Motley Fool Hidden Gems Investing - Everyday Low Prices > Treasure Hunting

Episode Date: December 23, 2024

If your company isn’t a growth business, what’s the advantage of being in the public markets? (00:14) Jim Gillies and Ricky Mulvey discuss: - Why luxury department stores are struggling. - Disney spending $645 million to make two seasons of the Star Wars series, Andor in a ten-ish minute discussion. - What investors should consider before using options to generate income. Companies discussed: JWN, PTON, DISHost: Ricky Mulvey Guest: Jim Gillies Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

the sale at nordstrom is over you're listening to motley fool money jim this is our second recording of the day we are now on minute 40 4-0 of seeing each other do i still do the like hey it's good to see you thing do we or do we let the listeners know what's going on behind the scenes feel free let's let's pretend okay it's so good to see you how's your morning going oh it's would have been better if we got on the first take but other than that it's great let's do this nordstrom story again first time for the listeners though the theme of this gym is that being a public company is difficult el puerto de liverpool sab is is acquiring all outstanding shares of nordstrom for a little bit more than

24 bucks in cash it's a tiny premium for what it goes for today the nordstrom family will hold on to a majority of the company as it goes private but why do you think this storied brand is leaving the public markets here because they haven't been rewarded for being public and also too they small premium this has been in the works for a year i think it was a year ago with december 14th in 2023 when uh el puerto de liverpool filed a public nda essentially saying yeah we're looking at. We're looking at this and we're happy to do it the way you guys want to do it, you guys being Nordstrom family. In September 2024, there was a preliminary filing offering $23 a share here. The fact they've settled at $24.25, this was coming for a while. You

can see it in the stock price chart this year as well. Nordstrom this year has been a market beater in 2024, which is kind of funny. It's up about 31% this year. But trust me, the 10-year chart tells you a very different thing. They really haven't gotten any advantage for being public, you know, they don't need to raise capital, so they're not using for capital markets here. They've got some debt, they'll be able to roll that just fine as a private company. And I think they probably said, them as well as Liverpool, were probably just sitting here going like, look, this is a cash cow, we can run it as a cash cow, there's no growth coming here. The stock being taken out today, it's about 17X enterprise value to free cash flow,

which is fine. It's unlikely to go much higher in the public market. This has not been a terribly great capital allocation story. There's been a little scattershot, as I probably would put it. They've made some questionable repurchases a little bit. They've had some dividends and they've cut them back during uh kovid and then only brought them back at about half the prior level and being a public company is expensive so you know these guys can just kind of go away and milk it for cash and uh you know call it a day this is a big bet for liverpool which is a about a seven billion dollar usd company and nordstrom is about three billion dollars and there is one brand in there that i'm particularly curious about which is nordstrom rack and you know i

like the nordstrom rack i know our colleague my co-host mary who's listening right now is a big fan of the nordstrom rack and also public markets love tj maxx so i guess when you're looking at this why couldn't nordstrom rack be more of a growth story as we're talking about nordstrom going private right now people love a treasure hunt jim well you know what people love more than a treasure hunt because big lot says hi people love everyday low prices people love buying in bulk to save a few bucks on a per-unit basis. So, you know, the luxury department stores of large, and this is the same problem at Macy's, the same problem at Kohl's, you know, a couple of Canadian names I could mention

that have long gone now, Eaton's and Simpson's. We, of course, saw Sears go away, not so much luxury, but, you know, department stores and the, you know, kind of the one-store-fits-all has kind of gone away in favor of the, or at least they've suffered in favor of the discounters. Could it have been the next TJ Maxx? I don't know, maybe. But I think people are just more interested in low-cost and buying in bulk. That may or may not be some commentary on the high cost of living today, but some of these things, their time has passed, rightly or wrongly. I don't think it's really that much more complicated. Then the fact that you have the

