Motley Fool Hidden Gems Investing - Brexit: What Investors Need To Know

Episode Date: June 24, 2016

Britain votes to leave the European Union. What does it mean for investors? Our analysts tackle that question and delve into some big news from Tesla. Plus, Cognex CEO Robert Willett talks about the business of machine vision.  Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode of Motley Fool Money is brought to you by Casper, an online retailer of premium mattresses for a fraction of the price, because everyone deserves a great night's sleep. Get $50 off any mattress purchase by visiting casper.com slash fool and enter the promo code fool. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money Radio Show. I'm Chris Hill, and joining me in studio this week from Million Dollar Portfolio, Jason Moser, and from MDP and Supernova, Matt Argesinger and Simon Erickson.

Good to see you as always, gentlemen. Hey, Chris. We have got the latest earnings from Wall Street. We will dig into the business of machine vision, and as always, we'll give you an inside look at the stocks on our radar. But we begin with the very surprising vote across the pond. The voters of Britain have spoken. By a margin of 52 to 48, they have voted to leave the European Union. Prime Minister David Cameron has resigned, and the ripple effects, Matty, were felt in markets around the world, including right here in the U.S., where the S&P 500, Dow, and Nasdaq all down more than 3% at various points on Friday.

This was a shocker. Shocking. Shocking. I am shocked. But really, above all this, if you look at the reaction around the world before we get into what actually happened, you know, this is really about uncertainty. You know, we don't know what the economic situation is going to look like for the U.K. and now the E.U. We don't know what this means for trade, what this means for the free movement of labor and capital. We don't know what this means for new tariffs or regulatory costs. And probably most worrisome, we don't know what's next. So, we don't know what other countries in the E.U. are going to hold referendums

with results. There are a few countries that are planning to do that this year. So, is the U.K. the first domino in a string of countries that might leave the E.U.? It's really, it's quite shocking. So, we don't know the answer to those questions, and especially not knowing the answers to those questions are multinational corporations, who are going to be very hesitant to invest capital, hire workers, invest really anything to grow their business, when there's this amount of uncertainty out there. And this could persist for many years. So, as investors I'd say, it's hard to get excited about any company that has a large position in Europe, or is looking to grow in Europe, because at least for the time being, there

is too much uncertainty on the corporate level and on the investor level. Yeah, and Jason, for me, what really gets me is something that Matty touched on there, and it's the timing aspect of all of this. It's not only that we don't know what's next, it's we don't know, is this unwinding going to take two years, three? We have no idea how long this is going to take. Yeah, not much of a blueprint for it. And I think that, to Matty's point there, I mean, we have the certainty of the election. Plenty of uncertainty as to how this is going to roll out, and I think that's going to probably result in some volatility. I can't help but

wonder if we're not going to see down the road here some Brexit regret. I'm going to go ahead and coin that phrase now, because I think we may run into a situation where we'll see more and more. I've seen some of this stuff floating around on Twitter, where people maybe aren't quite sure exactly what they were voting for. I think you get caught in the heat of the moment, and maybe your emotions take control, and you vote one way or the other without really understanding the implications. I'm not entirely convinced that people really do understand the implications of this totally, but regardless, the vote has been made. I think that, of course, there are plenty of businesses where this really

doesn't play into whether they win or lose. I think we have plenty of businesses in a million-dollar portfolio, for example, where I look at businesses like Ellie Mae and Boston Beer, and we think, well, this doesn't really have anything to do with them at all. It doesn't affect the fundamentals of their business, because they don't play in that market. Something like Amazon, perhaps so. But even then, that's a global, well-diversified company that does a lot of different things. And even social media, Facebook, Twitter, I mean, those businesses actually should be winning from this, because that's how all this information is really being disseminated anyway. So, I mean, you're going to hear a lot of buzzwords, flight to

safety, risk-off, and just sort of put that aside. Don't let these kinds of headlines force you to make hasty decisions. I think that's really the bottom line for investors today. And I think combining what Matt and Jason both just said, this is kind of introducing a lot of uncertainty for investors, because now it's a different set of rules. Because UK, in absolute terms, is about 4% of the global economy. Not a huge, huge deal until you consider, if this is the first domino to fall, other countries want to also leave the EU. Banks might need to recapitalize. There could be other dominoes that fall from this. And I think that's the concern that the market has. And that's why we're seeing today's sell-off. Well, and we were talking earlier today, Simon,

