Motley Fool Hidden Gems Investing - Emergency Pizza, Stat!

Episode Date: October 12, 2023

It’s hard to bet against the enduring appeal of everyone’s favorite dinner. (00:21) Bill Barker and Deidre Woollard discuss: - How Domino’s continues to compete for its share of stomach. - The importance of loyalty programs and the worry of loyalty fatigue. - If Walgreens’s new CEO will keep steering the company toward healthcare. (17:21) Deidre Woollard interviews Professor Michael Robbins on his new book Quantitative Asset Management and the future of AI in investing. Claim your five dividend recommendations here: www.fool.com/dividends. Companies discussed: DPZ, WBA, WMT, AMZN, UBER Host: Deidre Woollard Guests: Bill Barker, Michael Robbins Producer: Ricky Mulvey Engineers: Dan Boyd, Annie Pope Learn more about your ad choices. Visit megaphone.fm/adchoices

Your emergency pizza is ready. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard, here with Motley Fool analyst Bill Barker. Bill, How are you doing today? Good. Thanks for asking. Well, Bill, earnings season is starting to kick in. I'm sort of stealing myself for the onslaught of three, four, five, 10 companies a day. How do you deal with that tide of information? You know, I tend to focus on what's in the headlines to a very limited extent, and the specific companies that I'm most responsible for following as an analyst here at greater detail. It's the best time. It's the most

real information. I don't mind it. I love it. It's the best time. Yes. Well, we've got some earnings today to talk about. Let's talk first about Domino's Pizza. Same store sales down a little bit. Domino's is interesting to me because I think people think of it as selling pizza, and of course, it's selling pizza. But that's really part of the puzzle when you think about the business? It's a franchise business. It's definitely a selling supplies business. What metrics are important with Domino's beyond just, they're selling more pizza? Boy, that is a big one. It's a big one. It's a very big one.

Beyond that, what the store count is, the new store count year to year, what the cash-on-cash returns are per store and per new store. Are they cannibalizing any of the existing stores? I think that it's a relatively easy business to follow because it's got a simpler business plan than many others. Despite the franchise fees and all that, it's about how many pizzas they can sell more than anything else. They've expanded the menu beyond pizza. That helps at the margins, but the core business hasn't changed too terribly much. No, it is still all about the pizza. One of the things that's interesting, though, is, they are investing heavily in technology. They're partnering with Microsoft. They're passing

some of that cost on to the franchisees for things like the app. How much are the collaborations that they're doing, like Uber Eats. How much are you factoring that into looking at the business as a whole? Well, the Uber Eats collaboration is interesting. Domino's is still doing the deliveries, and so they're just visible on the Uber Eats app. They've already got a very well-developed online presence and have for years, and that's been one of the big contributors to their success. They're just expanding into UberEats in the sense that people see them there rather than their own ads. There are people who will only order from UberEats right now. That's how they just choose to get their food delivered.

They probably don't realize it's Domino's that's delivering rather than Uber. Over time, and this is going to be, I think, a market rollout initially, and then it's going to expand from there, potentially quite a bit of additional business for Domino's with relatively little investment, but it'll cut into the margins. But, no, the investment is definitely happening on their app and driving their customer loyalty and improving things on that end, as far as the technology goes. Yeah, they want people to order from them rather than through Uber Eats. They don't want to split the profits with Uber Eats if they don't have to. So, making additions to the loyalty program,

getting people to come back directly to them, just as a hotel would rather have you book directly at their site rather than through Expedia or Hotels.com or any of the other ways that you can get the same thing. But Expedia or all the intermediaries have their loyalty programs, and the hotels have their loyalty programs. It's the same dynamic here, where Domino's wants to develop the app experience and the online experience as well as it can, so that it's getting all of the money that it can from the sale. It's the same endpoint work that they've got to do. Yeah. Let's talk a little bit about the loyalty program. They announced something earlier this week, a PR-driven story, but

