Motley Fool Hidden Gems Investing - Dow Loses Chips, Boeing Loses Money

Episode Date: September 3, 2024

Intel, Southwest, and Boeing, have all had brutal starts to 2024 – can any of them turn it around?    (00:21) Asit Sharma and Dylan Lewis discuss: - The latest sign of Intel’s struggles – possibly being removed from the Dow – and how it got here. - Elliot Management’s increased stake in Southwest, and how the activist investor is planning on improving the airline. - Boeing’s recent analyst downgrade, and why manufacturing issues might lead to financial ones for the company’s aerospace and airline divisions. (16:23) Alison Southwick and Robert Brokamp dig into the mailbag and some questions on asset allocation, retiring early and becoming a financial advisor. Companies discussed: INTC, NVDA, LUV, BA Host: Dylan Lewis Guests: Asit Sharma, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

From morning hockey with a cup of coffee, to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash triangle for details. There's no shortage of big names in trouble.

Can any of them turn it around? Motley Fool Money. starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me today. Dylan, thank you for having me. We are tentatively calling this one Turnaround Tuesday, I think. That might be the theme of today's show. Once-vaunted names struggling to find their footing. We've got updates and looks at Intel, Southwest, and Boeing. Why don't we start with Intel? Rough 2024 so far, and that continues for the company. Reports out this week that the chipmaker may be booted

from the Dow Jones this year. Since we are looking at the Dow side of things, Asit, I'm going to fixate on the share price here. The company started the year at $48 a share. They are now down around $20 a share. Catch us up to speed. What's happening at Intel? Dylan, to tell you what's going on at Intel, we probably need to just take a few steps back because this has been a long way down for Intel. Believe it or not, Intel was once the Nvidia of its day. It had 90% of the share of its market and was seen as this indomitable force in the industry. But they started to see divergence with competitors around the time that AMD, a company which also manufactures chips, started to rise. AMD came out with some

pretty cool designs on the market in the 2010s, and Intel started to lose some share. They were actually already losing share at that point. Then AMD made a critical decision that it wouldn't manufacture its own chips anymore. It would really go more towards chip design and outsource the manufacturing to partners like TSMC, a big foundry or fab competitor to Intel. For years, Intel stuck to its own model of making its own chips, outsourcing some, and designing chips, and never really could gain its mojo. Fast forward to today, as most of our members know, Intel is now paying attention to that foundry business, trying to make a bona fide run at the likes of TSMC in their foundry unit. They're investing in being this fab dominant force again. They're

also still designing chips that go in everything from AI-guided laptops to data centers. The problem is, that fab business is eating a lot of capital. They're showing some losses on their books and it's dragging on the whole business. Investors still don't know what Intel is going to be at the end of the day. Will they be a strong foundry business that also designs chips? Will both of these segments work together? To top it all off, they're having trouble attracting initial customers to fund this development because people are so satisfied with TSMC as this high-scale manufacturer partner to so many great companies. The share decline I mentioned is symptomatic of all of those things you just laid out there

in terms of business issues. You mentioned the cost. Part of the decline, and I think the market sentiment really falling from this company, is the fact that they cut their dividend, which is something that they have been known for for an incredibly long period of time. When you think about the cocktail of the overall industry and where people have been moving a lot of their production, and some of the financial woes that Intel has found itself in recently, do you think there's a clear way out for investors? There's so much excitement in the space that they're operating in. I think with Intel, it's going to be a little difficult, but there's a positive sign here,

and it's a sad positive sign. Intel, I think, for a while has been bloated in terms of the types of employees it has working on each of its business problems. I should call them business objectives. Whether that business objective is chip design or the foundry business, they're known for having lots of layers of management. They're cutting 15,000 employees. Sadly, that means people are going to be out of work, but it's just what Intel needs to do to be competitive with the way this sort of modern chip production landscape has evolved. I do think they have just a lot of, I don't want to call it fat, Dylan, but just a lot of padding in that organization. And one of their board members just left for that reason. Reading between

