Motley Fool Hidden Gems Investing - Big Banks and Big Screens

Episode Date: April 16, 2024

Dealmaking is back, and the banks are loving it. (00:21) Asit Sharma and Ricky Mulvey discuss: - Why Bank of America’s $1.5 billion in net charge-offs can be forgiven by investors. - A long comeback for wealth management at Merrill Lynch. - IMAX’s cash flow story and the future of movie theaters. Plus, (16:33) Alison Southwick and Robert Brokamp answer listener questions about tracking investments, leveraged shares, and life insurance. Stocks/tickers mentioned: BAC, MS, IMAX, AMZU, NVDU, SOXL Host: Ricky Mulvey Guests: Asit Sharma, Robert Brokamp, Alison Southwick Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Got a question for the show? Email us at [e-mail]. Podcast episode of “The Town” with IMAX CEO Rich Gelfond: https://www.theringer.com/2024/4/11/24126970/hollywood-imax-dependency-movie-theater-sales Public.com disclosure: A High-Yield Cash Account is a secondary brokerage account with Public Investing, member FINRA/SIPC. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at public.com/disclosures/high-yield-account Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. big banks are wrapping up and earning season is just getting started you're listening to motley fool money i'm ricky mulvey joined today by asit sharma asit good day sir good day to you

Ricky what up fool what up what up fool we got another we got another batch of the big bank earnings we got Bank of America we got Morgan Stanley and I said the way I'm going to do this I'm going to give we have an I have a menu of appetizers and and you can select off this menu there's there's four options here's here here are my takeaways all right number one traders are back it was the best trading quarter in a decade for Bank of America number two is that Bank of America had $1.5 billion in net charge-offs. That's almost double from this quarter last year. That's coming from credit cards and commercial real estate. Number three, the big banks are still facing declines in interest income. Number four, an off-menu order. You can bring what you

want to the kitchen. What do you want to select off that for the big banks? Well, let's start with that big number from Bank of America, $1.5 billion in net charge-offs. I have a little saying, if you provision, you'll be forgiven, meaning thereby, if on your income statement you allow an advance for some big losses, investors are okay with it. That's what Bank of America has been doing. Every quarter, they've been essentially saying, look, we think some folks are going to default on their loans on the commercial side, on consumer side. We're preparing for that in our books. When it happens, we're taking the impact now. It'll just be like a book adjustment when those people don't pay up. Of course,

the government requires big banks to provision enough so that they won't sustain these big surprise losses and throw investors for a huge loop. But I think Bank of America has been doing a pretty good job of getting out in front of some commercial real estate exposure. And Ricky, as you point out, man, the U.S. consumer is spending pretty heavily. Now, that's a factor of a tight labor market. So there are more people employed and making money, but we're still tapping into those credit cards. It's always the stuff on page four or page five that always gets the real attention from these investor presentations. All right. One growth engine for both of these banks I want to chat about. And I've got

behind me, you'll see a cork board with some red string up. It's the wealth management. of which they're seeing a huge increase in revenue, not just from a growing stock market, but also net new assets. And I think there's a tremendous tailwind behind this. So Merrill Lynch, which is at Bank of America, has 3.3 trillion in client assets, benefited from a good market, also 6,500 new households. Their income is up about 10% year over year. Morgan Stanley, the gross profit is about flat, but they had almost $100 billion in net new assets for its wealth management division. Here's the stat that ties it together, Asit. The number of Americans 65 and older, which is when folks want to see a financial advisor more generally,

that's going to go up by about 50% from 2022 to 2050. Pick this apart. Is there anything in this trend that investors should be mindful of that think, you know what, maybe I should invest in some of these wealth management companies that are going to benefit from this absolutely tremendous tailwind that already seems to be taking hold a little bit. I mean, Ricky, this is a strong take, so I'm not going to pick it apart too much, but I do want to wind back the clock for just a moment. Let's go back 16 years to 2008 when a very staid and venerable investment firm was teetering on the brink of bankruptcy, that was Merrill Lynch and Bank of America swooped in. I think it was like a $50 billion price tag. And at the time, I remember so many people in the investment

