Motley Fool Hidden Gems Investing - Chewy’s New Kitten

Episode Date: July 2, 2024

This investor is not a cat, though. Asit Sharma and Ricky Mulvey discuss Chewy becoming a meme stock, Cedar Fair and Six Flags merging into one company, and headlines from 2029. Companies discussed: CHWY, SIX, FUN, AMZN, WMT Host: Ricky Mulvey Guest: Asit Sharma Producer: Mary Long Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

It's a big day for rollercoaster investors. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Asit Sharma. Asit, we've been talking for about 10 minutes. Still lovely to see you. Thanks for being here. i'm gonna pretend i just uh got on and saw you for the first time great to see you ricky sometimes sometimes we do hop on for the first time but sometimes we you know we chat about things that we can't chat about on the show anyway let's talk about chewy you're piquing everyone's interest now ricky but let's move forward with this show i was telling osset my deep dark secrets and someone who had maybe a little bit of a secret up until a couple weeks

ago was keith gill or last week aka the roaring kitty guy so last week i wondered sort of with tim byers why pet retailer chewy had surged more than 60 in a month then it turns out roaring kitty one of the leaders of the gamestop stock frenzy he had a movie made about him and he was sort of the the leaders of the online retail investor movement that was buying up the stock and squeezing the shorts on that. Turns out he's interested in Chewy now. We found out that he owns about 7% of the whole company. That's a quarter billion dollars. This is an interesting activist to have on your team or interesting stockholder to have on your team if you're Chewy. But let's focus on the shareholders like me, Asit. What should Chewy shareholders do with the news of Roaring Kitty

owning 7% of the whole company? I think what I'm going to say here is obvious, Ricky, that shareholders should prepare for a little more volatility than normal. But Chewy, it's been a volatile stock. The company is profitable. It has amazing loyalty for its products. Its average spend goes up every year for those who purchase its products for their pets. but they have this long-term plan to improve margins. It's taking some time. Investors worry about the margins. The stock has been down. And as you point out, suddenly, mysteriously creeping up. And this is part of that picture. But what does it mean for the long term? I actually don't think it means as much as this meant to GameStop when GameStop was hovering

under a billion dollars in market capitalization and Keith Gill was starting to accumulate his first position, just starting to get on YouTube and talk about this company. These are two very different situations. Yeah, it was pretty funny. Did you see the SEC forum where he created his own question that said, are you a cat? And it said, I am a cat. I am not a cat. And he checked the I am not a cat box. The second time, the joke's usually not as funny. That got me this morning. That got this cynical podcast host off it. Hey, well, I think you've got a point there. Let's talk about that. The second time around, is the joke as funny? One of the reasons that the magic worked for Roaring Kitty was that he was going into businesses that had a very

uncertain path of cash flow development. You look at GameStop hovering on the edge, teetering towards potential bankruptcy. They've made a business out of selling their shares whenever he pushes their stock up. In fact, he resurfaced. I believe GameStop took quick advantage of that and sold some shares, raised some money. Here, on the other hand, you've got Chewy, which has massive distribution centers. They have been working on their business development for years, an established company with much more predictable cash flows. With that customer loyalty comes very stable cash flows.

When investors look at propositions that are more certain, the stocks are less likely to get pushed around in the near-term. A highly uncertain company where that is in doubt could move a lot. Now, I know I just said that Chewy has been volatile, but part of that is investors resetting expectations for the near-term after a fairly successful IPO, and then the hard business of getting that model to scale up, which it's scaling up. I think for you, Ricky, you own shares, it's going to jump around a lot. But if your thesis is still that folks going to buy more food for their pets, and this company has the widest offering of SKUs and maybe the biggest distribution system for that. Not a bad thesis. I think that's a little

more complex than mine. I think customer love was a big part of my Chewy thesis, but I have been a little troubled by their seemingly inability to get more customers on the platform. GameStop also gaining about $2 billion in cash on the books from selling shares for the latest run-up we'll see if chewy takes um has been able to take similar advantage of that all right awesome let's talk about roller coasters shall we because cedar fair and six flags have officially merged into the largest theme park operator 27 theme parks 15 water parks nine hotels cedar fair and six flags calling this a merger of equals you know i i get a little skeptical at that. Anytime two companies come together, someone likes to be the alpha. Are you buying

