Motley Fool Hidden Gems Investing - Beth Kindig on Tech Stocks

Episode Date: April 21, 2022

As major airline stocks pop, it's reasonable to ask what the long-term prospects are for shareholders. (0:20) Jim Gillies discusses: - American, United, and the other major U.S. carriers - The airline-tangent stock he prefers - AT&T's timing with the spinoff of Warner Media - HBO Max gaining subscribers - Sleep Number's cash flow being better than its stock price would indicate (19:30) Deidre Woollard talks with Beth Kindig, lead tech analyst for the I/O Fund, about where she's finding opportunities in the recent downturn in tech stocks. Stocks discussed: AAL, UAL, AER, T, WBD, SNBR, NVDA, ROKU, AMD, MU Host: Chris Hill Guests: Jim Gillies, Deidre Woolard, Beth Kindig Producer: Ricky Mulvey Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey Ontario! Come on down to BetMGM Casino and check out our newest exclusive, The Price is Right Fortune Pick. Don't miss out! Play exciting casino games based on the iconic game show, only at BetMGM. Access to The Price is Right Fortune Pick is only available at BetMGM Casino. BetMGM and GameSense remind you to play responsibly. 19 plus to wager. Ontario only. Please play responsibly. If you have questions or concerns about your gambling or someone close to you, please contact ConnexOntario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. We've got airline stocks, streaming media, and a conversation with tech analyst Beth

Kindig. Motley Fool Money starts now. I'm Chris Hillen. Joining me today from Motley Fool Canada, Jim Gillies. Good to see you. Thanks for being here. Thanks for inviting me. We're going to get to Tesla's results on tomorrow's show. Today, I want to start with a different kind of transportation. American Airlines and United Airlines, both out with first quarter results. They both had losses, but they're both predicting profits for the second quarter. Shares are both up around 10%. A couple of ways we can go here, but just on the surface, what is your reaction to this move? because it seems like we do this dance, we collectively as investors do this dance,

at least once a year or so, where we just get excited about the prospect of major airlines and we bid up their stocks. Yes. I'm going to start off by saying that I am a cash flow value style investor. That is how I approach pretty much all companies, but that approach has me looking at the airlines and essentially saying, these are not long-term investments you want to make. I understand that the market is very, very excited today. American Airlines, their revenue passenger miles nearly doubled year-over-year. They did lose money on a gap basis, but they lost less than expected and they are predicting profitability this quarter. are still burning cash, but they cut their cash burn by about 90%. Now, last year, obviously,

it's not really a fair comparison in a pandemic-restricted universe, but they burned about $7.2 billion in operating cash flow last year, burned about $770 million. This year, United Airlines, much the same story, they beat expectations. They are also saying, hey, we're going to be profitable this quarter, Q2. In fact, their headline in the press release was, they expect the, quote, highest quarterly revenue in company history in Q2. Some might say that's bold, some might say, boy, that's lipstick on a pig. But they actually reported free cash flow this quarter as well. They generated $1.1 billion, stock is off to the races. This all sounds good. and of course, they are part of the big four oligopoly in the U.S. All of that said,

I find the airlines uninvestable over the long-term. If you want to play a recovery, I don't think that's necessarily a bad thesis, but please don't be under the impression you're going to buy and hold these things and have multibaggers over, say, a 30-year period. These are not companies to own for the long-term. When they do generate cash flow, and they did, United generated about $11.5 billion in free cash flow from 2010, I'm measuring from the date of the continental merger with United, through to 2019, the last year untouched by the pandemic. They did about $11.5 billion in free cash. They spent nearly $9 billion on buybacks. The share count today is back around where it was at the time of the merger because they frittered away all of the goodwill

from buybacks during the pandemic. Maybe frittered away is unfair. It was a pandemic, but similar American Airlines, their free cash flow negative over that decade. They also went hard into repurchases, debt-fueled. Their share count today is also back above where it was following the last time they went bankrupt, and I'm going to come back to that point in a minute. Basically, all of the cash generated, or in American's case, debt, over most of the last decade pre-pandemic got spent on buying back stock, and long-term investors today are back to companies that are the same size share count-wise. You got to wonder, if I was a long-term shareholder, what did I get out of it? The answer is, this is not a long-term value-creating industry,

it's cyclical. These management teams have shown time and again that they will not put up reserves during good times that help them in bad times. And so, my excuse or my solution here is I just avoid the whole damn thing. I don't go into airlines because I did mention, talking about American Airlines, the last time they emerged from bankruptcy, which I believe was 2011. These are companies that routinely go bankrupt when they hit bad times because they don't put up those reserves. I understand the pandemic is kind of a once-in-a-lifetime thing, so I kind of go back, okay, well, maybe they deserve some government support to get them through then. One does wonder what the excuse was the last time. My own country in Canada, our flagship carrier,

