Motley Fool Hidden Gems Investing - Airlines, Housing, and Your Wardrobe

Episode Date: August 18, 2022

Home sales fell nearly 6% in July. (0:21) Jason Moser discusses: - The challenge for 1st-time home buyers - Why he prefers investing in residential real estate through home improvement businesses (rather than home builders) - The airline industry's woeful track record on share buybacks - "Is this the best use of capital?" being a question to ask about any share buyback announcement (12:37) Asit Sharma and Deidre Woollard discuss the growing trend of 2nd-hand fashion and the opportunities for companies involved. Our annual investing conference is free for Motley Fool members and just 12 days away! For more details go to http://Fool.com/FoolFest. Stocks mentioned: HD, LOW, DAL, UAL, AAL, LUV, BRK.A, BRK.B, TDUP, LEVI, NKE, REAL, ETSY Host: Chris Hill Guest: Jason Moser, Asit Sharma, Deidre Woollard Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years. We've got airlines, housing, and we need to talk about your wardrobe, too. Motley Fool

Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Jason Moser. Thanks for joining me once again this week. Well, thanks so much for having me. Let's start with housing, because it is not just the price of gas that is falling across America. according to monthly data from the National Association of Realtors, sales of previously owned homes fell nearly 6% in July. There are a few different ways we can go here, but one thing that caught my attention was, just from the standpoint of people who are looking to buy houses, it's been a challenge the last couple of years. Even with prices dropping, time homebuyers, you look at the data, I don't want to say they're getting squeezed out,

but they are making up a smaller percentage than they historically do. Typically, it's around 40%. In July, it was just under 30%. Yeah, it definitely feels like as time goes on, it becomes more and more difficult for that first home purchase. I'm sure you and I can look back in our lives and remember when we made our first home purchase. That's a big purchase. Obviously, it requires a lot of resources, it requires a lot of, frankly, education and understanding the process and what you're getting ready to commit yourself to. But financially, it's just becoming more and more prohibitive. From the first-time homebuyers' perspective, that's really frustrating. You feel like you just don't ever have a chance. Now, on the other side

of the coin there, if you're a homeowner today, you're feeling really good about things. The homeowners themselves are in really a good position because we're seeing still a limited supply. I think everybody would pretty much agree that right now we are in the middle of the housing shortage here domestically. We need to see new homes being built. Well, the problem is, obviously, is the economy continues to face challenges. The interest rate environment continues to rise. We're seeing homebuilders canceling. Those homebuilder cancellation rates have more than doubled since April. I think if you look at July, you saw 17.6% of builder contracts actually fell through. That was versus 8% in April.

go all the way back to July of 2021, 7.5%. This is a very difficult climate for folks to commit to buying a home, and I don't know that we should expect that to change anytime soon. Then you top that off with existing home sales data, which is obviously falling as well. I think I think we saw nationwide 63,000 deals, I saw quoted on existing homes, fell through in July. There was about 16% of the homes that went under contract. So, you can imagine as a seller, you feel like you've got this thing locked down and ready to go forward and then that deal falls through. Well, that's going to be pretty frustrating for both parties involved. It's just a very difficult market right now in regard to housing.

From an investing standpoint, how does one invest confidently in residential housing right now? Is it through the homebuilders themselves? Is it through the businesses that operate in some ways on the margins of the housing industry? I personally think homebuilders are absolutely one way to do it. Now, I think said, invest confidently. I think when it comes to homebuilders, that can be a little bit more of a volatile ride. I think a lot of that just has to do with the data that we're seeing playing out here today. I absolutely agree that homebuilders are one way to do it because typically, when you have a shortage, you need to make up for that by building more and that would

indicate that the builders should be seeing some action here in the coming years. Now, they've got to deal with, obviously, supply chain constraints. They've got to deal with the rising interest rate environment. They've got to deal with inflation. I mean, it's a little bit of a tricky time. So, I think confidently, I personally just like more the home improvement in retail sectors. So, you look at the lows in Home Depots of the world. To me, I feel like that is probably a bit more of a reliable, safer long-term play. I think at least you can buy into those businesses and feel like you can own them indefinitely because they benefit from virtually every condition. If there's a shortage, then you've got people sticking in their homes

and they're doing more stuff to their homes. If you look at Home Depot's results they announced earlier this week, ProSales outpaced the do-it-yourself consumer sales in the quarter. That's just an indicator that there are home improvement projects that are happening. Makes a lot of sense. The homeowner is in a great place equity-wise. It doesn't take a lot to go ahead and open that home equity line of credit or take out that home equity loan and finance that project you've been wanting to do. They benefit rain or shine. I do feel like there are a couple of different ways to do it. I think having exposure to all homebuilders and the improvement space makes sense. It feels to me like the improvement space is probably a little bit