community saying, this is a terrible purchase. Look what's happening to brokerage commissions because of this newish thing called the internet. Look what's happening to the trading activities of companies like Merrill Lynch in the face of this big financial crisis we have. So a couple of things. One, things always can seem a little bit more dire than they are in retrospect. Of course, that was a dire time. But number two, I don't think many people appreciated, besides, I guess, some statisticians at the Census Bureau, how much demographics would change in the intervening year. So now we come 16 years forward, you're showing us what things might look like in 2050. And that was the real gem in this deal for Bank of America. And so they're benefiting not by

a lot of fat brokerage commissions via Merrill Lynch, but the fact that so many people who've made money, the boomers are transferring those assets to other folks. They're there to help people invest. So I think this is a nice wave for investing thematically. But here's what I do want to point out as in any industry, when you have a market that's burgeoning, it's always going to attract competitors. So you start showing a little bit of margin, you start showing some decent profits, everyone comes to the table, they want that business. And you have so many deep pocketed players in this business and a lot of boutiques as well that are going to fight for this business. I think we might see an erosion of the fee structure that's traditionally associated with

wealth management assets under management between now and this 2050 year that you mentioned. Let's pick your mind. Any interesting takeaways from these big banks? We've had Goldman. We've had JP Morgan. Let's add Schwab. We just had Bank of America. Ways that these reports maybe have compared or contrasted in your mind. Bloomberg reported recently, Ricky, that companies have borrowed $573 billion so far this year. And that to me is the biggest surprise, but it's related to these big bank earnings. So many of us thought that with higher interest rates, corporations would be really hesitant to take on debt. But what we see is if you're an investment grade borrower and you've got projects on the books, you're going to go ahead

and invest in those projects. You're going to raise money in the capital markets because you can refinance a few years down the road. So those activities, the capital markets being very strong, the stock market has been strong. We're seeing a little bit of activity in IPOs. All this opens the door for the kinds of activities that big banks love, which is, yeah, they like to make money off of deposits, but when that equation's upside down and interest rates are high, they want to do this kind of stuff. They want to help companies raise debt. They want to help them raise new money through the capital markets. And this has been beneficial.

The trading, investment banking activities have really stood out to me among all these big banks as a propellant for earnings. All right. I want to move on to a little bit. This is a stock I have on my radar. And one of the benefits of working on this show is before I really think about investing in something, I can bring on a professional equity analyst to help me work through it. I haven't bought stock.

I don't know if I will buy stock, but one on my radar right now, Asit, is IMAX. And here's kind of the pitch. So this comes from a lot of reading and listening to Matt Bellany's work, who has a phenomenal show called The Town. He has a newsletter at Puck as well. And kind of one maybe unfair summarization of what he's been saying is that while people are going back to the movies, cinemas are not getting back to those pre-pandemic revenue numbers anytime soon anytime in the next few years but the things that are really taking over are blockbusters these big events and he had an interview with the ceo of imax rich gelfand and i think it really showed just how much share

this company is taking and imax is are those massive massive screens that people go to see movies like dune 2 of which i have a stat this and this kind of blew my mind and this came from from their episode less than one percent of screens worldwide are imax and yet for dune 2 one of the i think right now it's the biggest blockbuster of the year it accounted for 22 of the revenue for that movie less than one percent of the screens 22 of the revenue i guess i first have asked did you see dune are you a dune head so i am a dune head you can say that i read i think the first four or five of the books when i was a kid i've seen i haven't gotten well i have to show off because the one time i work from home this is the one time in a week i get to imagine that

