Motley Fool Hidden Gems Investing - "Make no mistake, this too shall pass."

Episode Date: September 20, 2022

Bear markets always come to an end, but they're not necessarily fun while they last. (0:21) Bill Mann discusses: - The market reacting to the Federal Reserve's announcement a day before the Fed actually makes it - Why large companies like Microsoft are quietly preparing for 2023 and 2024 - The bizarre incident involving Beyond Meat's chief operating officer (11:25) Alison Southwick and Robert Brokamp talk with Emily Flippen about some of the biggest consumer goods storylines of the year, and potential radar stocks for investors.  Stocks mentioned: MSFT, BYND, NFLX, LULU, PTON, CHWY, SG, BARK, VDC Host: Chris Hill Guests: Bill Mann, Alison Southwick, Robert Brokamp, Emily Flippen Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder?

I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. Despite what you may have thought, Wall Street is not waiting patiently for the Fed's announcement on interest rates. Motley Fool Money starts now. I'm Chris Hill. Joining me today,

Motley Fool Senior Analyst Bill Mann. Thanks for being here. Hey, Chris, how are you doing? You know, I'm an investor. That's how I'm doing, Bill. I'm an investor in a stock market where we are just tiny boats in an enormous sea that at the moment is being controlled by the Federal Reserve. Are you making a tiny bowl reference? Is that a tiny bowl reference? You remember the guy in the little boat and he would sit literally in a toilet? Yeah. I think there's a reason they don't to those commercials anymore. Yeah. It's exhausting, isn't it? In all seriousness, it is a little, I understand investors who get down, you know, for all the

talk and, you know, John Matante and I had a great chat yesterday about the pessimism in the market and trying to, you know, rise above that because this truly is where the, you know, where opportunities for long-term investors live. They live in these situations. It doesn't mean that it doesn't get tiring and deflating at times. When I see, hey, investors collectively have decided that whatever the Fed announces on Wednesday afternoon is going to be awful. We're just going to collectively sell off stocks. It's like, hey, maybe we can just wait and see what the Fed announces. How about that as an idea? Sure. Instead of treating it like it's the next Pee Wee Herman movie. Oh, it's going to stink. Whatever, whatever it is that, that they,

that they've got coming. It's funny, Chris. And I don't mean funny. Ha ha. It is, it is always strange to me. We had conversations in 2019 in which we tried to describe to people what a bear market felt like. Because in 2019, and even 2020, we didn't get a real feel for it. It's not the fact that the market goes down a lot. Because that happened in 2017. It happened in 2014. It kind of happens all the time. It's the relentlessness. It's the fact that it doesn't end. And, you know, they say it's the hope that kills you. It's ultimately the lack of hope that, you know, I hope people who are listening to this really do understand that this too shall pass 100% chance.

Yes. And if history is any guide, when it does pass, there will be some stretch of time where the companies that we've been talking about for a while now, the companies that there is no doubt in our mind, they are going to come out on the other side stronger. In some cases, they will be stronger because the competitive landscape has gotten more favorable to them, not because they have risen, simply because they have maintained whatever status they're at and their competitors who are smaller and weaker continue to get smaller and weaker. And when that happens, I think we're going to see investors falling all over them. And I'm

talking about like Wall Street professionals falling all over themselves to buy into rising stocks. It's funny you say that. And you and I talked for a little bit offline about the fact that it seems like people are losing their minds now. And I really think that it has a lot to do with the fact that we as humans really don't like change. And the change that we're going through now, the change that we're experiencing is that there is no such thing anymore as a Fed put underneath equities. The Fed is primarily interested in inflation and inflation at this point, depending on how you measure it, their target rate is 2% and we are at somewhere around eight. And I don't need a calculator to tell me that that's four times too hot.