the family ownership and the dominance there, it's like, you know, they're still going to make their millions every year and it'll be fine and there's no tag days for them, but there's no, I was kind of thinking, like, what's the incentive to stay public, you know, you're going to get a low to mid-teens multiple on cash flow, your cash flow is not growing. In my view, at least anyway, there's not a lot of booming upside here, so, you know, get private, get rid of all the public filing costs. Maybe you can streamline the business a little bit more and then just run it as a cash cow for both Liverpool and the Nordstrom family. You get access to capital markets. You get more liquidity if you want to sell some shares. There's

some advantages to being a public company, even if you're getting a lower multiple, Jim. Yeah. I don't think they're going to have any trouble raising capital on the debt side. They get about $2.6 billion in debt, they will have no trouble rolling that. I don't see the potential upside in the value creation here. So it's like public, not public. I don't think it's going to really impact anyone's life unless your last name is Nordstrom. Bloomberg reported that in 2018, the board rejected the family's bid to take Nordstrom private at $50 a share. Now it's going for less than half of that. We've seen a similar story at Paramount, which is this family business that refuses to sell when an offer is high

and the growth prospects are subdued and you have outside buyers coming in and saying, hey, we can cool this melting ice cube if you want to hand it to us in the private markets. Are there any companies you're looking at today where if the board invited you in, Jim, you would say, you know what? Now might be a good time to leave the public markets.

Take the silver. Get out of here. Well, the first thing is I hope the board, the members of the board from 2018 who rejected that $50 bid. I hope they're writing checks to return all of the compensation they've got over the past seven years to take now a buyout at half. Good job, guys. I don't really follow companies to see them taken out in this kind of negative situation, which is what I think this is. I've got lots of companies I think are going to be acquired or I would like to see a

take out. I had one personally on my Canadian service here, it's being taken out today. It's kind of got a surprise bid, that's a tiny little company, so we won't go too far there. Because I play in the small-cap space a lot, I'm generally looking at probably about half of my companies over time get taken out. I'm thinking back to, I was the co-advisor for a little Foolish service called PayDirt back in the mid-2000s. And I've kept the names from that service in a little spreadsheet I check in occasionally. More than half are gone now, they're long gone, because just small companies get acquired. So, that's kind of what I'm looking at. I don't really look at these companies where, oh, we don't want to take it out, we don't get

taken out, okay, fine, now we'll take a buyout when you've eroded shareholder value for half a decade. That's not my jam. I will say though that there are some companies I think would probably benefit from being out of the public eye. The one that I think should probably be folded into a larger connected fitness player at some point, although we won't say Apple, but maybe Google and their fitness app because they did buy Fitbit, is Peloton. I think Peloton, on, they finally got the right people in charge, or at least better people in charge. They finally decided to stop bleeding cash, they finally decided to fix their balance sheet as best they could, given they were kind of over a barrel.

I think there's still a really nice subscription business hidden in there, even though their hardware is not selling as well as it was during the pandemic, for what I think are obvious reasons. I think the value of, and especially as they've got the app, so you don't even actually have to own hardware from Peloton anymore to play here. You can own the app and pay the subscription there and use your own material and your own hardware. So, I think at some point they'd be my candidate to go away, but unless you want to. I think people, you know, hope springs eternal and I think companies always think they can be the ones to turn around, new managers think they can always be the ones to turn it around. Heck, investors buying, I like

to call it the call to the value investor of which I am a card-carrying member. We always think a turnaround is going to come around and some of them do, but some of them don't. Nordstrom, public, private, I don't think we're going to be missing out by them going away. I think Peloton, if it gets taken out in the next couple of years, $20, $25, it shocked me all right we're gonna move on to a story that is significantly more personal to you as i you know the the listener can't see this i'm looking behind jim's shoulder and i see a stormtrooper bobblehead certified star wars fan this caught my attention forbes reports that disney will spend more than 600 million dollars on making two seasons of andor the second season