of a steadier ride than the homebuilders might be. U.S. Airlines got $54 billion in federal aid during the pandemic. A condition of that assistance was that the airlines were not allowed to use the money on share buyback plans. That ban is going to end on September 30th, and now the airlines are starting to do better financially. The unions representing pilots, flight attendants, and other industry employees are now publicly urging the airlines not to resume buybacks when the ban is lifted. I have to say, if I were a shareholder of Delta, United, American South. I think I'd probably say the same thing. Yeah, it goes to show you the difficulties in running a publicly traded company. You've got so many stakeholders that you have to appease.

It's not always going to be in line. They don't always line up with each other. I agree with you. It feels like to me, it could be argued that there's a very sound argument here for holding off on those share repurchases. It does feel like from a headline perspective, it sure does look like the airlines are having a difficult time right now dealing with their businesses. The customer experience just doesn't seem like it's been all that stellar lately, and that's for a number of different reasons. But at the end of the day, it ultimately means that these airlines need to focus on making sure that customer experience is as good as it can be. Clearly, you got to make sure that your employees are happy as well. Now, it can be also argued that

the airlines just simply aren't getting these share repurchases right in the first place. Now, I will go ahead and preface this by saying that I know some folks love the airline space, feel like there's a lot of value there, a lot of opportunity there. I'm not one of those people. I don't like investing in airlines. I don't own any airlines. I have a hard time imagining that I ever will own an airline. I feel like there's just plenty of data out there really to back that up. Perhaps there's a value investment there at some point or another, and if that's your cup of tea, then that's great. But for me, when I'm looking for businesses that I can just buy and hang on to. Airlines just do not fit the bill. When you look at the way the bigs have performed

here recently, their share prices, their repurchase plans, it just isn't lining up. I just want to look at a few examples here. Let's look at these big names in the airline space. Delta, they spent close to $5.5 billion on repurchases since 2018. You go back five years, $5.5 billion on share repurchases. Now, their share count is actually down close to 10%. That's great. That's what you want to see, at least when you're making those repurchases. The whole idea there, bring that share count down and ultimately make those shares outstanding a little bit more valuable. Now, even Delta shares are down around 22% over that time stretch. But then when you look at the other three, look at United, they spent close to $5 billion in

repurchases. Share count is actually up. Shares are down 40% over that five-year stretch. Look at American, they spent around $3.5 billion on repurchases, share count is up, their shares are down 66% over that timeframe. Look at Southwest, one that we've always looked at is maybe a little bit of a disruptor in the space in focusing a little bit more on that customer experience and looking out for shareholders a little bit more. They spent around $6 billion in repurchases over this stretch, that share count is up and those shares are down 24%. They're not really seeing the long-term impacts of spending on those share repurchases. I think when you look at that data, it really does, I think, bolster the argument that maybe these

guys need to focus on something other than share repurchases for a while. They can get their house in order, get that customer experience back in order, and get their financial house in order. then you can get back to returning value to shareholders through these repurchases, but maybe for them, the better focus is to just focus on that reliable dividend policy, give people some cash in the pocket and steer away from the theoretical impacts of share repurchases because clearly, it's not helping them today. Yeah, it's the question we ask all the time, regardless of industry, regardless of the business. When there's a share repurchase plan, we always ask, is this the best use of this capital? In some cases, it is, but in others,

you just look at the track record, it's just not. You're right. That's the question you need to ask, is this the best use of this capital? Look at something like a Berkshire Hathaway. Everybody's argued for the longest time, they should pay a dividend. Buffett and Mugger are like, listen, that's cash that we feel like can be put to better use, whether it's repurchasing their shares because they have such an intimate knowledge of their business operations, or investing in other opportunities. It doesn't seem like, to me, when you look at the airlines, they've got so many problems that it just doesn't feel like share repurchases are the wisest use of that capital. You also look at it going forward, I think it was the

recent legislation, the Inflation Act here, there's going to be a 1% tax on share repurchases. Now, if I'm correct here, I believe that's a net tax. It's going to be net of shares issued. It's not just whatever they've repurchased, they're going to be taxed on that. It's net of shares issued as well. That's something to remember there. That's something else to consider, at least, is that these share repurchases are going to get a little bit more expensive as the cost of doing business, so to speak, goes up. But to me, no question, with airlines, it just doesn't stand out as the best use of capital. Jason Moser, thanks for being here. Thank you.