you look at the U.K. economy, it is almost certainly getting smaller over the next four years or so. Right. So, before the show, Chris, you and I were talking about this. Bear with us, listeners, on this analogy of U.K.'s economy as an income statement, right? You're going to have fewer costs if they come out of the EU, because they're not going to be having to pay for a lot of these EU programs they don't directly benefit from. But the top line, the revenue and the GDP is also going to decrease, too, as it's going to be harder for those trade restrictions with other countries. Yeah, and I think, just speaking of Europe as a whole, there's the free movement

of labor and capital, which really was the basis for the EU, and now that's been put into question. Anytime, I think, there's restrictions on that. I think we view the free movement of labor and capital as progress in the world, in the economy in general. We're seeing the first major retraction of that from a Western developed country that we've ever seen. It's really unprecedented, and it is a little bit scary. I mean, I agree with Jason. A lot of this is noise, a lot of this looks pretty scary, and at the end of the day, we're investing in great companies that will do well with any sort of regulatory environment over time. But it is a little bit scary when there is this much uncertainty, I think, introduced

in the market. Given the currency effects here, I kind of feel like I need an impromptu trip over there to play some golf, because it would be pretty cheap. It would be very cheap to do that. We were trading emails late last night as it was beginning to become clear that this is how the vote was going to go. I'm curious if at any point, either late last night or at any point today, you were looking at all the red on your stock screens and looking, maybe even hoping, for one stock to fall. Because I know, just hearing from some of

our listeners on Twitter and through email, a lot of our members were thinking about this in terms of, hey, there are going to be some good businesses on sale here. Well, as the MDP team, we were talking last night, we were talking this morning, we have a list of about a dozen companies that, and I won't reveal many of them, we talk about a lot of them on the show, but a bunch of them where we have really a price range we'd like to pay for these stocks. And we're looking all the time for a correction like this. Now, I think this week's correction probably wasn't as sharp as it could have been, so we didn't really get the prices we were looking for. But we know what we want

to buy and what price. And we're waiting for days like this. And as long as they don't have huge, huge exposure to Europe or the U.K. I mean, stocks that are going on sale that aren't directly correlated to that could be an opportunity. Absolutely. The second most surprising story of the week is Tesla Motors offering to buy SolarCity for $2.8 billion in stock. Elon Musk is the CEO of Tesla Motors. He is also the chairman of the board of SolarCity. Boy, that must have been a quick meeting, Simon. Wow! Right? Elon Musk talking to himself. Is this a good idea? Well, let's think about it, Elon.

You're a SolarCity guy, and you don't like this deal for shareholders. I don't. But first, I'm shocked. Any other week, this would have been the most important news. It's just shocking to hear this is the second biggest story of the week. I don't think this is a great deal for SolarCity from the valuation perspective. I think that it does make sense strategically, definitely for Elon Musk and his vision of what he wants the future to look like, to fold SolarCity into the larger Tesla deal. But I'm hung up on the valuation on this, Chris, right now for a variety of reasons. I'll just go through two really quickly.

The first is, there's a large percentage of the valuation of SolarCity today that's tied up in existing contracts. They've already signed, and the ink has dried on. So, when you consider the amount of growth that this deal, which at the high end was at a high of $28.50 per share of SolarCity, down significantly now that Tesla's price has fallen, but it's just not giving enough credit for the growth tear that SolarCity's been going on. and considering also it's going into a multi-trillion dollar market, which is the electric energy industry of the United States. And the second thing is, I just don't think it's the right time right now. You've got 50% of the public float of SolarCity sold short right now. You've

seen a lot of political headlines that are anti-solar in the news. And I just don't think this is the time that you want to put your company up for sale, especially considering SolarCity was up to $57 a share at the end of last year. I just don't think the timing's right. And, Matty, you look at what happened to Tesla Motors stock this week, down more than 10%. You'd be hard-pressed to find someone on Wall Street who likes this deal in either direction. Right. I think it makes a lot of sense for Tesla, and I'll get into that in a second. But you're right, the market doesn't like the deal, because I think they look at Tesla, especially taking on integrating SolarCity at the same time while they're trying to build

