Motley Fool Hidden Gems Investing - Guidance Trumps Results...Again

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Starting point is 00:00:27 Because we have your number. Chris Hill. We've got the latest examples of guidance outweighing results. Motley Fool Money starts now. I'm Chris Hill. Joining me in studio today, Motley Fool Senior Analyst Bill Barker. Thanks for being here. Bill Barker. for having me. We're going to talk about two stocks that I own, and my heavy sigh should indicate how those stocks are doing today. We're going to start with PayPal. First quarter profits came in higher than expected. And absolutely nobody cares, because guidance

Starting point is 00:01:12 for the current quarter was apparently not what Wall Street wanted to hear. And shares of PayPal are not only down around 12%, they are within pennies of a five-year low. Yeah. Well, it's a growth stock. It's one that's visited a lot of interesting places on the chart. And I guess, as a shareholder, the level of interestingness of today's visited place is not the one you wanted to visit. Sorry about that. That's OK. I am wondering, however, if you think this move is warranted, if you think this sell-off is warranted. I will just point to one part of the business, which is the question of who the CEO is. Dan Shulman, CEO, announced in early February that he was going to step down.

Starting point is 00:02:04 They were going to have a new CEO in place by the end of the year. He said on the call, the board has formed a subcommittee and we're working with a leading search firm. which, I don't know, since they announced this in early February, I would assume that by late February, they were already doing both of those things. This is one part of the business. Put aside the numbers. Put aside what's happening with the gross margins and everything else. Maybe speed up the CEO search. Well, it takes a while to find top men to put on that kind of search, doesn't it? Yeah. Obviously, you want, as we all learned in Indiana Jones, you always want top men involved.

Starting point is 00:02:48 But seriously, you don't want to rush the CEO search. But give me something other than a boilerplate statement of a process that really should have started three months ago. Sure. But they've got until the end of the year. There's seven, eight more months. That's a deadline that's far enough out in the future that you would like to think that if it's an attractive business, which you've found it to be over the years, that they'll find attractive candidates. And it is also one which faces some challenges, not insurmountable challenges, but the growth equation here, as we've touched upon the disappointing reaction from the market today as a function of this quarter's revenues expected to grow basically

Starting point is 00:03:37 7%, 7.5%, which is a little bit higher than inflation. Therefore, it is hard to just have growth stock, capital G, capital S, as the title for this. I think that it's traveled in that realm since the beginning of its time and is used to a 30, 40 kind of PE that you would associate with a growth stock. Now, it seems to be growing, oh, about as much as the economy. Keeping in mind the shifting of expectations for investors, because it sounds like what you're saying is, hey, this isn't the growth stock it used to be. It's not to say that there isn't a business here. It's that you can't buy the stock at close to a five-year low with the expectation that it's going to

Starting point is 00:04:32 be a growth stock. You need to adjust your expectations accordingly. Maybe. There are stocks that are neither growth nor value, and then who's buying them? Because a lot of investors associate themselves with one or the other. It's certainly not trading at a value investors kind of multiple yet. It is sub-20, I guess, for the guidance for the full year. So, if you take the non-GAAP adjusted earnings, it's trading a little lower than that. But it's not going to look interesting yet to a true value investor. It's not going to look interesting right this second to a growth investor. And it's got more competition all the time. So, it ends up, today, being sort of stuck in the middle. It's trading

Starting point is 00:05:25 about a market multiple, a little bit higher than a market multiple. It is growing a little bit faster than a standard company at the moment. Yeah, it really seems, you take all that into account, you layer in the lack of a CEO, or the lack of a long-term CEO. And it seems like one that, if this is a stock on your watch list, probably just leave it there for the time being, at least until they roll out whoever the new CEO is going to be, presumably in the second half of this year. Yeah. That's, I think, how you might approach it. If you're just looking to be on the sidelines, it is buying back some of its stock. That's one of the things that it promotes in this

Starting point is 00:06:10 quarterly report, expected to reach $4 billion in share repurchases this year. I don't know, what is it, a $75 billion market cap, something like that. So, that's more than 4%, 5%, 6% of the total shares that it's buying back. So, it's expressing confidence in the long-term health of the business. I think that there is reason to continue to be enthusiastic about this business, moving beyond cash. Although, cash is making a little bit of a comeback. Yeah, in the war on cash. Cash is hanging in. It seemed like cash was out of it. Cash was on the ropes. Yeah. Do you find yourself using cash any more these days than previously?

