Motley Fool Hidden Gems Investing - Mailbag with Tom Gardner

Episode Date: September 8, 2024

Today’s show is a cut of our members-only podcast, Stock Advisor Roundtable. Motley Fool co-founder and CEO Tom Garnder answers member questions about: - Finding multi-baggers. - Under the radar opportunities. - Having a Chief Technology Officer in your family. Join Stock Advisor here: www.fool.com/signup Members of Stock Advisor and other advanced investing solutions at the Motley Fool can listen to the full show here: https://open.spotify.com/show/5qS2aRb3W5kAlffrVyok3z?si=255f8cf561f94cc5 Companies discussed: GOOG, AMZN, APPL, NVDA, SEZL, DFH, PACS, CLBT Host: Brian Stoffel Guest: Tom Gardner Producers: Mac Greer, Ricky Mulvey Engineers: Austin Morgan, Dez Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

Those are some of the factors that I have, John. There are others, but I just say, is it run by the founder? Is it cashflow positive? Does it have a worldwide customer-based opportunity? And is it demonstrating high top-line growth rates? I'm Mary Long, and that's Motley Fool co-founder and CEO, Tom Gardner. Today's episode is a cut from our members-only podcast, Stock Advisor Roundtable. We'll put a link to the podcast in the show notes for you. In this preview, Tom joins Motley Fool contributor,

Brian Stoffel, to discuss investor expectations for Airbnb, how AI is reshaping the tech workforce, and some under-the-radar names for investors to keep an eye on. And John says, what is the profiling criteria that the average person can look for in a company

to determine if it's going to be a future blockbuster? For example, what was the profile for Nvidia, Google, Amazon, Tesla, Apple, and companies like them that gave the early investor an indicator that this was something to pay attention to. Now, you already talked about this, but John says success leaves clues and the trick is to recognize them early and bend over and pick them up off the floor. Any more clues you want to add to that other than a CEO who might drive his employees crazy because he's fixing things right before they go live? Well, I do think that's one of the criteria is in general in these, if you want to find them early, you're probably not buying into a smooth ride. So that is both from, you know, the business and how the business is

being run, but certainly the stock, how volatile. The best performing stocks in American history have at some point, almost all of them, been very volatile stocks because they were entering a category that was confusing. No one knew whether to believe in it or not. But it turned out that they were great. And as people saw that in their business and product performance, they convinced people, institutions came in and things got stabilized. So if you're jumping in early on, and John, I love this question. Thank you for it and for the way you phrased it. I would highlight a few things and I'm going to go one by one to show you how I came to think Airbnb would be one of these businesses.

So I often start here, is it run by the founder? And the reason I look for that, it's not a requirement. The reason I look for it in the pattern is that founders are willing to do two things that other professional leaders might not be. One, to stay with the story for the long term because there will be ups and downs and a lot of people go to business school and get a professional job and succeed and get a lot of affirmation of their thinking, but they aren't really doing what they love. And that doesn't sustain 10, 20, 30 years. What does is that Jim Senegal at Costco has a reason to start that

business. I think that reason is right there actually in his childhood, but that's just my guess. I've not spoken to Jim about that, but he had a reason to create Costco. It matters to him. and he gave his life professional life to it and a lot of his overall life to it so founders do that more more so than a ceo that comes in and gets stock options vesting over a four-year period the second thing a founder is willing to do because of their time horizon is that they're willing to make decisions that look really bad right now and have really bad results but that's the action of planting seeds that will grow three five seven years from now so So taking the steps that look embarrassing or that are costly, look unproductive, like the metaverse for Mark Zuckerberg.

It doesn't look like the metaverse is going to play out in any way that they thought it might, or at least on the timeframe they thought. But it's a good indication to me that a founder CEO is willing to go for that, do it within the overall sustainable structure of their business. I don't want to be reckless, but so founder would be the first thing. Second thing is cashflow positive. Most of the greatest companies in the public markets. So if you're investing in the private markets, John, that's different. But if we're looking for the factors in the public markets, they're already cash flow positive. They may not be wildly positive cash flow, and they may be reinvesting a lot of that capital.

