Motley Fool Hidden Gems Investing - Are Investors Leaving U.S. Stocks?

Episode Date: April 1, 2025

The market is waiting for more clarity on tariffs. Fund managers are already making moves. (0:21) Bill Barker and Ricky Mulvey discuss: - How the market could react to tariff liberation day. - The impact from current tariffs for Harley Davidson. - If the motorcycle manufacturer is a value trap. - OpenAI’s funding round, valuing the hybrid non-profit at $300 billion. Then, (17:08) Alison Southwick and Robert Brokamp discuss how to recession-proof your finances. Companies discussed: HOG, OTC: SFTBY Host: Ricky Mulvey Guests: Bill Barker, Robert Brokamp, Alison Southwick Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

You gotta try breakfast at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. it was the night before liberation day and the markets were stirring you're listening to motley fool money

i'm ricky mulvey joined today by bill barker bill how are you celebrating the eve of liberation day Any fun plans on tap? I think I'll get a normal night's sleep and wake up ready for the action. Actually, the action doesn't really even kick in until aftermarket close. You've got another full day tomorrow to enjoy yourself before finding out the news. I'm just so darn excited to find... A lot of people think Liberation Day is just about commercialism and presence, but there's really a truth. What is the true meaning of Liberation Day. And that's what the markets are hoping to find out. The Washington Post reported that this proposal includes a 20% tariff on most imports, though the country-by-country

reciprocal approach is also being considered. All of this is to say, don't really know what the plan is yet. The cards are close to the chest. Short-term, is there a scenario where the markets cheer whatever comes from the news tomorrow? Sure. If the news is we were just joking, the markets would cheer that. But short of that, since you've got 20% out there today being a number out there, if tariffs announced came in well shy of that, and with a lot of verbiage that there were good deals that had already been made. This was going to be short-term and was all about getting trade deals, which were close. Sure, that would be something that the markets would cheer, but I don't expect any of

that. I went to public high school, Bill. Sometimes there was a feeling in the cafeteria right before a fight was about to break out. You had this feeling, you heard chatter, and you're like, I think a fight might break out. It almost seems like the financial news media is covering this liberation day in the same way. So, I think investors may want to be prepared for a violent move up or down tomorrow. We've done the scenario where markets cheer whatever comes. What's the scenario where markets are very fussy, where they're taking their cafeteria tray and maybe heading out the door? I think if here's 20%, it's on everything against everybody. And if anybody tries to retaliate in any way, we're just going to drive them higher. And I mean it, right? The

worst-case scenario, which is daring your friends to demonstrate any self-respect and reply in the most logical and understandable way necessary, and to say, if that's done, then we're at war, right? Now, that would be the fussiest scenario. That would be a major implosion. And to what degree we get that, we'll know in, I don't know, less than 36 hours. this is the first time i've heard the phrase or the word fussy and war in the same sentence and i appreciate you bringing that you said you opened with it yeah good point fair enough i'm trying to you know i'm trying to soften things but sometimes things get a little serious so you try to make jokes sometimes they don't land anyway i i think you know war is the war is the word that's out

there normally for uh for the for a trade a trade war it's it's been uh copyrighted you know it's trademarked. It's out there. We're just following the script. Longer term. Here's what some investors have been doing. This is according to a Bank of America survey reported in Bloomberg. Basically, now fund managers reported being 23% underweight in U.S. stocks, whatever that means. But that's a plunge of 40% percentage points from the previous survey. A couple of weeks ago, I talked to Richard Bernstein on the show. He's the head of Richard Bernstein Advisors, appropriately titled, about this long-term deglobalization trend. You see a lot of investors going from U.S. stocks to international equities to reduce their exposure

to American markets and spread their bets across the world. Is this a trend that you personally are following as an investor? And do you find yourself maybe picking up some international stocks and ETFs if you're doing any buying? Yes. In my case, I have maintained international stock holding percentage. And I've increased it in light of really the valuations of U.S. stocks. And that was true even before the recent unpleasantness. They've just been trading at very historically abnormal levels that imply a lot of good cash flows ahead. And I think that really above-average and above-trend growth for a sustained period of time was, and still is, priced into U.S. stocks. I think international stocks have offered better prices because they

