Motley Fool Hidden Gems Investing - Can a Time Traveler Beat the Market?

Episode Date: October 14, 2024

Even knowing the headlines, could you predict which way stocks and treasuries would move?   (00:21) Bill Mann and Dylan Lewis discuss: - SpaceX successfully recovering rocket boosters in its flight this weekend, the company’s engineering prowess, and $200B valuation. - Officials in China signaling more stimulus is on the way, but why investors really shouldn’t get too excited. - A game designed to show just how hard the market makes it to peer into a crystal ball, and a surprising stat about the daily returns during a great decade for investors.  (17:04) Motley Fool contributor, Rick Munarriz joins Ricky Mulvey for a look at the cruise industry and one long-term tailwind for its sails. You can play Elm Wealth's Crystal Ball trading game here: https://elmwealth.com/crystal-ball-challenge/ Vote Motley Fool Money as the top Money and Finance Podcast of 2024. https://vote.signalaward.com/PublicVoting#/2024/shows/general/money-finance Learn more about the Range Rover Sport at www.landroverusa.com Companies discussed: TSLA, NKE, AAPL, RCL, DIS, CCL Host: Dylan Lewis Guests: Bill Mann, Rick Mulvey, Rick Munarriz  Producer: Ricky Mulvey Engineer: Desiree Jones, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

we've got a humble reminder of how hard it is to trade motley fool money starts now i'm dylan lewis and i'm joined over the airwaves by motley fool analyst bill man bill thanks for joining me dylan how you doing i am doing well we've got a very fun show we've got some trivia we've got a game that our listeners can play at home and report back on their scores. It doesn't really get much better than that for me. I don't know about you. I think we need to talk about rockets to start with, though. How can we not? I mean, we all saw the videos over the weekend of SpaceX's engineering marvel. I feel pretty comfortable calling it an engineering marvel. They launched their

Starship from Texas and then, crucially, successfully retrieved the rocket boosters from that launch using a launch pad and mechanical arms to catch the equipment. Bill, Some people are likening this to chopsticks, but we're going to talk about the business side of this, but how unbelievably cool is this? Yeah. When I first heard of their plan, it almost sounded like they were going to have a giant butterfly net for the super heavy, but instead, it really actually did look like chopsticks. The incredible thing about this, and now that they have succeeded at it, maybe we can move on, but the audacity of not just putting that rocket at risk, but putting the tower at risk. And if you go back to Walter Isaacson's

biography about Elon Musk, most of the team was against them doing this. This is yet another time that Elon Musk has said, nope, this is the right thing we're going to do. We're going to take a big, hairy, audacious risk, and it worked. I think some of our listeners are probably familiar with the idea of SpaceX truly being an innovator in space exploration, travel, and logistics. They've come up quite a bit in contracts. They've come up quite a bit recently with some of the debacle over at Boeing. I do think some people would be a bit surprised to hear that this is a $200 billion company in its most recent private rounds. Bill, how does a company live up to that valuation doing this line of business?

Kind of a lot, isn't it? I mean, $200 billion is a massive company. Now, they do have Air Force contracts. They have essentially become, and I use the word essentially very carefully because NASA still exists, and there are a number of smaller companies that are getting into the business. But SpaceX has essentially become the primary launch vehicle entity for the U.S. space program and other countries as well. So that is an incredible pedestal for them to be on. How much is that worth? I mean, you tell me how many launches there are going to be on a yearly basis. Now, they have some arguments with California going on right now about how many they can do within that state. But guess what, Dylan? There are a lot of other states who are willing to have the halo effect of a SpaceX platform in their territory as well.

