Motley Fool Hidden Gems Investing - Making Sense of Market Hyperbole

Episode Date: August 14, 2025

There are some stunningly large data points pulling the market in different directions between cash on the sidelines and market valuations. These numbers can be a little paralyzing for investors without context and sifting through the signal versus the noise. Plus, space investing is having its week in the sun and wrapping up second quarter earnings. Matt Frankel, Jon Quast, and Tyler Crowe discuss: – The massive cash pile sitting on the sidelines – How they invest when broader signals say the market’s overvalued. – The fast changing landscape in the space indsury – Second quarter earnings surprises from Dlocal, Circle Internet Group, and Sea Limited. Companies discussed: BAC, BA, LMT, RKLB, FLY, NOC, DLO, CRCL, SE Host: Tyler Crowe Guests: Matt Frankel, Jon Quast. Engineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Tyler Crowe. Making sense of market headline hyperbole, the space industry is taking off, and companies are still posting surprisingly strong earnings results. This is Motley Fool Money. This is Motley Fool Money. Thanks for listening. I'm Tyler Crowe, joined by longtime Fools Matt Frankel and John Quast. We've got a pretty busy slate today. We're going to cover big earnings from C Limited, Circle Internet Group, and D Local. And we're going to tackle some of the most significant developments in space investing in quite some time. But first, we're going to talk about animal spirits and kind of take a pulse of the market because I think it's something really on people's minds lately. Now, gents, you and I have been writing about companies

in the market for several years now. And one thing our editors love is when there's gigantic numbers in the headlines. Now, John, when we were doing a little show prep, you kind of showed us going in that said there were some rather large headline numbers that made your eyes pop out a little bit. What'd you see? Well, it regards money on the sideline, Tyler. The most recent number that I've seen here is that there's $7.4 trillion in money market funds, which is far and away a record high. This is money that could be invested in stocks, but right now it's just sitting there and passively earning interest. I think the knee-jerk reaction to a number like this is that maybe stocks could soar if investors decide to suddenly

move that money out of money market funds and into stocks. And so, maybe when the Fed lowers the rates, that will be incentive enough for people to change up their strategies, and then stocks will moon, as the kids say. As the kids say. Certainly not the three of us are saying that, because that's way beyond our age category. But Matt, when it comes to big headlines, and getting back to our editors, we actually got to deliver on what those numbers mean. When we hear $7.4 trillion, it sounds like a lot, but in context, is that really a lot compared to what the market is? I mean, it is. Just to run down some of the numbers, there is roughly $60 trillion in U.S. stock market valuations combined.

That means more than 12% of it is in potentially investable money sitting on the sidelines. As long as interest rates remain relatively high, I don't see a big rotation into the stock market. It is likely to be gradual over time. You get a quarter-point rate cut. Some of it would come into stocks. It wouldn't be $7 trillion jumping into the market at once. But if risk-free interest rates come down, which a money market fund is a risk-free interest rate, it could be another story altogether. There's only so much money that would ever rotate out. Investors always keep some cash. That wouldn't go from $7.4 trillion to zero. But it could have a big impact. And it's also worth mentioning, that's just money market funds. That doesn't include people who put money

in high-yield savings, CD accounts, short-term treasuries, and all these other risk-free investments just because rates are high. Yeah. I mean, look, we're not going to accuse anyone of clickbait here. But let's be real. Investors being completely reasonable and holding 12% of their portfolio in cash, it's really not going to get a lot of people looking at the top of the news site for that sort of information. But that said, beyond the $7.4 trillion, there's an important lesson here for investors when it comes to signal and noise, don't you think, John? Yeah. And I was being facetious earlier. There's totally a lesson here that we can learn. The headlines are what they're trying to get you to read, right? And

it's always better to have a good, unprecedented record number in the headline to get your attention, but it's always good to keep an open mind and say, okay, what is there more to this headline that maybe I'm not being told? Here's another unprecedented thing that's out there right now. If you've ever heard of the so-called Buffett indicator, named after famous investor Warren Buffett, this is a measure of market valuations compared to the GDP. It just hit 212%, whereas Warren Buffett says 100% is a more fairly valued market. Essentially, what this is saying is that the market is two times or more overvalued. On the same token, a Bank of America just had a survey that said a record number of fund managers,