the lines, they had a prominent board member who left because he didn't think they knew how to operate a modern foundry business. To be able to offer something that's price competitive and is efficient, has this great ROI for customers, and is error-free in the production process. They're taking some steps, but this business is so expensive and it is so hard to be good at it, they don't have that spare cash to fund the dividend anymore. That's actually a positive step two. It looks like peak bad. It looks like how bad can things work? They're laying off so many employees and they're cutting the dividend. But to achieve this ambitious goal, that's what they're going to have to do. The problem is, do investors have the patience to wait this out to

see if Intel makes it with this new business model or not? Already, they're rumbling that they're going to have to sell a really nice division called Altera, which makes field programmable gate arrays. That's a fancy name for a flexible chip design. They're going to have to take some other measures just to keep funding this ambition. The declines that the company's experienced has taken it down to about 0.3% of the Dow. It is a share price weighted index, not our usual garden-variety market cap weighted index like the S&P 500. The problem here is, as we look out in the landscape, UNH, the largest company in the index, 9% of the index because it is a $600 stock. Intel down around $20.

the Dow committee not exactly thrilled with that ratio. I'm going to ask you a totally unfair question here, because I can. Knowing that it might get ousted from the index, is there a company that you would expect to see get added in its place? This isn't any kind of brilliance coming from me, Dylan, but I think many people would expect that if Intel goes out, Nvidia comes in. Chip for chip, right? It's a simple trick. Yeah. You and I were chatting about, before we started taping, about this word representative. The S&P 500 tries to find companies that are representative of the U.S. economy,

and so does the Dow. Well, this makes a lot of sense, and it would certainly give the Dow some luster that it's lost to the Nasdaq 100 and the S&P in recent years. I would fully expect that might be a swap out that we see. Sticking with our theme, we're going to check in on Southwest. We had a feeling that this was coming, but we now know it to be true. Elliott Management's interest and stake in Southwest just picked up. The activist investor disclosing in a recent filing that it now owns 10% of Southwest common stock, which puts the firm in a position to call a special board meeting if they are so interested. They have previously talked about wanting to get 10 board members nominated for the 15 seats on the Southwest board.

We've generally seen the market cheering all of the developments as Elliott has been getting more and more involved in the Southwest story. Shares up today on this news. Asit, do you think the street is right to be cheering this one? I think so, Dylan. One of the things that Southwest has to do is define this formula to make money in today's market pretty quickly. I think they're on their way. They abandoned their long-held and much-loved practice, at least by management, of letting customers board as they will. They're going to the model that everyone else has long ago adopted, which is, hey, if you've got premium space in the airplane, charge for it. That airplane is there

to be sectioned off in today's economy. There are some really great ideas I think Southwest can put forward in terms of affinity marketing as well, affinity revenue. That simply means types of add-ons that they have traditionally avoided. Now, the other big thing with Southwest that investors already know about is, they're not the most efficient of airlines. They have a certain network pattern which is different than legacy airlines with these big hub-and-spoke models. They also haven't been great at investing in their technology. We've seen this come back to haunt Southwest time and time again. Elliott Management, one of the things they're really pushing for is, you've got to become more efficient, you've got to upgrade your technology.

I think this is all moving in the right direction, but I'm going to throw out this one little caveat. I don't think it's that easy to quickly turn around airlines. There are these big fixed-cost propositions. You and I talked about Southwest a few months ago, and we fixated on that. What Elliott Management really is doing here is cheerleading a change in management. As you mentioned, they've got a proposal for 10 board members. Most of them are pretty well-known names in the industry with direct experience as CEOs or CFOs of airlines, and a few other good advisors. They want to improve the whole proposition of Southwest by committee, I think, and they're really panning the current management, which maybe that's somewhat

deserved. But I'm not so sure that this is going to be a quick turnaround story if Elliott wins what it wants. I think this still takes some time. Hearing you talk about the potential focus on premium seating makes me think, Southwest in several years may look a little bit more like Delta. I think that is probably true of a lot of the airlines in the industry right now. They're looking at one of the few companies that has been able to make the premium model work and the upcharge model work and saying, we can borrow from some of that. That said, Asit, I kind of agree with you. I feel like people know in their mind what Southwest is. There's a very specific brand