a Gigafactory, they've got billions in capital needs of their own, they're trying to meet this tremendous demand for Model 3 cars in a few years, and to integrate SolarCity at this point would really muddle things up. At the same time, I think this was Elon Musk's plan all the time. I think he set out to build not just a motors company, an automobile company, but an energy company, and he's built the stationary storage power part of it, he's built the electric car, he's never had the electric generation part of it, that's sort of the trifecta. SolarCity gives them that. SolarCity is the largest SolarCity panel. Of course, he's on the board, he's the cousins of the CEO and the CTO. I think this is always

going to happen. I agree with Simon. I think Musk recognizes that the market, A, doesn't understand SolarCity, is probably undervaluing SolarCity. It's his opportunity, it's Tesla's opportunity to make a deal at this price. So, not good for SolarCity shareholders, I agree. But for Tesla, this is a deal that probably makes sense. And I might add, too, that Elon Musk has excused himself from this vote. He owns 20% a Tesla, 20% of SolarCity also, and he and his fellow board member Antonio Gracias are both excusing themselves from this vote, making it even more important for individual shareholders. I think that's a good move. And certainly, Elon Musk has largely a very good

reputation in the business community. I think that's also a good thing. Because if this were any other CEO, in fact, if this were a lot of other CEOs that we've talked about in the past, this wouldn't pass the smell test. The fact that one person is the chairman of one company and the CEO of the other, and says, oh, I'm going to put my two toys together. I think it's very difficult to figure out, honestly. I mean, SolarCity is one of those businesses that I ... Matty mentioned the market, not really understanding it. I don't think that's a very big leap there. I think it's a very, very difficult business to fully understand. There are a lot of dots to connect. There are abundant capital needs

that this business is going to need for many, many years to come. So, I think at least, for the business' sake, it probably makes sense to be a part of Tesla's business, so to speak. I think SolarCity and Tesla together, that makes sense. Maybe it takes SolarCity from under the microscope that it's under now. For shareholders, yeah, this is probably a bad deal. The shares are far lower than where they were just a few months ago. And I think, again, it requires such a long-term outlook when you talk about these 20-year contracts and the cash flows that come from that. It's just a really tough business to fully understand. I think it's a good lesson for investors to at least say, hey, listen,

if you get into a situation like that where you're with the business, you like what it stands for, you're not quite sure how all the pieces work together, it's OK to maybe be a part of it, but make sure you position size accordingly, because you still need to be able to answer those questions. If you just put your faith in leadership, that's fine. I think Elon Musk is an exceptional leader, but they're not always going to be that way. And just to put some numbers, like Jason was saying about those future contracts that they already have 20 years signed with SolarCity, the net present value of the future cash flows

related to those, when you subtract out all of the costs and all of the debt, so the value to us in present value for shareholders is about $20 per SolarCity share today. And they're looking to add, in my model, between $5 and $7 per share this next year. So that's one of the reasons I think that we're considering this to be an undervalued deal for SolarCity. Last question on Tesla Motors, Matty. When you look at the next, I'm going to say, two years for this company, does a deal like this amp up the pressure on Elon Musk with respect to things like getting the Gigafactory online and delivering, by the way, those 500,000 vehicles in 2018? I think it does. They're going to need

capital. SolarCity needs capital. So, if they integrate SolarCity, I think the capital needs of the combined company only go higher, and certainly the risks go higher as well. Again, long-term, and if you believe what Elon Musk says, he thinks this opportunity is a trillion dollar company someday. I mean, he's throwing numbers way out there. We love that because we love Elon Musk, but the risks have certainly been amped up, I think, with this deal. And Chris, I would like to propose the combined company would have the ticker MUSK. I'm just saying. Sign off on that.

Coming up, some earnings news you won't want to miss, and a board member we can't seem time to find. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in the studio with Jason Moser, Matt Argersinger, and Simon Erickson. Guys, let's get to some of the week's earnings news. Bed Bath & Beyond stock hitting a five-year low after a first quarter that missed on just about everything you can measure, Jason. They missed on profit, revenue, same-store sales. This was not a good quarter. Did they miss on the Beyond part, too?

