Motley Fool Hidden Gems Investing - An IPO, In This Environment?

Episode Date: September 29, 2022

Volkswagen spun off its investment in Porsche for the first big name IPO of 2022. It only took until late September!  (0:18) Dylan Lewis and Tim Beyers discuss:  - Why Porsche is going public while other companies are holding off.  - Down rounds in the private markets.  - Promising results for Biogen’s Alzheimer’s treatment. Mortgage rates have doubled in the past year. (13:33) Deidre Woollard and Matt Argersinger look at the ripple effects and which companies could benefit from the shift. Companies mentioned: P911, VWAPY, RACE, BIIB, HD, Z, AOS, WSO, OPEN, LOW Host: Dylan Lewis Guests: Tim Beyers, Matt Argersinger, Deidre Woolard Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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BetMGM operates pursuant to an operating agreement with iGaming Ontario. The IPO market finally has some action, and Biogen has some good news for patients and investors. Motley Fool Money starts now. I'm Dylan Lewis. Joining me is Motley Fool analyst Tim Byers. Thanks for being here. Thanks for having me. Fully caffeinated, ready to go. Love it. Luxury automaker Porsche is now a standalone company. The carmaker came public on the German stock exchange at roughly a $73 billion valuation, good for one of the largest IPOs in Europe in a decade. Tim, for folks that like to see new names and tickers on the market, this is a good sign. It's a really good sign. It's hilarious in all of the best ways. Porsche

decided to issue 911 million shares, which is great. So those of a certain age, so like me, will remember the Porsche 911, iconic sports car that the company is still known for. And this is such a near miss, Dylan, in terms of it taking the hilarity to even a bigger level, because overall, the company raised $9.2 billion. It would have been so much better if they'd raise $9.11 billion. But I love it. I mean, it's a great move for a couple of reasons. The first reason, and I would say the most important reason, is that Porsche is competing in the luxury sports car market, has been for a long period of time, but that market is changing. We are wondering when we are going to get the first mass market iconic sports car EV

And that's a race that someone's going to win. And it's pretty clear to me that Porsche wants to win it. When you raise $9.2 billion, that money is going to be put to work, presumably up and down the supply chain in how Porsche thinks about building, designing, and outfitting its certain sports cars. So, I'm optimistic for what we're going to see from Porsche here. I think it's interesting, Tim, because a lot of the EV-focused companies we've seen come public over the last couple of years have been high-ceiling companies, but ones where the floor is very hard to determine. And Porsche, I would argue, is a high-floor company. We know what this business is capable of doing already, and it has the upside of EVs. very different than most EV companies we've seen over the past couple of years.

That's very true. And let's be clear, I mean, Porsche is not much of an EV company right now. They are still making gas-powered vehicles. They're going to continue to make gas-powered vehicles for a while. I mean, this is not an overnight shift. You're right about that. This is a company that also coming out of Volkswagen is it needs to figure out how to boost its margins and become a more efficient company as it makes a premium priced vehicle. So the margin profile, for example, is very different between, say, like a Porsche and a Ferrari. I mean, you might think of those brands as similarly, but they're very different companies. Ferrari makes really custom builds all of its vehicles and makes a small number of them, and so it has really outstanding margins. Porsche makes money.

It just is a mass-market car manufacturer, and so its margins are materially lower. Now, as it moves into things like EV still, I think it can raise its margin profile. It can get good prices. But there is work to do, right, to build out a line of sports cars that you can manufacture efficiently, swiftly, with a good degree of profit. It's a profitable company, but there's lots of room to make operational improvements. So, yes, you're right. This is not one that is shooting for the moon and it's shooting for outlandish growth. It's actually more of the one who's like, we're a well-established brand, and we're going to use this additional capital to make ourselves a better company, more efficient, better margins, better operations, better product.

