Motley Fool Hidden Gems Investing - Can These Three 2025 Losers Turn It Around?

Starting point is 00:00:00 Can these three losers become winners in 2026? You're listening to Motley Fool Money. Welcome, fools. I'm your host, Tim Byers. And with me are two of my fool colleagues, travis hoyum tom king travis i'm i'm emphasizing you because you haven't been on with with me usually it's you hosting yeah i'm sitting in a new seat here i like putting the pressure on you i appreciate that friends we're here to review some some big losers from 2025 so super microcomputer ticker smci lululemon ticker lulu and nike ticker nke uh they were on decaf this year, friends, inflicting dreadful returns on those who've held. Today, we're going to talk through each of these companies and then make a prediction about whether they can turn it

Starting point is 00:01:02 around in the new year. If so, what will winning look like? If you are ready to dive in, Tom, we're going to start with Supermicrocomputer. For those who do not know, Supermicrocomputer is like a reseller. They make servers, and those servers are customized by Supermicro. They have big relationships with NVIDIA. They have relationships with AMD. And so, they kind of build the chips, and then they build the motherboards, and they customize these things for big customers, particularly big data center customers. They have really close relationships with these suppliers, particularly with the chipset suppliers. And that had been really good business, Tom. But in 2025, the big boogeyman was Ernst & Young. And you may have seen this.

Starting point is 00:01:59 This was late 2024, early 2025. Ernst & Young said, and I'm quoting here, Gemini pulled this from some of their accounting statements, unwilling to be associated with the financial statements prepared by management for Supermicro. I'm going to say that's not good. It's not really good, Tom. If we look at this, margins were compressed. There were some real hits to free cash flow, a lot of notable pressure from competitors like Dell and Hewlett Packard enterprise. So when you look at this company, what do you think? Do you see a company that is primed for a turnaround or one that has been whacked so badly that it's going to take them a while to get off their knees? I would go on the side of caution with this one in 2026. I would

Starting point is 00:02:56 say it's probably going to be an underperformer or at least the risk of a significant meltdown is high. And the reason I say that is because until the end of 2023, this was a pretty conservatively run business. Their inventory, so as you mentioned, they mostly acquire, build inventory, and sell it to big data center clients. They were acquiring that inventory through their regular profits that they had earned through operations. But at the beginning of 2024, they started taking on a significant amount of debt. Since then, they've borrowed $4.4 billion, which is a significant amount of money for them. They've increased their inventory. They've used that money to build and buy inventory. They increased it by $3.3 billion. This is a strategy

Starting point is 00:03:47 that could work out well if they manage to sell that inventory at a decent price. But if there's a problem, if this AI boom slows down, they can't sell that inventory, it could become a significant problem for them. Yeah. Tim, look, I'm in my 30th year now investing. And one of the things that I have learned is that if the accountants don't believe the numbers, we shouldn't necessarily believe the numbers or management in general. So that is just a good reason to stay out of the stock. And the other thing is, you know, this was an AI play before, a lot of these other companies went crazy. You look at the chat GPT moment, it was actually super micro that went nuts before NVIDIA did. So things have really gone south from there from an

Starting point is 00:04:34 operating perspective. Their revenue was trending in the wrong direction exactly at the time when you think it should be rising. Something just doesn't smell right here. Maybe it's me being a little bit ignorant about the business and the ins and outs of exactly where they have an advantage and where they don't. I just think there's easier ways to play artificial intelligence, something as simple as alphabet, just by the leader at a reasonable multiple. You don't have to bet on these comeback stories because I just don't think 2026 is going to be the year for Super Micro. Well, if we're wrong, and I like that you both went thumbs down on this because we're getting some early consensus here, but if we're wrong, I'll just mention this for the listeners

Starting point is 00:05:17 here. There is the potential of an NVIDIA tailwind here. Supermicro has said that they have a backlog of $36 billion in revenue booked for, well, maybe not booked, but what they expect for fiscal 2026. And that is supported by $13 billion just for the NVIDIA Blackwell Ultra systems. So if they execute this, there might be some deep value opportunity here. But yeah, when the i i like the way you put this travis when the auditors say no maybe you want to pay attention all right up next we're going to talk about yoga pants it's lululemon you're listening to motley fool money 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

Starting point is 00:06:09 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 all right fools another of the big losers from 2025 was lululemon and if i give you some data here travis so lululemon underperformed the market This is as of our recording today, we're pre-recording on December 17th for our December 29th show. So we're trying to get a little bit ahead for, you know, respect everybody's holiday breaks. But as of today, Travis, Lululemon stocks is trailing the market by about 60% year to date.