the merger of equals like the billing says? I think so. I think both of these companies are faced with a tough market in their industry because the consumer has a little bit less purchasing power after the pandemic. Both companies are highly indebted. It takes money to open these parks, Ricky. There's a considerable debt burden that both have. The problems are similar. The overarching problems tend to lend to consolidation in this industry. Here you've got a company now that is going to span the whole bottom half of the United States, a lot of coverage on the East Coast, good coverage on the Midwest. Maybe they can find some economies of scale. I'm not too worried about 1% shifting here or another. What's your

take on this idea that they're a merger of equals? I grew up playing Roller Coaster Tycoon, and i grew up playing planet coaster so the idea of an investment opportunity becoming more attractive with more roller coasters like hits me hits me in a way that i am completely biased i'm like of course it makes sense more roller coasters equals more money naturally i think anytime a company now to actually answer your question anytime a company is getting 51 that may flex in unexpected ways down the road right now they might be in a honeymoon period where we're a merger of equals, but coming down the pike, the management team with 51% of the power may be able to use that. Let's talk about the consolidation because the pitch is that the deal is going to

create $200 million in synergies, $120 million from cost savings, and then $80 million in extra earnings from an enhanced guest experience. They're going to use that extra money to pay off a lot of the debt load that you previously mentioned. That's the pitch to investors. You're an investing analyst. Are you buying that story? Maybe buying that story, but it is something that's different. Let's take another company that uses a very similar pitch to investors, Starbucks. We're going to elevate the customer experience and that's going to increase sales. I think that works easily for Starbucks because you're talking about a nominal spend out of someone's pocket. So, if that elevated customer experience results in maybe

20% or 30% more in rate hike on someone's latte, it's not such a big deal. But investing in customer experience is harder in this industry, just as it is in the cruise industry. Any of these industries where you're not looking at a small spend, but disposable income, someone has to make a choice to go there. So, I wonder about that particular pitch to investors. And we were talking just before taping, you sounded a little skeptical on that front. So Salim Basool is the CEO of Six Flags. He's the chairman of the new combined entity. And his pitch when he came in as the CEO of Six Flags back in late 2021 was, we're actually going to decrease attendance a little bit. We're going to enhance the guest

experience and raise prices a little bit. And it seems that that hasn't quite happened at a lot of the six flags parks, you know, operations continue to be tough. I'm not saying that I could do better as an activist shareholder. It sounds like an absolute nightmare to run a theme park, but the core customer of these theme parks is one that's a little bit more value conscious, right? There's, there's takes in the financial media that this is a way for these parks to combine with Disney world and universal. And it's, it's, it's a completely separate offering. These writers do not understand roller coasters, Asit. But my take is it might not create the extra earnings that they may be pitching to the investors. Yeah. And you may be onto something here, Ricky. I know when Salim did this at Six Flags, one of the things they were working on is to decrease the bottleneck at the gate.

So you go to the park, you have to wait to get in. So by making it a more selective customer, maybe you have smaller lines, but then you're going to get people who want to spend inside the park. And I don't think that happened. When you raise food prices and make that food a little more upscale, you're still faced with the same dynamic of people who are trying to avoid spending on food because they want that allocation to go to the rides. people more often want to sneak in food to roller coaster parks and i'm not laughing at anyone who's listening today i mean my family did that way back when when we used to go to roller coaster parks long long time ago so this is something it's it's a dynamic in the industry which i know aslim basul has a desire to change the way people think of these parks but they're really adrenaline experiences, aren't they? You're taking your kids to go on a roller coaster. You want to make Ricky Mulvey's eyes grow wide. You're not really taking Ricky to go sit in a glorified food court and eat overpriced French fries. No, I grew up going to King's Island a lot in Cincinnati. And that's

where you went. Because if you're a teenager and you're bored on a summer day and you want to get out of the house with your friends, it's a really good option. I have been there. Amazing place. last thing i'll say on this too is sometimes the extra earnings comes at the cost of the regular guest experience is these parks cedar fair and six flags introduce more of these like fast passes paid fast passes what ends up happening is you get uh you know pure revenue pure profit from people paying to skip the line and then on the other side people are going to be waiting in more one two hour lines for that quick ride on the roller coaster and so it's something that honestly i think may hurt them a little bit more down the road. Last thing on this topic, whenever I think

of these types of companies, it's a really fun company that catches your attention. It's so fun from the Peter Lynch perspective. Go to the theme park, evaluate it as an investment. It's not a boring company. Even with this merger, the synergies, the defined offering, I'm going to give you the new six flags, or I'm going to give you an S&P 500 index fund. For your $100, Asit, what are you taking? Oh my gosh, you've put me between a rock and a rock, Ricky. But right now, I'm scared of the index because the big tech has propelled it so high. And here's a company that I really would love to wait and see. I'd rather visit the combined company and look at the guest experience and commit that $100 today.