I was going to say, let's not dismiss the beyond here. That's the real catalyst. Chris, I feel like we've been calling this one for the past probably four or five years. We've been doing market foolery and motley fool money. So, this is, I think, to us in this room, not a big surprise at all. I don't think it's hyperbole to say that this is a business in decline either. Certainly, it has hit its growth limit. I mean, you see the top line revenues are flat. It looks like they're starting to shrink.

Margins are telling the tale. They've fallen and they can't get up. And I don't know what they do in the face of this new e-commerce market to really turn this around. I know one thing they tried to do is recently buy the web property One Kings Lane, which a time ago in 2014 just about hit unicorn status as a billion-dollar privately managed business. It's been a bit of a downfall since then, and One Kings Lane has more or less become irrelevant. and it's so irrelevant that with the purchase from Bed Bath & Beyond, when they were asked about the price, they said, well, we bought it for a price that was not material to our

financials. And so, that tells me really kind of all we need to know. It's not really something that's going to be leading this business forward. I don't think it's going to have a material effect on their financials in the years to come, because I think, really, One Kings Lane is a business that also has become more or less irrelevant. So, I don't see any reason in the world why you would need to invest in Bed Bath & Beyond today. I'm going to keep that thumbs down in caps for a little while longer. FedEx posted a loss for the fourth quarter due to the cost of acquiring TNT, the Dutch package delivery company. You back out that charge, though, Matty. This seemed like a

pretty good quarter, but the stock was down this week. Yeah, solid quarter, and solid fiscal 2016 for FedEx. You can draw pretty much a straight line from the growth of overall e-commerce to FedEx's ground division, which grew 28% in the year. That's the big driver of FedEx's overall revenue, which climbed 6%. The big thing here for me, though, was the fuel expenses, which dropped 36% during the year. That helped the company report a 65% surge in operating profits. The stock was down. I'd say, if global stocks weren't imploding on Friday, FedEx was higher on this news, because it's pretty solid. Again, though, a company that faces some competition

coming forward, and with the Brexit and things like that, a little murkier on the express part of the business and the air part of the business. But on the ground part of the business, firing on all cylinders, as Ron Gross might say. BlackBerry lost money in the first quarter, but sales are improving in the company's software business. Simon, a glimmer of hope, or no? No, that's lipstick on a pig, I think. Don't cupcake it, Simon. Revenue down 39%, Chris. The story for this one is, ouch! BlackBerry completely

has missed the consumer market, in my opinion. They focus too much on corporate and government up front. They missed the opportunity that Samsung and that Apple fully take advantage of. I think that those two are too far ahead of them now. I'd stay away from BlackBerry. Lululemon Athletica founder Chip Wilson is no longer involved in the company's day-to-day operations, but he is still a major shareholder. He recently blamed long-standing board members for Lululemon's lackluster performance. Rhoda Pitcher, who has been on the board for more than a decade was unavailable for comment. And that's because, guys, nobody can seem to find her. Her bio on the website says she has a master's degree in organization development from

University Associates, which does not appear to be an accredited school. And the school's address turns out to be a residential home in Tucson, Arizona. Her consulting firm, Rhoda Pitcher Incorporated, has no website, contact information, or identifiable clients. She's not responding to phone calls. Is there a ghost? Is there a fictional person on Lululemon's board? Chris, listen. All we ask of Lululemon is that their board be as transparent as their yoga pants.

No more. No less. Okay? I don't think this is too much to ask. This story's been going on for a week, and the company put out a statement on Thursday that basically said, trust us, she exists. This is such a strange story. I just think if she does great, roll her out.

I know that's a bad word. But, I mean, just put the woman on TV, do something, because it's really mind-boggling here. You almost think, I'm not a conspiracy theorist, but you almost think, back in the day, IPO, setting up the original company, and the need to have an independent board of directors, I'm not saying they invented her, but they certainly kind of had her as a placeholder. She's not a real director, she's a real person, probably. It's strange. Chris, I almost hope she is a ghost, because if she is real and she's on the compensation committee, this is terrible corporate governance for Lululemon, right?

