alabama native, the home of Mardi Gras in the U.S. It's a great day for me, and I'm excited to be here with you. Happy Mardi Gras. Not so happy day for the stock market. Got an inflation report that it wasn't too, not celebrating quite like they are down in Mobile, Alabama and in Louisiana. Market appears to be taking a breather as the CPI print came out to three, and we got to use decimals here, I'm sorry, 3.1% on the year. The economists wanted 2.9%. This is a rounding error, Nick. I mean, is this really a bad report, or is this an excuse to sell?

Maybe both, I guess. I would answer your question, yes. Not either or, just yes. It's a bad report, just in the sense that it came in worse than expectations. For some market participants out there, that is a reason to sell. As we all talk about or know, valuations reflect expectations about the future. The higher those expectations are, the more the market is going to react when reality fails to match those. Foolish investors are probably familiar with what happens when companies report earnings, and businesses put out results that are different than the market expects. We'll talk about an earnings report here in a little bit. Macro also responds to expectations. In this case,

we've seen the market coming in today was up over 5% year-to-date in part. That was driven by expectations that the Fed might be getting ready to cut interest rates. Following today's inflation report, market expectations for a Fed rate cut in March have fallen down to below 10% a month ago. Those expectations were discounting a 70% chance of a rate cut. So that change in expectations, how it affects valuation models really is what's driving the selling today. I mean, the Fed's not just looking at a point two percent miss. It's looking for the long term trends, and that still appears to be good on inflation. I don't know. It always seems like those equity analysts are a little quick on the trigger to me. Let's look inside

the report. There is some good news for people who buy stuff because inflation overall is slowing down you've got used vehicle prices down about three and a half percent overall grocery prices down about the same amount apparel down about a little less than a percent the bad news it's always mixed you got shelter prices up on the month six percent year over year i mean it doesn't look like a huge a huge deal to me i saw a headline in the new york times that said stocks sink is stubborn inflation resets Fed forecasts. This is alarmist, Nick. You know, it could be. If you want to look on the bright side, the rate of the change is slowing down. We still have inflation coming in at 3.1%. That's slower than what we saw in

December at 3.4%. So we're slowly but surely ticking down toward that 2% target that the Fed goes after. However, I do think this stickiness of inflation, this sticking around for longer than the market expects, shows that inflation is stickier than the market had expected. I think historically, expectations about inflation are real drivers of inflation. It could mean that market expectations maybe have stuck in. I will say, looking at that shelter price inflation number, we still remain in a market where real estate is scarce. You see that in the valuations of companies out there in the market. Limited resale inventory leads brokers really having a tough time, but folks selling new homes are at all-time highs and

really sitting pretty. And I think that's part of what we're seeing in that shelter inflation number. Maybe a reason to look at some home builders. Let's move to the Shopify earnings. What a tough day to release earnings that miss a couple of expectations for a growth stock. The earnings in the stock, though, tell two very different stories. Usually you hear about a company beats earnings, but then they issue softer guidance. So the stock falls. That's the PayPal story from about a week ago. This time, we've got an earnings beat. We've got a swing to operating profitability. How about that year of efficiency? Guiding for 20% revenue growth. That's in line with Wall Street expectations. And the stock is down more than 10% this morning. What's the

street so fussy about? Yeah. So again, it comes down to expectations. As you mentioned, revenue growth guidance strong. However, operating expenses are going to come in a little bit heavier than the market was anticipating. As you said, look at this fourth quarter, this quarter just completed, really strong performance, hard to argue with any of those numbers. Revenue up 30% when you exclude the divestment of the logistics business in 2023. It was the largest revenue quarter in the company's history. Gross profit delivered another company record up 33%. Free cash flow margin at 21%. Shop pay doing very well. Gross merchandise volume up 32% year-over-year. Now, it's used on 60% of transactions on the platform.