Starting point is 00:06:58 I keep cash on me. I know. I didn't. But now, with the option of paying for cash and not facing the terrifying moment when the iPad is turned around and you've got the suggested 28% tip. Would you like to 28% or perhaps would you feel a little generous today and go beyond that? Or you could pay cash for something. Would you hand me that thing and you hand them cash and then you take some of that equation away? Yeah, the Journal had a story earlier this week about the rise of digital tipping, or at least the rise of digital tipping opportunities being presented to consumers, including in places where previously tipping wasn't really factored in.

Starting point is 00:07:46 Well, I had not realized that there was occasionally the opportunity to tip for self-service. Yes. Can you do that and then get the tip? That's a killer app. That really would be. Like a self-rewards program. Right. I got this thing. I brought it here. I've scanned it. Now, I would like 20% from somebody other than myself. Let's start with 5%. We'll work our way up. We're going to move on to Under Armour. Similar story. Fourth quarter profits and revenue were higher than expected. But as is the case with PayPal, guidance has shares of

Starting point is 00:08:24 Under Armour down around 5%. In the case of this business, it is full-year guidance. CEO Stephanie Lenartz says that Under Armour is planning to grow their women's apparel business. That's an opportunity if they can pull it off. But by recent history, I would basically say, the past eight years or so would indicate that it's an open question as to whether or not Under Armour can pull this off. Yeah. Did she introduce that with Stop Me If You've Heard This One Before? No, but she could have. She could have. She could have. I don't know. Under Armour doesn't have a successful record in trying to be all things to all people, does it? It had a successful record as being

Starting point is 00:09:14 a performance gear thing really aimed at men much more than women. That was a big hole The fashion part was a big hole. They've attempted in the last few years to fill those holes. And the attempts have been poor so far. And this is a company which, I would say, specializes in poor capital allocation decisions. It's raised another one in its press release today, saying that it has completed its share repurchase. I think it's bought 35 million shares in the last year for $425 million. Do a little quick calculation on that.

Starting point is 00:09:57 That's $12 per share that they've bought back. That's a lot of capital. Stock's at whatever it is, 788 today. It's bought back a lot of shares at 50% more than the market values them today. So, that's yet another poor capital allocation decision by the company. It really does seem like, and you could have made the case for what I'm about to say at any point over the last few years, but it really seems like as a business now, Under Armour is probably a more attractive target for activist investors than it has been in the past. This is a $3.5 billion

Starting point is 00:10:36 dollar company. They do have some level of brand equity. They do, as I've said many times before, they have nailed one of, if not the toughest parts of this business, which is they make good stuff. Their products are good. So, there's an opportunity there. But with the stock, as you said, around $70 a share. I'm not going to be surprised if, at some point in 2023, the story of the day is, such-and-such activist investor has taken a 6% stake in this business. Yeah, I wonder if they'd be better off under a larger umbrella, where they could just concentrate on being one thing, rather than trying to be for all ages and all performance levels and whether you're really wearing the brand to have a look or to perform.

Starting point is 00:11:33 I can remember back in the day, a decade ago or something, when I was on here, some of us were aware, this was the uniform for boys in school. Yes. You were of a certain age, 10, 11, 12, whatever it was, that's what your kid was wearing to school, and all of his friends, if you saw them at your house, they were all wearing Under Armour. They've grown up. They're no longer in school. They're buying this stuff for themselves. And apparently, they're buying less of it. Really? They're buying it for themselves? I've got to find different kids, if that's a thing that can happen. Yeah, it's not the uniform for all ages. Maybe the 11- and 12-year-olds

Starting point is 00:12:20 are still going into school every day and Under Armour every day. I don't know. But they're not growing sales at a rate that would indicate that they've held on to all of their past segments of the market. It seems like this is a particularly critical year for this business. To Lennartz's comments, if they're not able to get any meaningful traction in terms of female customers, if they're not able to do a better job with capital allocation, then I think it makes it all the more likely that the board starts thinking in terms of either, we're going to allow an activist to come in here and try and shake things up, or we're going to explore strategic alternatives.