identity that comes with that. I don't know that the customers that are ready to make those upgrade pays, those purchases, aren't necessarily going to be flocking to Southwest once they make them available. Yeah, it will take a little bit of time to change the perception of the brand. And I don't mean for positive or negative, but with sort of the premium seating and more affinity revenue, you're going to be targeting a business class of customer that Southwest traditionally hasn't been very strong with. And that's not going to happen overnight, but you're right, Dylan. If they make themselves a little bit more Delta-like, they have great presence in some big business cities, like just look at Chicago,

where they're really big in Midway Airport. These types of transitions can happen in three to five years. Maybe I'm calling this a three to five-year project, and then watch the egg on my face next year when they're the best-performing stock out of the airline group. We should move to another topic before I bury myself any further. It just means you were on to it early, Asit. We're seeing some early signs of traction. Wrapping us up with the turnaround stories, and not to be outdone here, Boeing facing a fresh downgrade and more concerns over its Starliner space equipment. Shares down about 8% today to their lowest point in the last two years.

Asit, you read the downgrade note. A lot of the very high-profile elements of Boeing's collapse recently have been well-documented. The issues with their 737s, the issues with the space station. What got pointed out in the note that made you want to talk about it today? Yeah. Well, Dylan, Acres had just this very realistic take on the problems Boeing is facing, and they spoke to the stuff I'm interested in. They were looking at the cash flow and saying, look, at this point in the time series where you introduce new planes and you spend so much in R&D, you bring them to market, you win the contracts, you're supposed to be making gravy at some point.

You're supposed to just be producing planes with not much problem, pulling them through the factory, delivering them, taking the money, and developing a lot of free cash flow along the way. And that isn't happening for Boeing because, of course, they've had production delays, they've had safety issues that never seem to end. And so, what's happening in this cycle is they're actually free cash flow negative. They're using cash. They should be making cash right now. And the note today just pointed out that, look, to be competitive in the single or narrow-body market, I should say, they need to start a new production cycle, and that's going to take tens of billions of dollars. Meanwhile, I taught it up, they've got $55 billion rough worth of debt on their

balance sheet. That means that somehow they're going to have to raise more capital. And I think what Akers was pointing out is that the best way to do that in today's environment is to go to the capital markets and say, we're going to sell some more stock, which means current shareholders get diluted so that Boeing can invest in its next generation of planes while they're using the cash that they should have been enjoying as free cash flow and trying to fix today's problems. It's a hard proposition that the investment analysts brought up, which is, look, they can make money. At the end of the day, Boeing isn't going anywhere, although the brand certainly is just a nadir here. But it's going to be a long time before you can make an argument

on the back of a napkin that says, this stock can make you good money. I think that's what scared a lot of Wall Street today. We've run through three different companies on today's show, Intel, Southwest, Boeing. All of them could really use a change of fortune. I'm curious, they all face very different challenges. Which one do you think is most likely to get back on track here? I think it's probably easiest for Southwest to get back on track. at the end of the day, they have their unit costs in check. Maybe it's not the most profitable of airlines yet, but they shouldn't have a problem getting their operating margin up

above 10% or so. Their operating margins have really declined ever since 2022. I think it can be done in probably medium-term. That's not too huge a goal. Intel, it's like an asymmetric bet. I love it. You're going to put a little bit of cash in this if you're a shareholder, not your retirement funds, not your nest egg, but you're going to pull a little money out of your pocket and take a bet on it. If they could turn this around, if Pat Gelsinger can stay on board, if he doesn't get run out of town and they pull off the Foundry business, then that could be a nice return in several years. Boeing, I don't know, Dylan, I'm going to flip it back on you. I'm thinking Boeing is the hardest story here, but I may be wrong.

What are your thoughts? Yeah, I think the reputational risk for Boeing is the toughest, because it was manufacturing and what they were supposed to be so good at. I think Southwest, at the end of the day, you offer people good fares, they're probably going to be willing to give you a shot as an airline, and you can initiate that relationship and try to build it out with customers over time as you reinvent yourself. I think with Intel, if the capacity is there, they may be able to find something. It's right next to their expertise for a while.