Even offline, the company is doing very well. Offline gross merchandise value up over 20% year-over-year. Looking backwards, numbers great everywhere. Looking forwards, again, if you look at the revenue number, great, you cited that 20% revenue growth number. If you exclude the logistics business, again, which has been divested, you're looking at more like a 25% plus revenue growth rate, which is pretty good. Gross margin expected to expand, that's good. But again, as I mentioned, operating expenses is where the problem shows up. Guidance calls for a low teens increase in operating expenses. If you trickle that forecast down, you're looking at an operating income number somewhere in the $170 plus million versus

expectations were in the $380 plus million. For analysts out there in the market, you're also seeing free cash flow margin expected to fall meaningfully down to a high single-digit percentage of revenue from over 20% we just saw in the most recent quarter. It is interesting, though, driving into those increases in operating expenses, management said there's two things behind that increase. One is employee costs, so the company is citing payroll taxes that they're going to have to manage in the next coming quarter, as well as employee compensation increases. Although you're not going to increase headcount, folks do have some of these raises that kick in at the start of the year. But the other one is a little bit more interesting,

which is marketing expenses. The company says it's going to push harder on performance marketing, claims to have improved its performance marketing performance saying, quote, it's unlocked some opportunities to reach potential customers at highly attractive lifetime value to customer acquisition costs and payback periods, including reducing payback by over 30% through the use of AI and automation. Really, they're saying, our marketing is performing better than expected. We think we can get better results than we've seen in the past. We're going to push even harder on spending. If they're right, this increased spending today will result in significant returns in the future. We shouldn't be upset about

this increased operating expenses, but time will tell whether those results pan out. Going back to sum it all up, good results this most previous quarter. However, the company is spending more than expected, which has folks selling the stock. But if those investments prove out, this might be a buying opportunity for long-term investors. You're telling me a growth company is acting like a growth company? I guess so. Founder-led company willing to invest where they see opportunities out there in the markets and willing to take the short-term lumps to make that happen. We'll see whether those investments pay out, but management has said, we think that there's opportunities here and we're going to go after them.

Let's take a look at some of the strategy highlights for management. You tell me if any are worth investors' attention. One is that it's going more into the B2B commerce space, signing a deal with carrier they do some hvac systems introducing a ship to store from the spot shop i almost said spotify shopify point of sale which allows brick and mortar locations to ship online orders a little bit of a departure from owning warehouses with flexport you've also got speaking of marketing mr beast promoting the shopify app putting out a video that was uh by by 40 million views, larger than the biggest audience for the Super Bowl this year. You've also got some AI co-pilots. We've got to have AI in there, Nick. You've got AI co-pilots,

photo editing tools, that kind of thing. Any of these strategic initiatives worth investors' attention? Well, the Mr. Beast one stood out to me just because it dovetails with that management commentary around expanded performance marketing, spend ways to reach more potential customers at attractive prices. This Shopify Mr. Beast video has over 165 million views, helped drive a spike in downloads for the shop app. This collaboration comes after the company did another collaboration with Drake last year, which presumably must have had some good results to see continued spending. It could be that the expanded marketing spend the company is talking about means we'll see even more of these partnerships to try to juice growth in the business. And if they're seeing

good results in the numbers they're talking about, then that's good spending. Let's talk about the price for a second. In 2021, Shopify traded at a 60X, 6-0 revenue multiple. Now it's at 15X. I say this firmly with my tongue in cheek. Are you ready to call this a value stock? I don't know about a value stock, Ricky, but definitely more in line with where the company has historically traded, really saw a massive multiple expansion in 2020 and 2021. That said, multiple has expanded a bit from where we saw the company this time last year. I just say it's not a value stock. It's a rule breaker. This is a company that's always traded over 10X sales, has always looked expensive when you just look at the trailing numbers. But it's also a business

that is undoubtedly the top dog in its industry, and that continues to expand its market every year. You talk about business-to-business sales. I talked about the offline business growing at a 28% rate. This is not just a company that's captured its market, but is growing, creating new markets year after year. And I think that's the type of company that can continue to beat the market's expectations, even when they're very high. And if they can keep doing that, then it's best days are still ahead of it. Let's talk about a big deal in the golf community, which I know you're following. So earlier this year, Tiger Woods left Nike. Now he's got a new brand with tailor-made golf equipment. It's called Sunday Red. Woods is getting his own headquarters,

designers, and staffing. Looks like it's functioning as its own kind of business. TaylorMade management confirmed that Sunday Red is planning to launch a golf shoe early next year, if not sooner. So you told me this was a big deal and really interesting. Why is it? Why is this a big deal? Sure. Well, obviously anytime you hear the name Tiger Woods and golf, it's a big deal. He's the Michael Jordan of the sport with this Sunday Red brand getting built out. Sounds kind of like the Jordan brand for golf, which maybe Nike took a crack at, at, at doing, you know, the past 27 years, but wasn't able to have the success that they hope to have. Clearly, it's why they've reduced investment in the business. Woods has had a relationship with