Starting point is 00:13:12 Yeah, you'd like to see that as a shareholder. I don't know where the power on the board lies these days. Kevin Plank doesn't have the traction that he used to have, but he's still there, still executive chairman. You just hope they stay out of legal trouble for a couple of years. Wouldn't that be nice? That would be nice. I'm sure the shareholders and the board would all like that. But that's been part of the story here, is a lot of lawsuits, SEC actions on the accounting, which was part of the story a couple of years ago, the UCLA business, where they had to pay $50 million, $60 million to UCLA. Yeah, just make some stuff, find whoever's going

Starting point is 00:13:59 to buy it, and give an honest story about your accounting. And as you said, they make good stuff, and they've got a brand, and there's value here. They've just got to run what they do have better, not keep chasing things like MyFitnessApp or whatever it is, share buybacks, overly expensive deals with colleges that they don't follow through on, the deals with some of the athletes that they then restructure their payments with because they're running out of the cash, but spending the cash on their shares. What is this thing, really? We're going to leave it with that question. Bill Barker, always good talking to you. Thanks for being here. Thank you.

Starting point is 00:14:49 If paying for college is anywhere in your future, you might have some questions about how to actually pay for it. Alison Southwick and Robert Brokamp caught up with Megan Brinsfield from Motley Fool Wealth Management to talk about some tips on paying for tuition. One of the biggest purchases a family may ever make is a college education. According to the college board, the average annual total costs, including tuition, room, and board of attending college full-time during the 2022-23 academic year ranged from $28,000 to $58,000, depending on whether the school is public, private, in-state, or out. Throw in some inflation and multiply those figures by four years, and you're looking at a total cost of $100,000

Starting point is 00:15:37 to $200,000 or more for a bachelor's degree. Here to help us discuss how families can plan for such a big expense is Megan Brinsfield, Director of Financial Planning at Motley Fool Wealth Management. Welcome back, Megan. Well, thank you. As always, I have brought along with me my disclaimers, and I will proceed with their procession now. So, I just want to remind everyone that everything stated here today represents my own thoughts, not necessarily those of Motley Fool Wealth Management or its affiliates. All information is for informational purposes only and should not be considered investment advice or recommendations. Any examples are for illustrative purposes only and not investment advice. Each individual has

Starting point is 00:16:22 unique investment needs and should do their own research or consult with a wealth advisor prior to making any financial decisions. Investing involves risk, including loss of initial investment. Motley Fool Wealth Management, a sister company of The Motley Fool, operates independently from The Motley Fool. All right, so if our listeners are still with us, first up, we have Midge Spidgerson. She's 57 years old and a DIY investor looking to retire in the next few years, after 35 years of a career. She has three kids, including a set of twins. Ideally, when the twins are through with college, she can take a lower-paying job and still maintain her lifestyle. Megan, what's your guidance for Midge Smidgerson?

Starting point is 00:17:06 Well, I think Midge has really gotten through the hardest part of putting three kids through college, which is a pretty heavy budget burden. So, in kind of looking at tailing off those expenses, Midge can really refocus on her own retirement needs and maybe supercharge that retirement because often kids graduating from college is occurring at peak earning years for most individuals. So, it's really an opportunity to shift focus. I'll highlight a couple of things that some folks may not be aware of. First of all, you used to get a break on your financial aid when you had multiple people going to college at the same time, but that is going to change starting next year, which will be a tough thing for people like Midge. I can also tell you that

Starting point is 00:17:55 by experience, when your kids leave home, your household expenses drop significantly. That does not necessarily offset the cost of going to college, but it somewhat does. Even though your kids are going in college and you have to pay the tuition and room and board and everything, you'll see things like your grocery budget drop, or if you're paying a lot for some sports events or things like that, those expenses will go away, which will be helpful. All right. Our next scenario is brought to us from Mr. Shaquille Oatmeal. I don't know why that cracks me up still. I saw it on the internet. I can't take credit for Mr. Shaquille Oatmeal. All right. Mr. Shaquille Oatmeal is counting on his children