there are other people out there besides a screen in front of me and when you're under socialized you tend to show off at any rate i'm waiting to see dune 2 i can't wait to see it i just haven't been able to see it yet it's very we got very deep for for a moment i hope you do we'll talk about it off air but with that you know with this with this growing sort of eventized need if you're gonna go to a movies do you think imax i guess will continue to be the winner in that shakeout imax is interesting ricky and i'll we'll start with the pros remind me to get to the cons that the pros take some time to work through but yeah you're totally right i mean you're talking about the U.S. box office receipts of Dune, I think Gelfand elsewhere in a discussion with analysts

mentioned that 18% of worldwide receipts were through IMAX screens. And I think it's underappreciated by most people how central IMAX is to Hollywood these days. In fact, it has an influence on when companies release their blockbuster movies because IMAX is a format that people love to see. So the major Hollywood studios work with this company to make sure that they can shoot on IMAX and distribute according to an amenable schedule for IMAX screens.

So that's one thing to understand about them. The second is this wave of directors who grew up as kids who really love this format. I mean, Christopher Nolan, I think, is the biggest proponent of IMAX, But there is an awakening among the directing community, especially of Hollywood blockbusters, that this is a must-have format. And artists, you know, the creatives sort of control the direction of everything else. I think number three is just this steady accretion of IMAX productions.

You can go to Wikipedia and look through the list of IMAX films year by year. And you can see how it's a linear function. So it's a steady grower. I actually got interested in this company because of a really fine analyst at The Motley Fool, Maylyn Quinn. She actually now has moved on, still within The Motley Fool, into artificial intelligence investing projects. But she got me onto IMAX. We looked at it together last year. I was just impressed by how pervasive the technology is, how important it is to Hollywood, and how steady this company is. So these are some pros. Now, let me give you the case of why the

market has not appreciated the company so far. That's what I want to hear. I've heard a lot of the pros. A ton of screens worldwide, including China. And this is the Easter Sunday experience. It's exclusive. There's one IMAX and that's what you're going to. And it's agnostic to what the big winners in Hollywood will be with the move to bigger blockbusters. Yeah, totally. When we look at the stock chart, we see that the market, though, must be worrying over something. You mentioned actually one risk that the market doesn't like. So that China exposure, if you break down the commercial multiplexes where we find IMAX theaters, nearly half of them are in greater China. So this accounts for about 25% of the company's revenue. Increasingly, Chinese consumers,

as they do in other walks of life, are becoming localized and brand conscious. So the ability for Hollywood films to penetrate the Chinese box office has been decreasing for a while. Now, IMAX will tell you two things. No. 1, they'll tell you, hey, the local productions are booming, we're working with the Chinese producers, so there's not really a problem there. But they'll also tell you that we expect most of our growth is not going to come from China in the coming years. They built up over the years a really huge presence there, and now they're walking that back, and that's going to take some time. I think the second thing that investors are a little worried about is just the balance sheets of cinema houses in the U.S. Now, your average IMAX location

attracts more customers. Many of these are leased by the company. But of course, you've got IMAX technology in so many different Cineplex configurations. So investors worry, if this industry, which did like $12 billion in box office receipts a year or two before the pandemic, and it's only scheduled to do $8 billion or $9 billion this year, can't really get into one higher gear, we're going to see more closures of cinema locations in 2025, probably 2026 timeframe. There's a little bit of a cloud over this stock, not for the virtue of what it is, but for the field in which it plays. Lastly, I just want to say, flip back to one more thing. I think the market is looking

at this steady step-up of revenue with the risks I've mentioned, but they're not paying attention to the cash flow. IMAX has hit a point where in just a couple of years, free cash flow is scheduled to increase pretty generously. If you do buy shares, Ricky, and you're patient, there's a scenario there in which the market starts paying attention to the cash this company is generating, and your investment might go pretty well. okay potential investment because it's what i'm what i'm thinking about the ceo said uh galfond said that they could double their presence in north america and still do okay i guess hinting at the um we're looking away from from china expansion and i still have this thing in my