TaylorMade going back to 2017, that's when Nike exited the club's business. This expands Tiger's relationship with TaylorMade into the apparel area that he had retained the apparel relationship with Nike even after going to another club manufacturer. But this movement into not just an apparel relationship, but TaylorMade now going to launch a golf shoe as part of this Sunday Red brand early next year, if not sooner. This is a segment that TaylorMade currently doesn't operate in. If you go to the golf shoe segment of TaylorMade's website, you see two flip-flops and one old out-of-date women's golf shoe from an old collaboration. This is really breaking into a a meaningful segment of the golf apparel market that TaylorMade is not traditionally operated in.

You know, I follow a company we've talked about here on the podcast, I guess, around this time last year, Kushnet Holdings, ticker is golf. They're really the top dog in this segment with their Foot Joy brand. That's one that Tiger had been wearing on tour since kind of separating from the Nike apparel relationship. You've seen that stock down about 5% this morning. Concern about, well, with this new brand entering into the market, could that change competitive dynamics in the space? For my part, I'd like to see the Sunday Red brand prove it first. Nike really made lots of efforts to break into the golf business and had some issues. Dedicated golfers tend to stick to the products they like. They're a pretty particular bunch. And while dedicated

golfers, this group is only about 15% of players, they spend about 70% of the dollars in the sport. That's an area where Foot Joy already has some really strong relationships, unlikely to dislodge those established relationships. However, for new and beginning golfers, really, this is an opportunity to capture them or to shift golfers away from some other brands. One other thing worth mentioning, TaylorMade last year made an investment in PopStroke, which is a top golf, but a putt-putt version of that. It's an area that Tiger has also invested in. You could see synergies with the Sunday Red brand and that investment and the way that Topgolf tries to push Callaway products and Travis Matthew products. You could see this pop stroke

retail location being used as a way to try to push the Sunday Red brand. If you were in the TaylorMade boardroom, is this a deal you would have gone after? I mean, Tiger is still synonymous with Nike. And now you have the TaylorMade and their owners, which is the hilariously titled private equity firm Centroid Investment Partners, credit where credit is due to their creativity. Tiger's got some risks. He's on the tail end of his career, and it's going to be really expensive to get him to wear your shoes. Is this going to be worth the money? Well, we'll see. I certainly would have kicked the tires on it if I was, again, Centroid, if I was tailor-made. Tiger is the most influential, famous golfer in the

business is going to be the one who's most likely to move the needle for you. It all depends on the price. There are some real risks, though. You mentioned Tiger being at the end of his career. Folks might not remember, three years ago, really seriously injured himself in a car accident. Could have ended his career there. He's had some issues in the past with operating a motor vehicle. Not only the career coming to an end, there are some unexpected things that could happen with Tiger. But I think private equity managed business looking to make a big splash. Maybe this company would like to go public at some point in the future. All these types of the tiger relationship would be helpful for that. Let's just say that. So there's risk to the deal, but I think it's

the type of thing that you kind of have to go after if it's presented to you. Nick Seipel, I'm glad you're not at Centroid Investment Partners. I'm glad you're right here at The Motley Fool. As always, appreciate your time and your insight. Yeah, happy to be here with you, Ricky. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce

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What was your first love? I'm talking about stocks, of course. Alison Southwick, Robert Brokamp, Jason Moser, and Bill Mann caught up for some stock-themed Valentine's Day stories. Valentine's Day is tomorrow. Maybe you're planning to spend it with loved ones. Maybe you're planning to scrunch up your face and say it's a stupid made-up holiday designed to sell chocolates and greeting cards. Or maybe, like us, you're going to pour yourself a glass of something, sit back, and reminisce about the big loves of your life. the ones that got away, the ones that broke your heart, but stocks.

So, Bill Mann and Jason Moser are analysts here at The Motley Fool, and they are joining us today in studio to share some of their big loves and losses in their investing in life. Hi, guys! Thanks for joining us! Jason Moser. Addy, I have a question. Addy Cross. Here we go. We're already going off the rails. Jason Moser. I didn't even say hi. I have a question. Addy Cross. Yeah, OK, fine. Jason Moser. I'm just so happy to be here.

