Motley Fool Hidden Gems Investing - How to Be Less Distracted (as an investor)

Episode Date: August 1, 2022

Two stocks we recently covered on the show are back in the news. (0:22) Jason Moser discusses: - Outset Medical shares rising 20% on its announcement regarding shipments - How the FDA's thinking and Outset Medical's are aligned - Pepsi taking a $550 million stake in energy drink maker Celsius Holdings (14:08) Ricky Mulvey talks with Asit Sharma about becoming less distracted as an investor, and an insurance company with a very clear focus. Stocks mentioned: OM, CELH, KO, PEP, GOOG, GOOGL, SNAP, KNSL, MSTR Host: Chris Hill Guests: Jason Moser, Asit Sharma Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. If you're feeling distracted as an investor, you're not alone. We're going to see if we can help with that. Motley Fool Money starts now. I'm Chris Hill and I'm joined by Motley Fool Senior Analyst, Jason Moser. Happy August. Chris Hillman. Man, August already. Happy August indeed. It is moving by fast, isn't it? Chris Hillman. It certainly is. We are actually going to revisit a couple of stocks that have been talked about on this show recently. I want to start with Outset Medical because this was a stock on your radar a couple of weeks ago on the radio show. For those unfamiliar, year. What is the 22nd version of what Outset Medical does?

Outset Medical is in the business of dialysis. They have a machine that they've developed called the Tableau. It's a dialysis console. Ultimately, dialysis historically has been seen as an expensive, cumbersome, tough to schedule process. There's a lot to and it's not terribly convenient, but it is a necessary treatment for a large population of individuals out there today. So, Outset set out to develop a dialysis machine that ultimately utilizes wireless technology in order to help make the process easier, more affordable and more convenient. You don't necessarily have to go to a hospital or a clinic, there are in-home uses. And so, that is what Outset does.

So, earlier this spring, the FDA came out, basically said, we're going to need some tighter restrictions on what Outset is doing. The stock got cut in half. And in mid-July on the radio show, you made it your radar stock because, and I'm paraphrasing, but you said at the time, Jason, that what the FDA was pushing for was actually very much in line with what Outset Medical was trying to accomplish. Do I have that right? Yeah, generally speaking, yes. That's a good way to look at it. It's worth mentioning that Outset pursues two ultimate markets. They have the acute market, which is ultimately your hospital settings, and then they also pursue the home market. That also includes clinics

where dialysis is performed. But ultimately, one of Outset's claims to fame is here, they are the first hemodialysis system on the market with FDA clearance for two-way wireless data transmission. This Tableau console is something that is not necessarily new to the market. already FDA cleared, but what the FDA was ultimately looking for was a little bit more rigor on some enhancement they made to the system as it pertains to the in-home use. As you can imagine, if you're bringing something like dialysis into the home, you need to make it as user-friendly as possible and you need to make it almost mistake-free. You have to have every opportunity to be able to get this thing right. They've done a really good job

of that over time and they've made some recent enhancements to the system and the software that runs the system. Ultimately, the FDA was looking for just some added clarity, some added rigor. What Outset did back in June, June 13th, they suspended the in-home shipments of the device in order to accommodate what the FDA was ultimately looking for. To me, it felt like this was just a matter of when they would resume shipments as opposed to if because of the FDA clearance that they've already achieved, that they've already been able to accommodate. Management was very transparent back in June when this happened. This was not something where the FDA laid the hammer down and said, you must suspend shipments.

It was more or less a mutual understanding. The transparency there on the call, I felt, was another sign that management was taking this very seriously and just wanted to make sure they had all of their ducks in a row. The acute demand remains very strong. Frankly, the in-home demand remains very strong as well, even during this brief hiatus, this brief suspension of shipments. There have been zero safety issues with the Tableau system. This is really, by all accounts, a very successful rollout. To me, it just struck me as something that management was on top of. Because they have the status as the first FDA clearance for a two-way wireless data transmission, it struck me that perhaps this could be one

of those things where the additional FDA rigor could help separate them even more with any potential competition. When you look at the market opportunities, they're pursuing $2.5 billion in the acute market, but about $9 billion market opportunity in-home market there. There's a lot of opportunity on the table for such a small business here that's just doing a few hundred million dollars in revenue still today. We got the news today, thankfully, that the in-home shipments have resumed. The additional rigor, the FDA felt met the standards of what they were looking for. It's back to business as usual for Outset, which is very encouraging, of course. The stock is up more than 20% this morning.