Starting point is 00:06:59 It has been a difficult 2025. So it does look like a couple of things are at work here. inventory issues. Maybe the inventory has been a little bit stale. 5% decline in America's comps, so that same store sales down in Q3 of 2025. The breeze-through products have not worked very well. And there may be some market share pressure here. So, when you think about Lululemon, Travis, where are you at? Do you think this is maybe a blip and you want to back this for 2026? or do you think there's maybe some deeper issues here? I hate to be the negative Nelly because it looks like a value. If you look at their price earnings multiple and a trailing basis, 14 forward basis, 17, that's, that looks pretty good. Especially

Starting point is 00:07:49 they're continuing to grow. Uh, they've had some tailwinds in Asia. The problem with fashion and brands like this is it's really hard to stay on top. You've got companies like Nike. We'll talk about them in a bit. They stayed on top for what? 30, 40 years. Yeah. That is not typically the way that things work. And what I worry about with Lululemon is they rode this yoga wave for 20 years or so. Now you're looking at where is the momentum? It's more with brands like Hoka and on, and that's where the growth is. And if you look at where the excitement is, not only with athletes, it's not necessarily about going to yoga class. It's about going to a workout. It's going for a run. So it isn't just about the fashion. It isn't just about yoga. It's about what are people doing

Starting point is 00:08:38 the things that are popular, even from a workout perspective, don't stay popular forever. You know, if, if there was a pickleball brand, maybe that would be the hottest brand in the market that I would want to buy. But right now I think, you know, stocks like on like Decker's outdoor, which owns Hoka, are a little more attractive. And Lululemon, I'm just worried that this is going to be a value trap for a long time for investors. I mean, that's an interesting point. I mean, Tom, I'm curious to know where you land on this. Travis says, not likely to be a market beater in 2026 here. And I'll tee you up with this. Maybe CEO Calvin McDonald has his own doubts because he's going to be gone at the end of January.

Starting point is 00:09:21 He has announced that he's on his way. I wonder maybe if some of the tariffs and macro pressures here are weighing on him a little bit. Where do you see things going for Lululemon, particularly with respect to things like guidance cuts? I mean, it hasn't been great. Yeah. I think people will enjoy this because I disagree with Travis.

Starting point is 00:09:41 We've got an opposite view on this. Like it? Go for it. the last the the last apparel company that melted down was under armor and it melted down from my view for two reasons the first was an accounting scandal it had gone from 20 percent growth every quarter for around about five six seven years or something and then an accounting scandal revealed that they had been encouraging retailers to to order early so that under armor could book the sales and keep up that 20% streak. When that was revealed, it really set off a chain of events for Under Armour. Also, on the operational side, in terms of

Starting point is 00:10:21 selling their gear, they started selling it in off-price channels just to try and get their inventory out the door. I think that really damaged the brand. Neither of those two things has happened with Lululemon. The cycle has turned against them. People are stretched in the United States. They can't justify spending $130 on yoga pants. I think that eventually that will change. I think that Lululemon hasn't lost its brand. I know that people's tastes change over time. I don't know what the future looks like in that respect, but I think it's a company that has that brand. It has maintained its strategy. It's made a few mistakes. The CEO is leaving. I don't know if that may have just been due to pressure from

Starting point is 00:11:11 the old, the founder and the guy, there's a man who owns 7% of the company. He could have, you know, encouraged him to leave and said, look, we need some fresh perspective and ideas in this company. So, um, maybe something like that. It's hard to speculate, but you know, I don't know if 2026 will be the year that Lululemon comes back, but I definitely have faith in it as a good investment over, let's say, three to five years. All right. A plus one for the rule breaker in Lululemon. So we've got Tom saying yes, it's a market beater. Travis saying no. Up next, we're staying in the fashion lane. We're going to talk about Nike. You're listening to Motley Fool Money. When you're a mid-sized business, you need every competitive advantage you can get.