it really made me think about their loyalty program. They launched this thing where they call it a free emergency pizza. Well, it's really just buy one, get one later. They call it an emergency pizza. It sounds kind of funny. It got a lot of headlines. But the other part that story, too, is they've also lowered the barrier to entry for the program. They're really trying to get that loyalty program going. They're trying to make sure that people become part of that. You just made a good point about Uber because, of course, Uber has their memberships and their loyalty programs. I'm wondering, do you think that the loyalty program is going to grow with Domino's? Does this have to become part of the system? Overall, how much do you factor

loyalty programs into thinking about the value of the business? Well, it shows up in the numbers, it shows up in the margins. I think that giving a buy one, get one later pizza, getting a little bit of advertising coverage for that is all to its benefit. I think that everybody out there, grocery stores, the little discounts you get by joining their loyalty programs. Certainly, the airlines are people who become quasi-addicted to the miles, the points, the free stuff they can get at the margins. The more that you make people think, and part of the equation of making people think they're getting a value, extra rewards from being in the loyalty program is to create real rewards. Domino's, it's easy.

You get a free pizza rather than you get access to the airport lounge or something like that. But the emergency pizza, I guess, offers some interesting advertising possibilities that I can think of. Yeah. I do wonder if there's going to be loyalty program fatigue, though. For some things, like airlines, of course, you're a member of those. It just makes sense. I think everybody I know is a Starbucks reward, going to get your coffee eventually. Sometimes you get a free one. That's a good thing. But eventually, do people get sick of managing all of these different rewards? Does that lead us more toward that idea of a super app where things get consolidated? I always feel like we go through these cycles

of consolidation and then unbundling and then consolidating again. A super app for all rewards. For all rewards. Hey, maybe for all food. Has somebody tried that yet? I mean, to a certain degree, it's meant to be your phone so that you don't have to remember all the things. You don't carry a card with you that you pull out at checkout at every establishment that

it can just live on your phone. So, that, I suppose, is the solution to the too many loyalty reward programs and numbers that you would have to remember and cards that you would have to carry. Yeah, that makes sense. They should just put it in the iPhone wallet. One more thing about Domino's. When people talk about the company, they worry about the debt a little bit. You have $5 billion in debt here. That's a lot of pizza. How should investors be thinking about that debt? It is a lot of debt. That's a fair thing to look at. It has worked out to the benefit of shareholders because debt has been

relatively cheap. The debt before the last 18 months was an extremely good way to fund growth compared to issuing more equity. I don't blame them for that. They have a target, I think it's four to six times EBITDA or something like that, on the debt. As long as they're maintaining what their target range for the debt is, I think that you can look at how that translates into additional profits for the company through the growth. But if debt becomes more and more expensive, and they don't have that much debt to pay off in the next three years, so no one should worry about whether they would run into any serious financial trouble. And of course, the business is very predictable. The cash flow appears every day. People eat every

day. So, it's a business that can maintain more debt because of the predictability of the cash flows. But it's a lot of debt for a company this size. Yeah. But the fact that it's not coming due anytime soon is at least a little bit of a comfort, I guess. Yeah. Hopefully, from everybody's perspective, it will be cheaper to borrow in the future than it is today, homeowners and businesses and everybody, except people who have savings and bank accounts. They don't mind higher interest rates, but everybody else is pretty much hoping in the future it's cheaper. And if it is, Domino's debt will be less of a problem than if it gets to be more expensive. Oh, God, I hope that is, in fact, math. Let's talk about another company that reported today.

