Motley Fool Hidden Gems Investing - Coke's Pop, Weber's Buyout, Stock Market Superstitions

Episode Date: October 25, 2022

Big Red is still trailing Pepsi but, just like its competitor, it's got pricing power. (0:21) Jason Moser discusses: - Coca-Cola's strength in the face of currency headwinds - PayPal's new partnership with Amazon - Weber's largest shareholder grilling up a buyout offer - A new metric for retail businesses: DTRG (13:17)  Just in time for Halloween, Alison Southwick and Robert Brokamp break down stock market superstitions. Companies discussed: KO, PEP, PYPL, AMZN, SHOP, LULU, WEBR, COOK Host: Chris Hill Guest: Jason Moser, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder?

I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th We've got a potential buyout, a new partner for PayPal, and a strong report from an iconic brand. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley

Fool Senior Analyst, Jason Moser. Thanks for being here. Jason Moser. Hey, thanks for having me. Let's start with Big Red, shall we? Coca-Cola's third quarter profits and revenue came in higher than expected. They raised full-year guidance. And I was reminded of Pepsi's latest quarter when we saw these results. I thought, yep, kind of like Pepsi. And I don't want to say they always move in tandem because they don't, and lately Pepsi has had a better run as a business, but but Coca-Cola has had a nice run of late, and just like Pepsi demonstrated with their latest quarter, Jason, Coca-Cola has got some pricing power and they are executing with

it. Jason Moser. I'm glad you said that because that is one of the primary keys to their success. One thing you notice when you read through this company's earnings call, this is truly just a global behemoth with a large presence virtually everywhere around the world. Basically, two-thirds of revenue and operating profit comes from outside of North America. It's always nice to see that kind of a business because they can exploit strength and ensure up areas of weakness there. But all things said, it was a really strong quarter for them, so much so that they see such a positive outlook for the rest of the year, they raised guidance. If you look at the growth for the quarter, organic revenue grew 16%,

unit cases grew 4%. They did see some pressure on gross margin, which was down 190 basis points from the year ago. A lot of that coming from currency headwinds driven by the greater macroeconomic picture and certainly some inflationary concerns as well. But they do have the ability ultimately to exercise a little pricing power in that business model. Ultimately, you saw earnings per share of $0.69 grew 7% from a year ago. Again, getting back to the way they see the rest of the year shaking out, they raised guidance for the full year, they expect organic revenue growth of 14-15% and earnings per share growth of 15-16%. Ultimately, you look at what this business deals with in the face of challenges as far as inflation goes, they continue to see healthy demand.

That's showing up both in growth in value and volume, which I think really just speaks to how strong of a business this really is, even in the difficult times. I will say, you mentioned Pepsi, and you have to be fair here. Looking back over the last five years, I mean, wow. It is really impressive to see how Pepsi has outperformed. The five-year total return, Coca-Cola 48.8%, but Pepsi 86.3%. Again, for a long time, we've spoken about the strength of Coca-Cola's business model. That hasn't really changed. I feel like this is a bit of a testament to how much better Pepsi's quarter actually was than Coca-Cola's. No, that's true. It builds off of a series of quarters that have been stronger than Koch's. But you touched on

something and I'm wondering if this is going to be something for us to watch as earnings season continues to unfold. I think we might see some separation between the grownups and the kids, because we know we're going to hear about currency headwinds. We know we're going to hear about the strong dollar. It is the stronger, more mature businesses, like Coca-Cola in this case, that can actually deal with that and put themselves in a little bit better position. They've got a little bit more pricing power. They're able to absorb the hit on the gross margin a little bit better. I just think we're going to continue to see this. I think that's a very reasonable point of view. This is a challenging time for everyone,

but as we say it so often, it's these stretches where oftentimes you see the leaders really emerge even stronger than before and being so well diversified across so many different lines, across so many different geographies, and having such a strong brand. It really does put Coca-Cola in a tremendous position to keep on succeeding for years to come. Again, you need to understand why you would own this stock in the first place. You're not buying this stock so that it doubles over the course of the next year or two years. This is a more defensive play, no doubt about it. But I think that's really the key to it. You understand why you'd own this stock in the first place. If you feel like you need that stability, that income