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Starting point is 00:12:55 on Lululemon. I think there's a lot of pressure on Nike. You've seen a lot of high performance from Ahn, from Hoka. The king of the running shoe maybe is no longer the king of the running shoe. I mean, Tom, talk to me about Nike and what you see here for a company that underperformed the market by about 25% year-to-date. Are they on track to be an outperformer in 2026? I think that Nike is a little bit lost right now. And the reason I say this is because around about three, four, five years ago, they began a strategy of withdrawing from their wholesale customers. So, they were no longer selling to big shoe retailers like Foot Locker and so on, designer shoe warehouse. And they said that what they wanted to do was basically to copy

Starting point is 00:13:46 the Lululemon model and control their brand better. So they just wanted to sell it through their own websites or through Nike-dedicated stores or through Nike-dedicated sections within certain types of shoe stores. And that strategy hasn't worked out that well for them, and now they're trying to reverse it and go back to those big retailers again. But in the meantime, these upstart brands like Hoka and On have taken that shelf space And I think that Nike is now coming back to these retailers sort of cap in hand and saying, hey, can we please have some shelf space back? So until they figure that out, until they figure out how they're going to sell their

Starting point is 00:14:29 shoes, I would avoid Nike, and I don't think it's a winner in 2026. I mean, Travis, does begging work? Can we have our shelf space back? I mean, it is kind of an interesting point. To be fair, Elliot Hill did say, he's been honest with investors, I think, on balance, saying that the turnaround will take a while, even though the strategy is, and I'm quoting here, to win now. What does winning now look like here, Travis? Where are you at with Nike? Any sort of growth would be a win, I think, at this point. But the challenge for Nike is,

Starting point is 00:15:09 you want to have companies that are playing from a position of strength, and they're playing from a position of weakness right now. And I want to just go back and just give the way that I look at these companies strategically, you know, Tom Thomas talked about it a little bit with these newer brands coming in, but the big picture is that Nike grew up in a world where supply owned the market, right? They could sign a huge deal with Michael Jordan, with Tiger Woods. They could put them on TV, put them in magazines. And that was how you got attention to brands. And then you walked into a store like a Dick's, like a Foot Locker, and you went, oh, I've seen those Nike shoes. I've seen those Jordan brand shoes before. That's how the market worked. In the world where

Starting point is 00:15:49 Hoka and Ahn are growing up, the market works very differently. You advertise on Instagram, you have Google ads. So you are more direct to consumer. That's what Nike saw as, oh, you know what? We want a piece of that too. And so they gave up their golden goose. The problem is the companies that have grown up internet native and being able to advertise in this new environment have grown in that space. And now they're starting to take Nike space. I think Nike, their future looks a lot more like Under Armour than it does like an on holding. And that's, that's, you know, really a damning thing to say, but you know, the stock isn't even all that attractive right now. 35 times earnings, even on a forward basis, basis, 35 times earnings

Starting point is 00:16:33 enterprise value to sales, you know, which doesn't account for profitability and margins and things like that, but that's 2.2. You can buy on holding, which is growing 40% over the past three years for 4.3 times sales. So less than double the price on a price to sales multiple, they're not focused on profitability quite yet, but they have 60% margins. Nike is much lower than that. Again, this really comes back to, they are in a tough position because they grew up in a world where supply owned the shelf space. And that was what mattered. We have seen companies like Budweiser, like Procter & Gamble. When you lose that power position, when the market changes, you are just fundamentally not structured to adapt. That's what I worry about with Nike.

Starting point is 00:17:20 So quick question for both of you, and we'll end on this. Give me a yes or no. Tom, you first. if there's tariff relief because nike like a lot of other consumer brands has been hit by the tariffs if there is significant tariff relief does your opinion change yes or no tom no i don't think the tariff relief will be enough travis no all right there you have it two thumbs down for nike fools uh this is part of this has been part of our series of year end looking back to look forward to 2026. Thank you for tuning in with us. Tom, Travis, thanks for being here. Really appreciate it. Fools, 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

Starting point is 00:18:12 solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Fools, we're so glad you're here. We hope you're having a wonderful holiday season. Our engineer, as always, is Dan Boyd, and our producer is Anand Chakrabarty. Thanks to Tom King and Travis Hoyum for being here with me. I am your host, Tim Byers. We will see you again in 2026, Fools. Thank you for tuning in. Fool on! We'll be right back.

Motley Fool Hidden Gems Investing - Can These Three 2025 Losers Turn It Around?

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