The problem hasn't been that they've been producing bad chips, necessarily. I think you're looking at a longer road here with Boeing because there's a much longer lifecycle to the business they're in as well. I think that people are going to be cautious to put serious budgets to work in aerospace and in aviation when you have big questions about the quality of the manufacturing they're doing. I agree. We'll see. They have a new CEO. There's some hope there that this is a more production, manufacturing-centric CEO. There's probably every chance they're going to turn around.

is that I was alluding to earlier, but didn't say explicitly, they're a very important part of the U.S. export economy. So, almost too big to fail, but man, they're trying the patience of that law, aren't they, Dylan? We'll see how far they get. Asit Sharma, thanks for joining me today. Thanks a lot for having me. This was fun. From morning hockey with a cup of coffee to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash

Triangle for details. Coming up on the show, Allison Southwick and Robert Brokamp answer your questions about asset allocation, retiring early, and becoming a financial advisor. Question is, my partner and I both work in corporate America and don't exactly love what we do. I'm an associate at a law firm. My partner is an HR manager. We're in our 30s and have about $800,000 saved. We're renting and don't have kids. How much do we need to retire early or move to lower-stress, lower-paying jobs? Well, Alison, the amount you need will be very unique to your situation, right? Specifically, how much income you need each year to cover your expenses. If you haven't already, I'd start by

exploring the FIRE movement. FIRE standing for Financial Independence, Retire Early. These are folks who have significantly cut their expenses in order to save 30% to 50% of more of their income in order to retire early, or to work less, or to take lower-paying jobs that they enjoy more. They take a scalpel to their entire budget, but they get the biggest payoff by reducing what are, for most people, the biggest expenses, starting with housing. Could you move to a smaller apartment or a lower-cost area of the city or country? Transportation. Do you and your partner have two cars and you can get by with one car? The third item is food. There's this whole subculture among the fire movement, like frugal foodies. Then what you'll also notice, if you move

from higher-paying jobs to lower-paying jobs or you work less, you'll see that your taxes will drop significantly, too. I will mention one rule of thumb in the FIRE community, and that is you can retire when you've saved up an amount that is 25 times your annual expenses. This is based on the old 4% rule that has long been a guideline for how long you can spend in your first year of your retirement, and then you adjust that dollar amount for inflation. I should say this rule was developed for people who are retiring in their mid-60s and not early retirees, but I think it's still okay as a very rough rule of thumb. Just make sure that you do a more thorough number crunching based on your actual situation once you're getting closer to when you might retire

or just scale back a bit. So, to learn more about the FIRE movement, you can just do an online search. You're going to find all kinds of resources. A few to consider, there's Choose FI. That's Choose FI. They have a great website and a great podcast. Mr. Money Mustache is sort of the biggest website in the FIRE world. And then a book to read might be Your Money or Your Life by Vicki Robin and Joe Dominguez. Just make sure you get the recent edition published in 2018. Our next question comes from Kat D. Can you donate appreciated stock from your taxable brokerage account without creating a separate charitable trust account? So, Kat, the answer is yes. And I'm just going to really focus on the benefits of donating

appreciating stock. Since a charitable trust is a complicated topic, it could be worth considering if you have a net worth of several million dollars and you're concerned about estate taxes. These trusts might also be attracted to someone in one's lifetime income, but more flexibility than what you get from an annuity. So it could be something to discuss with your estate planning attorney. The good news is you don't need a trust to take advantage of the benefits of donating appreciated stock. And I'm going to explain these benefits by way of an example. So let's say you're very generous and you want to donate $10,000 to a charity. You have $10,000 in cash, but in your taxable brokerage account, you own a stock that is now

worth $10,000, but it has a cost basis of $5,000. So in other words, you've doubled your money, which is good for you. You have a couple of options. Let's say you do option one, which is you donate $10,000 in cash. That means you still have that stock with that $5,000 embedded capital gain. Option two is, you donate that $10,000 worth of stock. You don't sell it. Therefore, you don't really realize any capital gains and don't have to pay taxes. You're essentially passing on the capital gain to the charity, but the charity doesn't care because they're going to sell the stock. Since they're tax exempt, they don't have to worry about taxes. Now, you still have that $10,000 in cash. If you still like the stock, you can buy it back