Addy Cross. That's not a question. Jason Moser. I know. Addy Cross. OK. So, today is Mardi Gras, and tomorrow is Valentine's Day, which means tomorrow is Ash Wednesday and Valentine's Day at the same time. What do our friends in Mobile and New Orleans do, which is more important? Well, for some people, it's a day of fasting, so that does not make for a very romantic Valentine's meal. This is my point! Sorry, I was thinking about that earlier, and I thought that I would bring

it to the Grand Council. Thank you. I have no answers for you, but I'm sure someone in our audience does. All right. No more questions, except the ones coming from me. Are you ready? Yes, ma'am. All right, here we go. First thing I want to know about is your first love, by which we mean the first stock you ever bought. Jason, tell us about that first love. Oh, the first love, the one that I bought first. So the first stock I ever bought, let me think about this for a minute. Bill Mann, why don't you go first? He didn't do his homework. My first love was impetuous. It was irresponsible.

It was a little company called Midcom that I thought was going to go to the moon. It went to the moon in a very aggressive way. What did they do? They should not have done this metaphor of love and dating for stocks. They lost money, is what they did mainly. They were super good at it. The second, I learned from the first, and the second was Berkshire Hathaway. OK. All right, that worked out. That was a good rebound. That was a good rebound, yeah. I think this is interesting. The first stock I personally bought, it's not the first stock

I ever owned, because I got gifts from my father along the way. The first one I ever purchased on my own was Cisco. The forks and knives company? No, I'm saying it was the tech company, Cisco. That was back in 2000-ish. so when you do the math, it wasn't really an opportune time to be purchasing. But everyone was talking about it. You turn on CNBC and it was like, Cisco, Cisco, Cisco. That was the first one I ever purchased on my own. I did that with the assistance of my, at the time, Edward Jones account representative when my dad had opened up that brokerage account. So he introduced you guys. He introduced us. He facilitated the relationship.

He was the matchmaker. Little did you know that he was actually talking about the Forks and Knives Company. You just didn't pay attention. And do you still own it? I do not. Because I think it's still down from that. I don't think it has ever recovered its price. That's a long-term buy and hold and cry. And we will come back to this one a little bit later. Oh, will we? OK, a little foreshadowing. Our next question is, what's your number? By which we mean, how many stocks do you own today? My number is complicated. It's complicated. He's giving us status

updates here. It's complicated. Well, because they're the stocks that you own for your kids and things of that nature. But my number is 26. Really? Which I understand to be more than some and fewer than most. I mean, it feels a little low, but I know you're an upstanding guy and a good investor. I think those are going to be quality 26, right? I will tell. 20 of them are good. Six I'm angry at. And I've owned most of them for a very long time. How long is a very long time? Well, Berkshire Hathaway was the second

stock that I bought. I still own it. So, that's more the case than not the case for me. Alright, Jason, what's your number? My number right now, it's 35 different publicly traded companies. Now, I will say, I own stock in The Motley Fool because we are fortunate enough to be able to do that. So, $36K technically, but that's not really true because most people don't have that opportunity to own shares in such a wonderful business as ours. So, $35K. Bill, I've always felt like that number could be lower. But as I get older, I default to not selling. If it's not working, it's not working. I still want to give it a chance, but it's not something I'm adding to. The number does seem to grow a little

bit as I get older as well. So, 35. Maybe I'm wrong, but I feel like our listeners would be surprised to know that's how many stocks you own. You work at a company that recommends buying stocks. I would think that you would just be constantly adding, adding, adding. But I don't know. That'd be nice if we could, but I think it's also always worth remembering that we have internal trading guidelines here that make it a little bit more difficult for us to just be able to buy and sell whenever we want. So, because we're in the business of offering advice and writing about those companies, we have those internal guidelines that just make it a little bit more difficult

for us to be able to transact like our members can. Alison, let me tell you a love story. That's why we're here. This is how this works. Yes, we do recommend companies all the time. But I find it's the ones that you know for a really long time that sometimes turn out to be better opportunities than the brand new thing, which you don't know as well. It's just shiny and beautiful, and you have not figured out its faults just yet. Fool's gold. Fool's gold. Out of curiosity, are those the only investments you own, or do you also complement that with mutual funds, index funds, anything like that?

