Motley Fool Hidden Gems Investing - Barron's Top Stock Picks

Episode Date: December 19, 2022

There's a value approach to Barron's annual list, and we've got some thoughts. (0:21) Jason Moser discusses: - The case for traditional value stocks like Bank of America and Berkshire-Hathaway - Inclusion of Big Tech companies like Alphabet and Amazon - Why attractive valuation isn't enough to get us interested in Madison Square Garden Sports (12:45) Jason and Matt Frankel review some bold predictions they made last year and share some predictions about mortgage rates, inflation, and stocks in the year ahead. Stocks mentioned: AA, GOOG, GOOGL, AMZN, BAC, BRK.A, BRK.B, CMCSA, DAL, DIS, MSGS, MDT, TSLA, TOL Holiday Music: 8 Days (of Hanukkah) by Sharon Jones & the Dap-Kings Host: Chris Hill Guests: Jason Moser, Matt Frankel Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Jason Moser. happy monday happy monday indeed to our listeners in france congratulations on an incredible run to our listeners in argentina who are we kidding they're not listening they're still celebrating their world cup victory um so as they have done for a while now baron's magazine has put together their picks for the 10 top stocks for the coming year i appreciate the fact that baron's led their article with their scorecard of the 10 stocks that they picked last year. The average pick is down around nearly 2%, that's still outperforming the S&P 500 by 10 percentage points. We're not going to go through all 10 of these stocks for 2023 in great detail, but the tickers

for all 10 are in the show notes of this episode, so folks can check those out. We can go into few that we find noteworthy, but it is clear, Jason, when I look at this list, the folks at Barron's are very much taking a value lens approach to stock investing in the new year, and you see it in picks like Bank of America and Berkshire Hathaway. Yeah, I think that's fair to say. It feels like investors, particularly this past year, you know, we always say price always matters, and it feels like a lot of investors have sort of renewed their belief in that sentiment, right? I mean, we have for a long time not had to worry so much about valuation, and it's certainly taken center stage these days

for obvious reasons. I do like that this is their pick. I mean, these are 10 stocks, right? we don't know how long ultimately, I guess they're really just judging themselves on a year. And so that doesn't really fully line up with the way that we do things here. But I do like that it's so well diversified. When you look at this collection of companies, you've got tech, you've got financials, you've got healthcare, you've got homebuilders, you've got airlines, you've got entertainment, I think there's some commodities in there even. So it is, from that perspective, I think a really attractive little collection of companies. Some I feel a little bit more bullish on than others. But yeah, I think it's fair to say that they are looking at this through

a very valuation tilted lens. I did smile at the fact that Amazon was one of their top stocks a year ago, and now the shares are down, call it 45%, 50%. 50%, it's on this list again. Now that it's a lot cheaper, it's really a top pick. I did chuckle at that. Well, it does feel like you've got some businesses in here that are far more proven entities than others. Amazon, I feel like we all have a certain level of conviction. I've been an Amazon shareholder for 11, 12 years now or something like that. It's a foundational part of my portfolio that I never even really give it a second thought that it's down 50% this year. Of course, I follow the business, I want to learn why and what some of the headwinds or challenges

the business faces may be. But generally speaking, it's been a tough stretch for Amazon stock, like you said, down about 50% for the year. But you ask yourself, why is that the case? It's not a unique story in that we're seeing a lot of these stay-at-home stocks come back to earth. I mean, and Amazon, I think, very much qualified as one of those stay-at-home stocks over the last couple of years. And so, it was easy to see the optimism perhaps got a little bit out of control, even for such a well-established business. They clearly overbuilt, they're dealing with a glut of warehouse space that they now have to right-size, and they've been dealing with growth sort of normalizing here over the last year versus what we witnessed

previous two years or so. But again, you look at companies like Amazon and Alphabet being another that they recommended. To me, these are just very obvious ideas in this space today. It feels like we talked before about how some of these companies are becoming more than just what they've been. We're talking about how we're redefining the word utility, example. It's not just your power company and your water company anymore. These cloud providers are modern-day utilities. From that perspective alone, I think you see something like an Amazon and an Alphabet and just the tailwinds that we'll recognize in the coming years through AWS and Google Cloud. Those are reason enough, I think, to own these businesses, but they also have so much