generating presence in your portfolio, it's not going to light the world on fire, but it's a tremendous brand with a lot of power around the entire world. It's always one to keep in mind. And for anyone who's wondering what we mean when we talk about stocks being a defensive play, it means that in a year like 2022, when the overall market is down 20%, Coca-Cola is flat. That's what it means. It means, year-to-date, it's outperforming the overall market by 20 percentage points. You could sit there and take the shorter-term view and be like, well, that's just that one little stretch of time. But the fact of the matter is, it does help you sleep better at night. Ultimately, it helps you justify owning those other

growthy style investments. It gives you the comfort, the confidence to continue holding those stocks that you need to allow a little bit more time to play out or are dealing with the challenges that so many of those companies are dealing with today. Shares of PayPal are up 7% today after Amazon announced it's adding Venmo as a payment option at checkout. Venmo is owned by PayPal. We've seen this from other businesses like Shopify and Lululemon that have offered Venmo as a payment option. Amazon, though, that is a nice win for PayPal. Yeah. I think this is a bigger deal for PayPal than for Amazon, but it's definitely a win for both. Venmo has grown considerably through the years. It's closing in on 90 million

active accounts now going to do something in the neighborhood, I think, of around $250 billion in total payment volume this year. It moves a lot of money across that network. This is right in line with the digital wallet and checkout focus that management has recentered around recently. We saw PayPal get a little bit too far outside of their circle of competence, so to speak. They were trying to do too many things and weren't really doing many of them very well. You pull back on that, stay in your lane a little bit, focus on the properties that are really succeeding for you. That is PayPal, that is Braintree, that is Venmo. I think this is something that ultimately could play out very well, particularly for the younger generation of shoppers. The shoppers that really

have grown up using Venmo so often. You link that thing up to your Amazon account. A lot of people have subscriptions to certain things that they purchase from Amazon. It's definitely a big opportunity to boost that total payment volume going through the Venmo network, which ultimately would be a very good thing for PayPal. Chris Hill The stock of the day is MedPace Holdings. Shares up 36% after the latest earnings report. I mentioned this only because two weeks ago on this show, Jim Gillies talked about MedPace Holdings as being the stock he was going to be watching this earnings season because management had been buying the stock and basically waving a big flag signaling that they thought there was

great value to be had. Kudos to our friend Jim Gillies. That's all. We're not going to talk about this. I just mentioned it on Jim's behalf. Hopefully, some of the folks who were listening two weeks ago, heard what Jim had to say and took advantage of that. This isn't quite the stock of the day, but shares of Weber Grill are up 33% because BDT Capital Partners, which I was today years old when I had learned about their existence, BDT Capital is the largest shareholder of Weber. They've made an acquisition offer for the company, reminding listeners that this is a a company that went public at 14, and the buyout offer is $6.25 a share. It has been a rough, short public life for Weber Grill and its shareholders, but maybe this is how it's

supposed to end. It felt like it had to end this way. We've talked about these businesses before, your Webers and Traegers of the world that make really great products, but don't necessarily translate into great investments because the products they make, I mean, you're hanging on to them for a really long time. I mean, you buy a good Traeger or a good Weber grill and you take care of it. I mean, you can own that thing for 15 to 20 years. And so then how else are they making money? Now, I give all of them full credit. They're trying to figure out how to make additional money, right? Whether it's selling the charcoal or the wood pellets or spice rubs or even meal

hits. But that's also not really the highest margin in business. Sure, it generates some repeat sales, but ultimately, I don't know that it always translates necessarily into the best investment. You could see the writing on the wall for this one from the very beginning too, because they raised $250 million in the IPO, and that was less than half of what they were really hoping to raise. I think investors take that as a sign. That gives you an idea. the enthusiasm, the expectations. Speaking of expectations, it's a business that earlier in the year, earlier this year, the very first quarter, I think in February, they were guiding for around 7% revenue growth for this year. Fast forward to August, the macroeconomic conditions