So when we are talking about an environment in which the Fed is no longer making things accommodative for every company, the thing that people have to remember is that for the well-structured, well-financed companies, even though they have to go through the same shadow of the valley of death as everybody else, it's good news that capital is more expensive because that ultimately will remove less well-heeled, less well-financed competition from the mix. Oh, it's a great point. And, um, you know, it's something we haven't talked about in a while. Um, but no, you're

absolutely right. Like if you're, if you're Microsoft, yes, you are looking at your budgets, you are checking all the boxes to make sure you are not being particularly wasteful. Although, you know, some have argued, uh, that that should be an ongoing process, but, you know, but you know, if you're Nadella or any of his lieutenants, you have to be on, you know, very quietly licking your chops. You're cracking your knuckles and waiting 100% true at what, what 2023 and 2024 will bring. Yeah. Um, all right. So we'll see whatever the fed announces Wednesday afternoon and we'll just, you know, you know, it's, it's, it's going to be terrible. That's what the market is telling us, right? Whatever it is, it'll be a mistake

It's my favorite quote of Winston Churchill's, when you're going through hell, keep going. Let's move on to a story just crazy enough to be true, which is that Doug Ramsey, the chief operating officer of Beyond Meat, was arrested over the weekend for getting into an altercation in a parking garage following a university of Arkansas football game. And what's catching everyone's attention is that part of this altercation is that allegedly Doug Ramsey bit the other man's nose. I did not have the beyond meat COO being a cannibal on my bingo card. I've got to tell you, Chris, none of us did. And I want to see that. I want to see that lottery ticket. And the company has not, to this point, issued any statements. And the cannibalism

and meat jokes kind of write themselves. But on a more serious level, I don't think the CEO of Beyond Meat had this on their bingo card as well, because we're like, what do you do in this situation? I shouldn't say we're used to. It is not uncommon for a few times a year, the headline for a given business to be that the CEO is leaving immediately due to some sort of job performance impropriety, a workplace relationship, something like that. This is someone who's been charged with third degree battery. If you're the CEO, if you're the board of directors of Beyond Meat, congratulations, you're now dealing with this. It's not enough to just deal with all of the regular challenges of running a public company.

You're now dealing with this. And what do you even do in this situation? Look, I think that we need to give a nod to the fact that the CEO and CFO and COO of Beyond Meat are dealing with a stock that is down 90% plus. They're dealing with a market that is highly competitive and they are barely, barely able to meet their gross costs to produce their near meat. And they've been under a lot of pressure. And I say that only partially, not to excuse someone for biting somebody else in the nose, because obviously that's not it. I ultimately on one level worry about this man's health, worry about this man's psychological health. And so if that is the case, if there is something that's going on there, I hope that Doug

Ramsey gets the help he needs because let's just, let's just set the table here. I don't know how things were where you grew up in Maine, but in North Carolina, biting someone on the nose was not a way to settle conflict. Nose meat is not the other white meat. No, absolutely not. So I don't know how the board handles this. I suspect, and I don't know that much about, about, uh, Mr. Ramsey. He has not been in the job all that long. He came over from, from Tyson's, which just sort of adds to the potential, uh, you know, even making it a conspiracy that he was some sort of Manchurian candidate to come in and start eating human flesh as a way to humiliate Beyond Meat. I don't know what kind of job he's done. He will have to answer

for his crimes. I do really hope that if this is something that is a sign of greater damage in this man's life, that he gets help for it. Well put. Bill Mann, always great talking to you. Thanks for being here. Thank you, Chris. If you were making a list of consumer goods companies, would you put Netflix on it? Today, Alison Southwick and Robert Brokamp continue their sector series with Emily Flippen, when they look at some of the biggest consumer goods storylines and some investment ideas to put on your radar. Emily Flippen This week is the last in our series tackling

different sectors of the market and getting you up to speed on what you may have missed over the summer, now that pumpkin spice is in the air. This week, we're joined by Motley Fool analyst Emily Flippen to cover consumer goods. I hope your bingo card has inflation and supply chain on it. But before we get to that, Emily, thanks for joining us. Emily Flippen Yeah, thank you so much for having me. What are we talking about when we're talking about the consumer goods sector? I'm picturing t-shirts, tennis shoes, and gallons of milk? You're not wrong. In fact, I think the traditional definition for consumer goods is just any company that is selling physical items to

regular consumers like you or I. Not necessarily merchants or other intermediaries. But I've always taken a bit of a broader definition of the consumer goods industry, which has often been to my peril, but we'll get into that. My definition is really any business for whom the majority of their revenue is driven by consumer purchasing. So, while the traditional definition, I think, has a pretty heavy focus on physical items, I personally like to extend it to services as well. So, in my opinion, a company like Netflix could be considered a consumer goods company because they're heavily dependent upon consumer spending. Of course, that is a controversial opinion. I was going to say, you made both bro and mine's eyebrows go up when you said that.