But if you press me on it, I'll go to a rock and a hard place and say, yeah, I'd still rather put the money in the S&P 500 index, even though I love fun ideas. There are other fun ideas. Look, Disney itself had problems last year with the same type of fast pass dynamic in their parks. It's a hard business. Maybe go for a company that's got a little more diversified hook. I know Disney, it's boring, but you've heard me tout the virtues of Disney before. I almost would rather put my 100 in Disney as a value play there. We haven't even talked about Inside Out 2 this week. Maybe we could chat about that soon, but we should move on. No, it made a billion dollars at the box office. It's, uh, you know, I'm not ready to overreact and say the, uh, say the movies are all the way back, but it was a, it was a good win for Disney.

All right. Final, final topic. I'll say we've got full fest in a couple of weeks. I'm really looking forward to it. July 14th through the 16th, we'll be in a DC talking to members and, you know, hopefully I get to see you there. One of the things I'm going to be asking, I'm going to try to get some audio for the show is, you know, what's your headline from 2029. We're traveling five years into the future and reading some newspapers there. And, you know, because investors, you want to think about the future. You want to think about what's headed or what's coming, excuse me. So I'll start with you just to maybe get the ideas flowing as people get hyped up for Fool Fest. What is your headline from 2029?

Investment AGI Eddie says no need to invest in U.S. stocks from this point forward. Simply invest in agi eddie why is that i'm just being sarcastic so agi artificial general intelligence we keep hearing this term in the press this is the moment where creative intelligence and artificial intelligence human-like intelligence merge and we get this all-powerful ai that will be as intelligent on in many different stratifications as human intelligence that's the moment where many people predict the worst is going to happen. There'll be this AI apocalypse. Now, five years from now, it's not going to happen. But I thought it would be fun just to think ahead what happens to investing when an all-powerful intelligence takes over.

So, my first one is sort of sarcastic. Do you think it'll solve the problem of having to research and pick stocks? You can just sort of hit a button that you could say and solve the problem for you. Yeah. On a more serious note, this question has fascinated me for a long time. And I think markets always have a way of thwarting the best technologies. Even if you have AIs competing against each other to root out the best stocks, it almost becomes like commoditized intelligence. They're all going to look at the same thing. The winners will be those who look away from the crowd. Investing, I have a feeling, is always going to be a hard game, even if the computers eventually take over. By the way,

I don't think they will. I think the best human investors plus the best AI will be the way to go in the future in terms of investing and probably many other things in life so you're not just hitting a button and saying well that was easy anyway the one i got is uh a little bit a little bit more basic but jc penny closes for pickleball entertainment center i think that uh i actually i think the pickleball trend is going to keep going as a lot of people it's it's become an acceptable way for people to socialize and meet new people in person and i think that part of the trend is really going to continue. And especially as more department stores close and you have all of this large retail space with good parking lots and the demand for experiences continues to increase.

I think these are going to blow up and I think they're going to be sticking around for a while. I really love that headline, Ricky. And I'm going to tease here, you and I are probably going to talk in the near future about something else that's coming into malls that would otherwise go out of business but let's leave that do you got another headline or do you want to save it for full fest i i have one okay one more let's hear it all right i i see this headline on the front page of baron's selling at just four times 2029 revenue of one trillion dollars is amazon undervalued oh i love that that's a good place to end it and that's less sarcastic here we go offset yeah so this is halfway serious if you follow analyst projections

out for the next four years, it's easy to see that Amazon.com will be on the cusp of a trillion dollars in sales. It's never happened to any company on the face of this planet. But I think sometime next year, latest by 2026, Amazon is going to overtake Walmart as the world's largest retailer with some $600 billion in sales each year. And they're going to quickly scale up to trillion. If you look at historical multiples, that means if they sell it four times that revenue in 2029, you've got to double from here on out. But what a ridiculous looking statement on the face of things. Asit, we've had a lot of starts and stops in today's show. It has been quite a journey. Hopefully, you, the listener, have not noticed,

but I appreciate you being here. And more so, I appreciate our engineer, Tibb Sparks, for cleaning this up. Asit, thanks for your time and your insight. Thanks, Ricky. And thanks, Tim, for cleaning up this roller coaster of taping today. But it was fun. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. Thanks for watching!