I think we have seen through several of Elon Musk's business ventures a deep understanding that if you can be the supplier of choice to the government or create good government incentives around your business, you are going to find a lot of success. It feels like that model is what's playing out here with SpaceX. We saw it with Tesla, with the EV incentives, being able to really boost adoption. It just seems like something he has understood well and continues to do well. Yeah, and there are a lot of people who might push back on Tesla being that entity. But if you think about the charging network now, every other company has essentially made their cars, their vehicles, backward compatible to the Tesla charging network. Tesla, they're happy to have the competition. I mean, that's something we learned when we spoke to Elon Musk 12 years ago. They aren't going out to be monopolists. They are going out to

launch a different way of doing business. They've done it in electric vehicles. They're doing it with space launches with SpaceX. They're doing it with the provision of internet and communication services with Starlink. It's really whatever else you want to say about Elon Musk. And there are a lot of things that are being said right now. You cannot deny the fact that he has the courage of his convictions, and some of his most audacious bets have turned out to be bang on. SpaceX, not the only company operating in the business of space. We have seen some smaller upstarts start to get attention in the last couple years. I'm curious, how interested are you in the business of space. Do you feel like space exploration and logistics is something that's

investable? I do. And it's come up from time to time. When I first started investing, there were a number of space companies, including a company that purported to want to be developing something to go mine asteroids. So it's not new that there is an investing interest in space. What is new right now is that there are a bunch of smaller companies, companies like Rocket Lab, companies like AST Space Mobile, Inspire Global, that are actually, even if they're not yet profitable, are generating revenues in a much more central component of space launch. It's not necessarily equipment that's being provided to the big companies. These are startups that I would be careful putting a huge amount of your money into any one of them, but they are in fact

credible as they stand today. All right, let's bring things back down to earth. Last week on the show, we talked about the unbelievable run that stocks in China went on in September. Shanghai Composite was up about 18% during the month. Bill, a large part of the reason why. Government stimulus spending. This week, after some comments from Chinese leadership over the weekend, we have a better sense of the government's outlook there. You are the person I go to with all things China. What are you seeing? It's interesting. Whenever you see any market go up 27% over about a week, which by the way, has never happened in the United States, ever. It's never happened in any of the major European markets. It's never happened in Japan. It's

never happened in Australia. That should tell you something very specific about the Chinese market, which that it is not, as big as it is, a mature market. Everybody was investing based on one factor, the fact that the Chinese government was going to send a bazooka's worth of stimulus into the economy to try and reignite it. Because over time, the Chinese economy has tended over the last 40 years to grow 6%, 7%, 8% per year. They're trying to get it back up to 5%. They need this growth because China's growth has been so uneven from one part of the country to the other. The big issue in China right now is that most of the problem that they have is on the demand side. And so what they're trying to do is they're stimulating kind of the wrong part of the

economy. And I say that somewhat authoritatively. I don't know actually how you would go about in a country that has as much debt as China does throughout the system, actually stimulating demand without creating more debt. So they've got a big problem. And a lot of people are saying, well, this looks like Japan from 1990. And I can't really argue with that. What exactly are the gears of that Japan in 1990 bill? Because if a country has a hard time getting growth together, even when they are taking on a more easy money approach and they are trying to get as much money as they can flowing through the economy, and the activity simply isn't there, what other tools do they have? Well, I mean, if you go back to Japan in 1990, and those of us

at a certain point on the actuarial table will remember some of the bonkers statistics, like the U.S. could sell the land around its embassy and pay off the entire debt of the U.S. government. It was driven by property and real estate in Japan, just as it is driven by property and real estate in China. And so there are really interesting stories in China. A few weeks ago, there was a court action in southern China where they foreclosed upon 87 flats in China. The interesting thing about these 87 flats is that they were owned by the same woman. she had gone out and bought all of these because it was the best place for people within china to invest their money they didn't really want to put it into the chinese stock market they don't

really have access to markets outside of china where's the best place to go it's the best place to go is into the property market now something that you should note about someone who owns 87 in places. Either that person is really rich or they're using money that's not theirs. And that is the big issue, right? The fact is that this woman was a nominee for a company that was trying to do the same thing. So you have company after company after company in China that is using the property market to try and generate a little bit of yield. And they did it because it worked forever and it stopped working. So the debt issues in China, it's like if you throw a marble into a centrifuge. You don't know where the problem is going to be, but you know the fact