coming in at 345 million dollars we'll go from the fan perspective and the investing perspective you know is is is a uh you know lower level star wars fan than you i like the first season i thought was pretty good practical effects are expensive i didn't know they were that expensive but i'm looking at this in my back of the napkin math is that these episodes are going to be about two times more expensive than the final season of game of thrones as a star wars fan are you happy to see this investment in a gritty adult star wars series heck yes it's not my money spend away go ahead this is the same thing i have when i see juan soto or you know uh shohai otani sign for whatever they sign for it's like it's not my money you have you know go get go get paid guys yeah so i'm i'm fine

with this i will also say that uh this is supposed to be this the final season of andor it's only going to run two seasons uh i will humbly suggest without seeing it that the final season of andor will be better than the final season of Game of Thrones. That might be more of a comment on Game of Thrones. But anyway, I'm happy to see it because I will hold that there are two distinct eras of Star Wars. There's before Disney and after Disney. And before Disney has its issues, the prequel trilogy is a step down from the original trilogy. Andor is the best thing they've done since they acquired. I'm going to loop Rogue One in there as well, because Andor is technically a prequel to the movie Rogue One. But Disney has not had any real clue how to hold and monetize

Star Wars. Now, I think they're going to lose their shirts on this, given the cost of this, because it is the least watched Disney Plus show, at least until The Acolyte aired. And if you tried watching The Acolyte, you'll know why that one failed. I did and I do. But I mean, why was Andor the least watched Disney Star Wars show? And the answer is, in my opinion, because the stuff they had before was scattershot. The tentpole movies, so the episodes 7, 8, and 9, they didn't have a coherent plan and they didn't have a coherent story. Episode 8 seemed to be trying to monkey with what they set up in episode 7. And so episode nine was trying to fix episode eight. Poor character writing. Finn's a big hero in the

first one. Oh, now he's a joke in the second one. Rey is perfect the way she is, so who cares? Captain Phasma was a waste. Snoke's the big bad. Oh, he's not. It was completely incoherent. The lesser, the non-trilogy movies, Rogue One is excellent, but it's excellent because it was a more adult and they took some risks. Solo is fine. But then what TV shows have they done? Well, The Mandalorian, the first couple of seasons are fine, the third season was terrible. Obi-Wan Kenobi was a joke, the Acolytes joke. Season 7 of Clone Wars was fine, but Bad Batch was kind of mundane. So, you know, they've been very scattershot and they don't know what they have.

And another thing, too, is what I've said here. So, we went to the Star Wars Land at Disney, and yeah, you can see a bunch of stuff behind me and what you can't see is all the stuff on that wall and you can't see the stuff downstairs. Like, there is a lot of Star Wars stuff in this house and we'll leave it at that, including some very nice artwork you don't realize is Star Wars stuff until you look closely. So, we went to Galaxy's Edge in Disney a couple of years ago and we were quite excited. And I took money, because I have money and I am willing to spend it. Disney, take my money. I didn't buy anything. I walked out because everything they are trying to sell you

at the Disney park is not Han, Luke, Leia, R2, 3PO. It's not Darth Vader, Stormtroopers. It's not the classic stuff that people who have money are willing to buy. It wasn't that. It was all stuff from the sequel trilogy. I'm sorry, I don't want a Kylo Ren plushie. I don't care. The character didn't resonate. The character was uneven anyway. But when they've had good writing and Rogue One is good writing. Andor is excellent writing. I would say that the Luthan speech, anyone who's seen Andor, the four people who've seen it will know what I'm talking about when Luthan talks about what he sacrifices. And it's gritty, it's adult, it's actually showing what life is like under this totalitarian government and that it's oppressive and that

it's hard and people are going to die. This is a mature story being told by a really good storyteller because you go look at a lot of stuff, it's played for laughs. It's like Star Wars can be funny, but that's not the primary motivation like Han Solo, funny guy. Princess Leia had some pretty good lines in the original Star Wars. But humor isn't the end-all and also too, and this is just a personal thing, and this is more Star Wars than anyone ever wants to hear from me. The totalitarian fascist government in charge, which is what the empire is. Under Disney, they're clueless rubes that can't do anything right, especially some of the, like, it's a joke. And if you don't give consequences to your characters,

people aren't going to take your character seriously. Well, IP management, including Star Wars and beyond Star Wars, is something that that Disney seems to be struggling with. They had a movie open this weekend that is underperforming with Mufasa. And these are fond memories people have as children, and they're kind of struggling to get people back to the movies to go see them.