I mean, they're rewarding the company for revenue, gross margin, and operating margin, all of which are not spectacular. They've been steadily declining for the last four years. So, either she doesn't exist, or they really need to improve how they're compensating their executives. Roderick, if you're out there and listening, please drop us an email, radioatfool.com. Coming up next, Matt and Simon talk with the CEO of a cutting-edge machine vision company. Stay right here.

This is Motley Fool Money. This episode of Motley Fool Money is brought to you by Casper Mattress. Steve Broido, our man behind the glass, how are you sleeping these days? I am sleeping fairly well. Well, like me, you have children, so you know that a good night's sleep is about the most important thing in the world. And I've got good news for anyone who's looking to get a better night's sleep, because Casper's mattresses are obsessively engineered. We've got an obsessively engineered mattress at a fair price.

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risk-free. You can get a twin mattress for $500, or a king-size mattress for $950, and you can save an additional $50 towards a mattress purchase just by going to casper.com slash fool and entering the promo code fool. That's casper.com slash fool and use the promo code fool. Terms and conditions apply. Welcome back to Motley Fool Money. I'm Chris Hill. Cognex is a company in the business of machine vision. At our recent FoolFest investing conference, Matt Argesinger and Simon Erickson sat down with Cognex CEO Robert Willett in front of a live audience. Robert kick things off by explaining just what in the heck Cognex does.

Well, Cognex is in the business of machine vision, so it's like helping computers see. The technology works on the idea that you have a digital imager, like in your smartphone, pixels, and they're capturing light as it hits those pixels and sends an image to a processor where we have a lot of software operating. And I would liken it a little bit to your head. think of your head for a moment you have an eye it's gathering information about the world around you and uh and that that information looks different if you think about it based on the light the angle the speed of movement color all kinds of things that are going on so the data you gather is complex and we as humans are pretty amazing at making sense of that data um cognics

technology is software a lot of it is optics helps you gather that image but really software algorithms that run on processes that make sense of them. You know, the phone in your pocket, the car you drove in here, the coffee pod you used to make coffee this morning is made with Cognex vision. And we saw, at least in your most annual or most recent annual report, that Apple is the largest customer of Cognex, about 18% of revenue. But we don't speak specifically about Apple, but can you tell us about how Cognex is working with consumer electronics companies? Yeah, yeah, sure. So yeah, it's in our 10K. We don't like to talk about customers specifically because we have a lot of kind of tight roadmap and technology alliances

with the most sophisticated manufacturers in the world. But consumer electronics has been our largest market for the last couple of years, along with automotive. Those are our big markets. We work with consumer electronics companies on scaling up manufacturing and implementing new features in consumer electronics. So let's say you think of your smartphone a couple of years back. a lot of, you know, starting to put cameras

on the front side of the phone as well as the back side of the phone, a lot of other, bringing in metal casing, and a lot of technology in terms of lithium ion batteries going into those products. There's a huge amount of investment and capital deployed in bringing those new features and technologies to market, and we work really closely with the companies that do that.

It's a very exciting field to operate in because just the sort of intensity and short product life cycles that go on in those industries are pretty amazing. So you literally have millions of people in China manufacturing those products. They're scaling up manufacturing in a matter of months. And we're there working to implement our technology to make some of those things couldn't even be done without vision technology and the manufacturing process. we at Cognix like to use the metaphors like building an airplane while it's going down the runway. So many people kind of deploy to get a product into manufacturing. So

it's exciting. It's intense. Very exciting. In your 2015 shareholder letter, you talked about the slowdown in industrial markets, big customers delaying orders. And these are things we've heard from a lot of companies, particularly those kind of serving or involved in manufacturing. I'm just wondering where things stand today. Are they better or worse than they were in 2015? Or where is the market right now? I think the U.S. industrial market particularly has been in something of a recession for the last few quarters. And I see signs of improvement going on is where I think it is. There's some underlying industries that have been relatively strong. Automotive, for instance. If you think of automotive, there's so much investment going into

new energy efficient engines more autonomous driving features in cars so big ambitious roadmaps cars on the road are pretty old you know and they're getting upgraded China it's a huge growth market for automotive so so like industries like that are lifting I think but American manufacturing has been under a lot of pressure from the strong dollar right China China's market slowing down. So we've seen that. What we saw, we published our quarter one results. They were better than people were expecting. So I think we're cautiously optimistic about the outlook in general. And so you mentioned China a few times, and of course, in terms of automotive,

consumer electronics, probably by now the biggest economy in the world for those markets. How important is China today for Cognex and certainly in the future? I'm going there on Monday. There you go. I'm there a lot. So it's very, very important. China was about half of our growth, incremental growth, in the last few years. When I joined the company in 2008, we were doing about $4 million of business in China.