91%, say that stocks are overvalued. 91% of these people who make a living by investing money, they're sitting there waving the warning flag. Stocks are overvalued. But again, maybe that's only half the story in both of these cases. So take the Buffett indicator. The economy wasn't globalized back when it first came out. We're a much more global economy. So comparing U.S. stock markets to U.S. GDP isn't as good of an indicator as it used to be. And then you take the Bank of America survey. Yeah, 91% are saying it's overvalued. But at the same time, fund managers' cash levels are dropping and are below 4% right now. They're saying overvalued, but at the same time, they're still investing their money. Yeah, throwing up a lot of different signals

here. You're talking about surveys saying things are overvalued. The case Shiller cyclically adjusted price-to-earnings ratio stands at 37.5%. That's the third highest reading after the dot-com bubble and the 2021 boom. Similarly, the potential growth indicator, which is a metric actually develop here at The Motley Fool, and something that's used to inform decisions about the Hidden Gems portfolio, is also signaling similar market signals that things are a little overvalued right now. So, when you hear these things of overvalued, all these survey numbers, things like that, Matt, I'm going to start with you, Matt, sorry. How does this inform or influence your investing decisions? It does, but it's important to mention what these valuation metrics are all talking about.

When you hear the Buffett indicator says the stock market is overvalued, that essentially is talking about the S&P 500. That makes up over 80% of the stock market. You're talking about the big companies, and that's really what's been driving the growth. If you apply that same indicator to, say, just the Russell 2000 or just emerging markets or any of these other smaller indices, it tells a completely different story. But yes, I absolutely use these valuation metrics to inform my decisions, especially in regards to deciding what parts of the market to invest in. Tyler, I know both you and I see a lot of opportunities in international stocks right now, because they're not nearly as frothy-looking as U.S. large caps. That's just

one example of how I use this in my thought process. John, same question to you. Do numbers about the market conditions that we just talked about actually change your approach to buying stocks? No. Market conditions don't really change my approach. If I've learned anything over the last decade of investing, I've learned that it's really important to put new money to work regularly. This is a core part of the Motley Fool investing approach. It really works. I don't know what the market can do, and information can change on a dime. If you remember the banking crisis just a couple of years ago, that started with just a post on social media and quickly spiraled out of control, nobody could have predicted that that would have been what happened. So why bother

trying to predict something if it is futile at the outset? And especially when you consider every single year, every three years, over a five-year span, there are always some stocks that have rewarded shareholders quite well. My job is not to find out what the market is going to do tomorrow. My job is to find those investment opportunities that are going to be good over the next three to five years. Letting businesses do the heavy lifting for you is always a great approach. So coming up next, we're going to look at space, the final frontier of investing. And what better way than with a delicious Pret organic coffee, Starting with just $1 all day, every day, now until December 31st.

We're back, and I'm glad that this is an audio podcast because the looks of exasperation from that really cringy transition from John and Matt would make for not-so-good video. But let's talk space investing because it has been a very busy week for the industry. We won't be able to cover all of it. I want to focus on three stories from the past week. One, the Trump administration has issued an executive order to loosen regulations on commercial space companies, especially around licensing and permitting our launches. The United Launch Alliance, the Boeing and Lockheed joint venture that's been the backbone of commercial space for decades, just launched its new Vulcan Rocket for its first commercial mission and kind of trying to compete again with SpaceX.

And then we also have Firefly Aerospace, which is another orbital launch company with its own set of bona fides in terms of what it's capable of. Had a rather successful IPO last week where shares popped 38% on its debut. Now, Matt, you follow Hidden Gems' darling Rocket Lab very much in this space area. Now, when you see this trio of stories, you've got looser regulations, and then two competitors showing bona fides again. Do you see this as a net positive or a net negative for Rocket Lab? Well, the looser regulations are definitely a net positive. But when it comes to the competitors, the space economy, for one thing, it's so massive that there are terms for several big winners, especially in terms of future potential.