immediately at this higher cost basis. You don't have to wait 30 days like you do with tax-loss harvesting. You can immediately buy it back. If you itemize your taxes, you can deduct the value of the stock, though there's a limit of 30% of your adjusted gross income that you can deduct in a single year. If you donate more than that, you can carry it forward for five years. The downside is that it definitely takes more work to donate stock than just writing a check or giving your credit card number to a charity. But I think the tax savings are worth it. Every brokerage has done this, every qualified charity. It does have to be a qualified charity, a 501 . They know what you have to do to accept donated stock. The process has been

established, but it does take more time. The bottom line is, if you have profitable investments at a taxable brokerage account and you're charitably inclined, then donating appreciated stock will likely be the most tax-efficient way for you to give to a qualified charity. Our next question comes from Dan. I hear the guidance that you're supposed to split your retirement savings between stocks, bonds, and cash. What about real estate investment trusts, aka REITs? I'm in my 40s and thinking I should pick up some REIT ETFs. Also thinking about adding some hard assets like gold. Any general advice? So a REIT is actually a typo stock. In fact, if you own any index funds, you probably already

have at least a little exposure to REITs. For example, between 2% to 3% of the S&P 500 is invested in real estate companies. That said, a REIT is a unique typo stock. It will get certain tax advantages if it meets certain criteria, such as it has to invest 75% of its total assets in real estate, and it has to pay out at least 90% of its taxable income as dividends. This is why REITs tend to have higher yields than most other types of stocks. REITs invest in all types of properties, like apartments, malls, hotels, office buildings, hospitals, storage facilities, cell towers. There are also REITs that invest in mortgages, but they're a different type of beast. I don't think they're generally appropriate for most investors, so we're really

talking about what is known as equity REITs. Besides the higher dividends, another reason to invest in equity REITs is that they have a similar long-term return to the overall stock market, so about 10% a year if you look at the return of REITs since the 70s, but sometimes dissimilar short-term returns. In other words, they're not always highly correlated to other types of stocks, so you get a diversification benefit. That sounds great, but the diversification cuts both ways, and we've seen this over the past several years. REITs have underperformed the S&P 500, partially thanks to the great performance of the tech-related companies in the S&P, but also because some forms of real estate, especially office properties,

they've struggled. Also, REITs can be sensitive to interest rates because real estate companies often borrow a lot of money. As interest rates went up starting in 2021 or so, 2022, that weighed down on REITs. But now that rates are going down, REITs have benefited. In fact, over the past three months, REITs are up 18% compared to just 6% for the S&P 500. it. But I don't really look at whether it's a good time to buy REITs or not. When I invest in REITs, I'm an asset allocator. I'm a long-term buy-in holder. I have a dedicated allocation to them in my retirement portfolio. It's around 5% or so. I just use a very low-cost Vanguard REIT index fund for that. I think that's a good place to start for most people.

As for gold, I'm not as big of a fan, even though I do own a little bit. I prefer investing in companies that sell goods and services, generate cash. Gold is just a rock that you hope someone will pay more for in the future, though it does have some industrial uses. I bought a little a few years ago when it was clear that inflation was going to accelerate, and now it's at all-time highs, so it's worked out. But over the past four decades or so, the returns haven't been nearly as good as what investors have received in the overall stock market. If you want to invest a little bit in gold, I guess it's okay. But I think for most people, you should have the majority of your portfolio in the stock market. Our next question comes from Mike from Ohio.

Hello. I love the podcast. I've been a member for years and years, and I'm not sure what I would do without The Fool. Oh, Mike, I don't know what we would do without you either. A number of years ago, we moved my parents' house into the names of all the siblings, so we all technically own the house. It's time for this house to be sold, so the money from the sale will be split between the siblings. Will this distribution be considered an inheritance or real estate sale. The house is also located in another state than the one I live in. So I am sure there are state laws that apply as well. I'm trying to determine what I can do with this money to be the most tax efficient. Can I move portions of it into