that that has a great chance of knocking the system out of true. When I was talking with our colleague, Buck Hartzell, last week about this topic, where we ultimately landed was China and companies based out of China, probably not the most interesting and investable ideas, particularly for American investors right now. But you noted the real estate issue, and we also just talked about the lack of consumer activity, that is going to hit companies all over the world. We've talked about that with respect to companies like Nike and Apple and some of the reports that those management teams have brought forward, talking about a little bit of weakness there. What are you watching for dominoes that

will fall with this story? Well, that's a super interesting question. And I come at this from another direction because one of the main stories that we've talked about really since the pandemic was the risk that companies like Nike and Apple had in terms of having so much of their supply chain in China. Apple at one point had 93% of its manufacturing based in China, and they were in the process of trying to diversify away from China very carefully. I suspect that one of the areas that we might see some benefit from these companies is China suddenly becoming a much more willing, giving partner with these companies. So, I'm not sure that you would see it on the demand side. You really might see it on the supply side in terms of the cost of doing business in

China. I appreciate you looking into the crystal ball a little bit for me there, Bill. And our final story today, a little bit of fun, and especially on the heels of that last conversation looking forward with China. We have long talked about how knowing the news doesn't necessarily mean you know what the market will do with it. And in the Wall Street Journal today, a game that proves that, there is the Crystal Ball Challenge from Elm Wealth, which gives you the front page of 15 issues of the Wall Street Journal from the past 15 years and puts you in a position to hypothetically trade the S&P 500 and 30-year treasury futures on that news a day in advance, essentially knowing the future. Before we taped, Bill, I asked you to play the game,

and i played the game how did you do it depends on what you mean well i think the the measures were were batting average so so how often were you correct and what did you do with the million dollars that they gave okay good i want to make myself look bad first and then go great after that my batting average was 23.81 percent like way worse than if you gave a monkey the little lever thing to try and guess. Less than 24%, less than a quarter of the time was I correct in the direction of the movements of treasuries or of the stock market on that day. I think this is going to be a short-lived win for me, but I batted 36%. I feel like you're about to come around and say that you turned your million dollars into a bit more than I did,

though? I turned my million dollars into $1.436 million because of one headline that came up that was clear to me what was going to happen. So you put a bunch of chips in when you had a good sense of what the market direction was going to be? That's exactly right. Yeah. I played every day. They give you the option to skip. So I played every day knowing full well that I didn't really know what it was going to be, but I did have one that I thought was a fat pitch. And it was talking about labor costs in the US. And I went in big and that worked out okay. Now, I don't know that that's a replicable thing in the market necessarily. I mean, because they gave you 15 days and it was over, what, a 20-year period? You have to be awfully patient to wait for that.

Yeah. And just to round out our stat rundown here, I turned a million dollars into one million six hundred and eighty two dollars, which you win certainly lags you. But it is almost impressive how unimpressive that number is. And I love that we can put something to it. That's right. You're betting on the past. See, well, I'm willing to bet. And again, 23 percent batting average. Don't don't take this bet. I'm willing to bet that you and I did better than average on an ending balance basis.

The coverage that I read on this bill said that most people lost money. Yeah. Yeah, which I think is a great reminder of how difficult it is to short-term trade, how difficult it is to anticipate what the market collectively will do with any one piece of information. And I think it's particularly funny because we are in a period that you would generally categorize over the last 15 years as being a pretty sweeping bull market that has been pretty good for investors. So you and I could have said, you know what?

I know generally the trend here and where stocks have gone during this period. And yet our batting average still was what it was. That's exactly it. Now it was Elm Wealth that did the crystal ball challenge. I would love for our listeners to go and try it out and to let us know. We will drop the game link

in the episode description for today's show. So before we wrap, I did some research here on my own, and I needed to dig into this just to really put a fine point on how difficult this is, Bill. So I mentioned we were in a bull market period. Over the last 10 years, so slightly shorter period than the game, S&P 500 has returned 212% on a price basis, 275% on a total return basis. The decade is a little bit more than 2,500 trading days total. Over that time, would you guess that there have been more up days or down days for the S&P 500? Oh, that's such a cruel question. I'm going to say that there were more down days than up days during that period of time.