my brain where i wonder if and they will tell you they they absolutely have a competitive advantage over other like premium large format offerings which like regal has where they i think he calls them fake X of, of screens that are sound a little bit like IMAX, but they don't have the aspect ratio. They don't have the sound or technology quite as down as IMAX has, but those still exist. And I do wonder if that competitive advantage, if that's good enough, a little bit cheaper, if that competitive advantage might erode over time, but definitely a stock I'm watching. Yeah. I love those two points to that. I think one thing that IMAX has going for it is brand power so when you combine their brand power with these non-hollywood experiences like beyonce's

tour like taylor swift's tour they have that going against this sort of fake competition as they call it the second thing is they're really working on trying to break into higher quality streaming they bought a small company a couple years ago for just like 25 million bucks so look for them to try to build some advantage there that could be another way they um can work against what what you rightly call out is maybe some competition and then it's such a tight space where people really don't want to spend a lot of movie tickets unless they're getting an imax experience or almo craft house experience those could be different genres see what happens we'll keep talking about it awesome as always thanks for thanks for joining me appreciate your time and

insight. A lot of fun. Thanks a lot, Ricky. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region. In seconds, you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted. When you have critical business questions that need answers, don't just file a ticket and wait weeks for an outdated report. Describe what you need and have Rippling AI build it instantly from your live people and business data. Whether

it's a dashboard with detailed charts or automated workflows with the right triggers, conditions, and approvals. Ready to rule your business? Head to rippling.ai slash fool to get the only AI built to give you full visibility and take complex actions across your entire organization. That's R-I-P-P-L-I-N-G dot A-I slash F-O-O-L. Sign up for exclusive access today, rippling.ai slash fool. How do you know if you're good at picking stocks? Up next, Allison Southwick and Robert Brokamp answer some of the questions about investing, insurance, and leveraged shares that you've sent to us at PodcastsAtFool.com.

That is Podcasts with an S at Fool.com. All right. Our first question comes from Haley, and it's a question we probably should all ask ourselves from time to time, but we don't want to. All right. I'm trying to figure out if the investments I've made in individual company stocks are doing better than investments I could have made in broad market index funds. Because if I did worse investing in individual stocks compared to an index fund, then I'll just save time and energy and go forward with investing in index funds. The part I'm getting stuck on is that I've bought different stocks at many different times over the last five years. So what's the best way to make the closest apples to apples comparison

of an individual stock's gains versus a market index gains? Should I just get the overall unrealized gains and compare that to the price increase in the index fund from the starting point of when I bought the stock? Well, Haley, you are absolutely right that you should monitor your stock picking prowess against a benchmark to see if you're beating a relevant index, because otherwise, why bother? Unfortunately, it might take some work to get a perfectly accurate answer. However, there are some things you can do that sort of get close to the answer. So I would start by visiting your broker's website and look for a tab or area labeled something like portfolio performance. And there you should find some choices in terms of lining

your portfolio up against some indexes. That said, there could be some limitations for this route. First of all, your broker may provide just your overall portfolio's performance, which really may not indicate how good you are at picking stocks if you have other investments in your portfolio, such as mutual funds, bonds, cash. So if your broker also allows you to break down returns by individual positions, that's better. Also, the results may not go back as far as you've been investing. You want to do some digging into how they've calculated the returns because it is very important that they factor in additional purchases or sales of an investment. This includes what you do with your dividends. Do you spend them or do you reinvest them? Because every

time you reinvest them, that's an additional purchase. If your broker isn't providing the answer you're looking for, you may have to do some work by figuring it out yourself with a spreadsheet or portfolio tools offered by folks like Morningstar and Yahoo Finance. Now, this is going to involve you entering your past transactions, which, depending on the size of your portfolio, will be a lot of work, although the online portfolio trackers usually allow you to import info from a spreadsheet or link up your brokerage account if you're comfortable doing that. If you go the spreadsheet route, do some research into how to use the XIRR function, which you can use to calculate your internal rate of return, which factors in multiple purchases and