a tax deferred account, education funds, et cetera, or is it a lump sum scenario? And yes, I will also plan on speaking to a financial advisor. Oh, it's almost like Mike has heard your advice before. Good job, Mike. Good job, Mike. But as a fool, I like to ensure I understand this all as well. So I am educated and prepared. Yes. So it sounds like what your parents did was they either sold or gifted the house to you and your siblings. And that would be important to know because it'll likely affect the cost basis of the property. And assuming that you and your siblings are now the owners, then this would be treated as a sale and not an inheritance when the house is sold. Also, assuming that the owners, you and your siblings, haven't been using this

as a primary residence, the sale would not be eligible for the home sale exclusion that most homeowners can use to reduce or even avoid capital gains taxes on home sales. You can, however, raise the cost basis by adding in any eligible improvements you made to the home. Once the sale settles, you'll likely get a big check. This would be a lump sum situation, and then you can invest it. Education savings is certainly a good idea. If you have kids who go to college, a 529 tax-advantaged account is a great idea. You can also invest some of the money in an IRA or 401k as long as your earned income, and that is money from a paycheck, is at least as much as you contribute in one year to all your accounts. On the other hand, if you're retired

and not married to someone who is working, then you couldn't put this money in some kind of a retirement account. I am glad that you'll be talking to a financial advisor and also glad that you know that just because you have a financial advantage doesn't mean you shouldn't educate yourself beforehand. That's great. It also seems you recognize that you have to be familiar with the laws of the state in which the property is located. You probably also have to pay attention to the city and county laws as well. If you're using a realtor who is local to where the house is, she or he may know if there's anything unique or quirky about selling real estate in that area. Our last question comes from Krish.

For the last three years, I have been managing all of my funds, IRA, brokerage, etc., including using some option strategies, and I've been fairly successful in it. I am thinking of extending it to also manage funds of friends, relatives, and becoming a financial advisor slash planner. Assuming the overall assets will be less than $5 million, do I need to get any relevant certifications in finance to become a financial advisor or planner? Also, please provide the best places to get the certifications from. So if you want to become a financial advisor, even if you're just managing money for friends and relatives, assuming you're going to be charging for it. The first place to start

is your state securities regulator. You will definitely have to register with them. And then you should investigate what's required from the states in which you'll have clients. Most states, you don't have to do anything if you only have five or fewer clients, but it's not true everywhere. So just understand that you have to look at each of those states. And then depending on what you sell and how you'll get paid, you may have to pass some exams, such as the Series 7 or the Series 66. Though in some cases, you actually have to be sponsored by a brokerage firm to take those exams, such as the Series 7. That's the registration and licensure. You asked, do you need any sort of credentials to prove that you actually know what you're doing and that you

actually are a good investor or actual financial planner? The answer is, surprisingly, no. However, if you plan to make this a career, I'd look into becoming a certified financial planner. That requires taking several classes, passing an exam, and then getting three years of experience, or two years of experience if you're working under the supervision of another CFP professional. That's the designation I have. But if you mostly just care about investing, you could look into the chartered financial analyst designation, which requires passing three exams. I said just, but actually, those exams are pretty hard. But it might be worthwhile if that's something you're interested in. My final thought here really is that you should

probably get a little more experience under your belt before managing money for friends and relatives. I love that you manage your own money and that it's going well so far. And I love that you're interested in the financial planning profession. I think it's a great career. But three years is a relatively short period. And I have to say that I have seen many examples over the course of my career of people taking over the portfolios for friends and relatives, and it ends up straining or even ending the relationship. Sometimes it's because the person managing the money wasn't as good as they thought they were. Sometimes it's because they actually were a decent investor, but they didn't understand the tax consequences of the decisions they

were making. And sometimes it was because the friends and realtors just weren't very sophisticated about investing, and they got mad at the person managing the money every time the stock market went down. I would say, take some time to get a little bit more experience. Definitely look into what's required in your state, and look into getting the CFP, a CFA, something like that. And then think long and hard about whether you really want to mix money with family and other relationships. Listeners, if you have a question for our next mailbag, email us at podcasts at fool.com. That's podcasts with an S at fool.com. As always, people on 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. I'm Dylan Lewis. Thank you for listening. We'll be back tomorrow.