Part of it stems from my desire to talk about a wide swath of companies that isn't your traditional retailers, restaurants, or e-commerce, because I think a narrow view of consumer goods can steer people away from some really interesting companies that still play off the same trends and tailwinds that affect consumer spending. My opinion may not be the opinion that works for many investors, but it's the one that has worked for me. So with that being said, when you look at the holdings of a consumer goods ETF, you're going to see names like Coca-Cola, Nike, GM. Are those more called consumer staples, discretionary? Is there a difference between the people who make the things versus the people who

sell the things? Yes, definitely. So I love that differentiation, the consumer staples versus the consumer discretionary. And their name kind of gives them away. But the consumer goods industry can be broken down into two types of spending. That's spending that happens as a necessity, as a part of everyday life. And this portion of spending that happens that's discretionary or with excess slush funds that consumers like to spend, but maybe don't have to spend on a regular basis. So when I go to the grocery store, I will always buy a gallon of almond milk. I think everybody does. It's always sold out. But I'll get my gallon of almond milk. That's a necessary spend for me.

I drink that. I consume that every week. But maybe a non-necessary spend for me will be some makeup that I purchase on the way out or a special treat, right? So, that's a difference between the necessary, the staples versus the discretionary. And when you're breaking down analyzing businesses that maybe sell necessities versus discretionary items, it can get really interesting. Because typically, the necessaries are items that are more stable, I suppose, because people are going to be buying them regardless of how the economy is doing. The spending doesn't shift as much as they do for discretionary items, but they also have less pricing power. If the price of my almond milk goes up too much, there's a lot of substitutes that I

can buy for the almond milk in this case, whereas the discretionary item, my makeup, maybe I'm more brand loyal to that makeup. When you're investing in this industry, you can do the risk-reward trade-off between the two with consumer necessaries or staples in this case being lower risk, but also lower reward, and the discretionary being higher risk, higher reward. So, what are you focusing on when you're looking to invest in consumer goods companies? I think the one aspect that really applies for consumer goods companies, and this applies to both the staples and the discretionary items that tends to be overlooked by a lot of investors, is the brand power. And it's easy to be overlooked because it's not a quantitative metric. You can

look at a lot of quantitative metrics for many different businesses, and we can get into some of those. But the one that I think drives way more of the sales and the margin and the market is willing to lead on is just the perception of a brand in a consumer's mind. And it's so qualitative, it's really hard to capture. There are some metrics like net promoter score and PS that some companies survey for to get a sense about how the customers are feeling about their brand and whether or not they'd recommend the brand to other people. But these are still trying to quantitatively analyze something that's inherently qualitative. And so, I think having a great understanding of the brand that's underpinning any consumer goods investment

is really critical for getting an idea about the business itself, because that's going to tell you a lot about how sticky its customers are, if the business has pricing power, and what the long-term growth prospects could look like. Yeah, because I can imagine for something like in the fashion industry, brand could be pretty fickle, or it could get hit, right? Like a sudden thing could happen that could hit a specific product, so then people aren't going to use it for a while, or maybe they get suddenly, I don't know, brand can just seem very fickle as well. Yes. There's brands and there's also trends. So you'll have a lot of businesses that are playing off maybe a one-time trend and they think what they're doing is building up a really strong

brand. But in that case, people are more loyal to whatever the trend is, as opposed to being loyal to the brand. So it's important to differentiate between those two. But to your point, brand is something that is constantly changing and evaluating. So you need to have a good understanding about what you use to evaluate brand in a business. In my case, a lot of that is great boots-on-the-ground research. Using your brain, even if the metrics maybe aren't painting the full picture, reading reviews that you can find online, all of these things influence how a brand is perceived by consumers. To your point, that can change very quickly. I'm trying to think about a good example. Peloton may be one business that at one point had such