But you can see this thing is profitable. It's not they're reaching for profit. They're promising profitability. It's like they're profitable, and they see such a big opportunity. They're taking those profits and reinvesting them out there in the marketplace. So that's a founder run that's cash flow positive. the third according to the companies that you've mentioned would be a worldwide user base or customer base the ability to impact the world um and again that could be starbucks with coffee

uh that could be google where it's driven by advertisers but you know it's it's powered by all the users using google and that may be shifting a little bit with perplexity and other ai and search tools coming along which is a challenge to google but as you're looking for for these small companies doesn't have an opportunity to have a worldwide user base or customer base. And then the final one, which hasn't ended up proving out for Airbnb at this point is that the early signs for Airbnb, it was a very substantial top-line growth. You know, you had, you had a company that, you know, 2021 to 2022 went from, you know, six to 8 billion in sales. So that's a 33% top-line growth rate. If that continues,

that's amazing, but it hasn't continued at that rate. It doesn't look like it's going to be a company that drives its top line at that rate. So when you look at long-term businesses in public or private markets, but let's just say in the public markets, there's a pretty close tracking between the top line growth rate and the performance of the stock. So it's not a perfect overlay because if you end up with those cash machines, they may not grow their top line that much, but they may just pour so much cash out of the business that it drives the valuation higher. But at a certain point, you can only squeeze so many drops from a single orange. You need multiple, you need an orange tree of growth. You need a vineyard where you don't need just a single

orange that you're squeezing more profits out of. And so right now it doesn't look like Airbnb is going to be a 20% plus top line grower. And if I were working at Airbnb or they called me to give a talk to the management team, or they cared at all what I said, I would be saying, what unlocks 20% top line growth for this already very large business? How do we go from 10 to 12 billion to 15 billion to 18 billion to 23 billion? How do we get there a lot faster than it looks like we're going to get there right now? Do we have any ideas? Do we want to go for that? If not, then we're going to be a cash cow dividend paying company that I still think will perform very nicely from today's valuation, as I've said already enough. Those are some of the factors

that I have, John. There are others, but I just say, is it run by the founder? Is it cashflow positive? Does it have a worldwide customer base opportunity? And is it demonstrating high top-line growth rates? And the last thing would be a portfolio management tool, which all of us at The Motley Fool, from rule breakers to hidden gems and services across The Motley Fool over 30 plus years is the last way to really find them is to make sure you're diversifying because you're going to make mistakes. There's no way you're going to, you know, bat 700, you know, hitting seven out of 10 pitches.

It's just not going to happen. It's going to be a lower rate than that. So you need to diversify, accept some losers and then absolutely delight when you get that 50 bagger that will come along. All right, Tom, I'm going to put you on the spot because you gave us the four characteristics you look for. I'm Brian Chesky.

I'm calling you right now. Do you know what the thing is? Because I'm curious. This is a stock that I own that could, I thought experiences might give them that boost, but it doesn't seem like experiences on Airbnb is giving that boost. Is there anything that seems like low-hanging fruit to you, or are you just saying that's the question they should be asking? Well, I have two opposite ends of the spectrum, and I don't have a good idea on the second one. But on the first one is that I would – I mean, we've got a lot of money here at Airbnb, right?