more to offer. It does make sense to see those on that list. Bank of America, I think, is a really interesting one because it definitely feels like it's set up to succeed given this rising interest rate environment. But when you look at how the stock has performed this year, it's underperforming the market year-to-date, a time where I think many would have probably predicted the opposite given what we know. We've been waiting for a while to see this interest rate environment start changing, and we know that that will ultimately have a good impact on banks' financials in regard to the net interest income that they generate. But this has not been a good investment this year. It's not been a great investment over the last three and five years

either. But back to your valuation point, Bank of America is trading at a discount to JPMorgan, Morgan Stanley, U.S. Bancorp on a price to tangible book value basis. is. Perhaps they see an opportunity there in the valuation as well as the favorable bigger picture for these banks. I think another thing to keep in mind with Bank of America is you look to the efficiency ratio as a metric that can tell you how efficiently banks are operating. That ultimately is just non-interest expenses divided by revenue. You want to see lower. If you see over the last quarter that they reported, the efficiency ratio was 62%. trending downward. But if you go back to 2019, that number was 45%. I think that really shows

you there's clearly room for improvement for Bank of America on this front, and it feels like the trend is headed in that direction, which leaves me feeling like this could be another good pick on their part. Chris Hill You mentioned the track record over the last few years for the stock. That shows up in one of the other stocks on Barron's list, which is Medtronic, which really hasn't been a great stock over the last five years. But you talked about how this group of stocks is pretty well diversified, and I think you can say that in a couple of different ways, certainly by industry, but also by what am I expecting out of this stock? I think it's reasonable to have different expectations.

you look at a company like Medtronic, which is so good at what they do in terms of medical devices, and it's a dividend aristocrat. I don't own shares of Medtronic, but that's one of those stocks where if you do, as long as you have your expectations in line with what to expect out of the stock, I think you're in pretty good shape. I wanted to get your thoughts on Comcast, because Comcast is on this list as well. It's a business we don't talk about all that much, but it seems like one of the knocks on Comcast has been the Peacock streaming service. And relative to other streamers out there, lower adoption, fewer paying customers. Is Comcast, in your opinion, being unfairly dinged for that? I mean, I understand it's

it's very easy to sort of, I mean, it's a diversified business and some parts of the business get more attention than others. And I understand why Peacock gets the attention that it does. But I'm wondering if that's part of the reason it's on this list where it's like, Comcast is doing a lot of other things that make a decent amount of money. And yes, they want to get Peacock to the point of profitability, but let's not unduly punish this company. Yeah, it feels, I don't know if they're being unjustly viewed through that lens. It does feel like they are being lumped together with all of the other streamers, really, more or less. Obviously, Disney has been dealing

with some headwinds in the space. It feels like with Comcast, it's a tremendous business in that they have this very robust broadband offering, and yet by the same token, its cable business is suffering due to, of course, cord cutting. Enter Peacock, and Peacock ultimately, we know, it's their streaming service, which it's NBC-centric. It was never meant to be a Netflix competitor in that, oh, they're just trying to get as many subscribers, and it's a subscription business, and that's how they generate their money. Of course, Peacock has a number of different tiers for subscribers to pay from free to no ads altogether, or at least minimal ads. But it does feel like given the shift in the landscape, you're going

from this cable-centric media landscape to a streaming-centric media landscape. I think that investors are starting to view Comcast through that lens. I think that we see a lot of uncertainty still in that space as to how this is ultimately going to shake out and ultimately really how profitable it's going to be. You go back to Disney and the challenges that they're facing. We talked about this switch from Bob Chapek leaving and Bob Iger coming back in. That's all fine and dandy, but what is Iger going to do differently? Because even though you've got new leadership in there that maybe is a better cultural fit and maybe people have more faith that he really is the right person to lead this business through this changing environment.