sales of the same investment. But that just calculates your return, not the return of a benchmark. You have to create a separate portfolio of just an ETF or a group of ETFs that track the indexes you want to compare yourself to. Every time you make a purchase of a stock, you have to record it in your spreadsheet and then record an equivalent dollar value purchase of the index ETF on a separate tab, and then compare the returns over time. It's an extra level of hassle, which is why I think an online portfolio tracker is probably the easiest route for most people. All right, next question comes from Ernie. My wife and I have term life insurance policies that will expire in a year. Should we get new term policies? Some financial background.

Both boys are out of college, and they do not have any student loan debt. The mortgage was paid off last month, and we have no other debt except for credit cards that we pay off every month. I'm 62 and my wife is 59. We have almost enough money to retire now, but we'll keep working to have more during retirement and to build up a larger buffer for potential problems. What should we consider in deciding to renew our life insurance? You mostly only need life insurance if your family would be financially devastated if you or your wife passed away. But from what you told us, I don't think that seems to be the case. The kids have been taken care of, mortgage has been paid off, you have almost enough to retire.

Assuming your family would be financially fine if one or both of you passed away, then you probably don't need life insurance, especially since a new policy at your age would likely be pretty expensive, especially if you have developed any health issues. Instead, invest that money to further bulk up your savings. There are some cases where life insurance can make sense for estate planning purposes. If you don't have an estate plan or you haven't updated your plan in a few years, work with an attorney to get an updated plan. Then ask her or him if if there are any reasons to have life insurance. But for most people, it's really not necessary. So really, I'll just say congrats on doing such a good job with your financial planning.

You likely don't need to be sending money to a life insurance company once these policies lapse, and you can instead spend that money on yourself. Next question comes from, just the letter J, Rowan Allison. I'm in my low 30s. My wife and I both have life insurance through our employers, as well as term policies that we opened up when we got married in 2021. I also have a whole life policy that my dad opened up for me when I was young. He transferred the payment responsibility to me for this policy a couple of years ago. The monthly payments are a little over $12 and the total death benefit is about $16,000. I've been considering cashing out the whole life policy, which would be over $2,000. The monthly payment for the whole life policy just seems a little

pointless to me given the total death benefit. However, my wife and I recently received the exciting news that we have a baby on the way. Oh, congrats for upcoming little baby Jay. This got me thinking if I should keep the whole life policy and potentially transfer it to our future child, if that's even possible, but I'm also not sure if there are alternative, possibly better life insurance options out there for a new child. I could definitely use some bro advice here. Oh, but not some Alison advice. That's okay. We'll let that one slide. Thank you for all of the life and financial advice over the years. You both have given me sound advice from being a recent college grad to now being a somewhat responsible adult. Keep up the great work. Aw, thank you, Jay.

Yeah. And congrats on the new baby. And thanks for the kind words. Allison and I have been doing this podcast together for almost 10 years, joined by Rick behind the scenes as our producer. And it's just nice to hear there's some folks out there that have been along for most of the ride. So thanks for that. As I hinted at in my response to the previous question, life insurance is meant replace the income of someone who is financially essential to the family. Most kids don't fit that description unless they're a successful baby model or something like that. I'm actually not a big fan of life insurance for kids. You're better off just sending that money to a 529 college savings plan rather than to a life insurance company. However, like many other life events, having a kid is a

reason to evaluate whether you and your wife have enough insurance. You can find calculators on the Internet that can help determine the amount you need, but a good rule of thumb is 10 times your salary plus another $100,000 to $200,000 for each kid you want to put through college. As for the policy your dad bought you, my guess is that it's best to just take the $2,000 and put it in an IRA or a college savings account. But you might want to talk to the insurance company about your options, especially if you think you need more insurance on yourself. You might be able to use the cash value to buy a paid-up policy, which is life insurance that you don't have to pay any additional money for. But even if that is the case, you want to compare what