Perhaps that's why we saw pretty good demand for this IPO, because let's be honest, you look out at the IPO market for 2022, and it has not been great. You go back to 2021, over 1,000 companies went public on U.S. exchanges, raising over $300 billion. In the first half of 2022, the total was just 92 companies raising just under $9 billion. Those are very different numbers. I think we can say it's worse than not great. I think we can say That's a catastrophic drop. That's the sort of thing that you see in movies where you're jumping off the top of the building and you hope that the parachute opens. That's not just a slow down. That's a freeze. We can effectively call that a freeze. And honestly, I don't blame the investors who are not pushing companies to go public. On the private market side of things,

valuations have moderated dramatically. There have been lots of layoffs, particularly in the private market for tech companies, but just in general, right? Lots of companies not hiring as much. There's been layoffs. The amount that companies are raising in the private market are at very different valuations. In some cases, they're raising via what's called down rounds, where they raised at a higher valuation in the round prior. They go to get more money from private investors. And those private investors say, yeah, you're not worth as much anymore. And so those investors get better terms. And so the valuation goes down. That's what we mean by a down round. If you've just raised on a down round, the idea of going public after that

is anathema because what investor is going to want you to go public at a valuation that they don't want so they can't make as much money? There's just the economics of going public have really changed because things on the private market side just aren't as good. The market is a bit more depressed. So that market has to heat up. The demand and the valuations have to improve before I think we see the IPO market warm up again. But what makes Porsche interesting before we close up on this topic is that this is a company that's very well-established.

So why is it an easy one for the IPO market? Profitable, well-established, well-run, long history, strong brand, and a very clear idea of what Porsche is gonna do with the capital that it raises. that's an excellent candidate for an IPO. Another easy story for people to root for, shares of Biogen were up 40% yesterday after the company announced its experimental Alzheimer's drug, lakenamab, slowed progress of the disease by 27% compared with a placebo in a large trial

of patients in the early stages of the disease. Now, if you know anyone that's affected by Alzheimer's, you've been rooting for good news for a very long time. Absolutely. And this feels like incredibly positive news in this space. Absolutely. I mean, it's amazing news. And Biogen has been working in this space for a while, and we should be fair and say there have been false starts. And so if we want to look at this through the lens of just how hopeful we should be, I think we should be hopeful. This is the good news we need right now. Lots of people are rooting for this. Please, God, can it work this time? I mean, I really think a lot of us are rooting for it in all of, you know, for all the right reasons. But there have been moments where different

clinical operators like the Cleveland Clinic have said, hang on, this isn't exactly what we think it is, or we need to see something different. And that could happen again here too. But the more results we get like this, Dylan, so I think we should expect more trials, more data. Like once you see things like this, the next thing is what's the next data? How much more can we get? Can we see even more data? Can we see even better results? Can we try it at different stages of Alzheimer's? I think you'll see a lot more clinical work being done here and a lot more emphasis on give us more data, please, so we can figure out how safe this is and try to get it into the field. But overall, what a great win for Biogen and good for them. I think the move we're seeing in the stock is indicative of just how hungry we are for

great news in this space, because it's just an absolutely catastrophic disease, and people will pay for it. Doctors will prescribe it if it works. So there's hope. There is. And you kind of preempted my next question, Tim. If we know anything about the scientific process, we know it is remarkably thorough. and we see positive trial results, and I think especially if you're someone who does not spend

a lot of time in this space, you might say, wow, it really seems like there's something here. How excited should people be when they see this kind of news, either specifically for this drug or just looking at trial results in general? Because we know it can be a very long road from trial to actually getting a drug to patients. Well, if I had a family member who was suffering from Alzheimer's, I would be hopeful but cautious because we've been in this area before. And it's I think it would be absolutely heartbreaking to have it fail again. So I'd be hopeful but cautious as an investor. I think I would act similarly. I would, you know, if you were looking to add to a position or start a position in Biogen, I would say there's no reason to go

both feed in, but I wouldn't be adverse. In fact, I would definitely encourage if this is something you really wanted to do, yeah, starting with a very small position, less than 1% of your overall, like really, honestly, less than 1%, Dylan, I would say even a handful of shares and then kind of watch this, use it as a way to study what's actually happening. And then you can start making decisions about how real this is. Because if it's real, I mean, honestly, if this is real, then Biogen has much, much further to go in terms of the stock price. When I see news like this, Tim, I almost think it's more of a win for overall research than it is specifically for the company developing the drug.