I'm not terribly worried about the others. Rocket Lab, next to SpaceX, is the most successful launcher ever and has done 64 successful launches. The simple way to say it is launching things into space. There's room for a lot of growth for a lot of companies here. Rocket Labs also uses a lot more of a Razor and Blades model. They're more of an integrated provider of space. They not only manufacture and launch rockets, they manufacture components for rockets, they provide servicing. So, as the business grows and as the space economy evolves, there's a lot of different ways they could take that, which could give them a nice little competitive edge. I read the prospectus for Firefly Aerospace, and to be honest,

knee-jerk reaction is that this business model looks an awful lot like Rocket Lab. Now, John, you recently studied up on and wrote about the Firefly Aerospace IPO. Did anything in particular stand out to you? I think the thing that stood out most to me was that this company really wants you to know that it landed on the moon. I mean, it feels like every answer to every question in every interview was that Firefly Aerospace has landed on the moon. And look, I get it. Landing on the moon is a really cool thing. I'm happy for the company. I'm fascinated by space exploration personally. I love the idea of a permanent moon base. The company has talked about maybe it can be involved in getting a nuclear reactor on the moon. That's something that the current

administration wants to make happen. So look, I get it. The moon landing is reason for optimism when it comes to the long-term prospects of this business. Now, I will say that according to Firefly's own filings, it's targeting markets that could be worth $40 billion one day. It's not targeting the entire space economy. As of this taping, it's valued at more than $7 billion. So That's actually a pretty steep valuation in relation to the size of the market it's going after. What stood out to me is it's still operating at a gross loss, and that's probably going to continue for a little while. Now, it is going to try to make reusable rockets. It's working in collaboration with Northrop Grumman. That should be able to get some costs down

eventually. But for now, the financials look pretty rough. It doesn't really have a predictable revenue stream. Think SpaceX has Starlink. That's a predictable thing it can count on. Firefly Aerospace is going to be a little bit choppier. It's going to depend on its launches. It's going to depend on its moon landings. So I think there's still a little bit of risk here. The valuation is high. So I'm on the sidelines personally, but very interesting company. Yeah. I think my biggest thing from kind of reading all of this, especially with the Firefly Aerospace IPOs, both for Rocket Lab, Firefly, the biggest question I actually have right now is how much success will they have building relationships with clients that basically

aren't NASA, the DoD, and Space Force, and basically government contracts. I mean, those are great clients to have and customers, but they can only spend so much money. And this industry is becoming more competitive by the day. I mean, I wouldn't be surprised if we saw a few more orbital launch companies go public in a year or two. So I think it's something we certainly want to keep an eye on. So coming up next, the best of last week's earnings. You gotta try breakfast at A&W And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st.

You gotta try breakfast at A&W At participating A&W locations in Ontario. We're mostly through earnings season, and the post-mortem of the second quarter is starting to come out. According to FactSet, a data aggregator, 81% of companies that have reported so far this quarter have reported earnings per share results actually above Wall Street analyst estimates. Now, if it holds for the entire quarter, we're only about 90% of companies reporting, it'll be the most companies to report above estimates in two years and well above the 10-year average for beating markets.

Now, I'm tempted to rant about analysts giving easy hurdles to clear, but this is a family show, so we'll keep that for another time. What we know is that a lot of companies have beat earnings, but there were some recent results that have really stood out in the past week or so. So, John, I want you to go first, and which one did you see? Yeah, thanks, Tyler. I was quite surprised with results from DLocal, symbol D-L-O. Stock is up nicely here after earnings. This is a small Uruguayan fintech company that specializes in cross-border payments. It's led by former MercadoLibre executive Pedro Arndt. So it does have some experience management, but investors have historically been really nervous with this

one. So basically, D-Local is building some payment rails on its own that help cross-border payments. And over time, it's been taking a smaller and smaller cut of transactions. This is called its take rate. The gross profit margin has been going down over time, even though revenue growth has been quite substantial. You can see this in its most recent guidance here for 2025. It expects total payment volume growth of 40% to 50%. That's red hot. But it only expects revenue growth of 30% to 40%. A smaller cut of that payment volume to actually be its revenue. The fear here is that it's going to keep deteriorating more and more over time. The profit margins are going to go down.