You know that pair of jeans you like? Did it have any previous owners? For an increasing number of people, the answer doesn't really matter. Asit Sharma and Deidre Wooller discussed the growing trend of secondhand fashion and the challenges and opportunities for the companies involved. I'm Deidre Woollard, and I'm here with Motley Fool analyst Asit Sharma. We're going to talk about the boom in secondhand retail. Hi, Asit, how are you today? Hi, Deidre. I'm doing well. Good to be with you. Well, let's get into this because this is a category I'm fascinated with. I see it as this real growth area for investors because we've got some long-tail demographics that support it.

So, when I was growing up, secondhand was profoundly uncool. Nobody did secondhand. Now, resale is booming, and one of the emerging leaders in resale thread up, they put out this report every year. I love it. It's on the overall market. I mean, of course, they're going to say resale is booming because they're thread up, but it also has a lot of facts from other places, and they forecast that resale will grow three

times as fast as the overall apparel market globally, and it could reach $82 billion in the U.S. alone by 2026. So that just kind of blew my mind a bit. There's this whole shift going on in secondhand clothing. And Asit, what's going on with the younger generation here? First, let me say, Deidre, that market is so massive, $82 billion in just a few years. Why do we need to invest in tech, right? Just invest here. Yeah, I've thought about this a lot over the last few years. I think you're a little younger than me, but we know we're sort of proximate generations, I think. And there are lots of trends that are coming together different from when we were younger. I think this younger generation, it tends to be more attuned to

the effects of climate change, to waste, to social inequality. They're a much more socially conscious generation. Let's just say millennials all down. I'm lumping a lot of generations together. So, these are all types of ideals that tend to benefit a circular retail economy. And we've also seen over the last six or seven decades, as we've moved really gradually from this post-war industrial economy in the 1950s to what we have today, which is a consumption-based economy, this idea that what you wear is the first signal of social status has really dried up, that pull that you've got to have the nice new pair of Nikes, although people still love Nikes, or crisp, clean, brand new clothing, that's no longer quite as important today.

What you wear today, especially on social media, signals many things. It's your potential wealth status, but it could also signal how creative you are, the things that you like. can signal to other people likeness. We saw some of these trends play out over many years. I think social media amplifies the many virtues that clothing can have. These trends together with one more that I think is really fun are partly to explain that third trend is this experiential aspect for the youngest consumers, even younger than millennials. These kids love to thrift. In fact, the idea that today we're talking about the word thrift as a verb takes me back to the late 1970s, early 1980s when I was a kid wearing bell-bottom jeans.

I love that, bell-bottom jeans. I wanted to think about that because, okay, so you've got this really big thrifting market. It's moved beyond those store racks that we used to shuffle through back in the day when I was looking for that perfect slouchy oversized blazer. I'd like the idea that we've got resale as a service. This has come up in the last couple of years because all of these retailers watch all of their clothes go into the secondhand circular economy and they're like, well, wait, can we get in on that? They're starting to and they're partnering with companies like ThredUp, but they're also partnering with some big private services that are white labeling this. And it's really interesting where we're going with this.

It's kind of this thing that's called a circular economy. So like ThredUp, they're partnering with Gap, Madewell, Tommy Hilfiger, Eddie Bauer, all of these big brands. And all these brands are now saying in their stores, like we have resale as a service, or you can even turn in your clothes. Is this what we're going to be doing in the future? Instead of like taking that big bag to Goodwill or something like that. We're going to be like, hey, here are these jeans I bought three years ago. Gap, take them back. Well, I want to return to Goodwill by the time we finish this segment. There's something very interesting there. But we're sort of headed gradually in that direction, Deidre. On the surface of things, it's so much easier today because of technology to get

a very nice pair of secondhand jeans. The idea that they have to be new due to the technology, the distribution that is every day, if you drive along the highways, becoming more and more prevalent, our capacity for logistics and warehousing as a society. All of these trends play into the fact that we might be trading our clothes around in the future. I also like with some trends that aren't as visible. There are companies that are focusing deeply on making fibers out of sustainably based sources, recycled clothing. I know Levi's, of all companies, is redesigning its iconic 501 jeans to include a fiber called Circulus. There's that circular term in there, which itself is made partly from recycled denim and organic cotton and

credit to a publication called The Sourcing Journal from where I learned this. But a lot of it may not even be visible to the naked eye. There's certainly some interesting trends of the idea of fashion becoming more circular and less of the fast fashion type of production of brand new clothes, rapidly getting them to outlets. That seemed to be a really prevalent trend just a few years before the pandemic. Yeah. I've been thinking a lot about that because yes, on one hand, we've been seeing that happen with fast fashion. On the other hand, we're seeing companies like Shein go crazy. And so there seems to be this weird sort of thing that's happening. Two things are happening at the same time. We're still seeing a lot of