You would be right. 54% of the days were down days, 46 up days during a period where the market It performed incredibly well for investors, again, highlighting how difficult it is to do anything with the short-term information that we get, even if we get it correct. Fantastic. Well, Bill, I won't ask you to look into the crystal ball anytime soon, but I am looking forward to hearing what our listeners do with the game. Hopefully, they hit a little bit better than us. Thanks for joining me today.

Thanks so much, Dylan. Coming up, Motley Fool contributor Rick Munarez joins Ricky Mulvey for a look at the cruise industry and one long-term tailwind for its sales. New from Nespresso, blend wellness into your coffee routine with the Coffee Plus range, infused with functional benefits. Choose the coffee you love with added B vitamins, like Coffee Plus B12 to help support immune function and Coffee Plus B6 to keep your day moving.

or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com rick i know you're a cruise investor and you know we're recording this right before hurricane milton touches down in florida so you're not going on a cruise in the next few days but more generally are you a cruise goer yes yes i am and probably not as much as i should living in florida where you have like easy access to so many ports to so many exotic destinations uh but a few weeks ago i did go on the disney wish disney's newest boat for their first uh halloween on the high

seas cruise in mid-september so uh that was a lot of fun it's my first post-pandemic cruise but before that i had a cruise an ncl cruise in the fall of 2020 a scandinavian cruise i was really looking forward to and fall of 2020 obviously did not happen uh for cruising but as a kid my parents always loved to travel and they loved cruising especially since my mom had a fear of flying so we'd go like uh transatlantic on the qe2 from new york to uk uh a lot of caribbean cruises obviously being down here in florida so yeah i'm no stranger to cruises i enjoy it uh and it was great to get back into the open waters for the first time in about six or seven years wait so you said the disney what was that experience like on the disney wish oh it was

great so as a long time ago when cruises were really cheap our family would go on halloween because that's always off season for them so we'd go to the disney wonder and the disney magic their first two boats but it had been like you know almost 20 years since since that and yeah this the new boat it's an amazing much larger a lot of things to do clearly the whole industry itself has evolved to make things more exciting and action-packed uh but yeah just stuff like eating in a marvel restaurant where basically a whole ant-man uh and wasp show breaks out and screens all around you and at the end spider-man bursts into the scene right before dessert like a real live action spider-man so it's things you really don't expect on a cruise ship and i went in

knowing as little as possible but yeah uh we had a great time a little bit of those i'll throw it back to the terminator 2 at universal studios vibes there i'll go to the investing part of the conversation because cruise lines have had or an interesting post-pandemic life so we'll go to the pandemic recovery where cruises are coming back a little bit, but investors are concerned about travelers' willingness to get on boats with lots of people. And also, these companies have a significant debt hangover where they were taking out a lot of debt during the pandemic just to keep their companies alive. Carnival, for example, more than 2x-ed its long-term debt load between 2019 and 2020. It's still fighting off that hangover. Now we'll fast forward to 2024. Only

one operator has seen its stock surpass pre-pandemic levels, and that includes Disney, where cruises are a bit of a side business. That company is Royal Caribbean, and its stock is up more than 100% over the past year. Rick, what do you think is behind that rise? Yeah, so there were 31.7 million passengers worldwide who took a cruise last year in 2023. That's 7% more than in 2019, the previous record, obviously, before the pandemic. And in North America, which is the heart of Royal Caribbean's business, naturally, customer base at least, it was 18.1 million passengers, up 18%. So Asia is the only region that has not recovered to back where they were in 2019. And folks are spending more on theme park tickets, concert events.

So why wouldn't they be paying more for all-inclusive resorts, tours, and naturally water escapes on a cruise ship? to me. More specifically, to Royal Caribbean's case, revenue last year, $13.9 billion, is 27% higher than it was in 2019. Trailing revenue is $15.3 billion after the first two quarters of this year, so it's 40% higher than it was in 2019. And the story gets even better on the bottom line. Royal Caribbean was the first of the three major cruise lines to return to year-round profitability last summer. Over the past year, it has posted double-digit percentage earnings beats with record revenue, record earnings, and a record number of customer deposits for future sailings, it's not hard to see why Royal Caribbean is beating raising its way higher.