This is a company that has been public for less than two years. The market cap, as you said, it's a small company. The market cap is just under $1 billion. How much of an acquisition target do you think this company is? Let me put it another way. As a shareholder, is that something that concerns you at all? Because you're clearly a fan of the business, and I'm sure you'd like to see it run on its own for a while. How much is that in the back of your mind? Well, it definitely resides in the back of my mind, for sure. It's something I think about constantly. We see a lot with these medical device companies that they can be very attractive takeover targets for larger

players in the space. When you look at all sorts of companies out there that do all sorts of things in the medtech space, this is still, as you mentioned, a very small company. It would be a very easy acquisition if somebody decided they wanted to come in there and take it over. I do hope, as you mentioned, that they have an opportunity to let things go on their own because there is a nice razor and blade model here at Play where that console is the gateway, but then the additional services and the software that come from that, very high margin, very specific to that Tableau device. It presents a very attractive opportunity for investors for sure. But by the same token, you have to feel that larger players in the

healthcare space are looking at this company and thinking, wow, they're on to something pretty special. It's a big opportunity in a space that really isn't going away. There's no substitute for dialysis ultimately. That's what you have to really think of is that it's a necessary treatment for such a large population out there today, and there's not really another option. It feels like they're onto something here, and I would imagine there are a lot of larger companies in the healthcare space keeping a very close eye on them. We're going to stick with the theme of potential acquisitions because two weeks ago, Ricky Mulvey talked with Rick Munarriz about Celsius Holdings, which is a small-cap energy

drink maker. One of the questions he put to Munarriz was about whether Celsius could be an acquisition target for Coke or Pepsi, and I'll paraphrase what Rick said, which was basically, no, it's not Coke, but it might be Pepsi. Pepsi is a more likely candidate to take an interest in Celsius. That was in mid-July. Cut to this morning's announcement that Pepsi has made a $550 million investment in Celsius. It represents about 8.5% of the company. And I don't want to ascribe the ability to see the future for our friend Rick Munarriz, but he got this one right. And this kind of makes sense when you consider that energy drinks are one of the fastest-growing

parts of the beverage industry. Yeah, they really are. I mean, you've seen a lot of growth in that industry over the last several years. I mean, Monster Beverage, of course, I think a lot of people are very familiar with that name. Celsius being, I think, they hold the No. 4 spot currently in the energy drink space, but they're growing very quickly. I think that's part of the attraction there for Pepsi in this partnership that they've forged today. It's a great win, I think, for Celsius because it really plays into that benefit that we speak of when we talk about companies like Coca-Cola or Pepsi. It's that distribution advantage. It's the immediate opportunity

to plug into such a large network and get your product out almost everywhere instantly. That's something that's going to happen here with Celsius, which is obviously a very good thing. Pepsi, a nicely diversified business, when you look at the beverage side of the business, that represents about 30% of the company's overall revenue. The North American beverage business was about $25 billion over the last 12 months, and that was about 30% of the overall business. Now, Now, when you compare that to the actual size of Celsius, you've got Celsius trailing 12-month revenue of $400 million, and analyst estimates pegging at around $600 million for this full year. So, in the context of $25 billion beverage business for Pepsi, it's not that big of a deal

for them today. In other words, it's a pretty easy, sensible bet to make. I think the only The only real question or eye-catching part of this is just the valuation that Celsius gets because it's not the most profitable business in the world. It's still very young, I guess is what I mean. It's not to say that it's a challenge business, but the forecast of $600 million in annual revenue for the full year, and that translates ultimately to expectations for about $0.45 in earnings per share. You look at the share price today, and that puts shares at 200-plus times earnings. It's understandable in the sense that the business is growing very fast. You can't take that away from them. When you look at this company's top

line, it continues to grow at really impressive rates. I think that's because they've offered up a little bit of a differentiated product as it pertains to energy drinks. Whether that ultimately works, I just don't know. The energy drink space is an interesting one as we move away from sodas and towards alternative fizzy beverages. But clearly, they are onto something given that growth rate. Yeah, it's not a cheap stock. You can slice it a couple of different ways. This is not a cheap stock. But it does seem like this is a movie we've seen before, particularly with beverage companies. It doesn't mean that they're immune. We saw recently Coca-Cola, which over the past decade had taken an investment

in Honest Tea, eventually acquired it. Then earlier this year announced, you know what, we're just shutting the entire thing down. We feel like we have more promising tea options in our portfolio. But it wouldn't be a shock if a year or two from now we're talking about Pepsi just buying this company outright. Yeah. That seems like it could be a very natural progression after what to me seems like a very logical, sensible first step in the investment that they've made today. Again, placing a small bet, so to speak, on idea with a lot of potential. A company with a large market cap, but still relatively small revenue. But again, that revenue growing very quickly. I think it really just boils down to,