Air Canada, they last went bankrupt in 2004. Today, the stock is fine. But you don't get the long-term multi-bagger returns that we as fools want to buy and hold and achieve. The industry itself, it doesn't like to provide that to us. We run into recessions, we run into pandemics, we run into hard times. My preference, if you want to play in this space, I could suggest maybe, and I think this is a good place to go as well, especially in the wake of all the support the airlines had to have and the provisions they had to provide for the government for their aid. I kind of like the aircraft leasing operation. So, AirCap is the big dog in the space, AER, the New York Stock Exchange. They are the world's largest owner of aircraft,

and they're leasing it to the airlines. And the airlines aren't going to have a lot of money lying around for CapEx. So, they're going to, I think, for at least the next half decade or so, going to prefer to lease these assets, let someone else own them, we'll pay rent monthly. and I think that's a good place to be if you are one of the aircraft lessors, like an AirCap, like an Airlease. So, if you're going to play in this space, I prefer that end rather than the airlines themselves. Let's move on to media then. Just buried that one right away. AT&T's latest results come with a side serving of irony, because just as AT&T spun off WarnerMedia, which includes HBO,

WarnerMedia comes out with the news that HBO and HBO Max added three million subscribers in the first quarter. Look, it was just yesterday that Tim Beyers and I were talking about Netflix, which was the story of the day. One of the things we talked about was companies like Roku and Disney, the shares of those companies being down, and I get the logic here. There were some people on Wall Street who looked at Netflix as the clear leader in subscribers and said, well, look, if they're losing subs, it stands to reason that Roku and Disney might be in similar trouble. WarnerMedia sharing that like, no, we're actually still gaining subs, although granted, they're gaining off of a smaller number than what Netflix has.

Yeah. My take on it, because we talked a lot about Netflix as well yesterday on Motley Fool Live, for example. My take is, the danger that I perceive with the Netflix, and I share the concern that was expressed that, oh, okay, well, if Netflix is getting whacked, maybe everyone else is and we should be wary of them. My concern is, Netflix might have stealthily turned into more of a long-term, slow-grower incumbent play, like a legacy cable company that, of course, they were the ones who displaced them back in the day. They may have turned into that, we really didn't notice. It's one quarter, it's not a great quarter, marketing spend per per net customer ad even after you take out the Russia thing, because most of their customer

ad miss was because of Russia. The reaction to Netflix yesterday really looked to me like the market en masse saying, yeah, growth expectations are done here, and they were valuing it that way. It's unfortunate if you're a Netflix shareholder, obviously. As far as Disney+, far as HBO Max goes. If these services are indeed growing, then to me, it also speaks to we've become oversubscribed. I don't know how many subscription services you've got in your house. I think I counted yesterday, I've got five. Before we started recording, you mentioned Apple+. I remembered I don't have that anymore, but I have in the past. I wonder if people are also doing a little bit of a la carte shopping. It's like, well,

I want to catch whatever the latest, greatest show on HBO Max is, or I really love the show Always Sunny in Philadelphia, hey, Disney Plus here in Canada has got 13 seasons of that show on it, I'm going to subscribe there. I'm going to let my Netflix subscription lapse for, say, four to six months, and I'll come back. And if people are starting to do that kind of a la carte shopping, I don't think it bodes well for the largest player in the space, and certainly I think Netflix said a few things about that. But I do take the point, Chris, that AT&T spinning off into WarnerMedia, into Discovery, I believe shareholders got shares in the new WarnerMedia, so hopefully they held it. But this feels like a very AT&T

movie. AT&T has not done much for long-term investors either. I'm starting to see a theme in my talking today. They've not done a lot aside from pay them a dividend. I believe the stock prices, if it's not down from where it was a decade, absent dividends, it's close. I enjoy your dividends and I hope you kept the WarnerMedia shares. Real quick before we move on, do you think we're moving to a place with all of the streaming services. Should the expectation for investors be, regardless of the streaming service, that churn is going to be an ever-present challenge to the point where don't expect great retention numbers? Say what you want about any of these services and the content they have. They all appear to make it pretty easy to sign up and