have worsened. They withdraw all guidance. You really have no idea or at least no faith that management really knew where the financials were headed for the near term, at least with business. They keyed in, I think, on some important strategic imperatives. They were talking about new growth products, things like subscriptions, things like accessories and charcoal and woodpeck, whatever it may be, rubs, meal kits, accelerating the e-commerce growth and the DTRG. For those of you who don't know DTRG, that's direct to Ron Gross. Ron Gross himself just got got a new Weber Gorilla. Boy, is that thing spanking new. But that was a big part of the business. That actually grew 12%, that e-commerce side of the business, the direct-to-consumer,

ultimately expanding the retail base, investing more in emerging markets, a continued focus on operational efficiency. Maybe we will see the acquirer here continue to focus on those strategic imperatives in order to get this business going back in the right direction. direction. But again, it does feel like it's going to have to come a lot from cutting the fat and really maximizing efficiencies, because you just aren't buying a new grill every couple of years. Yes. Although, as you mentioned, our friend and colleague, Ron Gross, recently bought a Weber grill, shared on Slack a photo of the grill set up, and we're like, that looks great. He just very quickly added, like,

oh, no, no, no, I didn't put this together myself. That's a service that you can pay for delivery and assembly and that sort of thing. It's like, okay, yeah. The good news is, he opened the invitation to us on the channel, he's going to have us over for dinner. I cannot wait. Because, hey, listen, it sounds like he knows what he's doing on a Weber site. Ron, I'm looking forward to getting over there. Jason Moser, great talking to you. Thanks for being here. Yes, sir. Thank you. Tis the season for monsters, ghosts, and superstitions. Wouldn't it be great if you could sacrifice

just one stock in your portfolio by throwing it into a volcano, thereby saving the rest of your stocks? Alison Southwick and Robert Brokamp take a closer look at stock market superstitions and which ones may have some validity. Superstitions are a way for humans to create some sense of order or control over the randomness of life. Did something unlucky or irrational happen? It must be because of the whims of a supernatural power or force like fate or just cats. But don't worry, because even if it doesn't make sense, it makes sense because you knew better than to open that umbrella indoors, you knucklehead. So, though we like to think of the stock market as being rational with our Bloomberg terminals and charts and

algorithms and supply and demand and sellers and buyers, Wall Street is also a bit superstitious. So, today, we're going to see which superstitions in the stock market are actually worth believing. After all, the funny thing about the stock market is that if enough people believe the same thing and act accordingly, then it can come true. I'm going to name the superstition, and Bro is going to let us know if there's anything behind it. All right, let's start off with a sign of our times. October. If you've heard the phrase, sell in May and stay away, you were maybe wondering when it's safe to come back. The answer is after October is done sowing chaos in the markets. The panic of 1907, the crash of 1929, and Black Monday in 87 all came in October. Across the pond,

apparently, they say sell in May and buy on St. Ledger's Day, which is a horse race in September. But that means you'd be buying back into the market just before October's reckoning. So, I don't know, bro, what do you think? Well, let's start with that whole sell in May thing. So, if you break up the historical returns of the stock market by month, you can see there's actually a little bit something to that. So, you could rank the months according to the likelihood that the market made money, and also just by the actual average returns of that month. And according to your Denny research, the months between that May to October period

do tend to be toward the bottom, with the exception of July, which actually has the highest average return. And there's a reason why October has a particularly bad reputation, because if you look at five of the 10 worst one-day drops for the Dow, they've come in October. However, it's not the worst-performing month. That honor belongs to September, which historically has posted a negative return 55% of the time. It's making it actually the only month that is more likely to lose money, and the average return is just a negative 1.1%.