Starting point is 00:18:33 to get many scholarships for college. He's 56 years old with a kid ready to go to college in the fall, and he saved up $70,000 in fully vested 529 accounts. However, Mr. Oatmeal's advisor told him to keep two years of college cost in safer investments. But then his son was awarded a $4,000 a year scholarship, and maybe even more scholarships are on the way. So how should Mr. Shaquille Oatmeal consider these new windfalls? Well, I think that certainly impacts the underlying investment allocation of these college savings. We always want to focus on keeping near-term needs safe. So, anywhere from one up to three years of those anticipated college costs being kept in safer investments like money market or short-term bond type vehicles. So, I think the

Starting point is 00:19:26 advisor in this case was really pointing them in the right direction, but the target amount of that adjustment would probably need to change to account for those scholarships because that's going to have a direct offset to the near-term need and allow some of that money to grow more long-term. One of the great things about the 529 plans is that if your student does get a scholarship, whatever that scholarship amount becomes eligible to distribute without any penalty. So, normally, those 529 funds have to be used for qualified education expenses in order to get that tax break. But the scholarship does kind of give you wiggle room in that. Yeah. So, it bypasses the penalty. You still have to pay taxes. But the other great thing

Starting point is 00:20:16 about the 529 is, any money that you don't need or the student doesn't need can be transferred to qualifying relatives. So, other siblings, cousins, aunts and uncles, even to yourself if you plan to go back to school. And there's no limit on when the money could be withdrawn. So, if you have money in a 529 that your kids don't need, you could transfer it to yourself, let it grow through the years, and then use it eventually for your grandchildren, assuming you are blessed to have those folks. And by the time you have grandkids, that account could be pretty big. Yeah. I think the other final thing we might want to note is just in recent years, the permitted uses of 529 funds have really expanded. Most recently with some rules about actually

Starting point is 00:21:02 transitioning those funds, any unused funds in a 529 to Roth IRA savings, that is kind of hot off the presses kind of stuff. Prior to that, but still pretty recent, is the ability to use 529 plans for student loans, to pay down your student loans or even pay for private tuition costs of primary school. The use of 529 funds is getting more and more flexible and potentially more advantageous to actually build up an excess in those accounts. All right. And our final scenario is about one Adele Dazeem. She's 64 years old looking to retire in two to three years. However, her son has other plans because he wants to do summer school and stay for a fifth year of college to graduate with a master's. So how does that

Starting point is 00:21:52 change things for our dear Adele Dazeem who was just about to retire? Well, I think one thing that Adele needs to consider is, does he or she actually want to support the entire cost of that extended school experience for their son? And sometimes parents are very committed in supporting education goals, and so they're willing to make adjustments. And I know in this hypothetical case, the client was considering, well, maybe I stay in my house a little longer, maybe I work an extra year or two to help support this endeavor and really see their son through that master's program. But master's degrees do tend to be more expensive than undergraduate degrees on a per-year basis. And so, that can be a very significant expense and could potentially

Starting point is 00:22:50 delay someone's retirement if they were committed to that financial outflow. Yeah, I agree. It's a classic financial planning principle, and that is, you have to take care of your own retirement before you worry about your kid's college, because your kids can always get financial aid, but there's no financial aid for retirement. I think springing for an undergraduate degree is awfully helpful already. Springing for the graduate degree, if it will imperil your retirement plans, might be something that you would reconsider. Bro gives you permission to say no. That's right. Exactly. Bro, do you have any final parting advice, perhaps, where people can go to learn more

Starting point is 00:23:31 if they're trying to save up for college? Yeah, I'll just give some parting advice. First of all, the best place on the internet to get information about saving for college is savingforcollege.com. Lots of good information about 529s, both the savings plan and the prepaid plan, as well as the Coverdell education savings account, which I think is an underappreciated college savings account. And they also rate 529 plans. Each state has their own plan, but you don't have to stick with your state's plan. There might be a better plan for you. And if you're looking for a good book, I recommend Ron Lieber's book. Ron Lieber is a columnist for The New York Times. He wrote a good book called The Price You Pay for College.

Starting point is 00:24:09 Megan, thanks for joining us. Thank you for having me. I really appreciate it. Chris Hill. As always, people on the program may have interest 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 Chris Hill, thanks for listening. We'll see you tomorrow.

Motley Fool Hidden Gems Investing - Guidance Trumps Results...Again

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