We've loaded up, and we know we're going to be fine. Our stock is down. That's disappointing. But we're sitting here and we're looking at our balance sheet. We're like, I don't think we're running into any cash problems here. We got $11 billion in cash and $2 billion in debt. So we basically have $9 billion to work with. I'm going to invest to make sure that neighbors... You've heard me say it before. The neighbors love that Airbnb is in the neighborhood. Thank heavens Airbnb has opened an apartment on my floor in this building. I'm so thankful they're there versus who's rolling their suitcases in and out of this place at odd hours all the time. I don't even know them. And like the neighborhood's

kind of falling apart because I can't count on my next door neighbor when I need butter. So, so that's, that's one side. The other side is how does Airbnb get revenues from people at home when they're at home? I, again, I'm not saying I have a ready-made answer, but you've got a great brand. What can you do in the experience category to make Airbnb something I'm connected with, whether I'm going to stay in somebody's apartment or house or not? How does Airbnb become an everyday brand for me? And again, I'd have to do a lot of experimentation. Now I do have $9 billion and I can experiment in little $5 billion increments all over the place with that amount of cash so i'd have a team that was trying to figure out how do we make airbnb an

everyday brand and uh i don't have the answer right now but but i hear you my tongue in the cheek answer would be come up with a roboticized cleaning maybe they need to work with tesla get a roboticized cleaning agent that would knock down those cleaning fees that everybody complains about and i would use it i'd use it in a second but you know that's a great point well the challenge with with this not that we want to go off on this path and i know you have some other great member questions here but is you know with robots it's just you know it has to be it's like where robot cleaning will work is in hotels when there is the same cookie cut room over and over again it just goes in there systematically when you have to take that

robot into multiple different homes with different layouts it starts to get harder to do but i do those cleaning costs are hurting that's that's hurting hurting the uh experience and the buying enthusiasm for customers all right our last question here comes from luke this is an interesting one here luke said on the podcast tom recently did you not think the other questions were interesting no they were terrible questions john and mike just luke okay yeah sorry john sorry mike well here's the thing do better next time isn't about yeah do better this one has nothing to do with companies this one has to do with families or circles of friends and says on the podcast, Tom recently discussed encouraging someone in the family as the chief technology

officer, the CTO, who keeps up to speed with the latest innovations. And he also referred to having a family CFO or chief financial officer. And I wondered if he could expand on this as well as any other C-suite roles he likes to have in his close circle. That's great, Luke. Well, I'll stand behind the first two. And if it's not somebody in your family or your extended family, I would find somebody in the community. I would definitely as an investor and in my professional life and just in my developing my worldview, I would want to find the most advanced AI engineer or specialist that I could be in touch with just to be able to ask questions. What are the themes? What's going to happen? What are you doing now? The ability to,

with concurrency process massive amounts of data. I mean, I have to say this. We're right now already here, but it'll start to become clearer over the next year, two years, that we're all going to have a bunch of digital agents working for us. An average company might have 100 full-time employees, 100 people on contract, and 1,500 digital agents or digital bots. And those bots are here and ready to go because they don't have to be fit into a house physically working to clean something or going down a sidewalk or um working in a warehouse those are harder to get to and there are major investments being made some very exciting companies in those areas but we're talking about like the intellectual bot the digital agent that wins in chess that wins and go

that can correct all the flaws in somebody's extended you know software code right to then writing original code, essentially, quote unquote, original, but starting to produce. So we're going to have, again, our fellow employees, our contract employees, which I think is a good thing for companies to be thinking about is that you're able to check in with people around the world who have specialized knowledge that could be helpful to you. But then the big growth rate is going to be in digital agents. And the only way to understand that is to be talking to somebody who's creating them, who's using them, who knows them. I mean, I now know some people in my life who basically are saying, I have 20 full-time software developers working for me.