Last year, when you count the technology that was purchased for use in China and what we sold in China, well north of $100 million. All organic growth, right? China, I think, is so important to high-tech manufacturing in the future for a number of reasons. One is the labor market is changing so quickly, so it's getting smaller in China. More people are retiring than entering the workforce because of the one-child policy they had. The cost of labor is going up faster than productivity, so wages are going up faster than people are able to make things. And then what's getting made, particularly in electronics, is getting too small for human hands to make the next generation.

So these are a lot of great conditions for machine vision, advanced automation to grow. And that's why we see a lot of maybe slowing down, still growing twice the speed of any large economy in the world. And our segments still have a great future, we think. Well, I wonder what that means for the U.S. manufacturing economy. I mean, so, you know, we've heard certainly over the last few years that there could be somewhat of a renaissance maybe in U.S. manufacturing, especially if technology sort of enables us to be more productive here in the U.S. versus, say, developing countries. Do you see that happening? Do you see maybe a lot of manufacturing coming back to the United States?

I'm sure that Donald Trump and some others would probably prefer to see that. Or do you continue to see it kind of outsourcing to developing countries? Well, I think we all love to see more manufacturing coming back to the United States. It's not going to be the manufacturing that left. It's going to be different stuff, right? I think there are some pockets of real innovation and potential for American manufacturing. They're in areas like robotics, a lot of really great stuff going on in robotics with a lot of different companies here.

Manufacturing things like electric technology, electric cars, right, also. So it's another area. And artificial intelligence, certainly, and 3D technology, virtual reality technology. So I see some of those being areas of really exciting growth and and value creation in America But do I think like you know? Millions of people are going to be going back into working with their hands assembling stuff in America in the next few years no You mentioned virtual reality let's follow up on that just a little bit look into your crystal ball if you will do you see There's there's opportunities for company like Cognex and virtual reality or even augmented reality

that there cognex kind of plays um in various segments related to that right so there's a lot of really interesting um electronic chip sets technology being developed for the consumer electronic space right which will you know probably will you know will be wearing those headsets you know sometime in the future and they'll be a big part of our lives i don't know when but some of the innovation that's going on there we're bringing back into cognex and 3d vision is an interesting area for us. Generally, our technology has been going to market in 2D, just X and Y. Now, we like to shine structured light, like a laser, onto what we want to image in production, and that gives us like a theta, a third dimension that we can look at. And

it's got to the stage where chip technology is fast enough that we can process all that data in a way that's meaningful to production-wide speeds. So that's an area where we're benefiting from all the virtual reality stuff that's going on. The other area is consumer electronics companies are important and large customers of ours, and they've got to figure out how to make those things, right? And we collaborate with, really, all the big names

in consumer electronics on their plans to ramp up production stuff. It's really difficult. You know, how are they going to make those things precisely, how are they going to have the energy performance, you know, going on in them that's effective, et cetera. So we see that as a growth market. It's not a big market for us today, but we're always looking for, you know, what are the big trends in consumer electronics as it relates to manufacturing that will be big for us in three to five years. And another big growth market you had mentioned is life sciences, right, just entering the life sciences market. Can you tell us a little bit about what you're doing there?