I think of Daisy Ridley's character in Star Wars. That's Rey. Rey, excuse me, Rey. And in one of the new movies, they have her essentially speed running through Jedi training. She's perfect. And when you think of like the original trilogy, Luke Skywalker has to go through some stuff with Yoda in order to be a Jedi. And I think there's just some fundamental misunderstandings about storytelling under this new regime for Star Wars that I don't understand why they don't understand it. You're exactly right. And again, I think Daisy Ridley did fine with what she had,

what she had to do, but the character was written where she gets everything almost instantly. And so, the classic hero's journey, the hero has to suffer in order to overcome, and you don't see that. But you're exactly right. I mean, especially at Lucasfilm, Disney is having problems. But even at Lucasfilm, like, the Indiana Jones movie, Dial of Destiny or whatever it was, people want to see Indiana Jones. And the first 20 minutes of that movie where they've de-aged Harrison Ford, and I understand that's expensive, and that felt like Indiana Jones. And I'm hearing good things, but there's a game out called The Great Circle right now, I'm hearing really good things about that game. But when it came to the rest of the

movie, the movie was awkward and bad because they just showed old broken-down, they deconstructed the hero. And that's kind of what they've done with Star Wars as well, we're going to deconstruct Han Solo like forget the love story of Han Solo and Princess Leia now they're divorced and he's an absentee father because reasons you know and it's just like well like we don't we don't want our heroes deconstructed okay we don't want to be told that hey the heroes you loved yeah they're flawed and terrible and here's some new heroes and we're going to take these guys apart like it it's just it doesn't sell so we can talk about what Disney doesn't know how to sell the fact of the matter though biggest two movies this year are inside out two and deadpool and wolverine

both of which are good movies by the way both of which are are pretty good movies so inside out two was good because it had something new to say in a sequel in the original inside out the main character you know young kid experiencing these these emotions now we have her in puberty and understanding things like anxiety so there's something new to say from a director that has children and also like is able to bring real life into it and deadpool was actually was a real risk It was an R-rated movie coming from Disney about superheroes, which is something that, granted, it's a sequel, but people still like going to the movies to see superheroes in the X-Men. Yeah, I mean, I liked both of them. I really did.

I agree with what you said about Inside Out 2. Deadpool and Wolverine, I mean, the amount of character work. I mean, I know it's an R-rated movie coming out of Disney, but, you know, it's not the first time. They used to have, what was it, Miramax or whatever they had to deal with. they would release their r-rated stuff uh yeah they can do that and and the audience is there but i mean like you know the audience has been built up in the prior to deadpool movies it's been built up in however many x-men movies there are which even when they changed the main cast they never recast logan right they never recast wolverine it was always huge jackman

the issue the issue i i see is that you know we you can't make your money now in selling the you you know, selling the DVD and the Blu-rays after, right, which kind of was the way it was for about 20 years there, it's like, even if you didn't make it back in your box office, you would make it back in DVD and Blu-ray sales later. We're not really doing that anymore because, well, because we don't, no one buys physical media, we all want to subscribe to 17 streaming services, apparently, instead. So, a lot of these things, they're losing their shirts on them and they haven't really found a way to monetize them, and so, what are they doing?