a premium brand that has been so horribly devalued by its post-COVID experience that now they're selling on third-party marketplaces like Amazon, where they wouldn't be caught dead only a couple years earlier. That does dilute the value of Peloton's brand. So having a good understanding about the strategy that both consumers and management take with that certain product is critical for, I guess, evaluating the differentiating factors of a business's brand. Yeah. Staying in the gym zone. Also, if you remember Lululemon and all, their brand took such a big hit for a number of different reasons, but they were totally able to bounce back and see incredible returns over the long term. What about physical retailers?

Are there different metrics that you look at there? For physical retailers, it's actually a lot easier. Brand is still important. To your point, Lululemon is a great example of that. Don't discount the value of that, but you can also look at more quantitative metrics. So, for any physical retailers, you have something like same-store sales, where they're analyzing the sales in a particular store year over year and how that's evolved over time. Sales per square foot, which is exactly what it sounds like, measuring the efficiency of a selling space for a physical location, and even the lifetime value of a customer in comparison to its customer acquisition cost. All of these things are great, real metrics that drive at the value of a brand.

If a brand is strong, those typically tick up over time. For example, Lululemon, they have consistently expanded their net sales per square foot. Same-store sales have grown for businesses like Chewy, for instance, which I think has an impressive ability to drive brand loyalty. That is also a business that has expanded its lifetime value of its customers, kept its acquisition costs low, all highlighting how powerful those brands are. Their business models are just that much more efficient because brands are really prominent and strong. Between COVID, supply chains, and now inflation concerns, the sector has been making a lot of headlines. But how would you sum up the last year or so? I think you summed it up. I can go now? No, it's great. I mean, you kind of nailed

exactly what's been happening to this industry. And it's more of the same. Everything is supply chain, COVID, inflation, margins going down. The one thing I'd add is actually inventory. And maybe this is the accumulation of all of these factors now showing up on the balance sheet for a lot of consumer goods companies. But physical retailers, businesses that hold inventory on their balance sheets, have had a really tough time navigating the past couple of years because they couldn't get supply because of supply chain constraints. And now they're in that position of having to make up for what is a delayed backlog of demand while also trying to predict what that demand could look like in an extremely challenging

environment, both with inflation and fears over consumer spending falling down. So, we've seen a lot of retailers have bloated levels of especially discretionary inventory on their balance sheet, with Target being a prime example of that over the past quarter. They doubled their inventory year-over-year, mainly in things that are not selling through, discretionary items like TVs. So, that's going to be challenging for that retailer. Lululemon, since we're on the subject, also had an incredible, I think they've grown their inventory at nearly a 20% CAGR over the past three years. Really well positioned in terms of inventory headed into the holiday season. But if that inventory doesn't sell through, these are going to be retailers that have to discount

the inventory to get it to move. And when you're talking about the quality of a business's brand, in this case, Lululemon, you can understand how discounting inventory would be very degrading to what is normally a very strong brand. So, the holiday season is fast approaching, which is the most wonderful time of year for the sector. Meanwhile, everyone is worried about, like you said, inflation. I mean, but combating inflation also means that we're worried about creating a recession. What's your take? I'm so interested to see how this holiday season is going to play out. Because as you mentioned, we have two narratives happening right now. Some CEOs of some businesses are saying, man, things are looking bad. We're not

feeling super great headed into the back half of the year. They're lowering guidance, both on the operational side, but also just from demand falling. While other companies are saying, no, we expect demand to remain high, consumer spending has not fallen the way that we have expected it to, despite rising inflation and interest rates. And we're prepared for a really strong holiday season. We'll start to see the first inklings of that, I think, as we head inch into the holidays here about what spending could look like. My personal expectation is that we're probably not going to have a blowout holiday season, but it's not going to be the disaster that some investors expect it to be. I expect it to be relatively strong. But to your point,