is this differentiated enough to where it attracts the masses? Is it going to be able to nurture that same brand identity that other energy drinks in the space have been able to to forge over the last several years. I guess that just remains to be seen. It's energy drinks, but maybe a little bit healthier for you. That sounds good on paper, but I think it really just ultimately has to translate to folks buying the stuff. Good news for them, it seems like a lot of folks are buying the stuff. Jason Moser, great talking to you. Thanks for being here. Thank you. Charlie Munger, the Vice Chairman of Berkshire Hathaway once said, I did not succeed in life

by intelligence, I succeeded because I have a long attention span. Ricky Mulvey caught up with Asit Sharma to talk about how you can become a less distracted investor. They talked about one insurance company with a very sharp focus. Today we're talking mindfulness and investing and hopefully finding a couple of companies with some focus. Joining us now is Senior Analyst and Contributing Learner to The Motley Fool, Asit Sharma. Asit, good to see you. Asit Sharma. Ricky, always good to see you, man. I've been thinking a lot about just distraction and focus lately in part because I love being distracted. We're working at home, but I also

know that being distracted can make you worse at investing. I've been reading this book called Stolen Focus by Johan Hari. It's a great book, highly recommend it. It revolves around this thesis that our attentions were hijacked by tech companies and these distractions often involve terrible outcomes. Your attention is valuable real estate. Asit, you work on the virtual revolution. There are billions of these interruptions, distractions every day. Tristan Harris, when he was at Google in 2013, Google was then sending out 11 billion interruptions per day. You have to think it's more now. I guess to start, in the virtual revolution, does that just mean our phones are going to ding a whole lot more? Are we going to get even more distraction moving

forward. Yeah. So, Ricky, I work on a service, indeed, that tries to identify new economy opportunities. And you're identifying a trade-off to some of this great tech in that companies to make money need our attention, and they're not shy about grabbing that attention. They're not shy about exploiting the many addictions that we have, those dopamine hits, to the pings, to the notifications, that little rush that we get when we check our mobile devices. Often it's tied to social media. Sometimes it could be an intrusive distraction we forgot about, which you and I will talk about in a moment. But sure, this is something that we are contending with, but it's not absolutely a modern problem. If you go back centuries, great writers, essayists,

novelist poets from Montaigne on have talked about this problem. There's a really famous poem by Samuel Taylor Coleridge called Kublai Khan. Coleridge famously was interrupted in a flow state. He was composing this amazing poem, and it is quite amazing if you get a chance to read it, by a visitor, an unnamed person from Porlock, who came in and interrupted him right as he was writing down this whole poem from memory that he had composed in a dream state, Ricky, and he complained about this. Now, maybe he just had writer's block and didn't know how to continue the poem. There's a theory about that. But this is not a new problem. The difference is today that either well-meaning or ill-intentioned companies

know how to press our buttons that pull us off that focus we so want to enjoy. Yeah, I think it's been hypercharged, to say the least. There are times I look at my phone now, and you can tell when I'm like, oh, I guess this tech platform needs a little bit more engagement. You have to have had that experience. Yeah, for sure. For me, I'll give my quick story. I, during the pandemic, had downloaded the app from a smallish restaurant chain, pretty good local joint, just for ease of use, just to be able to punch in an order. Two weeks later, it's the middle of the workday, I'm in a flow state, I get this buzz in my pocket, I pull it out, we haven't seen you for a while.

Come on, it's been two weeks, I'm a new customer. Now, of course, the moral of this story is, I should have muted that upon installing the app because we know the ways to reduce these. That's my story. What about you? What, what's an alert or interruption that made you think, gosh, does this really count? Yeah. For me, it's at this point, it's Snapchat, which I use less and less. Like I'll put it this way. I am not adding new people on Snapchat in this part of my journey on that platform, but it's, it's getting, it's still trying to pull me back and it'll tell me like, Hey, this person that you had a class with in high school that you haven't communicated with in 10 years has made a story. And we thought that

that needed to be on your lock screen with that alert. And so for me, that's where I've been, I've been considering, haven't done it yet. Cause I still like talking to my friends on there, but I was, I've been thinking, I think I need to turn off the push notifications for this, uh, for this social media app. I will say though, have you been back to the restaurant after it guilt tripped you? You, you left, you left the story kind of hanging. Yeah. Much like your poet. Look, I like everyone else in modern life. I have a semi-addictive personality. So nonetheless, I went back. Okay. If you've made it through this much of the B-segment, thank you for hanging out with us through poetry distraction. Let's think about some companies

that have a clear focus, because I think it is very easy. You see companies getting distracted with sometimes overpaying for acquisitions, different corporate strategies, whatever you want to call it. When you think of a company with a very clear focus, what do you think of? because I'll give you mine, but it's not necessarily for the right reasons. So the company that comes to my mind, Ricky, is Kinsale Capital. It's a smallish insurance company we have in many portfolios at The Motley Fool. It plies its trade in something called the excess and surplus market. This is like specialized insurance. Think of a tattoo parlor on the edge of town, in a town that's seen better economic days. Who's going to insure that puppy? Not the

big insurers who are focused on what's called the big admitted market. It takes a certain amount of focus to be able to underwrite this kind of insurance profitably. And Kinsale is very, very good at this. They have subject matter experts that focus on different lines. They don't try to expand into other parts of the insurance market, even though this is one of the most fragmented markets in the world, and it's so tempting to add on revenue. Look, let's just get into X-Line. We can increase revenue by 10% next year. They've always taken the harder way, which has turned out to be very profitable for this company. It's helped them grow sustainably. They go about in their part of the insurance world using data analytics,

having great loss ratios, so they underwrite risk in a sustainable fashion. They keep control of their operating expenses, they're closely held, all the kinds of things you like to see and they're growing at a really fast rate, 36% compounded annual growth rate over the last three years. This is what Focus can do for you, if only we could bring ourselves to Focus. What niche are you talking about when you say they have a specialty niche in insurance underrating? Their part of the market has a perceived higher risk. This ENS market or excess and surplus market, it really is a very small part of the vast trillion-plus dollar industry

that is global insurance. When you're focusing on a market that's only in, let's say, the tens of billions, it takes a certain amount of discipline to keep within that market. You could go laterally into a part of the market that might be worth hundreds of billions for you, if you got into, let's say, life insurance. But Kinsale focuses on specialty risk underwriting. And I think this is a model that many other companies would do well to follow. So, like scuba diving, tattoos, cigarettes, dirt bikes, risky activities. Yes. In some ways, that's true. Mostly focused on corporate activities. But I think you've described the picture pretty well. For me, my company with a lot of focus

right now is for the wrong reasons, and that would be MicroStrategy. CEO Michael Saylor has made extraordinarily clear that he would like to use his company to buy more Bitcoin. Focused for the wrong reasons, but hey, there is a focus there, so I had to give him a shout out. Not just companies, though, as we talk about focus and distraction, what are some practices you really like that has helped make you more mindful, whether it's just in your life or as an investor? My colleagues, Tim Byers, Brian Stoffel, and myself have a show for Motley Fool subscribers every week. It's the Mindset Hour. Now it's changing to the Mindset Half Hour. And we're always preaching to put distance between stimulus and response in our mindset sessions. So this is

more about emotions. When a down market, a bad market is driving you to frustration and driving you to angst. And one day you just open up your laptop and you start hitting sell. We always say, look, take a pause between that stimulus and your action. One example of this is maybe imposing a rule that I'm not going to sell or buy any stocks until I've had one Saturday between the urge. I'll sit down with a cup of coffee for an hour. I'll think through my plan. I'll do some research and then I'll make a decision. I think this piece of advice that we're always trying to push out also works for focus and avoiding distraction. If we could all just celebrate the pause, find some time that we can block off everything, not just digital and

technologically oriented distractions, but analog ones too. Even friends, loved ones, just have some time alone in a space where we're not going to be bothered. I think this could be a good strategy for those who are suffering from too much lack of focus and too much distraction. Before I turn my notifications off and go out for a walk, what are some distractions you're welcoming right now? Yeah, briefly for me, although I could name probably six or seven, and I'm not good at any of them, I think reading novels and writing in my journals, because both those activities stretch time out for me.

I sort of lose track of time. I get in that flow state and then I feel better for it afterward. Instead of time getting compressed, it expands a little bit. How about you, Ricky? Healthy distraction. Well, not lately, but I pick up basketball. That for me is when I can enter a flow state of not really worrying about the world around me, but just I have a ball and I have an enemy and it's great. And then let's just say the less healthy one. There's a phenomenal show on Hulu right now called The Bear, about this restaurant environment. It brought me back to the feeling I had when I watched The Sopranos for the first time, of that very real, visceral slice of life story.

I absolutely love it. Man, I have to check that out. All right. Asit, see you soon. Thanks for joining us. Thanks so much, Ricky. This was a lot of fun. 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 Chris Hill, thanks for listening. We'll see you tomorrow.