You and I were on the Motley Fool Morning Show for our membership yesterday. We talked a little bit about Walgreens Boots Alliance, because they announced a new CEO, Tim Wentworth, who has a strong healthcare background. Walgreens is interesting. It is really moving into that healthcare business. They're growing that mostly through acquisition, but debt is a factor here. It's costing them a lot of money. Looking at this company, when you see a company in general in the midst of this real change in focus, how do you assess the value of the long-term strategy, especially when it's an older company like this? Well, I assess it in the numbers and what management says about the strategy, and they

may have heard the conference call today. This was the first chance from the new CEO to talk about whether there are any changes in the pace of the rollout or the use of funds to acquire rather than to do something smaller scale within the stores. So far, it has not worked out terribly well for shareholders. I think that the transition to a CEO with more healthcare background, particularly in the PBM space, is good because that's a big part of Walgreens' money, is negotiating and managing the PBM relationships and surviving them. And so, somebody who knows where the bodies are buried is going to be useful. Yeah, yeah. You know, the results came in below estimates. I mean, part of that is just,

you know, less COVID vaccines, less COVID testing. But even though the results came in below estimates, the stock was up. I think some of that is that new CEO bounce, maybe a little bit of hope that they're going to have a new strategy, or just the idea that after six weeks of an interim CEO, at least there seems to be a plan forward. Do you think that might be what's causing a little bit of that? I'd have to guess, having not heard the conference call, that something in there was was useful. I think that the stock is down so much this year that simply not delivering bad news, or news as bad as it might have been, especially after the CEO abruptly left. There might be questions about whether another shoe is going to drop. With a stock down 30-some

percent this year, today's report had an easy act to follow. Now, a lot of the time, somebody new to the equation will come in, and I don't think that there's been time to do this, just dump a whole lot of things, the Big Bath theory of getting all the bad news out right away. And they're like, none of that's my fault, so we'll just take a bunch of write-downs, and we'll just put all of the losses in a big bucket, and therefore, they don't count. I don't think there was time to do that for this report. The miss on top line, small as it was, I think the market is taking a sigh of relief, I think, that there isn't any particularly bad news this time. Yeah. They did talk a little bit

the release about cutting costs. I think the market wants to see that. They've seen a lot of acquisitions, and now they want to see this cost-cutting. They want to see finding where they can make some savings. But you're right, it hasn't performed well over the past few years. A tough business for pharmacy overall. Now you've got Walmart, Amazon, Costco, everybody's getting into the pharmacy game. I'm wondering if Walgreens has to make this payoff in order to survive. Really, these businesses are moving from retail, essentially, to now being retail and increasingly healthcare and services. Maybe so. It is a problem that your traditional business, which has worked very well and has allowed you to grow a lot, is

being now attacked by Walmart, Amazon, and Costco. That's a lot. That's a lot to deal with. And so, they've got to have some strategy for what that world is going to continue to look like. And the one that they have gone with has not translated into profits yet. But they're in a good space. They're a trusted healthcare name, more so than those others. And there's an opportunity there. But large drugstore chains don't survive just because they get large. Yeah, very true. I mean, we're betting on the demographics of the aging of America with this one. All right, Bill, I'm going to wrap up with a silly question. What's your pizza order? My pizza order usually involves a lot of meat for pizza.

What are you, like a sausage and a pepperoni guy? Something like that, yeah. Whatever's available. Yeah. And yours? I'm a pineapple person. I don't know about that. Thanks for your time today, Bill. Thank you. If you're a regular Motley Fool money listener, you're probably well aware of how dividend stocks have the potential to really supercharge your portfolio's returns. Dividends have accounted

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to talk about how quantitative investing works and the potential and dangers in AI-driven investing. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region. In seconds, you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted.

When you have critical business questions that need answers, don't just file a ticket and wait weeks for an outdated report. Describe what you need and have Rippling AI build it instantly from your live people and business data. Whether it's a dashboard with detailed charts or automated workflows with the right triggers, conditions, and approvals. Ready to rule your business? Head to rippling.ai slash fool to get the only AI built to give you full visibility and take complex actions across your entire organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. Let's start at the beginning. Quantitative asset management. People have probably heard it said a lot, but not necessarily understand exactly what it is and how it differs from other investing

approaches. Yeah, it's in the news a lot lately. And in fact, I think most investors now are quantitative in one way or another. But people, I think, misunderstand the purpose of it and think it's about coming up with a number, a scale, a metric to judge a trade, when really it's about the process of thinking through the trade in a disciplined, structured way, which I think works for everyone, even people who aren't great at math. That would be me. Your book focuses on a lot of different types of modeling. So how can a qualitative investor like me get a better understanding of some of the models used in quantitative analysis and get a little more comfortable with some of those numbers? Well, there's lots of great information out there,