Yes. Yes. No doubt. No doubt. It's a win for doctors. It's a win for patients. It's a win for the entire sector. So yes, I think it's a societally, it's a much bigger win than it is for Biogen if it's real. But we hope that it's real. We just don't know that it's real yet. I love the way you put that before, the good news we all need. It is. I mean, we need good news right now. And I, you know, Ted Lasso's coming back at some point until ted comes back give me some good news man give me some good vibes tim i'll happily have you play ted for me any day you always bring some great positivity to the show i appreciate it yeah it's a uh it's it's a really it's a weird time for the world and and for the market so we we

take the good news we can get and and keep it in stride tim thanks so much for joining me thanks Dylan. Mortgage rates have doubled in the past year. What are the ripple effects and which companies could actually benefit from fewer Americans moving? Deidre Wollard and Matt Argersinger have more. So Deidre, I hope you don't mind me saying this, but I kind of consider you the Motley Fool's authority when it comes to home prices and home sales trends. You and I follow a lot of macroeconomic data that relates to housing. And probably the biggest one we talk about regularly is mortgage rates. And I think for years, you and I were just amazed at how low rates we're getting. They broke through five, then four, and then three, and it just never

seemed like there was a low, even though we knew at some point rates would turn around. and now they finally have. I'm seeing 30-year fixed mortgage rates above 6% now. I don't think we would have dreamed of seeing that at the beginning of this year. Really, the rates haven't been as high today than since before the great financial crisis about 15 years ago. It's been amazing turnaround. You combine those high rates with just this economic climate where there's a lot of uncertainty. A lot of people think we might be heading into a recession. That's really slowed the housing market. So in your mind, what are the ripple effects of mortgage rates doubling in a year? Yeah, there are a lot of ripple effects. And you mentioned sort of that sort of sticker

shock that's happening. So right off the bat, we've got that drop in purchases and refinancing. So the latest data from the Mortgage Bankers Association shows that purchases are down around 20%. Refis are down over 80%. So as you mentioned, we haven't seen these kind of rates in a long time. So refinancing would be pretty much off the table for anyone who got a mortgage anytime within the past five years at least. And refis are now at a 22-year low. That has a huge impact on mortgage companies, right? A few of the smaller ones have already closed up shop. I'm also looking at the impact that we're going to see for some of the major banks that deal a lot with mortgages. And I think in the next earnings season, we're going to hear on earnings

calls, a lot of talk about that. And yet at the same time, we're seeing this uptick in home equity loans, home equity lines of credit. People have a lot of equity in their homes as prices have risen and they might need cash if we are going into a recession. And so this is creating this kind of weird climate where there's not a lot of activity in the market. Anyone with a locked-in mortgage rate, some of them are even backing out of purchases even if they have that locked-in rate because they're scared, right? This fear of the recession, inflation is impacting both existing home and new home sales. Yeah, it makes sense. I mean, it's just a lot of uncertainty. I think people see home prices starting to slow, you know, fall a little bit. Rates are still high.

Rates could go higher. Let's tackle first the new home side of the market. You recently looked at housing starts data and permits that were down over 14% year over year. That's a pretty sharp slow down. What does that mean for the home building industry? Yeah, it's really interesting. So with the housing starts numbers we get every month, we get permits, starts, and completions, and they really are sort of a far-term, medium-term, and near-term view of how builders are feeling. So permits, like you mentioned, down 14% year over year. So that's really telling us that they're long-term being a little bit pessimistic. Starts tell us more about how home builders feel they can sell in the medium term. And those were actually pretty good. Those

were over 12% above July. So that's telling us maybe they're trying to finish homes and just kind of get in while the market is still good. And then completions tell us how many homes are being finished and ready to sell. And those are about 3% above a year ago. And each month also, there's a home builder sentiment number. And the most recent one was pretty gloomy. Builders are reporting they're seeing less traffic. They're reducing prices at a faster rate. And they really are feeling sort of pessimistic about that deeper slowdown that might be coming. And yet, we got August new home sales this week that were really kind of confusing because new home sales were up almost 30% from July and still about flat year over year. Maybe that's just a