Also, October has something else going for it. According to Charlie Bilello of Compound Capital Advisors, in past bear markets, the S&P 500 has bottomed in October more than any other month. Now, the low of this current bear market was on October 13th, so let's hope October comes through for us again. So, for each of these superstitions, I'm going to give it a rating of one to five broken mirrors. More broken mirrors means it's more valid. So, for sell in May and go away, I'm going to give it two out of five broken mirrors because the returns are historically lower,

but you still make money, and it's not consistent enough for you to really trade on it. But as for October, I'm going to give it four broken mirrors because it generally is a below average month, but also historically kind of an interesting month. And as a big fan of Halloween, I love the idea of the market being a little spookier in October, or at maybe a little bit more dramatic. All right. Next, we're going to look at the moon and all that. You've heard of bear markets and bull markets, but what about a werewolf market? If you can blame other strokes of bad luck or otherwise erratic behavior on a full moon, then why not the stock market? A number of studies have actually looked

into the validity of investing based on the moon, and two back in the aughts agreed that during the 15 days of the lunar month closest to the new moon, so starting seven days before it and ending seven days after, the stock market's average returns are higher than those of the other half of the moon. Better by as much as 10% a year if you follow the strategy like the faithful moon goddess worshiper you are. Bro, what do you think? Well, what's interesting about these studies is that they look not just at the U.S. stock market, but they found that this happens in other markets as well. In fact, one study found that it's stronger outside the U.S. And as you pointed out, this better performance has to do with the time around the new moon, which is when the moon

is between the sun and the earth, a condition known as syzygy. So there's your new word for the day. It's the opposite of the full moon, which according to these studies is a worse time to be investing. And believe it or not, their actual trading strategies, even websites devoted to trying to profit from this. So the proponents argue that studies clearly show that people are generally at their worst during the times around the full moons. You see higher rates of insomnia, depression, heart attacks, even homicide. Some studies have found that this happens in other animals besides humans. I will say that there are plenty of other studies that debunk these theories, but we definitely know that the moon affects bodies of water, and we humans are about 60%

liquid. So, why wouldn't the lunar phases affect us in our investing? At least that's what thinking is behind this strategy. So, what's my final rating? Well, my first inclination would be to just give it one of five broken mirrors, but the studies are actually pretty compelling. Plus, we're less than a week from Halloween, so I'm going to give it three broken mirrors just to be in the spirit of the season. All right. On to the next one. And we've all heard of it. As with all noble sports ball traditions, an octopus in a Cincinnati aquarium selects who will win the Super Bowl. And if it's an AFC team, then we will suffer a bear market in the coming year. And if it's an NFC team, we'll have four more weeks of Tom Brady. Wait, maybe I have that

wrong. Okay. Take out the stuff about octopi and Tom Brady. And basically, if AFC wins, market go down. If NFC wins, market go up. The theory was coined in the late 1970s by a New York Times sports reporter named Leonard Coppett. So, Bro, what do you think? Well, so first of all, as a lifelong Tampa Bay Bucs fan, I'm guessing that Tom Brady wishes that octopus or whatever coaxed him out of retirement had done something different because the season isn't going very well for us. But as for the superstition, you're right, Alison, that the current version says that the market will go up a year after an NFC win. But when Leonard Coppett identified this trend in 1978, he wrote that the market would

go up if a team from the original NFL won and would go down when a team from the original AFL won. To understand why this matters, we have to review a little bit of football history. Back in the early 60s, there were two leagues, the NFL and the AFL. They didn't compete against each other, though they did compete for fans and players. Then in 1966, they decided to gradually merge. At first, they played separate schedules, but they agreed to play in what they called the annual AFL-NFL World Championship game, which eventually, thankfully, became known as the Super Bowl. Then in 1970, they fully merged under one name, the NFL, and created the NFC and the AFC. But to make an equal number of teams in each conference, three teams in the

original NFL had to move over to the AFC, the Steelers, the Colts, and the Browns. This is important because according to Mr. Coppett's version of the Super Bowl indicator, when any of those three teams win, the market is supposed to do well, even though they're now part of the ASC. Now, when Coppin wrote about this indicator, it had a 12-for-12 success rate, which is pretty remarkable. How has it done since then? Well, it has had a success rate of 75%, which is still pretty good, but it's not done very well recently. It was on a six-year losing streak until 2021 when the Tampa Bay Buccaneers and Tom Brady beat the Chiefs, the Bucs are an NFC team, and the market did indeed do well that year. But this year will likely