What ultimately is he going to do differently? Because we know that's been a key point of focus is Disney getting that streaming operation to profitability. Not only profitability, but you want to see robust, sustainable profitability. I think that's the big question with Comcast right now. You've got the advantage there in the pipes and how a lot of that information is being delivered to us. But beyond that, what it has done so well for so long and having that diversified offering and doing more than just being the pipes, having that entertainment offering, the cable business, there's just less certainty right now as to how the future of the streaming business is going to look, particularly in the next several years. There's going to be

some consolidation, there's going to be some spinning off of things, and where Comcast falls is kind of yet to be determined. And then I think the wildcard with Comcast at the end of the day is it just has such a bad reputation for customer service, doesn't it? I mean, I'm not a Comcast customer. I'm not a Comcast shareholder. But I feel like I hear at least a story or two every week about someone's escapades with Comcast and how miserable they are as a Comcast customer. I think it's a sign of how bad the customer service at Comcast was, go back five, seven years or so, that they have improved it. They have legitimately improved their customer service. And you're still hearing those stories.

One last stock before we wrap up. Madison Square Garden Sports, the parent company of the New York Knicks and the New York Rangers is on this list. I understand the valuation case when you look at where the stock is trading relative to the value of those two teams, but I look at that business and I only have one question and that is, is Jim Dolan still running things? Because any New York Knicks fan listening right now is nodding and saying, oh yeah, one of the most dysfunctional owners in professional sports in America is still at the head of the org chart, and I don't care how attractive the valuation is, Jim Dolan is still at the top of the chart, makes me say, no, thanks, I'm going to pass on this one. Yeah. Well, you raise a very good point.

I think that's something that a lot of people should keep in mind is that even if a business may present an attractive value proposition, there's more to consider and leadership is certainly one of those things. I think Elon Musk is probably a good example today. You could probably look at something like Tesla and say, man, this is a company that's really led the way and holds an enviable market position, but it's being led by this Mercurial leader and you just never know what you're going to get. There's a trade-off. I feel like that trade-off also exists here with Madison Square. I do agree. You have to understand this is a ticket to ride with the the Dolan family. As I say, every investment requires a certain leap of faith and there's

probably a greater leap of faith involved with this one. Over any real stretch of time, this has not been a good investment. That said, it's not to say it couldn't work out, but ultimately, if you're going to play that value side on an investment like this, it's ultimately about the value being realized. You need to realize the true value of those teams. As it stands, it doesn't seem like the Dolan family has any inclination to let go of those teams anytime soon. Then they have to realize that value other ways. That's through media deals, that's through ticket sales, whatever it may be. That certainly could be something that develops over time. I'm with you, this is not an investment idea

really attracts me because of that Dolan leap of faith. I've just seen through time, I've heard pitches through time of this business and I understand the logic, but we've seen how this has played out over the past several years and it just doesn't seem to be working. For those reasons, as they like to say on Shark Tank, Chris, I'm out. Jason Moser, good talking to you. Yes, sir. Now that we've talked about stocks for 2023, let's talk about bingo cards for 2023. Jason Moser and Matt Frankel are keeping score on their bold predictions from the past year, and they've got new predictions for the year to come about mortgage rates,

inflation, and the stock market. Before we get into how things are looking for 2023 and your bold predictions, let's take a look back at 2022, this year that was. Let's keep you honest. I think you're going to enjoy this segment because you did pretty well. Let's go ahead and talk about what were your predictions for this year, 2022, and how did everything shake out? Like you said, I did pretty well this year. I'll run through my five predictions last year. I said that value stocks were going to outperform growth. They have by about 27 percentage points as of right now. So I'd call that one a win. At the beginning of 2022, the projections had

the Fed raising interest rates once or twice by a total of about 25 basis points. So I said the Fed will raise interest rates faster than expected. That definitely happened. I said, home prices will rise by double digits again, which a lot of people thought was a crazy thing to say, given what happened the year before. So that went well. Home prices were up 13.5% year over year as of the end of October, the most recent data. I said crypto was going to have a rough year. And not that I knew the FTX collapse was going to happen, but Bitcoin and Ethereum, both did pretty poorly. The one that I got wrong was, I said, SPACs were going to make a comeback, and that's not even worth acknowledging. That one did terrible.