the economy can change very quickly, and consumers are fast to adjust their spending if they see hard times on the horizon. So, as before, we like to give our listeners a stock to watch or put on their radar. What is a stock that you think our listeners should be keeping an eye on? One stock that I've been keeping an eye and I still have questions about it, to be clear, but it's certainly on my radar more and more with each passing day, is actually Sweetgreen. The ticker is SG. I think if you live, especially in the New York metro area, you're probably familiar with this company. They're a fast, casual salad chain. They went public maybe a year or so ago. I had a lot of questions about their

strategy to expand into the suburban market, because I have to be honest, they sell $15 $15 salads. I don't know, it's hard to get me to eat a salad in the first place, but also paying $15 to do it, it sounds like a hard bargain for the suburban Americans out there. But in their most recent quarter, despite a lot of slowdown because of that consumer purchasing that we just mentioned, they actually had really strong strength in their suburban markets. Despite more than a third of sales coming from the New York area in particular, the suburban stores that they have built out have just been incredibly strong. They have long-term plans to get to 1,000 locations across the United States. So I'm pleasantly surprised

with how effective that expansion has been. This is a company that has some, again, going back to the metrics, some really impressive metrics, including restaurant-level margins. While the business isn't profitable itself, the restaurants are increasingly profitable with time. So it's certainly one that is on my radar. I have not bought it personally myself, but I'm watching it more and more each day. Yeah. I'm going to say it's due to the Green Goddess Salad. Oh, man, that one's phenomenal. Put avocado in anything. Right? It's so good. All right. I believe you also have a stock for us to avoid. Yes. The stock that I have to avoid right now, and admittedly, I could be wrong,

as with Sweetgreen, but it's actually Bark. It trades under the ticker B-A-R-K, believe it or not. They're the owner of BarkBox, which is the subscription service for dogs, kind of like Stitch Fix for dog toys, if you can imagine it like that. The reason why I call it out as a stock to avoid in particular is because I think there's a lot of belief from investors that the pet industry is really recession resistant, which has historically been relatively true in comparison to other sectors. But when you're a business like BarkBox, even though you do play off the trends in pets, that is still very discretionary spending. So they aren't necessarily selling cat litter or the dog food. They're selling stuff that could be easily cut from investors

and consumers' budgets with time. That's also alongside the fact that it's a business that has, in my opinion, a relatively weak brand, poor margins, and it's pretty unprofitable. It's one that, for the time being, I'm just avoiding. Now, Bro, for investors looking to add maybe some broader exposure to their portfolio, to the consumer goods sector, do you have an ETF or a fund for us to consider? Oh, I most certainly do. I would say It's certainly something to consider for those of us who are Motley Fool investors tending maybe more towards growth and tech-oriented type of stocks. Something to consider to add a little bit of diversification to your portfolio might

be the Vanguard Consumer Staples ETF with the ticker VDC. The companies here are tried and true. The top 10 holdings are Procter & Gamble, Coke, Pepsi, Costco, Walmart, those types of companies, Estee Lauder, Colgate, Palmolive. These are holding up much better than the overall market. So far this year, the S&P 500 is down 16%, NASDAQ down 25%, but this ETF is only down 6%. Another way to measure the volatility would be its beta. According to Morningstar, the beta of this ETF is 0.6%.

What does that mean? Well, if you have a beta of 1%, you're as volatile as the market. If you have a beta greater than 1%, you're a little bit more volatile. This has 0.6%, so it's about 40% less volatile than the overall market. Plus, it has a decent dividend yield of 2.3% compared to the 1.6% from the S&P 500. I think this would be a good way to add a little bit more ballast to maybe the more aggressive side of your stock portfolio. Emily, I want to thank you for joining us and closing out our series here. What is your parting advice for investing in the consumer goods sector?

This is one sector where boots-on-the-ground research can be really valuable. it can be easy to write off experiences as anecdotal. But if you're an investor, I mean, if you're interested in investing in Chipotle, get out and go to a Chipotle or a Walmart or a Target. This is one of those industries that lends itself really well to those personal experiences. It helps you get an idea about the value of a brand's brand and can give you some, I guess, inside scoop in your investment and make you personally interested in following it alongside when you have those personal experiences to back it up. So don't be afraid to get out there and just experience these companies for yourself before making an investment.

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. Thank you.