They're all digital agents. So my output has grown dramatically. And that's why you're seeing the salaries and the role opportunities for non-AI techies collapsing. And you're seeing the AI salaries spiraling, right? Because companies are realizing if this person knows how to do this, they know how to bring their 10 agents with them and they are producing a 10X. So why wouldn't I pay them, you know, 50% more, right? So that's what's happening in that marketplace. And then with the CFO, I would just say, I spoke to a money manager years ago, who's managing quite a lot of capital and has a lot of connections with not just institutions

that invest, but also families, large families, extended families that have money with the firm. And what this person said to me is every extended family has at least one person who will burn through every dollar the family gives to them. And I laughed at that. And they said to me, I'm not kidding. Every extended family has at least one person. You can give them a $500 monthly allowance. You can give them a million dollars when they turn the age of 30. You can give them inheritance. Everyone has at least one that will just, the bottom will drop out no matter how much you're giving to them. And so having a CFO and a system, because that means that person can be inside of companies too. Companies need the CFO to make sure. I've spoken to CFOs that have said, I trust less than 10% of our full-time employees with capital. And I found them and I deployed to them. And the other 90 do a lot of great things, but I'm just not giving them money to go out and use it and bring back more money to me as CFO, which I need to keep our company alive. So sorry to restate those two, Luke, but I would say my third one wouldn't actually be a C-suite position, although we could imagine some that could be fun or interesting. But I actually would go to a quiz that you can take and your family can take online called the Synergist Quiz. It's free. You will see it at, I think it's just Google Synergist Quiz.

Les McCune is the author and creator of this methodology. And McCune is spelled M-C-K-E-O-W-N. And Les has spoken to The Fool a number of times, and we love his books that we've read. And what this system helps you to identify in you is something of these four traits. I'll say them very quickly. You're either an idea generator. You always have new ideas coming to you. We have those people.

We know those people in our lives, right? There's good and bad. They can have too many ideas, but they have ideas. The second is get stuff done. Person who just mows through checklists. Wake up in the morning. I need to get through this checklist and then I'll feel like it's a positive day. You know, next one is I'm a people person.

I can bring people together. I might not get things done. I might not have a new idea, but I'm really good in mediation and helping teams thrive together. And the final one is I'm a systems person. I'm oftentimes behind the scenes. I don't necessarily get things done. I may not have an idea.

I may not be socially interactive, but I can make the system run better, right? And so when you think of your family and your household, who's the one generating the fun ideas of what we could do on the weekend? Who's the one who's getting stuff done and making sure that we complete each day with tasks needed? Who's the one who's sort of socially in the middle, making sure everyone's doing great as we go through? And who's the one looking at the system and saying, hey, family, we keep running into problems because not everyone's getting their homework done or not everyone's cleaning their room. And how are we going to create a better system out of this? So I've found that those factors have been helpful in any team I've worked on. And I do see them in my friends and family around me. And I try to structure things to help people take advantage of their greatest strengths, because no team is balanced if they're all one or two of those factors. You really need all four functioning. So that might help you, Luke, as you build the C-suite around your CTO, CFO, to start to look at some personality traits and getting people set up to succeed most in their life and be a great member of the team.

I like that. I'm going to have to check that out for my own family. I'm going to wrap up with two quick questions. So see if you can get these in 30 seconds or less because they're snappy ones. Number one, small caps have had a bit of a comeback. You got a few small cap names that you find compelling? I do. I knew you were going to ask this question, so I have four.

And these are in real money portfolios elsewhere in the hidden gems universe. So I'm plucking them out of large groups, but I like these companies very much. So here they are, RapidFire. Sezzle, this is a S-E-Z-Z-L-E, ticker symbol S-E-Z-L. This is a buy now, pay later. And if that has a lot of taint in your mind, this is a mission-driven, really beautiful company. Small cap, first recommended it. It was in the low 80s.

Now it's about 135, and that's only a couple months later. So it's had quite a run. But long-term, I think we're looking at a winner here. Number two is DreamFinders Homes, ticker symbol DFH. Also, like Sezzle, very high inside ownership by the founder. regionally in the South in home building. We're going to need a lot of new homes built and very financially, very well-run company. The third also has very high ownership, inside ownership. It's called PACS, P-A-C-S. It runs post-acute care facilities. So someone has