they all appear to make it pretty easy to cancel. If they're doing it on a monthly basis, I just wonder if all investors need to just recalibrate their expectations on churn. I agree. They make it very easy to get in and get out. Paradoxically, I think, you know what the tool that I found personally for keeping me a customer is two of my streaming services will allow you to pay for a full year upfront, and the price is equivalent to paying for 10 months instead of 12. I was just going to say, if all of these services aren't looking at that, I just remember when Disney Plus launched and they had the monthly price and they had the annual price, and the annual price was something

like 20% less. It's two months cheaper because Disney Plus. Now that I think about it, I've actually got three that I pay by the year. And they mix that with content I actually want to watch, which I'm increasingly finding on Disney Plus and the Canadian service that supplies HBO. And I'd be wary. I'd be wary if I'm a Netflix. And just some of the stuff that Netflix was talking about going after the ad-supported levels. We went to Netflix to get rid of ads, going after password sharing. I don't think you're going to convert those people who are used to paying nothing for your product. I don't think you're going to convert them to the highest level of your product. I was wary after yesterday's release on Netflix.

Chris Hill I did an interview earlier this week on another show, and the host asked me for a couple of thoughts on earnings season that we are just starting. And one of the things I said was, the phrase supply chain issues is going to be a phrase we continue to hear from companies. And we heard it today with Sleep Number. Their first quarter profits were lower than Wall Street was expecting because of supply chain issues. Sleep Number is, for people who have been around The Motley Fool for a long time, this is a stock that has been on the company's radar, on your radar. You and I were chatting earlier this morning. Do you get the sense that the business of Sleep Number is in better shape than the stock price would indicate? Because the stock is down

10% today, and I think it's half of where it was maybe a few months ago. I think it's actually about two-thirds off or maybe more now. I've followed Sleep Number on and off for the better part of two decades now. It used to be called Select Comfort. It was a multiple recommendation back in the old classic hidden gems of the mid-2000s. And back then, they had some issues. Look, they grew very well during the housing boom. And of course, people said, yeah, well, you're selling beds in a housing boom. When the housing market turns, you're going to sell less beds. Like, oh, no, no, no, we have data that says we're not tied to housing starts. We're fine. We are a growth company. And look at how confident

we are. They were debt-free in the early 2000s. They built up a nice cash hoard. And when things started rolling over, they spent the entire cash they generated in the seven or eight years before on buying back their own stock. Then they took out a line of credit and they maxed that out to buy back more of their own stock because we are not tied to housing market. Housing market rolled over. It turns out they were tied to the housing market and the stock went from $25 to $0.25 at the bottom, which is basically the only reason they did not go bankrupt is because the bankers wouldn't have been able to run it any better, so they gave them more and more rope. And so, what ended up happening is, they issued some new shares, they took on some

vulture financing, they got through the credit crisis, all the shares they bought back got flooded back onto the market, and then some, but they started to recover, they did survive. And the one thing that I really like about Sleep Number Company is that they are consistently cash flow positive, even though we understand supply chain. And actually, I'm buying that as an excuse. There's a couple of companies I could point to that I'm not buying that as the rationale, but I'm buying it here, because they are making a reasonably complex product, sourcing parts from around the globe, and there is a supply chain snozzle right now. But so, Sleep Number in their second act, say from about 2011 onwards, they've generated, and this is just barely over a billion

dollar company, they've generated about $1.1 billion, $1.2 billion in total free cash flow over that period. It's been growing. It's grown about three-and-a-half times over the past, I think, 11 years, again, since they emerged and had their second act. They've bought back nearly $1.55 billion worth of stock. They've basically taken all their cash flow, again, got them in trouble before the housing market rolled over a lifetime ago. But this time, it's been a real drop in their share count. They have bought back 60% of their stock. The difference between the amount of cash they generated and the number of amount they bought back has been debt-fueled, but their credit line is a lot better this time in terms of it, and they are still very, very cash flow

positive. I know the stock is down today, it's down about 10%, 12%. I know it's significantly down from where it was a year ago. People are clearly looking at what happened the last time, a market rolled over, a housing market. This time, they've stuck in their homes for two years for a pandemic, they put money into their homes, hey, let's buy a new bed. I think people are inferring the same things happening. I'm looking at this going, I'm interested in this stock for the first time in probably a decade. I'm now interested again, because again, the stock price is about double where it was, where it maxed out in the pre-housing crisis days, but the share count is 60% less. It's almost like the share price today is arguably, or the market cap