blip. This tends to be a more volatile section of the market. But the median price for new home dropped about 6.3% month over month. So, a lot to watch on that front. Well, okay. So that's the new homes market. Let's talk about existing home sales. This is the bigger piece, right? This makes up about 90% of the market. Sales there are off almost 20% compared to last year. You like to pay attention to inventory levels. What are you seeing there? Inventory is the thing that I think fascinates me most about existing homes because a six-month supply is considered healthy. And we haven't had a six-month supply pretty much since the great financial crisis. We're at about 3.2 months. That indicates that maybe we should still continue

to be in a seller's market, but the sellers aren't selling. And this is a hard thing to figure out. Often, if you've got the prices that are slightly past peak, which I think is what we're seeing right now, all of the numbers that we're seeing is showing that there's a slowdown in price. We're not seeing prices drop yet, but the rate of increase is slowing. So that should make sellers want to sell, but then you've got those high mortgage rates. And so there kind of isn't anywhere else to go because if someone moves, they know they're going to have a higher mortgage rate and who knows when it'll be time to refinance and get it down to a more reasonable rate. And then the other factor I'm thinking about a lot more right now is this move away from

remote work. I'm watching the prices drop dramatically in some of the markets where people moved during the pandemic. One of my personal bellwethers has been watching Boise, Idaho. Idaho has seen a 60% decline in people moving to the state since 2020. And Boise used to be the hot, hot market. It's now struggling. I think we're going to see that in a lot of places that people moved away from the coast, that now those prices are going to drop. Right. I think Boise is a very interesting story. I think you also saw just big surges in larger markets like Phoenix, Arizona, Austin, Texas, we know of Miami, Florida, Tampa, Florida. And there was a lot of home sales, there was a lot of building, and you saw the appreciation,

I guess, in the home values was the greatest in a lot of those places. And you just wonder, as you mentioned, as this remote work trend slows down or even reverses to a certain extent, are those markets going to be hit the hardest? But I like what you said. We were talking about inventory. And I think that is the, you said it, it's kind of the big conundrum of this market, right? Because I think for a long time, you know, I've talked, well, whether even if mortgage rates went up, home prices or home sales started to slow down, it'd be hard to see price dropping because of, in most markets, you've just got demand constantly outpacing supply. Maybe not now in some of those hot markets that we were talking about, but in most markets, I think

demand is still a situation where it's outstripping supply. And you've had a situation where now sellers, even if they want to sell, they've probably locked in a rate that's 3% or even less. And how in the heck are they going to move up to a bigger home, even if they wanted to, or a different place, and know that they're going to have to sell and then get into a rate that's going to be 6% or 7% even? So it's almost like the market's still at this standstill. But I think maybe at some point, the dam has to break. Sellers do have to come down in price. Buyers' patience are going to be rewarded. And maybe that's what breaks it open. But all these things are taking place, lots of moving parts. What does this all mean to you for the market

as a whole? And what companies might benefit? Yeah, I think a lot about the demographics, where we've got these two giant population cohorts, right? We've got the millennials and the boomers. The boomers aren't moving yet. They're aging in place. And you've got this group of millennials that actually really want to be in, but they can't quite find the right house because it's because of housing prices. But there's another interesting phenomenon. There's an article out in the New York Times by Emily Badger talking about the fact that there's no such thing as a starter home anymore. People are staying in houses longer. It used to be five to seven years. It's now more like 10 to 13. And households are smaller, but home sizes are much

bigger. I mean, I see this in my area in Northern Virginia, little neighborhoods of cute 1960s brick houses. But every couple of houses, you see the house that's been remodeled and kind of super sized. And I think we're going to see more and more of that. You and I before, we've talked about the nesting impact. I mean, I like Home Depot and Lowe's as long-term investments. I know you've looked at those too. I'm also starting to branch out into companies like Watts Co., which does HVAC systems or A.O. Smith, which manufactures water heaters, as other areas that are kind of interesting long-term investments because you're going to see more and more, I think, remodeling. I mean, it'll be interesting to see if this shifts with inflation and if home prices drop,