really haven't done well for years compared to the U.S. stocks. Whenever anybody is saying, yeah, we've been positioning for more international coverage and increasing our holdings, In part, what they're doing is trying to take credit for something that's already happened. Everybody knows international stocks have outperformed the U.S. by a large amount this year. So, if you say, as I just did, yeah, I've been doing that, you're trying to get the credit for outperforming the market. Whether it's true in your own case or not, I think that there's some of that going on. So, let's talk about a company where there is absolutely pretty much no growth priced in and it is at the center of the trade wars small lowercase tm and that's

harley davidson which does a lot of manufacturing in the united states does some international sales there's a story in the wall street journal about how tariffs already affect harley pointing out the road glide which is a touring model of their motorcycle starting at 28 000 in the u.s However, in Denmark, it's already at about $77,000. That includes a 25% value-added tax and a 150% luxury tax. If the new tariffs that the EU is threatening, that $77K goes to more than $100,000, $124,000. So this is a company that's absolutely gotten... It's been taken to the woodshed for a number of reasons.

Tariffs are one of them. but i mean how is harley doing in international markets to begin with how important is is europe and asia to to this company by unit sales i was looking this up uh last year 94 000 unit sales in the u.s 151 000 globally so you know you've got about 60 percent or so of your sales in the u.s some in Canada, Asia, and Europe is a fair fight, not many in Latin America. I think that it's still a major U.S. brand. I think it's got a little bit of a bullseye on its back for being so commonly associated with the U.S. as some of the whiskey brands and things are just their big targets for headlines and things like that, when some of the very

specific tariffs in europe and otherwise are designed so they're you know they're going to be suffering in terms of international sales i'm surprised you know given the level of tariffs you know in denmark specifically but in some of the other places that they do as well as they do internationally uh and it's it's going to be tough for them to maintain that i don't want to buy a motorcycle to begin with. Not my style. No disrespect to the motorcycle lovers. I like my car. And I can't imagine spending more than a hundred grand on one that I know goes for less than 30,000 elsewhere. Yeah. I mean, it's very effective in protecting the local sales, the BMW and the European brands. When you hear headlines like that, you definitely see that there is an

argument for some tariffs imposed by allies as being really unfair on their face to specific U.S. companies, and that there's a place to negotiate about some of these things. Whether bringing out a 20% tariff against everybody on everything is the way to negotiate is something that the market will weigh in on tomorrow, perhaps. This is something that CFO Jonathan Root, the CFO of Harley-Davidson, was talking to Congress about, where the markets overseas are very unfair to his company. And mentioning that bikes brought into the United States receive at most about a two and a half percent tariff. So they're playing this sort of unlevel playing field internationally, popular within the United States. But I wonder, could retaliatory tariffs,

could a trade war, not focusing on the entire market, actually benefit a company like Harley Davidson, which would have a lot of competitors shut out of the United States and maybe have some negotiating leverage to sell more bikes in international markets? It could. I wouldn't want to bet on it, but it could. If its strength in the U.S. grows, it's got about 37% of the heavyweight market in the U.S., and it's the leading player. It used to have 50% of the heavyweight market before COVID. So, it's been bleeding market share. Giving it up competition. Tariffs could help it domestically. Could they help enough domestically to make up for lost foreign sales? Your guess is as good as mine on that. But the steel and aluminum tariffs,

either way, they don't help Harley's costs for producing bikes here. A lot of their input costs are already subject to tariffs, and they're going to be weighing on the margins. And I don't think Harley can just pass on all of those costs easily and maintain profit margins that it's got at the moment. You're not the only investor who's pessimistic about HOG. That's the ticker symbol for Harley-Davidson. It went from about 10, 12 times trailing cash flow now to three times trailing 12 months cash flow. And it did post an operating loss in its latest quarter. Market cap went from more than $6 billion a few years ago now to about $3 billion. Besides the tariffs, you had CEO Johan Zeitz pointing to, quote,

continued cyclical headwinds for discretionary products, including the high interest rate environment affecting consumer confidence. I'm trying to find my contrarian side. And there are times where, as an investor, you want to look for those blood in the streets stories where you're finding extraordinarily negative headlines about companies affecting stock prices for good long-term investments. The problem, Bill, is that often the market is pretty good at assigning price tags for companies, and contrarians often look foolish, lowercase foolish in the end. For folks like me, any general advice for people who want to be a contrarian watching these trade wars play out and maybe thinking about putting some money into a dumpster