They are really relying on existing IP, we're going to do sequels as much as possible, because at least we've got that, kind of, built-in audience that maybe entice you in, or we have to get smaller. And these are the two that hit, but I already mentioned, you know, how much I'm not a big fan of the Disney-era Star Wars, with a couple of exceptions. And I mentioned the Indiana Jones, it's like, guys, at some point, and even in the Marvel which, of course, Disney owns as well. They peaked with Endgame. Endgame is five years ago now, it was 2019. All of the Marvel since then, all the Phase 4 and Phase 5, whatever

we're doing, the TV shows, the movies, it's just been a steady degradation. It's nice what happened with Deadpool and Wolverine and it's good, but I don't have a lot of hope for a lot of the other stuff that's been coming out. Does anyone remember what the plot of marbles or the eternals was like two final points and then i'm going to move to a question for hard the hardcore investors listening if you made it through that conversation on on disney and star wars i want to make sure we leave you with a little treat something to take home with you so my two final points are one the international box office is less reliable for big tentpole movies and then the second is is that deadpool and wolverine was the only big marvel movie this

year i think both of those those facts are important all right i had to say that now we're going to go to a mailbag question that you know at the end of the year i want to get to an advanced investing concept because in the beginning of the year we're going to get some more general stuff as we have newer investors welcomed to the show so here's the question from cowl fool that i thought would be good for you jim i'm thinking about using more options to generate income on the stocks that i own this is selling a covered call what should i know before doing this and is there an advantage to doing this instead of just owning dividend paying stocks and doing a little less work? Well, the advantage is you can increase the income on the underlying

stock by selling calls against it. The disadvantage, and I can go in a number of different directions here. Well, number one, first off, two, companies that pay dividends. So if you're going to sell a covered call on a dividend-paying stock, dividends take down the price of the calls. So when you're selling it, you're arguably getting paid less than you should be, you have to get you a finance paper to show you how that works. But let's just say, selling cover calls on big dividend payers is going to pay you less. The problem that CalFool may be stepping in here is, because they specifically say, generate income on stocks I own. Well, what is your cost basis in those stocks that you own? What account

are those stocks held in? If they're held in a tax-sheltered account, this is probably not that big of a deal. If they are held in a non-tax-sheltered account, let's say, I'm going to pick on Starbucks just because it's the one that comes to mind first. I think it's about $85 or $90 a share. If your cost basis is $10 a share and you, say, get paid $2 or $3 to sell a three-month call option against your shares, that money is yours to keep. You'd sell one call option for every 100 shares you own. But if the stock runs up, if the stock goes from $85 where it is today, $87 where it is today, let's say it runs to $120 by the end of the three months because Brian Niccol is perceived to be turning

the company around. If you sold, say, the $90 call option to generate income today, you are going to be scrambling to either buy those calls back and they're going to be a a lot more expensive and it's going to largely eliminate any profitability you could have had. Or you're going to say goodbye to your shares that maybe you don't want to say goodbye to, and you'll have a big tax bill. So, always think about, am I doing this in a taxable account? If not, it's probably fine. You might end up selling something you don't want to sell too quickly, but at least there's no major tax implication. If it's in a taxable account, you might want to to rethink this. This is why when I was running Motley Fool Options, my good friend Jim Mueller

is running Motley Fool Options today. He will say the same thing. We've always preferred what's called the buy right. If you want covered calls and you're aiming for 1% a month, which is reasonably you can do it, maybe a little bit better actually, what you would do is you would buy shares in lots of 100 and then you would sell a call, one call contract against the shares you bought. That way, you're deliberately targeting income. Don't do it in an account where you already own shares. We could lose those ones, taxes again. But just be careful and think about what you're doing. Think about the tax implications. And then as well, be sure you're okay waving goodbye to those shares. Because at some point, you will see a stock run up,

you will see a call exercised against you. And then the final potential indignity is always be aware if you are going to sell covered calls on a dividend-paying company, be aware once the stock price goes above the strike price on the call, and if we're heading towards the next dividend date, you might lose your shares early. And there's some formulas you need to worry about, but you might lose your shares early because the counterpart of your option might try to steal your dividend from you. So just be aware and think through the implications of what you're doing here. It can be a fine. I do cover calls all the time. Just be aware. Good place to end it. Gets a run long today. No B segment. Jim Gillies, appreciate you being here. Have a good holiday

week, and I think I'll see you in the new year. Thanks, Ricky. You too. 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 external buyer-sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.