Yeah. SPACs have been a disappointing story for the year. Honestly, in looking back at it, it's not terribly surprising. I think with SPACs, that's one of the bigger lessons I took away from 2022, is that while SPACs have brought some very interesting companies to the public markets and given investors the opportunity to consider them, the downside is that they bring so many of these companies to the public markets far earlier than they probably should be going public. and that really plays into the price that you pay. We've seen, obviously, many of these SPACs dwindle. It's not terribly surprising in hindsight when you look at the actual businesses and the numbers that they're recording. It's not to say that they don't have bright futures, but it really

alters the timeline. That SPAC investment, I think you have to adopt a much longer time horizon there in that investment. A good lesson learned from 2022 that I certainly plan to take forward. Hats off to you. You nailed it right there. You got a lot of things right. I will jump in there and say, listen, the Motley Fool Money preview show last year, as we were previewing 2022, I said, don't be surprised if we have a down year in the market. The last down year was 2018 before then. The saying goes that one of every three years, the market is down on average. I think if you go all the way back to 2002, not including 2022, we've had four years where the market was actually down. 2022 is, of course, going to be down as well. But I was saying the

same stuff. We're going to see some level of inflation stimulus becoming a thing of the past, interest rates will be going up, and certainly that's all played out and the market has suffered for it. But hopefully, 2023 will be a better year. No guarantees, but you've got some bold predictions for us for 2023. Let's jump right into those. What is your first bold prediction for 2023? First one is that the Fed is going to get inflation in check. I actually amend that to say that they already have inflation in check a little bit more than the market's giving them credit for. What I mean by that is, if you see the headline inflation number, which last month was 7.1%, that's a year-over-year number. That's comparing it to November of

last year. But if you look at the month-over-month inflation data, it tells a totally different story. The CPI increased 0.1% month-over-month in November. Even if you take out energy and look at just core inflation, it was 0.3% month-over-month. Extrapolate that over a 12-month period, and you've got less than 4% inflation. I think inflation is already under control more the market's giving it credit for. With the Fed's actions, I think that's just going to get even more apparent in the new year. Yeah. It feels like they are not going to be easing up anytime soon, based on Jay Powell's recent comments regarding 2023, and even going into 2024. Do you feel like there's the chance that they overdo it, though,

with this rate policy? I understand the mindset. I think the worst thing they feel like they can do is to ease up too soon and then things get back out of control. They feel like maybe it's safer to go a little bit too far than not far enough. What's your take there? That leads me to bold prediction No. 2, that we're going to see the Fed funds rate decline in 2023. I think because of prediction No. 1, that inflation is going to be a little more under control than the market seems to think right now. I think that's going to happen toward the beginning of 2023, when we're really going to see the inflation numbers come down significantly. So, I think the Fed's going to say, whoa, whoa, whoa, we might have overdone it a

little bit and start to pump the brakes. I think we're going to end 2023 with a lower Fed funds rate than we have right now. Interesting. That's fascinating, particularly given their comments in regard to not trying to ease up until probably 2024, or at least, I guess they said, no cutting of rates until 2024. How do you feel like this all plays out for the market in 2023? Well, to be fair, they were saying the complete opposite at the beginning of 2022 that actually happened. So, take it with a big grain of salt. But with the market, I think the market's going to have a great year in 2023. I'm not an eternal optimist. Most of my predictions for 2022 were

pretty negative. I think that 2023 is going to be a year of a rebound for those reasons. They're going to get inflation under control. They're going to start cutting rates, I think, quicker than the market, and even they think they're going to right now. I think the market's going to have a very strong 2023. There's a lot more that can go right than wrong in the market right now. That's the first time I've said that in a long time. It feels like what's going on right now with Fed policy, just the economy in general, we're seeing the consumer, the consumer is getting into a tighter spot. I could never really figure out, you go through these bank earnings calls and they talk about the consumer being in a great place. Certainly, that narrative

has changed here just over the last month and a half. I think I was looking at Bank of America's call, Brian Moynihan back in October, talking about the consumer being a good place. Then a couple of weeks ago, we saw the headline where Moynihan and Wells Fargo and others saying that they're starting to see the consumer become a little bit more stretched. It feels like, to me, we're going to enter 2023 with a lot of what's going on right now. It leads me to wonder, do you feel like maybe that market performance, do you think it'll be weighted more towards the back half of the year? I would say that that's fair to say. I don't think we're going to come like roaring out of the gate in January, February. It really depends on when