I do not. Well, I guess I actually do own a little bit in an S&P index fund, but that tends to be kind of a vehicle. Other than that, real estate, I think. That's kind of where it draws. No crypto, no gold for me. I've got the usual, Panamanian farmland and molybdenum and things like that. I've got some funds. Unobtainium. Yeah, those sorts of things. Our next question is, what's the one stock that you've married, by which we mean a stock that you never see yourself selling out of entirely? Well, I'm sure everybody would be

just absolutely flabbergasted to hear that I'm going with McCormick here, but so I will. It's just such an easy answer for me. It's a stock that I've owned for a long time. It's one that I've continued to add to. As I get older, it fits only more and more into my retirement strategy with dividends. Dividend aristocrat, I assume that at some point here it will be a dividend king. I will cook as long as my body and mind allow, which means that my kitchen will always be just stocked with McCormick spices and flavors and whatnot. Jason Moser, by number of hours, how long has it been since you've consumed something that McCormick makes? Well, I mean, I had dinner last night.

That's not a number, but OK. I'm not so good with math, Bill. Alright, Bill, how about you? Which stock have you married? Jason, can you guess mine? I could have guessed. Imagine Berkshire Hathaway or Costco. Thank you! Costco. Costco, a couple of weeks I went in, my wife and I went in to get one item, and we came out with 29. And it's just the two of us now. We're not buying useful things for kids running around. We just came out with 29 items. I think about that a lot. But they were well-priced and take up

a lot of space. These both are true. This week, because Valentine's Day is tomorrow, we're talking about love. Our last question for today is, who taught you the most about love? I'm looking for a stock that taught you your most valuable investing lesson. And it all comes full circle because I go back to Cisco. Let's hear this tale of love. I wrote about this years back when I first got here. Your biggest investing mistakes. One of my biggest investing mistakes was ultimately investing in something that I didn't even know. I didn't understand. I did what this

representative told me to do. And I just took it at blind faith and just said, OK, no, that sounds great. And in hindsight, obviously, it didn't work out so well. It was not the right thing to do. So, Cisco always stood out to me. Whenever I see that ticker, it's a reminder to me, make sure you know what you're getting into. So, I look at Cisco is one of those ones that always stands out. Can I provide a Cisco-related lesson from someone else? A fellow who used to be our tax expert on our discussion boards, Phil Marty, sadly passed away a few years ago. He talked about how he held on to Cisco through the dot-com days because he didn't want to pay the taxes on it. Well, the market

took care of that because it took care of all those gains, so he didn't have to pay any taxes. Fixed it! Yes. The lesson there, of course, is, if it's the time to sell something, don't let taxes deter you from what is the right move for your situation. If it's time to break up with someone. We have to torture this metaphor. This metaphor has gotten off too easy! Mine is also a tale of woe. It is basically this. When someone tells you who they are, you should believe them. The company is called Nuance Communications. It was purchased a few years ago. But it was a company that I bought and held forever because they had all

of the licenses and technology for voice recognition technology back in the day when this was the shiny new thing and you didn't expect your refrigerator to respond to you. To this day, their successor company owns all of it. So, they get paid, but their executive team made sure that all of that money stayed within the building of Nuance Communications. They paid themselves so much money that really nothing ever trickled down to shareholders. After a while, you just have to realize, and this is what I realized from this relationship, that you have to understand that a management team that does not seem willing to pay down to shareholders, you should believe them and move on. Right. You're putting so much into

that relationship and you got nothing out of it. Nothing. Nothing. And they told us, they told me that's what was going to happen. Personally? They told you personally? They're like, Bill, man, I'm sorry, but... Listen, yeah, in the middle of the conference call, and Bill, no, you looked at me like I was serious. I'm totally not serious. No. They tell you in things like the proxy statement. That's their love letter, and it was all about them. Yeah, that's a good one. Again, this week, we're talking about love. Next week, you're going to be coming back to talk more about loss. We're going to talk about the stock that got away, the stock you

should have dumped earlier, the stock that really broke your heart, and that one time you cheated. Yeah, that's right, Jason. I don't understand why you're looking at me. Okay. You're the one that made the most guilty face. Maybe work on that. Nervous tick. All right. Thanks, guys. We'll see you next week. Thanks. Thank you. As always, people on the program may have interests in the stocks they talk about, and 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.