And a lot of these models are accessible to people without a lot of knowledge, although it's a little dangerous to use a powerful tool without a good understanding. But some of these tutorials are really intuitive and interesting. So you can think of, for instance, a linear regression as a way to put a line on a chart full of dots so that the line is as close to as many dots as possible. And the way they do that is they measure the distance between the dots and the line and try to make the sum of those distances small. In fact, the real way they do is they take the square of those distances. A lot of the other more powerful machine learning methods are based on that sort of thing. They might use a different way to measure things or a different kind of line. Or maybe they use that line to divide two different types of dots instead of trying to find a line that's closest to fit them all.

And that's a second type of problem called classification. So even in this short discussion, this simple analysis, we sought the two major types of quantitative analysis, regressions, and classification. So it can be intuitive. And a lot of videos show this graphically with all sorts of colors and moving graphics. And I think it's pretty accessible for a lot of people. But then these much more complicated models, the ones that people are so excited about lately, like the large language models, they're harder to grasp. It's harder to get a true

understanding of those things. It's a little like quantum physics. Once you move out of the realm of what you're used to and the intuition about the world around you and things become abstract, it's hard to get a really good understanding to be able to use those tools properly. Yeah, that's an interesting point you made about the difference between intuition, because so much of qualitative investing is thinking about what you feel about a company, what you know, listening to the earnings calls. You look at the numbers too, but you also are going on a lot of intuition, whereas quantitative is really different from that. So thinking about modeling in general, what are the limitations of it? And when maybe should we put the modeling

to the side and go a little more on the intuition? Yeah, that's a really great question. And there's a lot packed into that. But all models are limited, almost by definition. It's just prohibitively difficult to build a model complex enough to take everything into account. So an important feature of quantitative investing is if you do your testing, you run a bunch of experiments, and you know what you've tested and what you haven't. You have that envelope, that parameter that you're comfortable in. You know you've tested these things, and you're pretty reasonably sure that you understand what's going on. In quantitative investing, it's pretty clear what you don't know. You may be right, you may be wrong, but if you haven't tested it before,

you really don't know. And that's a great feature in a way of thinking. If you're qualitative, if you're intuitive, it could be very powerful. But you're also always a little unsure, sometimes more unsure than others. And a lot of times your mind plays tricks on you and your comfort level informs you of how much you believe in something. So if you're comfortable with the situation, you have the intuition that you know what's going on. And that's not at all necessarily true. With quantitative investing, you know exactly the limits of your knowledge. And importantly, when you're trading, you should have an investment thesis. You should have a reason for investing. And that's the difference between investing and gambling.

And when that thesis is violated, when you're out of your depth, you should exit your trade, even if you're making a lot of money. Because if you're making a lot of money and you don't know why, maybe you'll start losing a lot of money and not know why. The important thing is you should know why. And for me and people like me, quantitative investing gives you that comfort level that you actually know where that barrier is. You know what you've tested and what you haven't. And also, very importantly, and this is something maybe some amateur traders don't think so much about, when things don't go well, people want to force you to stop what you're doing. They get uncomfortable. They get afraid. And it's important to be able to defend yourself and

your trade. So if you have tests, you can say, hey, look, we've experimented with this. We've seen this in our experiments. You're uncomfortable. I get that. I understand what you're feeling. but your feeling is not as valid as our experiments, right? Until you have a good reason for us to exit our trades, we have a good reason to stay in them. Whereas if you're intuitive, your reasons might be great, but they're a little harder to convince people of. And that may turn into someone forcing you to exit a trade before you have to. I want to talk a little bit about AI and how it might change the world of investing even more that it has. You mentioned earlier the large language models. What should we be looking for?