be another loser for the indicator. The Rams won earlier this year, another NFC team, but right now the S&P 500 is down 20%. But who knows? Maybe things will turn around. Anyways, you may wonder what Leonard Coppett thinks of the indicator he created. Unfortunately, he passed away in 2003. But Jason Zweig of the Wall Street Journal did interview him a couple of years before his death. And here's what Coppett said, quote, it's a joke. I meant the whole thing as a satire on the fallibility of human statistical reasoning. It's too stupid to believe. And of course, I agree. There's absolutely no reason for the outcome of a single game to determine the performance of the stock market. And for that reason, I give it one out of five broken mirrors.

All right. Next, we're going to look at the maiden in the volcano. For the maiden in the volcano superstition, we'll turn to Josh Brown, aka the reform broker. According to Brown, in times of market turmoil or in the midst of a heavy sell-off, many portfolio managers and investors believe that they have to blow out one position to appease the market gods, tossing a maiden into the volcano so that the island will be spared the wrath. Such thinking is as primitive as you get, noted Brown, but it feels good when it works. And if this happens once or twice, logic aside, you'll swear on it. Yeah, this was a new one to me. And I guess the idea is that generally you shouldn't sell during a market downturn because then you

won't benefit when the market rebounds. But if you sell just a little, that'll appease the stock gods and they'll turn the market around. And I think you get bonus points if it's one of your favorite stocks. And I think it sort of gets to how we anthropomorphize the market, thinking that it's a singular living entity with its own free will, when in reality, it's the culmination of millions of investing decisions made by millions of people every day. So as you might expect, I don't think there's much to it, so I give it one broken mirror. However, in the 2009 article in which Josh Brown talked about this, he mentioned another superstition, which he called The Man in the Box, and he explained it like this, quote, I just know that as soon as I put

my position on an XYZ, the man in the box will know it, and the whole market's going to drop like a rock. And I think many of us have felt this way, right? We buy a stock and it immediately drops, or we sell a stock and it takes off, or we at least fear this will happen. So, I give that one three broken mirrors, not because I think it's true, but because it's probably a pretty common superstition. I know I've felt this way at times. All right. And our last superstition we're going to look at is the presidential election cycle theory. Now, you might be thinking the superstition here is that when, insert political party you ascribe to, is in the White House, the stock market goes up. And when, insert political party you oppose, holds the presidency,

the market goes down. But actually, this party agnostic superstition says the stock market in the U.S. performs weakest in the first year or two of a president's term and then recovers, peaking in the third year before falling in the last year of the presidential term, and then the cycle begins again. Bro, what do you think? Well, like many of these beliefs, there's actually some data behind it. Historically, the market does perform best during the third year of a president's term. And the fourth year used to be considered pretty good until this century when we had bad years in 2000 and 2008. But the belief here is that for the first two years, the president focuses on policy priorities,

but then does all he could do to juice the economy in the second two years, so he or his party will get reelected. And there might be something to that, But it doesn't mean you shouldn't invest during the first two years. Historically, the market still makes money, just not as much. So, I'm going to give this one four broken mirrors, partially due to the data and partially because we're about to enter the third year of a presidency. And frankly, I think we could use a little optimism about investing right now. In fact, according to Ryan Dietrich of the Carson Group, the stock market has posted a positive return in the year following every midterm election since World War II. And let's hope

that history repeats itself. And we started the show by talking about the October effect, which is also known as the Mark Twain theory, since he said, October, this is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February. As long-term investors at The Motley Fool, we agree. It's always a dangerous time to speculate in stocks. Instead, hold through all the moons, all the Friday the 13th, and all the Super Bowls. because long-term, bottoms-up investing is something you can believe in. Before we go, we have a mailbag episode coming up on November 15, and we need your questions

to fill it. So, send us your personal finance-related questions to podcasts at fool.com, and we might answer it on the show. As always, people on the program may have interest in the stocks they talk about, The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.