So those are the numbers. Why does Royal Caribbean count as a top dog compared to Norwegian and Carnival in this industry? Yes. So Carnival is rightfully the largest player. If you go by terms of revenue and passengers, they're the top dog. But that's pretty much where the road ends. Royal Caribbean has double the market cap and an enterprise value it is 33% higher than Carnival, because it is far more profitable. And in this case, Royal Caribbean, they've historically posted highest margins in the industry. It's also grown faster than Carnival or NCL. So it has that going for it. It has a stronger brand loyalty than its two largest competitors, even though I personally own all three shares now. It obviously

has the best looking stock right now. So yeah, it's the sea dog of the cruise lines right now. So clearly, you got a basket. And there's something interesting going on with cruise lines. We talked about travel demand earlier. Disney had sort of hinted that the parks business might be cooling off just a little bit. They've increased the ticket prices a lot. Airbnb has even said that they're seeing booking times shortened, which a lot of investors have taken to seeing as demand cooling a little bit. But on the other side, both Carnival and Royal Caribbean are saying, hey, our consumers are really strong. We're seeing a lot of booking growth ahead. Royal Caribbean recently reinstituted a dividend, even showing some confidence.

Why do you think these trends are shifting a little bit towards cruising? Yeah, so I see this as different sides of the same coin. And with Disney, so yeah, Disney World, they had an 18-month celebration of the resort turning 50 that ended in the springtime of last year. Disneyland was celebrating 100 years of the company itself being around. Revenue per capita at Disney World and Disneyland is 40% higher than it was before the pandemic. So attendance has not reached the previous highs, but revenue and profitability has. It makes sense for sticker shock and fatigue to cool a little bit for Disney and other major theme park operators. Over on the cruise, for Airbnb side, it was totally different.

So why did Airbnb take off after the pandemic? Folks wanted to get away, and renting an entire place seemed a lot safer than being in a hotel room or much less a cruise ship when COVID-19 rates were spiking. So companies also let people work remotely so they could explore and stay anywhere as long as they had a strong Wi-Fi and a cool-looking Zoom room. But now they're being called back into the office. Cruise industry, very different. So you couldn't get on a cruise ship in 2020 or even through most of 2021. And when you did, you had to jump through more hoops than a Westminster Kennel Club contestant. So it was very difficult to even take a cruise until about 2022, 2023 is when things started normalizing.

And at that point, there was pent-up demand for cruising, which is always good. And then folks got called back into in-office work. That didn't impact retirees, which is a big part of the cruising business that's traditionally been big fans of these cruise ship getaways. Yeah, Jason Liberty, the CEO of Royal Caribbean, has pointed to more retirees as one of their biggest long-term tailwinds in the recent earnings call, saying, quote, the number of baby boomers reaching retirement age is expected to grow 30% to about 73 million people by 2030. That's from today. Based on our research, retirees take 50% more vacation time than non-retirees. Having been on a few cruises, I'm buying this growth story. It's something that

matches up to... I used to work for a wealth management company. There was this idea that our long-term business is doing just fine because so many people are retiring. They have some money. They need some help with it. Are you buying this growth story? Yeah, I am. I think the whole graying of America, the fact that people are retiring and they're living longer, is a great play for investors in general. And I'm sure you can find healthcare companies, you can find senior assisted living facilities operators as REITs.