been in the hospital. They're not yet ready to go home. They need additional care. These facilities have generally been run down because they've been purchased by private equity firms that don't know what they're doing and borrow a lot of money. And then the only way they can try to get back to even when it doesn't work as easily as they thought is to cut back on patient care and cut back on the facilities. And that's dreary and depressing for everyone. And they should almost be ashamed of themselves for what they've done in this category. Meanwhile, here comes Pax, founder run, very high insider ownership with a passion for creating great locations. They acquire them and upgrade them. And I think they're set up for quite a run here in the

public markets. That's BACS. And the final one is Celebrite, C-L-B-T. And this is the company that extracts digital forensics for law enforcement. So when there's a crime that's been committed, those crimes have digital footprints all over the place now on cell phones, tablets, texts. All this information can be extracted by law enforcement with the Correct Protocols and Celebrite is the leading provider of that with great economics. It's also been a very good, all four of these have been, Pax is relatively recent. Cecil has been great, even just recently. DreamFinder, Holmes, and Celebrite have also been great stocks.

Usually, as we know, when small caps perform well, that's a good sign because there's possibly a huge market in front of them. They're still a small company and there's some positive indicator the market's seeing. They're delivering something great. I think those four companies are very interesting over the next decade. All right. Final question. What is one story or development that you are particularly excited about going forward that we have not mentioned already? It's an internal one at The Fool that I've kind of mentioned. So I guess I'm

cheating a little bit because you added that last little phrase there. Maybe I'll give a secondary answer if I can come over quickly, but I know we want to get through this fast here at the end. But we are creating databases that create scoring systems for public companies and features and industries and public companies using AI tooling. And it's really wonderful and interesting. I use these tools now every day. You may see a fair number of transactions for me, for those of you in our portfolios, because I'm upgrading into companies that I have gotten to study more about because I have a system for evaluating them. And it opens the door on cracking open that 10K and having a good sense this is financially well managed or has a great

leadership team or as product advantages. So if you think of things like Gartner, Magic Quadrant, and other more professional B2B research, I think we're going to be bringing a lot of that here to the Motley Fool membership base. And I think it's going to scale and be unique in the marketplace. I use it all the time. I'm seeing what we're able to create with our teams around the world. And I'm quite excited about bringing that forward to everyone in membership at the Fool. And insofar as something that I haven't mentioned outside of it, I would say, I guess I'd kind of mentioned this also. I, I, I recommend really looking at dividend companies, very well run small caps off the beaten path, uh, businesses and more cautious

and moderate class of classified stocks inside the fool. I don't think that like anything calamitous is going to happen, although we never know. But, um, but I, I think it's a, it's a more fully priced marketplace right now, which means keep investing, but be cautious. And I have no problem having 10% to 15% of an equity portfolio in cash today. So there's my closing reflection, Brian. You did a good job pivoting. I didn't mean that you just put one sentence in there. I think that's still allowed about the internal tools.

And I'm looking forward to seeing those as well. But that wraps up this month's bonus episode. Tom, thank you so much for joining. Mutual thanks. and just want to let folks know what's coming up in the next month on thursday september 5th you'll be getting your recommendation from tom and team hidden gems and then a week later on the 12th of september quarterly updates to our foundational stocks and our penalty box now as always people on the program may own stocks that they talk about and the motley fool may have

formal recommendations for or against the stocks mentioned so don't buy or sell anything based solely on what you hear. Thanks to our producers, Matt Greer and Austin Morgan. And on behalf of the entire Stock Advisor team, I'm Brian Stoffel saying thanks for joining us this month. And we'll see you back here for our regular Stock Advisor Roundtable in September. Fool on! If you're not a member of Stock Advisor, you can join and get access to Stock Advisor Roundtable plus monthly bonus episodes with Tom G just like this one and access to Stock Advisor's full scorecard of recommendations by going to www.fool.com sign up. And if you're already a member of one of our premium US services, a reminder that you can catch the latest episodes

and the full archive of Stock Advisor Roundtable in the TMF app or by linking your account on Spotify. We'll drop all those links into the description for today's show.