fast fashion. And yet, we're also seeing this growth in recycling. And I find this fascinating. I think so much of it is driven by social media. But I wanted to talk to you a little bit about where these industries are going, because right now, it's not looking good. It's tough. Resale profitability has been really tough. ThredUp has announced layoffs, and different companies are really struggling with profitability. And I think part of that is because there's so many different models. You've got different business models. We remember the old-fashioned thrift store, the secondhand store. There used to be the consignment store where that was for the fancy people, where you would bring your fancy, fancy items in and consign them. Those models are being

brought on online. You've got companies like Poshmark, Depop, which Etsy bought. Those are heavy on that social shopping model. It's very asset-light. But then you've got a company like the real, real, where you have to send the things in, they have to be consigned. ThredUp, where you've got these massive, you send the bag and you've got that whole process where they're bringing all the clothes there. How is this going to work out? There's so many different business models and maybe none of them have quite figured it out yet. I like this characterization of figuring it out because this is exactly what both private and publicly traded companies are trying to do as they build out their businesses in real-time. Resale has always been a tough

business in the fashion world, but it can be a lucrative one if you can find that magic formula. What's challenging companies with an inventory model is that they've got the inventory costs associated with that. They have to handle the inventory. They have to separate it. On some platforms like ThredUp, they have to present it to the potential buyer. Then you've got the fulfillment costs. Those just eat up the bottom line. Then on the non-inventory model side, you have a really tremendous marketing and advertising expense to have that social element get promoted. Then you've got the customer side of it, which is enticing people to engage in what's a modern-day side hustle. It's something that, for those of us who want to clean

out our closet occasionally might have some attraction, but the cost of keeping the customer side, the supply side as well engaged is also a cost that gets distributed all up and down the P&L. It's hard to see, but this is part of it. How do you keep people returning to a platform? How do you keep people wanting to sell their clothes and others to keep coming by to see if there's something new. All of these problems that you would face in a physical environment are exacerbated online. It's so interesting, Deidre, when you look at the ThredUp, Poshmark, The RealReal, they all have expanding gross merchandise values. Their platforms are growing, they have expanding revenue. It's just that they have not yet found that magic formula

that produces positive free cash flow and profits. Not to say that these are bad models where they're not going to succeed. But you have to be a patient investor if you're starting with this. Those really nice thredUP reports, which I too have been reading for many years, they show a market that itself is growing with potential in excess of the actual business models. Lastly, curious to hear your thoughts on this, they're the unspoken giants which provide this competition in the marketplace, Goodwill and Salvation Army, their thrift stores, they get their inventory for free. We drop it off, they put it in their stores. That's a massive marketplace that always presents a quick and easy and lucrative shopping outlet

for many people who may not even have the time to poke around online. Well, yeah, you mentioned something really interesting there because you mentioned the word side hustle. And that is something that is also a huge part of this because we're starting to see that. You've got the poshies, the poshmark people. They go to Goodwill. They go to the thrift stores. They won't tell people which thrift store they go to because they know it's a good one. And so they'll get them and they'll resell them there. So you've actually got a resale market within the resale market, which just kind of blows my mind. Right now, I'm taking kind of a basket approach early on with this, with ThredUp and the real, real stock prices are low. It's going to be an

unsteady and potentially unprofitable business for a while. Is that kind of what you think about this space, too? I mean, yes. I think you just gave listeners the right approach, Deidre. I love your approach. I think for any kind of theme in investing, it's a waiting game. Whether this theme, let's look at 3D printing years ago, or the metaverse, which is a big investment theme today, or resale, secondhand fashion, each one of these themes is going to take time to play out. There will be winners, there will be losers. Your best bet as an investor, if you're really interested in a particular theme. If resale and the circular economy just grab your mind, your intellect,

and your passion as well, don't jump in with all your capital. It's a long-term game and you'll have time to see which models start to succeed. If you do this regularly, you'll also get some new opportunities as new companies come public either through their own IPO process or as in the case of Depop, which you mentioned, which was acquired by Etsy and gives you an avenue to invest in that. But yeah, I would make no changes to your approach. I'm trying to do a little bit of that myself. Dabble a bit here and there while prices are low. Awesome. Well, thanks for chatting with me about this. Let's continue to keep having these conversations every couple of months because this is going to be an interesting

one to watch. For sure, Deidre. This was a blast. Thanks so much. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow.