Motley Fool Hidden Gems Investing - How To Tune Out Market Noise

Episode Date: March 24, 2025

Tariffs and tech bubbles and uncertainty, oh my! (00:21) Asit Sharma and Mary Long discuss: - Companies that could be celebrating on April 2. - What’s to blame for last week’s market “freakout��� - 23andme’s bankruptcy filing Then, (17:50), Fool contributor Travis Hoium joins Ricky Mulvey for a look at MGM Resorts and the company’s bet on online sportsbooks. Start your day with The Fool's free daily market email newsletter. Subscribe at www.fool.com/breakfastnews How do you tune out market noise? Tell us by writing into [e-mail] ! Companies discussed: TSLA, MSFT, AMZN, NVDA, META, GOOG, AAPL, ME, MGM Host: Mary Long Guests: Asit Sharma, Ricky Mulvey, Travis Hoium Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

The tariff situation changes. Again, maybe. You're listening to Motley Fool Money. I'm Mary Long, joined on this Monday morning with Mr. Asit Sharma. Asit, thanks for being here. Good to see you. Mary, thank you for allowing me to come back. Of course. We'll have you come back many more times in the future. What did you do last time that I'm unaware of? Let's not rehash old history. Let's proceed. Let's move on to the future. Another day, we got another tariff-related development to kick off the week. We're now a little bit more than a week out from what's been dubbed

Liberation Day, aka April 2nd. That's when the U.S. intends to impose reciprocal tariffs on a set group of countries. The idea of imposing these tariffs at all, plus this continued back and forth with Canada and Mexico in particular, has set markets into a tailspin of uncertainty these past few weeks. The market's general trajectory has been downward since these tariffs were first announced. We got some news that I want to hit about the potential narrowing of these tariffs ahead of April 2nd, aka Liberation Day. But before we get to that, Liberation Day has quite the ring to it. Are there any companies that are going to be celebrating this April 2nd when it hits? Mary, maybe the steel producers. I thought I saw this morning

that UBS had upgraded steel producers. And I sort of get that because these are companies that have been up against much lower cost competition in raw commodities. Steel is something that's subsidized by a lot of economies. So maybe this helps that industry. But look, that has some follow-on effects on things like roofing companies because that means their stuff is getting more expensive. Alternatives to steel like aluminum are getting more expensive. So there's a small group that's really going to be celebrating Tariff Liberation Day. It's not a huge list that we can look to. For everybody else, it seems that the only certain thing is that uncertainty is sure to continue. There is this glimmer of hope that perhaps these fast-approaching April 2nd

tariffs won't be as wide-ranging as they were once assumed to be. News came out last night that the White House supposedly plans to narrow the scope of these tariffs. This most recent iteration of the current plan is allegedly that tariffs will target 15 percent of nations that run persistent trade imbalances with the U.S. This cohort is being dubbed the Dirty 15 by Treasury Secretary Scott Besant. Sectoral tariffs are also now likely to be delayed post this April 2nd date. Okay, so we've got this news, but again, there still seem to be a lot of details that need to be hammered out. We don't really know what the timeline of these changes will be or exactly what the scope, narrow or wide, of these changes are going to be when they do roll

out. With all that said, all that unknown, Azit, what is an individual investor supposed to do with this kind of situation. Mary, I think maybe the best strategy is recognizing that tariffs and uncertainty that stems from tariffs are going to be a feature of the investing landscape. If you told me a few years ago that there was this great technology, it's called transformer technology, and it's this extension of machine learning, and it's going to be a feature of the investing landscape, I probably would have embraced that and said, all right, let's roll with it. Let's see if we can make some money from generative AI. our brains aren't as well equipped to handle features that have negative implications that

could mean that potentially the stock returns won't be as great or that there will be some winners we have to find and some losers that we have to avoid. But acceptance is a really great tool when you hit these periods where the change is in how the outcomes might fall out and not always for the best. So for me, this is a way to cope. It does mean, though, that you have to get a little bit more knowledgeable than you were before about different industries and the potential. Potential is such a big word here, isn't it? Because the story changes from one day to the next. But the potential effects, and that's some work. But look, everyone now understands what a large language model is. Everyone knows what chat GPT is. So we can learn. It's just we don't

like to learn as much about stuff that's frightful or tough or uncertain. The S&P, the Dow and the Nasdaq are all up this morning. And there are a lot of financial headlines that attribute that upward swing to this news about the potential narrowing of these tariffs that are set to roll out next week. Those headlines assume that the tariff news is what's been causing the downward swing that we've seen the past few weeks in the markets in the first place. Bloomberg opinion columnist Nir Kassir has another idea. He argues that, quote, the freakout was more about big tech than Trump's tariffs. End quote. Kesar's argument is that the Magnificent Seven stocks account for nearly a third of the S&P 500, and that last week's sell-off brought

down every single one of those once high-flying stocks. So the median decline among that group, the Mag7, was 14.4%. Collectively, those losses were responsible for nearly half of the S&P's total decline. What's notable is that the rest of the S&P fared better by comparison to the MAG7 stock. So, a quarter of stocks in the index posted gains. And interestingly, industrial and consumer companies, which you would think would be impacted by tariff news, those were well-repped among the higher-performing group, while tech stocks, which are insulated from tariffs, those are the ones that largely fell. So, Asit, what's your take on Kesar's argument? Why might the market be freaking out, to use his term, over big tech? Why might that be actually where the

downward swing is here rather than this tariff news? Yeah, I'll try to unpack why, if we go with this argument, the market is freaking out over big tech. But there are some other fun things in what you just posed to us that we should hit as well. Okay, big tech, you're supposed to do a job. You're supposed to take a lot of capital that you have on your balance sheet, and you're supposed to invest in leading-edge technology, and you're supposed to keep getting returns from that. I think the market is freaking out over big tech because the market understands that there's a certain amount of profit and cash flow that's posited to come from all this investment in AI infrastructure, data centers, CPUs, GPUs, etc. Mind you, in this group can branch out to

the Mag7, because they're tech stocks, too. I mean, Tesla is investing as much in GPUs as almost any other business out there. So, if you just think about the big picture, it's a story of investing now. So, having a little bit less free cash flow on your hands, taking your operating cash flow, and then building so that you can get a gain in the future. And I think short-term ripples in that narrative. For example, we've been talking, Mary, you, myself, Ricky, about DeepSeek, the effects of Chinese innovation. I mean, there's a story out this morning that Jack Ma's Ant Financial Group has made some advancements in using Chinese GPUs to cut costs by 20% on their training inference models. So I think there's just a lot of doubt about this

long-term idea that the massive balance sheets and the great cash flow that all these businesses have can produce this kind of return on technology. But I would just point out here that, okay, if you buy this argument, look back 10 years, 15 years, when all these companies were investing in the so-called cloud. Most of us didn't even know what that meant at that time. Well, the uses of that investment are harder to see. Where the earnings will derive are harder to imagine. On the ground today, yeah, it looks like there are so many factors that could crimp the ability of these companies to earn off of their investments. But again, the future is really, really hard to see. And that's why I don't take any kind of short-term lessons from this.

I mean, I like what the article is posing. It's a fun way to look at it. I like the call-out to the idea of Le Freak. So, Freak can be bad as well as good. I think in this article, it's pointing to something bad. But here's something that may surprise those who are listening today. If you go back to the 19th century, if you go back to the 1880s, we had concentrations then. Visual Capitalist, which is a really fun site, charted this out recently. In 1880, the share of top 10 stocks in the S&P 500's market cap was 27%. Now, it's 38% a day. And everyone is freaking out. But these concentrations have always been there. It's because the weighted capitalization index finds the companies that are making the most impact in

the economy and pulls them into the index. And then they rise as earnings rise, and they become bigger as a consequence. So yeah, we should have a little bit of freakiness on the margins, but I don't think we should freak out. In thinking about this argument and just the weight of the MAG7 stocks within so many indexes. I was initially tempted to ask you whether this was a story about sky-high big tech valuations coming back down to earth. But when you actually look at what the valuations for these companies are, with the exception of Tesla, which is trading at 132 times earnings as of this morning, all the other MAG7 stocks are trading at something between 20, 40 times earnings. Are those reasonable prices to pay

for these companies right now? They feel like they're at a little bit of premium at those prices when you look at the price today versus the projected earnings for the next 12 months. But there's some nuance in there. For the bigger companies, they have so many levers to pull the per share earnings up. A company like Apple or a company like Microsoft engages in tremendous dividend payments and tremendous share buybacks. So the shareholder feels okay with a PE ratio 31 on a forward basis for Microsoft and 34 PE ratio forward basis for Apple. These are numbers that you supplied to me, Mary, in our notes. I buy them. I think about free cash flow, how these companies are poised versus the free cash flow they generate. That feels like it's

even more expensive because these businesses have less free cash flow. You just read the headlines about Meta investing tens of billions in AI infrastructure. Even Apple's getting into the game with its $500 billion investment in CapEx over the next several years. We understand they're going to produce less free cash flow as they build out this next generation in various ways. For Tesla, it's creating this environment where they can build a lot of humanoid robots. For Alphabet, it's making sure that all of its edge in very deep learning, machine learning just doesn't go by the wayside as Microsoft and OpenAI do their thing. For Amazon.com, it's continuing to build out AWS and trying to build their own chip infrastructure.

So, they don't have to buy all that expensive stuff from NVIDIA. Each one of these companies is really just trying to buy stuff now and build for a future that's still five to seven to 10 years down the road. So, in that instance, they're not that terribly overpriced, there is some risk in this, of course, that all the investments don't pan out. And then we'll look back and say, wow, the 10 biggest capitalization stocks today are no longer Meta, Alphabet, Amazon, Nvidia. There are other companies that we might not have seen coming up in that index. We've been talking a lot this morning about the big macro and big companies. Going to pivot and turn to a story that is about a much smaller company,

especially today. There's been quite a bit of drama unfolding over at 23andMe. That's the genetic testing company that was famous, especially a few years ago, for at-home DNA tests. Over the past several months and years, they've been facing quite a bit of trouble. Today marks another chapter in that story, that chapter being Chapter 11 bankruptcy, which the company filed for late last week. 23andMe, once upon a time, was valued at $6 billion. Last week, it was closer sort of $50 million. So it's been quite the steep slide for this company. But again, once upon a time, 23andMe tests were all the rage. The stock went public, yes, back in 2021. But again, I mentioned from $6 billion down to $50 million last week. Asit, why couldn't 23andMe turn these

once amazingly viral testing kits into an actually successful business? Two words, Mary, business model. I mean, there's so many ingenious things that get created in society that we work backwards from. It's like, I've got this amazing idea and I'm going to go sell it out in the marketplace. But the problem with that is sometimes the most beautiful ideas don't have a sustainable market. And in this case, a DNA-based analysis in a testing kit where use your saliva and get back these revealing results about your genetic makeup, that turns out to be a one-time deal. And so the company from the beginning was up against this one-off proposition and it never really could figure out a way to have recurring revenue streams.

That was the basic issue with this business. I mean, I think it was a wonderful idea and it's fund that we can create so much with technology in this day and age. But if you're going to go and be a business, and especially if you're going to come public via a SPAC, try to prove to investors that you can make this work. And to their credit, 23andMe did try. They set up a therapeutic division. They set up a drug discovery business because they had a database of genetic material. So this potentially was a way to have revenues that just weren't one-off, but it never panned out for many reasons. So that's really the issue here with this business. So we started off today's conversation trying to make sense of the ups and downs of the market

and larger macro news. We do have here at The Fool a daily newsletter that kind of summarizes all this news that's going on in the market each day. It's called Breakfast News. At the end of that email, there's a question, which we call the foolish fun section. And last week, one of these foolish fun questions was about how readers tune out market noise. So I wanted to highlight one response that came in to that question from CMF Boiler Pete. They write, concentrate on process over outcome. If you're following a process that historically results in good market returns, it helps to mitigate the noise of market gyrations. That process might include regular investments in stocks or ETFs, journaling to quantify your thesis behind a stock purchase

or sell, keeping an appropriate amount in cash as an emergency fund, diversifying your investments, et cetera. It doesn't block out the noise entirely, but it does give you comfort that you are doing things right. Asit, to close us today, how do you turn out market noise? Wait a minute, Mary. You want me to improve on CMF Boiler Pete's answer? Come on. This is a high stakes. An impossible task. It's a great answer. Amazon sells a number of white noise machines on discount, so this is one way I do it. The other is the warm fuzzy. To be a little bit more serious here, I used to be an auditor. We had this really weird term called the warm fuzzy. This is after you've done all

your homework on a business. You've put in all the paperwork. The senior audit partner is going to review all your analytical procedures and tests and your write-ups and adjustments to the financial statements, all that good stuff. You reach a point where you're like, I feel like this company is legit. The financial statements are fairly presented in accordance with GAAP principles. I'm feeling good about this. And I try to reach a level with the businesses that I own, the companies that I own, and also the industries that I'm excited about. Get to that level where I sort of understand it. I've done my work. I feel good. And that, more than anything, helps me to ignore sort of the short-term market noise, which is scary. I don't think

we should ever completely ignore it, because sometimes it tells us something very important about the future, maybe things won't be as great as they were, or maybe they'll be better. So we do have to be attuned to market noise. But my answer is really just a variation on CMF Boiler Pete's answer is like, do the fun stuff, the research, the homework, dot the I's, cross the T's, get that warm fuzzy. And that market noise will be just something in the ambient background. I'll close this out by posing a challenge to anybody listening. If you listeners have an answer or can improve upon CMF Boiler Pete's answer, leave a comment wherever you're listening or write to us at podcastatfool.com. That's podcastatfool.com. And tell us how you tune

out Market Noise. Asit Sharma, always a pleasure. Thanks so much for chatting with me today. Thanks a lot for having me, Mary. It was a lot of fun. march madness is in full swing up next full contributor travis hoyum joins ricky to take a look at how mgm resorts is breaking into the online sports betting business march madness is well underway and the american gaming association estimates that americans are about to wager $3 billion on the men's and women's tournaments. Figured it's a good time to check in on a gaming stock. Travis, you've been following MGM Resorts for quite some time now, and it has sort of an interesting relationship with online sports betting, with BetMGM, because it's not

the company's main revenue driver, and it's also in a 50-50 partnership owning it. So let's start there, since we've got March Madness happening. How does BetMGM fit into this company's overall business? And is it important to your investment thesis for MGM Resorts? BetMGM is kind of an extension of the MGM brand. Like you said, it's a 50-50 partnership with Entain. So it was kind of a low-risk bet for them when they got into that business. But it getting me pretty big, $2.1 billion in revenue over the past year, although it did lose money. That should turn around the bottom line anyway. It should turn around in 2025, where they're expecting to be EBITDA break-even by the end of the year.

But the opportunity, I think, the bigger opportunity is going to be in their fully owned operations. That BetMGM partnership is only in the U.S. Everything else that they're doing around the world, in Brazil, in Europe, they own all those properties. That was $140 million in revenue over the past year, but lost $77 million. It's a decent business, but this is not DraftKings or Flutter, which are going to be the more focused online gaming companies. Is it central to my investment thesis? The great thing is, it doesn't need to be. This can be optionality because you get a great core business with the resorts in Las Vegas and in Macau. Let's look at Las Vegas because that's where about half of MGM Resorts business comes

from. This is one where you may have your free call option with BetMGM, but I wonder if there's a period of softening happening in Vegas with a few phenomenon. One is that wallets are getting tighter. You had a lot of the resorts on the Vegas Strip change table game rules, things like six to five blackjack, which many visitors were not happy about. And now it's at a period where overall gaming revenue is actually falling in Vegas table games down 16%. And there's also sort of a, some visitors are getting a little less entranced with Vegas. The Las Vegas convention and visitors authority found that 75% of respondents last year said it was extremely or very likely that they would come back to Vegas. That sounds good, but it's down from 84% last

year and 87% in 2022. So just a few years down from 87% to 75%. Are these phenomenon? Is this downturn a serious problem for MGM Resorts? I think you need to look at a little bit of context with this. So there's natural volatility in Las Vegas, and this can be from a number of different things. For example, in 2023, they had the first F1 race. That may have been the most profitable weekend ever in Las Vegas history. But prior to that, you had the deflation from COVID. The bounce back was actually phenomenal. In 2024, gaming revenue on the Las Vegas Strip was $8.8 billion. The first time that Las Vegas passed $7 billion was 2022, so not all that long ago. The peak prior to COVID was $6.5 billion way back in 2007. The new normal, as I think about it

in Las Vegas, is higher than it was pre-COVID. I think long-term, that's going to be good for companies like MGM. This is going to be a volatile business, but at the end of the day, the meetings and convention space, these entertainment hubs like Las Vegas are going to be more and more valuable as most of us are working either from home or dispersed all around the country, all around the world. You need to have central locations to meet. Las Vegas has got to be one of the top couple of places to meet in the U.S., so it's always going to have that position. And given the fact they own about half of the Las Vegas Strip or operate about half the Las Vegas Strip, that's a great position to be long-term, even if there is a little ups and

downs and hiccups here and there. MGM also has properties in Macau and is building across the world. In Dubai, there's talks about a resort that doesn't have a casino, but they might have a casino there later. They're trying to get that going. But also one that they're building, which translates to about $10 billion in Japan. And I know this is one that you're bullish on that you wanted to talk about on. So what's going on with MGM Resorts in Japan? Yeah, Japan is a huge story that I think the market's not really thinking about. That property is going to be, like you said, $8 to $10 billion. I always assume it's going to be on the more expensive side. So $10 billion or so. And this is a huge opportunity because it's going to be

one resort in Japan. There was thoughts a few years ago that this was going to be multiple resorts. But the Japanese economy is bigger than Singapore, which is really the only proxy that we have here, Marina Bay Sands generates about $2 billion in EBITDA each year. That's a proxy for cash flow coming from each of these resorts. So that's where I think the bar of expectations are for MGM Osaka. It could be even higher than that. Osaka has 20 million people. It's about the size of the New York metropolitan area. So I've never been to Japan, but this is a very densely populated, very wealthy country. And the other thing is we don't know exactly how big the gaming market is going to be there. Estimates years ago was that it was going to be a $40 billion market. I don't

think that's going to be the case with a single resort. But think about this. There's 12,000 pachinko parlors in Japan. They generate about $210 billion in revenue. So at least a portion of that is going to end up at MGM Osaka. I think MGM's cash flow for their 40% stake could be over a billion dollars when this resort is open. They're going to only have to put a couple of billion into the property itself. There's going to be a little bit of debt behind that. They have some of that already lined up. I think this could be a phenomenal property, potentially the most profitable in the world when it opens in 2030. Basically, you're getting it for free because the stock is so cheap. It'll be interesting to see how that plays out. There's some

interesting cultural differences that people are going to note where if you're from Japan and you go to the casino, it costs you $40 to enter. They limit it to 10 times a month. Maybe not the worst idea for us to try that out in the U S but they've done this before too. They've done these kinds of things in Singapore. So those sorts of restrictions are not unheard of in the industry. Yeah. The Dubai one's interesting to me because I've gone on some YouTube rabbit holes where I'll look at these like Dubai theme parks, like inside and they look really cool, but they can be empty. All of that is to say like a mega resort in Dubai is not a slam dunk for investors. This is two and a half billion dollars without a casino on the property. How are you looking at this one?

Honestly, I don't think about this Dubai property all that much from an investor perspective because we just don't know all that much about it. And I don't think their capital input is going to be all that high. They do have partners with that property that are tied to the leadership and government. Management has basically said, we really like this property, but it would be a really great property if it had a casino. So again, probably a low risk, potentially solid reward for MGM to make. But this is more brand building, I think, in a very high wealth area like Dubai, but ultimately you want those customers to maybe spend some money there. Maybe you get a casino there, but the better thing would be to, Hey, come to our casinos in

Japan or Macau or Las Vegas. And that's ultimately where you're probably going to make more money from even the brand building there. Real reason I wanted to talk about this company with you. It's, it's flashy. We got to do March madness up top. That's what gets your attention, but this is the stuff that matters. They have a long-term buyback story going on. MGM Resorts, since 2021, has reduced its overall share count by 40%. They don't pay a dividend. What do you make of this capital allocation strategy? It's great to see them rewarding long-term shareholders like this, but why not pay a little dividend? Show a little discipline with that. There's a couple of things, I think, going on here. Management thinks the

stock is really cheap. I generally agree with that, depending on what you're looking at. This is a company with free cash flow yield of 15%. You could also do things like pull out their partial ownership businesses in Macau or at MGM. And they've said that the stock trades for about an enterprise value to EBITDA or cash flow of about four, four and a half. So if you look at that, the obvious thing to do is use your cash flow to buy back stock. The other thing is that companies in Las Vegas, particularly in the casino industry, have gotten burned by dividends in the past. When they had to cut dividends during COVID, they were just kind of building up this reputation in the dividend community with investors that, hey, we're going to have the cash flow to pay

this. And then suddenly you go through something like COVID and you got to say, hey, you know what, just kidding. We don't have that money. We need to save it. And I think dividends are just looked at differently than buybacks. If you need cash to invest in a new casino in New York or in Japan, and you just reduce your buybacks, nobody's going to be mad about that. But if you say, you know what, we're not going to pay a dividend next year because we have this great investment opportunity. That's going to be taken very differently by the market. So I think you combine those two things and management just kind of doesn't want to get in the dividend game. But if you want a dividend in the gaming industry, they do pay rent to Vici Properties,

and that's the company that is going to ultimately pay a dividend for investors. I want to talk about the balance sheet real quick because Fitch rated MGM secured debt at BB plus, unsecured debt at BB-, this is important for listeners, because that is below investment grade. Junk rating, which is actually not uncommon among gaming operators. Steve Wynn did quite well with Michael Milken back in the day, taking on junk debt to build casinos. But is this junk rating a concern for you? Does that mean there's balance sheet concerns for any investor looking at this company? Yeah. Junk bonds really built the Las Vegas Strip. So, not surprising. Maybe they just stay there out of nostalgia for the past. But I think the reason that that would be a little bit

higher risk for investors is there is a different part of the stack. And that is, I mentioned VG Properties. That's the REIT that owns the real estate for most of MGM Resorts properties in Las Vegas and all around the country. So that's going to be where there's a little bit lower risk if there's some sort of default, if the business kind of goes south. Whereas the operating company, MGM Resorts, as we can invest in today, doesn't own that real estate. So you have a little bit more leverage in the business. That's why debt investors are going to look at it as a riskier business than just the real estate side. So I think that's why it makes sense that they do have a little bit riskier debt. That said, solid cash flow company. So as an investor in stocks,

it's not something that I'm super concerned about. And then as we wrap up here, I know MGM Resorts is a stock that you're really interested in. I think you've bought it personally. Why is MGM Resorts the gaming stock you're into? Why not Wynn, Caesars, DraftKings, Flutter Entertainment? I think it's a combination of valuation, the solid businesses that they have and the locations that they have. Caesars doesn't have exposure to Macau. Japan is a big piece of this. And then the optionality in online gaming. With something like DraftKings or Flutter, you're paying for that digital business. So you're paying a premium for a business that I don't know if we know it's going to be profitable long-term. With MGM, I get a great core business in the Las Vegas Strip.

In Macau, you get the upside from Japan and the online gaming business, all without paying much for that upside. So I think the risk-reward is just best with MGM. But look, all the casino operators are pretty cheap right now. So Wynn, Caesars, I don't mind doing a basket if that's investors are interested in. Travis Weill, appreciate you being here. Thank you for your time and your insight. Thanks for having me. 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. All personal finance content

follows Motley Fool editorial standards and is not approved by advertisers. For The Motley Fool Money Team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.