is less today than it was. They have demonstrated they can generate and grow their cash flow. to me, in any environment, any investing environment, that to me is very interesting. And today, you're paying about 10.5 times free cash flow for this business. So, I guess I'll end on a happy note there. I kind of like that. I was going to say, are we about to end on a potential buying opportunity? You know, I'm liking this one. Well, because the other thing is, too, is people who I've talked to, and I know people you've talked and we know a couple of people in common who have bought this product. Most people really like this product when they buy it. Yes.

And you know, that's not nothing. It's not really the repeat purchase of, say, razors and blades, but yeah. Sure. But it's still, I could go down a dark path saying, well, after pandemic is over, maybe you're expecting an uptick in the divorce rate so people will need to buy a second bed. But that would be dark and we're not going to go there. We're going to end on a happy positive note. That's why I love you. Jim Gillies, thanks for being here. Thank you. Patience is a requirement for long-term investing success. Over the long-term, patience gets tested. Take the last six to 12 months, for example. If you own shares of companies listed on the NASDAQ,

yeah, your patience is probably being tested. Beth Kendig is the lead technology analyst for the IO Fund and The Motley Fool's Choice for Tech Investor of the Year in our 2022 Women in Investing Awards. Recently, Deirdre Willard sat down with Beth to talk about where she sees buying opportunities during this downturn and how she's managing long-term expectations for her investments. I think you've hinted around the fact that it's been a bit of a bumpy road for tech recently. Certainly, investors who are heavily invested in tech are feeling that. Of course, we always feel like there's opportunity in there too and it's all about the good companies. What are you thinking about tech right now and some of those valuations you're seeing?

I've been a buyer. The IO fund has been buying, nibbling. When we see quality company beaten down in price, we try not to overthink it because there will probably be a day where we talk about the prices of 2022, meaning that they were so low. The probability that 2022 was oversold is pretty high at this point. It was just an extreme reaction to the downside as part of 2020 and 2021 was an extreme action, the opposite direction. Extremes are a good moment to pay attention to what's going on and think of the opposite of what the market is doing. And so we've been buyers. And the reason that I'm a buyer is because I'm part of the 2030 club, I fully am invested in tech minimum through 2030. Uh, and I can tell you

that I've always said, no matter what market it was, especially during the height of the exuberance, uh, that you need to have bare minimum three-year hold, ideally a five to seven year time horizon. And I can tell you that my 2018 class of stocks, the entries that I have in 2018, they're, they're doing phenomenal right now. Um, because I held for three plus years that those entries are just, they're crushing it. There's some up, you know, 500%. Um, and so I 2019 as well, they, they still are holding well, a lot of those entries. Um, the more challenging year was obviously 2020. Uh, that's the year that everyone was so excited. People were willing to pay anything, but if you even have 2020 entries by 2023, you're probably doing pretty

good. So I think people just get really emotional and they are very afraid of failure. They're very afraid of losses. And so they'll see, you know, arbitrarily they'll look from November to April, which has not been very good, but whoever said you could hold tech stocks for five months, whoever told you that is the last person you should be listening to. Cause it's, it's just not a five month industry. It's actually a seven to 10 year holding time horizon for the best tech investors, which are venture capitalists. So why is a retail investor or an individual investor thinking they can make money in tech at a fraction of the time horizon as some of the best tech investors in the world? So I think just like staying really firm on the time horizon is

absolutely essential. And that's what piece has most been forgotten lately. Yeah, but totally, totally agree at The Motley Fool. We have a rule about holding things at least five years. Five to seven absolutely makes sense with that longer tax cycle. Wanted to ask you, we're starting to head into earnings season. Kind of wanted to find out what you thought about the last earnings season, where we saw a lot of companies posting some pretty strong results and the market just reacting negatively over and over again. Did that represent an opportunity to you? And how much attention do you pay to earnings in general? Hmm. We pay really close attention to earnings. Uh, and I would say that when a company has a