That said, even with that long-term concern, I think that at some point there's a really interesting business here that could be worth earning. And so it's really focusing on these emerging market economies. That's where the growth is happening. Think Africa, think South America. Revenue has doubled over the last three years. It's getting approval to operate in more countries. Its net revenue retention rate of 145% says that its customers are using it more over time. It's free cash flow positive. The share count is down. There's a lot of things to like here. And if we can start getting clarity on how low is that gross profit margin going to go and stabilize, once it does stabilize, this could be a rewarding investment.

Yeah, it's interesting. There's a lot of growth because cross-border payments is one of those things that people can be very frustrated with. Somebody who spent some time overseas can very much attest to that. But also, like the discussion about space, there seems to be a lot of companies coming out of the woodwork to fix cross-border payments, which actually kind of explains the declining take rate you alluded to here. And since we're talking about cross-border payments, Matt, I'm going to kind of interject and do mine first. But it's the stablecoin company Circle Internet Group, which is CRCL. Now, it didn't report an earnings beat because it actually doesn't have any earnings yet. It went public a couple of weeks ago, and as a result, it had a lot

of one-time expenses related to its IPO. Some of those things can be hard to sparse out of what precisely it was and wasn't a one-time cost, which can be a challenge for a lot of investors. But no matter what management says, sometimes those one-times become a little more recurring. What was impressive, though, was that 58% year-over-year increase in revenue for this company. And there's a lot of buzz around stablecoins and their ability to handle cross-border payments and transactions and things like that after the Trump administration passed the Genius Acts, which set some regulatory frameworks for stablecoins and kind of, I would say, legitimized the space a little bit more for institutional investors and things like that.

So, there's clearly an appetite for stablecoins that Circle is serving with its USDC coin and its EURC stablecoins, basically matching U.S. dollars and euros. Now, here's what I find fascinating about this business, and it's kind of a weird quirk, is that even though it is in the business of minting and redeeming stablecoins in U.S. dollar and euros, the vast majority of its revenue actually comes from the interest earned on the cash of dollars and euros that it holds while people own their stable coins. I am genuinely curious how Circle's business will perform in a declining interest rate environment, which is something that the Federal Reserve has been hinting at, at least certain governors and other players in government have been asking for

for a while. If your entire business is making interest rate spread, that might hit revenue a little bit. Matt, I know you're chomping at the bit to discuss C Limited. We've seen it a couple times in some Slack group channels and things like that. You have the floor. Matt Frankel. First of all, I love Circle. I'm glad to see them having success. I've known their leaders since the early days. I had dinner with them at a 2014 conference when they were valued at something like $5 million. I'm so thrilled to see them having the success they are. Sea Limited was the best-performing stock in my portfolio last year. So, of course, I'm going to talk about it. It was up 162% last year, and it's up another 65% this year,

including a 20% post-earnings pop just last week. And there's good reason, because just a few years ago, the company was losing money hand over fist. In 2022, it reported a net loss of $1.7 billion and had just single-digit, really just agonizingly slow revenue growth. One of its segments was declining. Last year, it grew revenue by 28% and was nicely profitable. It really turned things around. This year, it's looking even better. In the most recent quarterly report, C increased its revenue by 38% year-over-year, and all three of its business segments were doing really, really well. For example, the Shopee, which is their e-commerce platform, grew sales by 34%. The digital entertainment platform, which was left for dead by investors a couple of years ago

as a declining business, is guiding for 30% bookings growth year over year. Not only that, but gross profit in the company grew by 50% year over year. Net income was roughly 5X what it was a year ago, so the margins are improving very quickly. The stock still trades for about 45 five times forward earnings. But it has large market opportunities. It's not cheap, but with the growth numbers it's putting up, it's not that expensive either. I would love to get into these numbers a little bit deeper, but unfortunately, that's actually all the time we have for today. So we're going to have to leave it at that and maybe a discussion we can have a little bit later on our next show. So Matt, John, thanks for

sharing your thoughts with us. Let's hit the disclosure and get out of here. 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 the stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisers are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out the show notes. Thanks to our producer, Dan Boyd, for keeping this herd of cats together.

And for Matt, John, and I, thanks for listening, and we'll chat again soon.