the current company is offering versus what you get from another insurance company, because you could do something called a 1035 exchange and transfer that policy to another company, especially if you cashing out the policy would result in fees or taxes. And just finally, best wishes on the upcoming addition to your family and get some sleep now while you still can. Oh, yeah. Our last question comes from Abhi. Could anyone shed some light on how leveraged shares, such as AMZU, NVDU, SOXL on the bullish side and others on the bearish side operate. I'm curious if these funds borrow money to create leverage. While I've attempted to research the topic, the information I've come across only mentions that over the long term, they may not fully

replicate the effects of 1.5X or 3X leverage. Any insight would be appreciated. Let's start with what's behind those tickers. AMZU is the Direction Daily Amazon Bull 2X Shares ETF. NVDU is the Direction Daily Nvidia Bull 2X Shares. Then SOXL is the Direction Daily Semiconductor Bull 3X ETF. Now, Abhi said 1.5X and the names of these ETFs are 2X because just two weeks ago, these ETFs increase their leverage from 1.5X to 2X. If you bought these ETFs a few weeks or a few months ago, and you thought you were just getting 1.5X leverage, they now have been moved up to 2X leverage. These are leveraged ETFs, and they are aimed to produce returns that are two to three times the daily performance of the underlying stock or index. These leveraged ETFs have been

around for a while, but we're mostly based on indexes like the NASDAQ or the S&P 500 or even the Treasury market. But in 2022, the SEC allowed these to be based on individual stocks and also issued a statement basically saying, we're allowing this, but these investments will be so volatile that we think most people should avoid them. I have to say, I agree. The way these work is, let's just use the Nvidia one as an example. If Nvidia is up 10% in one day, the 2X ETF will be up approximately 20% that day. Not exactly 20%, but pretty close. Just that day, the longer you hold these, the less you'll see that one to two relationship. So let's just look at NVIDIA. Year to date is up 78%, quite remarkable. So you would think that an ETF that is two times the return

would be up 156%. But no, the bullish 2X ETF for NVIDIA is up just, air quotes, 124%. So still very good, but not exactly 2X. And that leverage goes both ways. So a 10% loss in one day would be 20% loss in these leveraged ETFs, but just for that day. Let's look at a stock that's not doing so well this year, Tesla, a stock I own, which is down 31%. Direction does offer a daily Tesla Bull 2X, ticker TSLL. That's down 46.6% this year. Still a huge drop, but not quite a two-for-one drop. The gains are magnified, but so are the losses, and that 2X or 3X relationship it won't hold up beyond a day. Now, let's finally get to Avi's question, which is how these ETFs do this and whether it involves borrowing money. The answer is that yes, some of these ETFs use

borrowing to get their leverage, but mostly it's done through derivatives known as swaps. The swaps could get very complicated, but they're basically an agreement between two parties. In this case, the ETF manager and an investment bank. What they're swapping is cash flows. What likely happens is the fund pays the bank a fixed cash flow, and the bank pays the ETF a variable cash flow that depends on the performance of the underlying stock or index. Now, this, of course, costs money, which is why these ETFs usually have expense ratios of 1% or higher, which is pretty steep as far as ETFs go. And then furthermore, companies that trade derivatives like these usually have to post collateral in the form of super safe investments, which is why if you

dig into the holdings of these ETFs, you'll see a lot of cash, treasuries, or treasury funds. Those are the basics on how these funds work. Direction actually has very helpful articles and videos on its website. Just know that even though it's pronounced Direction, it's spelled D-I-R-E-X-I-O-N. You might want to say Direction, but that's not how they pronounce it. And just finally, just be very careful if you're considering these ETFs, especially the ones that leverage to already volatile stocks, because owning these ETFs could be a very wild ride. 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. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.