Yeah, so you go to the doctor, they take your blood, but it goes into that little test tube, off it goes, you don't think where it goes. Well, it goes into a lab, it could be in a hospital or elsewhere, and it goes inside a big machine, like maybe a half-million-dollar machine, and it gets analyzed, and as it passes through that machine, there's a lot of things it wants to do. It's almost like a little factory, so vision can be reading your name on the test tube, but it might be looking at how the blood or the sample changes color when a reagent goes into it and it might be guiding the automation inside that

equipment so the test tube isn't damaged creates a biohazard shuts down the machine etc so those are kind of that's an interesting market one we've been working on for a while we sell a tiny vision engine into that market and we like it because those machines are regulated by the FDA. It's a long process to get approved. But once the machine is approved, it has a long life, seven to 11 years. And it's a nice continuous stream of revenue for us. As an investor looking at Cognex, what would you say is the biggest challenge for you or the biggest risk for Cognex in, say, the next several years? I think we love our culture. I think our company is as good as the

brilliant engineers who come to work for us and love working at Cognex, right? So that's key. And so I think what we have to do as we get bigger, and we've been growing a lot, is not lose the kind of entrepreneurial, we call it a move fast spirit, where we encourage engineers to take risks, we encourage them to make decisions. And also, and we have this play hard culture, we might talk about it, which is designed to really kind of make engineers feel like they're doing their best work, they're loving working at Cognex, they're supported, and they're making the most of their careers. So as we get bigger, probably my most important role is to make sure we don't lose that and we build on it. And we don't become kind of a boring ho-hum company. We want to be an

exciting, growth, high-quality company. And I think a measure of that might be our gross margins. If you look at Cognex's gross margins, they're in the mid to high 70% range. And we think that's a measure of the value that we're creating for our customers or even for society in general the quality of our innovations right so um you know my you know when i when i worry about stuff it's like those gross margins go down our workplace is boring we're not recruiting the best and the brightest into cognac so that's uh that's that's the risk it does seem like you do have the best and the brightest saw that 36 of the company is about engineers right now about 37 i've got an advanced degree. And you guys are spending about 13% of revenue on R&D. Can you talk a little bit

more about how that process works from creating new ideas to prioritizing your R&D spend and then commercializing products? Yeah, yeah. So, you know, so we have a lot of people out of MIT and top engineering schools work at Cognex. And, you know, we really listen to them. You know, we really try to have them understand what's going on in the broader computer science, artificial intelligence world. And we go through it, but then we also go through probably what you would consider a very rigorous planning process in the business. It's kind of on an annual cycle. Around this time of year, we're getting our top people together and we're kind of blue-skying about where is the business, where is the industry going, what interesting innovations and technology do they

want to work on, what do we see in the competitive landscape. We're mapping the markets that we serve and compete in, and then it kind of starts to narrow down to a three-year product plan for our major product areas, and then we apply rigor about, in a simple way, what's it going to cost engineering-wise to get products to market, what do we think a four-year gross margin is going to be on those products, and we just do a four-year cash to decide which we think are the best things to work on. So we got that, and then we have a pretty large kind of blue-sky budget where we're working on stuff that is very long-term, and it's very exciting, and we don't quite know

where it goes. And we have some geniuses in the business, always wish we had more, but we give them a lot of free rein to innovate and do stuff. And it seems like you're also having a lot of fun, too. We saw your shareholder communication, if anybody gets a chance to look at this. It is Back to the Future themed. Rob, I see that you are Marty McFly. I am.

And Dr. Bob is the professor. Yeah. It seems like you guys are having a lot of fun. Can you actually tell us about how you met Dr. Bob the first time and how you actually came over to Cognex? Yeah, yeah. So Dr. Bob is a very idiosyncratic, zany inventor, was a professor at MIT and started Cognex and grew it.

And today he's the chairman. He lives in California. He's the chairman, but he also carries the title Chief Culture Officer, right? So he's all about kind of making sure that culture is alive and well at Cognex. So it was back in 2007, I was working for Danaher, a very large, very well-managed industrial company, and I think focusing on organic growth projects for them had a title with innovation in it.

And so I thought, you know, I've got to go visit these guys at Cognex and think how I can get some of their innovation juice flowing for my business. And I went over to Boston, sat down, and we all came in from Danaher, And we actually all looked a little like this. We were probably wearing ties. And the guys from Cognex were on the other side of the table. They were wearing black turtlenecks that said Cognex here. And I said to them, you look like you're out of the Blue Man Group.