maybe people will spend less money. Maybe. But I always look at this leading indicator of remodeling activity, which comes out from the Joint Center for Housing Studies of Harvard University, they're still forecasting a 10% gain in remodeling activity up through the second quarter of 2023. Now, that's down a little bit from what we've seen recently, but I'm not concerned about the DIY market and the companies that serve that as all. I think they're going to continue to benefit. Well, right. And you mentioned earlier, it's with people staying in their homes longer because maybe they have to, because it's too expensive to move away or move up. Why not take a lot of that equity that they know they have in the house, take a loan out or not, but invest

in the home itself. And I think you're right. I think that's one area of the market that probably won't fall off as much, which is the home improvement side. I love the companies you mentioned, Home Depot, Lowe's, A.O. Smith are some big players there. Speaking of a big player and maybe a bellwether for real estate transactions, let's talk about Zillow. It's been a tough, tough year for Zillow. And recently, they started testing power buying in a couple of markets. It's something we've seen startups do. So a buyer makes a cash offer that's backed by Zillow and then has 90 days to secure financing. This tells me that Zillow sees that buyers still want houses, but what do you think about this program? Zillow is fascinating to me. I've been

a Zillow shareholder for a while. I feel like right now they're doing some kind of spaghetti at the wall approach, trying to figure out what works now. They're out of iBuying, so what's next? Yeah. They're testing out a couple of things. They're testing out power buying and they're also testing out their Flex program, which is free leads for agents. Zillow's primary business is that agents pay for leads. Now they're testing out this thing where they offer the leads for free, but then they get a commission on any deal that actually closes. The power buying thing is interesting to me. It made so much sense in the heart of the pandemic when you had multiple offers and you had bidding wars. We're seeing a lot less of that. And so I

think the cash deal incentive thing might be a little less necessary as we go on. The other factor that I'm looking for with that is institutional buying, because at the peak of the pandemic buying frenzy, you had individual buyers competing against institutions. Maybe we're going to see less of that, because certainly I've seen some private and public companies, including Blackstone, signaling that they're going to slow their single-family rental buying. so maybe that gets easier for buyers, which actually then might not be such good news for Zillow and this new power buying program. Speaking of competition for single-family homes, let's talk iBuying. Let's end it on this, because if the market is slowing down,

if we're entering a sluggish market, what do you think it could mean for iBuyers? You looked at some data recently that showed that Opendoor lost money on 42% of the homes it sold in August. That is, to me, doesn't seem like a sustainable business model. But you and I have talked about it. The down real estate market is what we've been waiting for. This is the true test of iBuying. So what could we be phasing here? And do you think there is a future for the iBuying industry? I do think there's a future. We're in that tricky market where prices are starting to go down in some markets. So that's a challenge for Opendoor because they may be buying at a rate that isn't going to be where the market is in even a couple of months. What's happening is happening pretty

fast, especially as mortgage rates continue to go up kind of fast. So I think they might have gotten ahead of their skis, especially Las Vegas, Los Angeles, Phoenix. That's where we're starting to see things turn really fast. Opendoor can handle a loss for a few months. Maybe that's just the price of a turning market. But what I worry about is if they have to take on more debt to buy aggressively and keep up their pace of buying, then I start to get more worried about it. But I think long-term, I still like iBuying as a potential segment of the market. I'm just not sure how big it could be. One indicator that I'm looking at for success of iBuying is days on market. So days on market for the last few years has been sub 30 days. So that means houses sell

on average in less than a month. So you don't really need to worry about selling that much if you're in that kind of market. But that ticks up. We keep seeing more price reductions. People start watching that and then they think, okay, with iBuying, I can move on more quickly. And maybe that's a great idea. But to kind of end up where we started talking, I'm not sure how many people are looking to sell. I mean, part of the core premise behind iBuying is the idea that people don't sell because it's too hard to go through the sales process. But I think as we've discussed here, there's just a lot of other reasons why people are staying put. Well, thanks, Deidre. It's always great to get your expertise.

Thanks for the chat. As always, people on the program may own stocks discussed on the show, 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 Dylan Lewis. Thanks for listening. We'll see you tomorrow. Thank you.