fire? Okay. I would not open up thinking of Harley as a dumpster fire, even though the market, as you point out, is treating it as a bit of one at about a PE of seven to eight right now. And this is a company with a long history. It's got a product which remains roughly as relevant as ever. It's not going away. It's not necessarily a value trap in the way that some companies, like a Kodak or something, where you just see their product evaporating over some period of time, and even though it's at a very low PE, it's like, well, things could get a lot worse. I think that the things which weigh most heavily on the company right now are more transitory. I don't know what's going to happen with the tariffs in terms of their duration, but I don't see the

product itself as becoming significantly less relevant year after year after year to the purchasing public. They've got a $1 billion buyback authorization out there. If they're buying up their shares, and authorization doesn't mean they're actually buying, but they're authorized to buy their shares. If they're buying their shares in volume, I would like to see that as a signed that the company sees value in its stock. That buyback authorization would be about one third of the company's total market cap right now. Let's go to this OpenAI story, which just closed a $40 billion funding round. Congratulations to Sam Altman and the team. The value for this hybrid nonprofit is now $300 billion. This is the largest amount raised by a private tech company.

It was led by SoftBank at a $30 billion commitment. This is one of the hottest companies in the world. We talked about one of the least hot companies in the world. OpenAI is one of the hottest companies in the world, led by Masasan over at SoftBank. He called you and he said, hey, Bill, I got this funding round going. You want to kick in a couple of bucks? Do you want to buy some shares of OpenAI at a $300 billion valuation? What say you? I don't think that Masazan being interested in it at this price would be enough information for me to act. He's had some great investments and some terrible investments. This is not going to be one of the truly terrible ones, but I don't know that I would choose it and the what's behind

door number two aspect of it, because I don't have any look at their financials, compared to things which are in competing space. Google is available for 20 times earnings right now. It's got a lot of the same sorts of investments and capabilities. It's obviously not a pure play for AI, but it and some of the other names that you know are, I think, ones that, that, depending on your investing style, might be more interesting than what is going to be a remarkable story if OpenAI does, in fact, go public at some point in the near future. It'll be fascinating to see what value it gets. But I think there's tons of value here, but I have no way to quantify it. What is the pivot that OpenAI

investors are banking on. The CFO, Sarah Fryer, told Bloomberg that roughly 75% of OpenAI's business comes from consumer subscriptions, the $20 a month payments they get to make really cool videos and extended question asking and feeding in images, that kind of thing. The investors don't seem to be banking on this as a subscription business, though. What is the pivot that these open AI investors are seeing here? It's such an open question as to what the revenues are going to be, how much of this is going to be enterprise versus consumer. There seems to be a willingness at the moment to consider the infinite value that AI may create, and that open AI may be getting the largest chunk or a very large chunk of that infinite value.

So, I don't know that it's going to play out that way, no one does, but the number of applications for this with agentic AI and things going well beyond putting a query or a prompt into a bot and getting an answer, getting a funny or whatever picture, you know, the application of this at the enterprise level is going to be, I think, what investors are going to need to see to come up with a $300 billion valuation. That's once the agents can take action on your behalf. Sounds nice for email, but also might be a weird environment when my AI agent is talking to your AI agent to book a podcast conversation, but then you have a vacation we didn't know about or that kind of thing. We'll see how it plays out. Bill Barker,

appreciate you being here. Thank you for your time and your insight. Thanks. Thanks for having me. You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with a delicious Pret organic coffee? Starting at just $1 all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario.

Up next, Allison Southwick and Robert Brokamp share some tips to help you recession-proof your finances. Recession risks are on the rise. Impending trade wars, accelerating layoffs, declining consumer confidence and a stock market correction have americans understandably skittish according to google trends searches on the term recession are at the third highest level of the past 10 years these concerns are reflected in plenty of recent headlines such as a recession may be coming it's not too late to prepare says usa today or cnbc with recession is coming before end of 2025, generally pessimistic corporate CFOs say. I mean, that's my number one barometer is the

generally pessimistic corporate CFO indicator. And how about one more example? Stocks fall sharply, bonds, gold buoyed as tariffs stoke recession fears, say Reuters. So to be sure, many aspects of the economy are humming along just fine. A recession over the next year or two is not a certainty. Goldman Sachs recently estimated the odds of a recession over the next 12 months at 35%. Not great, but less than 50-50. But a recession eventually is guaranteed because we haven't yet figured out how to eliminate the boom and bust cycles of the economy. Yeah. So let's talk a little bit about the history of recession. So it's commonly thought that a recession is defined as two consecutive quarters of declining GDP, but that's actually