that inflation starts to get under control. But having said that, I think we're going to see a very nice kind of rebound as we get into that back half of the year. No matter what happens with inflation, the Fed's not going to issue an all clear right away. It's going to kind of ease back into it. It's going to be a little while before we can say that inflation is definitely under control. I think that's fair to say. I think a second-half rally is more likely than a first-half rally. Now, I feel like bold prediction No. 4 makes a lot of sense. I would volunteer that this is probably the case as well. But you think that crypto will continue to be weak. Why is that? We're just seeing a domino effect from this

FTX collapse. I just saw news this morning that a lot of the celebrities who were on FTX commercials are now not only coming out and saying, I was just a paid spokesman, I didn't really have anything to do with it. Now they're saying, I don't believe in anything crypto. It was just a paycheck for me. So you're kind of seeing a lot of sentiment turnover. It kind of seemed like a house of cards in a way FTX did. And not just in terms of the business, in terms of kind of the effects it had on the public's perception of crypto because now you're seeing all these celebrities who for the past two years have been saying oh buy bitcoin buy this but it's the future and now they're kind of reversing course um i just think they're i don't see what the next leg up in the cryptocurrency

market would be i don't see where the i don't see a speculative speculative bubble coming back anytime soon i don't see i don't see interest rates going to the the point where money is essentially free, to be perfectly clear. I think the Fed's going to reduce rates cautiously. So, I think that the catalysts are all toward lower cryptocurrency prices going forward. Yeah, it does feel like we have a situation here where, with what's been going on with FTX and all of the other shakeout in the industry, for what is still a very nascent industry to begin with, and I would say probably mostly full of early adopters, you probably have a lot of people who have been on the fence in regard to crypto and considering

it as an investment and want to be a part of that. They're seeing what's going on right now, and that is just the straw that breaks the camel's back. They're like, oh, well, I was on the fence before considering, but now, no way, I'm out. The last bold prediction of mine is that mortgage rates are going to be below 5% by the end of 2023. That might sound like the boldest prediction of the five right now, a lot of people might say, considering what's happened in the market. I mean, mortgage rates were about 3% at the start of 2023. They peaked at over 7%. They've come back down a little bit. They're about 6.4% right now on a 30-year mortgage. So it's not that far from the below 5%

target. But what a lot of people don't realize is, one, even if the Fed doesn't start cutting rates in 2023, like my prediction number two says, mortgages are supply and demand driven. They're not tied directly to the Fed's rate actions. So mortgage rates can rise if the Fed's lowering rates and vice versa. I think you're going to see right now there's no supply and no demand in the real estate market. The market is just terrible. I think you're going to see as inflation starts to come under control, lenders are going to

be more willing to take on risks. Right now, lending standards are very tight compared to the past couple of years, which often happens in times of economic uncertainty. But if we can get inflation under control and avoid a recession, you're going to see much more of a supply of mortgage loans coming back into the market, lenders more willing to lend. And demand is virtually nonexistent right now. So to get that demand up, lenders are going to have to start reducing mortgage rates.

And I think the natural direction of mortgage rates is going to be down in 2023. 2023. I think Freddie Mac's mortgage rate prediction was 4.5% at the end of 2023. I'm not alone in this one, but it does seem like a bold prediction, given where the mortgage market is right now. All I can tell you, man, is I am very grateful to, month after month, just get to take a glance at that 3% 30-year fixed rate that we locked in on our house not all that long ago. I don't know that we ever get back to that level, but certainly those rates have gone up very quickly. It made it prohibited for a lot of buyers in the market, so it's very understandable real estate is having

a tough time. Those are five very interesting predictions. You know what? I'm already looking forward to this time in 2023, where we can go back and review these and look to your bold prediction for 2024. Thanks for having me on. Hopefully, do this again next year. Absolutely. It's always a pleasure. Matt, I hope you and your family have a wonderful holiday season. Same to you. 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. Fry a bunch of latkes With apple, salt, sour cream and oil We're cooking up the brisket The kosher butcher sold my uncle's store