All these options are out there. But I am an optimist. I like to think that the older I get, the more I'm going to want an active, adventurous lifestyle. So I'd rather invest in the camping world. So think of RV going over the cross the blue highways all across the country, or specifically the cruise lines. as a way for just you know when you're retired why would you not want to sail and especially

when you're older and you don't necessarily want to go from airport to airport and passport stamp to passport stamp and have to figure out where restaurants are a cruise ship everything is all contained you don't have to pack your suitcases more than once and you're at a wake up at a new destination practically every day and you have everything right there you have cruises you have shows you have every possible entertainment category happening i think it's definitely a great way to play a great play. Cruising industry in general is a great, great way to play the fact that retirees are, you know, or want to get out. Oh, I, I'm a fan of cruising. I believe that sometimes I like vacations that are adventurous, but I'm okay with a vacation where you can chill

a little bit. I want to go to the balance sheet. We talked about debt earlier and Royal Caribbean has about 400 million in cash and more than 6.4 billion in current liabilities. I'm, I'm taking out the unearned revenue, which is basically booked cruises. So this is just like the accounts payable, short-term debt, and other, in quotation marks. So $400 million in cash, $6.4 billion in current liability, stuff they got to pay. They got a lot of big boats. They got a lot of disruptions. We just talked about the hurricane. Any balance sheet concerns here with Royal Caribbean? Yeah, and they also have plenty of nice, big, expensive ships on the way too. So this is a capital-intensive business to build out. But no, I do not have concerns. Royal Caribbean,

they have $3.8 billion in liquidity. It has paid down more than $5 billion of its debt, of its long-term debt since peaking, peak leverage in 2022. Its debt to EBITDA is down to 3.5, which is a very feasible model, feasible number when you think about a company's EBITDA continues to improve with every passing quarter. And more importantly, this summer, it brought back its dividend of $0.40 a share for the first time in four years now. And to me, it was able to do that because it got its leverage down to the point where it could return capital to its shareholders without upsetting its creditors. So I don't think Royal Caribbean brings back its dividend

for the first time in five years if it was a concern about its balance sheet. So we've got a few companies for investors to watch. That's the investing side. We'll wrap it up with some consumer stuff. You said you've recently booked a cruise. You like going on cruises. Any tips for booking or going on a cruise?

Yeah, so if you have a long window, if you know that, hey, I want to go on a cruise next year or something like that, not immediately, wait for what they call wave season. This has appeared right after the holidays in December to the beginning – to sort of the end of March, like that three-month gap of time where cruise lines, they are aggressive, at their most aggressive with promotions. They do this because if you're a cruise line, you want as much visibility as you can for the peak summer and the peak holiday travel season. And you're going to want to do it once people have basically all these spending on holiday gifts and everything, and they just have – you need that money. So you're going to promote aggressively to make sure you have the calendar filled up, which is something that Royal Caribbean and all the cruise lines have done really well.

That's one good time to book if you want to look at it. The Disney Wish Cruise, I booked it a little more than a month ahead of time, and usually that's like a mistake. But I was going in mid-September, which I knew was already slow season. I knew the boat would not be full, and I was able to just – when I saw it, they were offering rates, and they do this at all cruise lines, not just Disney, where instead of booking a specific room, you can book a category and they'll find you a room. And I know that seems scary. Like what happens if you get there

and there won't be a room? There's always a room waiting for you in that scenario. And in this case, I was able to get any outside veranda, like a veranda outside family room with a veranda than I would an interior cabin for a lot less. And not only that, because the boat was so empty, I was actually upgraded to like, I was on the pool deck basically within like,

you know, three doors away from all the food court items and the pool and the aqueduct. So I was able to experience that all there. So yeah, don't be afraid of booking early. But again, if you have time, go ahead and book late. And if I didn't book through Costco, but you mentioned Costco earlier when we were talking before,

if you are a Costco member, Costco travel gives you, I believe it's like five or 10% of what you pay back as a rebate in Costco card money. So there are ways around to just, you can book direct, but travel agents have great deals. A lot of ways to get your cruise cheaper

than you think you would have to pay. All right. I'm going to be doing some internet searching. Rick Moneris, thanks for your time and your insight. Appreciate being here. As always, people in the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. And just a reminder, Motley Fool Money is currently a finalist for Signal's Best Money and Finance podcast for 2024. Voting ends this week, and we'd love for you to weigh in and help us take the trophy home.

We'll drop a link to where you can vote in the podcast description for today's show. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.