They kind of did. Anyway, we got chatting. Like 20 minutes into the meeting, Dr. Bob says, stop. I'd like to clear the room. I just want to talk to Ra one-on-one. 20 minutes in, he's like, I'm looking for someone to run this company. And I think it's probably you. So, yeah.

So he The guy is like so intuitive So smart, so opinionated And it's never boring I sometimes like to say To people, he's everything I'm not And if we were in the English Government system

I would be the Prime Minister, he would be the Queen Right, so Rob Willett, thank you very much For giving us some cool time, thank you Up next, we'll get to the stocks On our radar, you're listening to Motley Fool Money 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. Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser, Matt Argersinger, and Simon Erickson. You can find past episodes of Motley Fool Money and all of The Motley Fool's podcasts online at podcast.fool.com. We've also got a listener survey we would love your help with. It'll help us serve you better. It takes just a couple of minutes, and you can do it anonymously. So, if you could help us out, we'd appreciate it. The survey is online at podcast.fool.com. Time to get to the stocks on our radar, and

we'll bring in our man Steve Broido in from the other side of the glass to hit you with a question. Matty Argersinger, you're up first. I'm going with TripAdvisor, T-R-I-P. It's a company we own a small piece of in Million Dollar Portfolio. I noticed the travel stocks are just getting crushed after Brexit. But look, it's not as if the U.K. leaving the U.K. is going to prevent people from traveling to Europe or getting visas to travel, and I just think that's a little unfair. The closer TripAdvisor gets to $60 a share, the more we like it in MDP. Steve Broido, question about TripAdvisor?

What does TripAdvisor look like, let's say, 25 years from now? Wow. They're the only place people go for all their trip and hotel needs. I have no idea, Steve, but I think it's going to be a massively bigger company by then. Jason Moser, what are you looking at? Trying to figure out what I'm going to look like in 25 years. Okay, so, listeners probably feel like it maybe took something away from them with Bed Bath & Beyond, so I'm going to give them something here with Wayfair. Wayfair is the reason why Bed Bath

& Beyond is facing so much trouble there. Ticker is W. But again, Wayfair is the online retailer for home furnishings. We've talked about it before, like the business model, they don't carry a lot of inventory. Very much a logistics and customer service company focused on building that same type of business that Amazon is building. Investing more in the last mile to control that service experience themselves. A big opportunity in the U.S. with around 67 million households. They're expanding internationally, particularly Western Europe, which really more or less doubles that market opportunity. And in August, I think this is actually kind of encouraging, they're starting up a wedding registry, which,

if you're like me, Chris, and you remember those days, man, that's pretty cool. You go in there and just tell people to buy you stuff, and they buy it. They could be a big moneymaker for Wayfair down the line. So, let's take a look at it. Steve, question about Wayfair? How did Wayfair sell something that's almost impossible to sell online and do it well? I mean, furniture is the worst possible thing you can sell, except maybe for farm equipment. Yeah, and I think that's interesting, Steve, because I think most people look at Wayfair as just furniture, but it's really home furnishings.

Only about 25% of the sales are those bulk furniture items. A lot of it boils down to towels, dishes, comforters, blankets, yada, yada, yada. So, it's more than just furniture, Steve. It's furniture and beyond. I was just going to say, that's the and beyond. that's the beyond. Simon Erickson, what are you looking at? Chris, I'm going with Verisk Analytics, V-R-S-K. First of all, thanks to Emily Flippen. She's been interning with MDP this summer, did some great work on this pick. So, thank you, Emily, for that.

Verisk is a data analytics provider that's very good at predicting things. So, initially, this business was helpful for insurers who were making actuarial models to predict losses and risks. But there's a lot more things being predicted these days, including fraud detection for e-commerce, safety operations for the energy industry, and even in healthcare and predicting upcoming conditions. So, I think there's a really good future for Veris coming up. Steve? Can they predict the next president of the United States? I'm going to have to ask him about that one, Steve. I cannot answer that question today.

That would be huge. Steve, you got a stock you want to add to your watch list? I got a catalog from Wayfair recently, and it piqued my interest. Hey, now! All right. Simon Erickson, Jason Moser, Matt Argersinger. Guys, thanks for being here. Thanks, Chris. That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening.

We'll see you next week.