really strong report and the market sells off, that is usually a buying opportunity to us. That's the best buying opportunity because I'm looking for facts. I deal with facts. I don't deal with opinions. I mean, we have to deal with opinions and sentiment. It is baked into the technicals. We have another person at the company who does technicals. What I'm saying is like, as a long-term buy and hold tech industry analyst, I am really looking for facts. I'm really looking for management to tell me what the outlook is. That is way worth its weight over an analyst trying to give me a buy target. I greatly prefer to listen to management teams and I like to listen broadly. So it doesn't matter if I own the stock or not. If I'm in the ad tech industry, I will

list that, you know, if I have ad tech stocks, I will listen to heavyweights in ad tech, their calls, just because they're usually giving you a really broad look. They have visibility that we don't have. Analysts can obviously go and do channel checks, but channel checks aren't nearly as good as, you know, having the visibility at the company and the right management teams are trying to build trust with investors. And even if there are headwinds or whatever it might be, they will clearly articulate what the forward outlook is. And when the market penalizes them, um, I've actually written about Roku lately. Um, they reiterated their full year guidance, but they weren't able to meet Q1 because of supply chain issues. Those kinds of things are

big buying opportunities to me because, uh, we foresee supply chains as transient headwinds. So we were, we were buying, I mean, we were buying in some cases not recommended. We bought going earnings a couple of times that worked out well. One time it did not work out well. And then the others we were buying within the week after when the market was penalizing them. And we feel very good about those entries. Yeah. Roku is definitely one that's been on people's minds lately. You mentioned the term channel checks. Can you define what that is? It's just an analyst who will be able to talk to vendors, talk to people within a supply chain, for instance, and see what their take is. So a supplier for iPhones might be able to tell you like what kind of orders are looking

like, or they might be able to talk with other, you know, bigger customers, uh, and see like our orders being canceled. Are they being doubled? Um, and it's just channel checks around the health of, uh, the underlying business and the supply chain. For instance, in this case, we had a downgrade on NVIDIA because someone, uh, you know, uh, analysts thought they, you know, has done channel checks in the supply chain. Uh, they think there could be some cancellations coming, but ultimately, uh, you know, this is just one I've had to address recently. Ultimately, I think management probably has that visibility. And so I'm siding with management and that was across the semiconductor management teams, AMD micron, they all said flattish, uh, PC units

and their forecasts seem to have taken that into account. So, channel checks, again, versus management level visibility, I usually tend to lean heavily towards management. Interesting. Yeah, the semiconductor industry right now is kind of fascinating because it's generally so cyclical and yet we're in this sort of backup period with so much demand. Looking forward to next quarter earnings across tech in general, what are you looking for? certainly supply chain is going to come up. What other things do you think are things to pay attention to in tech? That's a great question. Speaking of the supply chain, we really think there's going to be a rebound in the second half of the year. We've pulled tons of data.

We have a great team, strong team. Bradley and Royston helped me with that. And we've published some pretty convincing data. So check it out if you haven't seen it. It's published for free on our newsletter and our website. And, uh, there was a very big, historically big, uh, auto inventory rebound, um, in Q4. So, uh, we're hoping that funnels through by the second half of the year. If so, all kinds of industries will start to be positively impacted. Uh, ad tech, especially, I would say is one where if it can't come in the current guide, we really are watching it for the Q3 guide, which would be an ad tech rebound due to supply chain issues easing. That's one to look for. What we try to remind people is that perfect timing is impossible. So we can give you kind of

a broader, like, could it be Q2 guides? Could it be the Q3 guide? I don't know, but we think it's coming. So we think that supply chain will start to ease. And then the other one that our team has dug up, the team of analysts, is the CapEx spending from big tech. That's where, you know, Flattish, PC units, anything Russia, China, that is being filtered through on the semiconductors. Can that overcome the fact that all FANG or, you know, plus Microsoft is spending heavily on CapEx, which filters down to semiconductors? So, that's the kind of, you know, that was something that Bradley actually has written extensively on as well as, you know, Facebook, Amazon, Google, Microsoft spending hand over fist right now on data centers. So we're hoping that keeps our

strong. Yeah. I've been watching the data centers and seeing them pop up in, in small towns and the difference between some of like Google building data centers versus also leasing data center space. Just fascinating. I also wanted to just zero in on something else you said there too, which is it doesn't necessarily matter if it comes in Q2 or Q3. I think that reiterates what you just said about the long-term hold, that if you are a long-term investor, it doesn't matter when that rebound is coming because it's coming and you're in there for the long-term. 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.