not the official definition. It's certainly a sign that things are slowing down. But we don't really know when an official recession has begun or ended until the National Bureau of Economic Research says so. So, the NBER is a private nonprofit research organization made up of more than 1,800 economists and their folks who say, basically, recession began and recession ended. And the NBER does provide data on recessions as far back as 1854. So, since then, the U.S. has experienced a recession on average every five years. However, there was more than a decade between two of the last three recessions. The average recession has lasted 17 months, but since 1945, the average has been just 10 months. The last two downturns were on the

opposite ends of the duration spectrum. The 2007-2009 recession lasted 18 months. That was the longest recession since the Great Depression. But the most recent recession, which was caused by the pandemic panic of 2020, was just two months. That was the shortest recession ever. Recessions can have an impact on most aspects of your finances, but not all in bad ways. Here's how a recession generally affects different aspects of the economy and your money. Let's start with, well, stocks go down. Yeah. The stock market is considered a leading economic indicator. It tends to drop several months before a recession officially begins, and stocks usually, but not always, rebound before the recession ends. If you're

trying to say, you know what, I'm going to keep some cash on the side, I'm going to wait for the economy to recover before I get back into the market, you're probably going to miss some of the best-performing days of the recovery. According to Truist co-CEIO Keith Lerner, the median recession-associated decline in the S&P 500 since 1948 was 24%. The sectors that tend to hold up the best during recessions are consumer staples, utilities, and healthcare. Another thing that tends to happen during a recession is that interest rates usually go up. Yeah, the bond market and the Federal Reserve both react to recessions by driving down interest rates. However, if inflation stays high or increases during the economic downturn,

what is known as stagflation, interest rates may actually go up, as happened during the 1973-74 recession. Rates have already actually started to decline so far this year. While the Federal Reserve held rates steady at their last meeting, they've indicated that they've penciled in two rate cuts this year. So, the takeaway for your finances are that if rates do continue to decline, you may want to lock in current rates with some of your money, maybe by buying CDs or bonds. Also, depending on where rates end up, a recession actually could be a good time to refinance a loan like your mortgage. All right. So, interest rates usually go down and bonds go up, depending on the bonds. Yeah. So, bond prices move inversely to interest rates. So, if rates go down,

bonds usually go up. Plus, there's often this flight to safety during a recession, which means people sell their stocks and buy bonds, which also drives up bond prices. This is already happening with the Vanguard total bond market ETF up 3% year-to-date. Not a whole lot, but that's pretty good for three months' worth of work from the bond market. That said, it does really depend on the quality of the bonds. Treasuries tend to hold up very well during a recession. Investment-grade corporates historically have been more of a mixed bag. Riskier corporates, like high-yield junk bonds, they tend to go down right along with stocks during a recession. Sometimes not quite as much, but still pretty big, 10%, 15%, 20%. So, for money you want to hold up during the downturn,

stick with FDIC-insured cash and treasuries, with maybe a complement of diversified bond funds that are a mix of government-issued debt and investment-grade corporates. All right. How about home prices? Well, they normally hold up all right. Yeah. Home prices have declined in just two of the six recessions since 1980. And one of those was just a decline of less than 1%, so no big deal. Research from Mark Holbert of MarketWatch found that from 1952 to 2018, home prices on average actually grew more during bear markets and stocks than during bull markets. Now, I know most of us are thinking about the 2007-2009 recession, which is when both stocks and home prices plummeted. But historically speaking,

that actually was an outlier. So, home could be a good stock market hedge as well as a good inflation hedge. But, you know, as they always say about real estate, location, location, location. So, for example, during the oil bust of the 1980s, home prices in Texas, they really struggled. And I've got to say, as someone who lives in the D.C. suburbs of Northern Virginia, I'm going to be very curious to see what happens to home prices in this area with so many federal employees getting laid off and so many government contracts getting canceled. All right. Another factor of the economy, this one's probably not going to be so surprising, is that the unemployment rate rises. Yeah. On average, the unemployment rate