How does it impact your world? Yeah, it's already had a tremendous impact and it will continue to do it. But I think the story is really changing. So machine learning and artificial intelligence are really just an evolution of statistics. If you're in the field, you recognize that they're just maybe a more powerful way to do statistics. Some of them are a little more removed than others. Large language models are very different from simple linear regressions. But it is an evolution. And it will certainly affect everything. It's already pervasive, even if you haven't noticed it yet. Netflix uses it to help you pick your movies. certainly most ads you have are generated by some form of AI. Spam filters have been using AI for

decades. So I think the fact that it's there and you might not even notice it is a testament to its power. But what I think is changing is that up until a little while ago, it was very hard to do those things for an amateur. And you're pretty much limited to simple statistics. Recently, I think many amateurs can do it. You can download software, you know, Scikit-learn or MATLAB has all sorts of packages. I mean, there's lots of different ways to use AI as an amateur, either for free or very close to free. And until a few months ago, I think they were pretty sophisticated relative to most of the other things that we've heard about in the news. There might be some secret things going on in government laboratories and hedge funds and

things. But in terms of what was known in the public media, the free software was pretty powerful. But that's changing. So, open AI is becoming not open. There's all sorts of private models by Microsoft and all the other big companies. I'm sure the hedge funds have all their own secrets. At the university, I work with research partners who use these enormous computers, just the size of large buildings and quantum computers and all this technology that's absolutely not accessible to individuals. So I think we're moving through a golden age of AI where amateurs can really do some very sophisticated stuff. And this is kind of going the way of high trading, where average people just can't compete. And there'll only be a few entities with even the

possibility of competing with each other. Every once in a while, there'll be a tremendous breakthrough, which can happen outside of those organizations. An amateur could create a mathematical proof that just turns everything on its head. But that's really rare and hard to do. So I think this idea of producing alpha, this idea of outperforming the market is going to get further and further away from the average person. Even these little niches, these little opportunities that a lot of people don't look at are going to be hoovered up by these machines that are so capable of doing so many things at once. It's a little bit dystopic, but it's kind of the way it seems to me right now. Is there still value for people to try to learn and try to

understand investing with this idea that you've got this sort of AI threat kind of looming over us? Well, yeah, I think there's still a lot of time before that happens from a personal standpoint. It's not going to happen overnight, but maybe in a generation, maybe the people in high school now won't have the opportunities we have to create investment returns. But right now, there's a lot being left on the table. A lot of these machines are making some very obvious mistakes. I read an article about that game Go, you know, with the little rocks, the little board game. And someone used AI not to create a strategy that beats the game, but to identify the weaknesses in the other AI strategy, right? So it wasn't trying to find a way to win. It was trying to find a way to expose

the obvious errors the competitor was making. So it's kind of a cat and mouse game. And as we know from high frequency trading, it really hasn't worked out like a lot of people would have thought it was. These high frequency trading machines are not so brilliant because they're focusing on speed. So they do some very simple trades, but they do them very quickly. So if you can think of something a little smarter, maybe that's another dimension where

you can beat them, even though they're faster than you. The same may be true with AI, at least for the next five or 10 years. Don't quote me on the time. I don't know. I'm not a futurist. But they're making plenty of mistakes now. I mean, anybody who uses voice recognition on their phone knows how many mistakes their text messages have in them, right? So there will be errors to capitalize on. And in a lot of ways, that's easier than finding investment opportunities. I'd rather find mistakes in an algorithm than, you know, try to find a good trade. There's less noise and randomness in it if you can identify a pattern. So, yeah, there are things that we can do.

It's not going to turn overnight. Well, fantastic. Thank you. This was great. Really appreciate your time. The book is Quantitative Asset Management. 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 stocks based

solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.