goes up by approximately three percentage points during a recession. But during the 2007-2009 recession, which was pretty bad, it doubled from 5% to 10%. People were out of work on average for almost half a year, so six months, which explains a little bit about why we always say that you should have an emergency fund of around six months. During the pandemic, unemployment skyrocketed from 3.5% to 14.8%. For people who are many years from retirement, I would say job loss is actually the biggest risk of a recession. If your portfolio drops, you could ride out the downturn and your contributions to your 401k and your IRA buy stocks at cheaper prices. But losing your job can range from being disruptive to devastating. I would say now is really the time to bolster

what I call your human capital. Look for ways to demonstrate your value to your employer and your customers, maintain your professional network, and keep your skills up to date in case you need to hit the job market. If you don't have to hit the job market, you may be wondering about benefits. Well, workplace benefits tend to stay flat or get reduced. Yeah, workers who are fortunate to keep their jobs could still experience a reduction in their overall compensation package during a recession. Raises and bonuses are harder to come by. Companies who are really struggling actually may reduce your pay and other benefits. The next company gathering may be in the office conference room instead of at a restaurant or

hotel. You may see other perks curtailed. For example, around 10% of companies reduced or eliminated their 401k matches during the pandemic. The figure was closer to 20% during the Great Recession of 2007. Finally, after all of that bad news, maybe there's a little bit of good news. Inflation tends to go down, at least we hope. Yeah. If there is an upside to a downtrodden economy, it's that the cost of living doesn't go up as much, and actually sometimes goes down. Consumers usually cut back on their spending during a recession, so businesses often reduce their prices to try to get people into the stores. If you have the means, you have a job, you have the money on the side,

a recession actually could be a good time to make a big-ticket purchase, such as a car, refrigerator, or other big household appliance. That said, some of us are old enough to remember the 1970s and the era of stagflation, when prices kept going up despite a muddling economy. And I have to say, that's probably more of a concern these days, since President Trump wants to impose significant tariffs, and tariffs can be inflationary. OK, bro, let's bring us home. What's the foolish bottom line on recessions? Yeah, I would say to get your finances recession-ready, start with that boring yet important

advice to make sure that you protect any money you need in the next few years by keeping it in cash, short-term bonds. This is also probably a good time to look at your budget, reduce any unnecessary or underappreciated expenses, maybe use that money to build up your emergency fund. And as I said earlier, do everything you can to shore up your job security if you're still working. If you're near or in retirement, the concern really is probably more about your portfolio since you'll soon be using it as a paycheck if you're not already. And this is where asset allocation and diversification really becomes important. It starts with building that

income cushion, which is five years' worth of portfolio-provided income in cash, maybe short-term bonds. It's also crucial to have different types of stocks and own enough of them. We often say here at The Fool that you should own at least 25. I like more. Maybe throw in some index funds as well. You can always keep investing in growth-oriented stocks, tech stocks, but maybe have a complement of some solid dividend-paying consumer staple stocks. You just don't want too much of your retirement riding on just one sector, one industry, or one style of investing. Finally, the good news is just to take heart in the fact that every recession has been followed by an economic expansion. They don't last forever. Eventually, unemployment will come

back down. The holiday party will want to be held at some fancy hotel. And the stock market will get back to new highs eventually. All right. Well, one last thing. While it is April Fool's Day, I have something that's not a joke to share. My time at The Motley Fool is drawing to a close, and today is my last episode of Motley Fool Money. As some of you know, Bro and I, with Rick behind the sometimes literal glass, have been podcasting together for over 10 years. It all started with the Molly full answers podcast back in 2014. Now, because of my time with bro, I've forgotten more things about finance than most people will ever know. And because of the hundreds of postcards we received over the years, I like to believe we made a difference in a few

people's lives. Anyway, thank you, bro, Rick, Ricky, and to our dozens of listeners so long. And thanks for all the stocks. Well, Alison, I have to add in my own thoughts. Of course. Yes, It has been more than 500 episodes together. And as I've told you many times, working with you and Rick and doing this podcast has been one of the highlights of my career, if not the highlight. You're smart, you're funny, you're hardworking,

you have a big heart, and of course you love Star Wars and a good Christmas song. So I know I speak for our dozens of listeners when I say thank you so much. We're going to miss you and we wish you all the best. Thanks, buddy. Aw, Rick, are you crying? I am. Aw, you'll be okay.

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 stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that I would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll see you tomorrow. Thanks for watching!