Motley Fool Hidden Gems Investing - Markets Love Certainty

Episode Date: November 6, 2024

Donald Trump’s 2024 election victory gave investors a swift and decisive read on America’s next president. We sort through the reaction and everything else going on in the market this week.   (00:20) Asit Sharma and Dylan Lewis discuss: - The reactions to Donald’s Trump’s 2024 Presidential victory across the crypto, currency, and stock markets. And a reminder as you see Trump Trade headlines for specific sectors and companies. - Super Micro’s woes, and the outlook for a company with no auditor, no annual report and perhaps soon, no listing exchange. - Nvidia topping Apple as the most valuable company in the world and heading into the Dow Jones Industrial Average soon.  - Why Novo Nordisk and Eli Lilly are giving totally different reads on the markets for GLP-1 drugs like Wegovy and Zepbound.  Companies discussed: BTC, SMCI, NVDA, AAPL, INTC, NVO Host: Dylan Lewis Guests: Asit Sharma Producer: Mary Long Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

The results are in. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me. Dylan, thank you for having me. Well, Asit, the market loves certainty, and the day after the 2024 election, we have it. Donald Trump has more than 270 electoral votes and a large lead in the popular vote. He has been elected our 47th president of the United States. And as we tape today, S&P 500 up about 2%, dollar having one of its best days ever in

eight years, and Bitcoin at all-time highs. There has been no shortage of chatter about the Trump trade and the market pricing in a win. Anything jump out to you as we see the market process the news? Dylan, I think what jumps out to me most is the broad-based movement across different sectors, across different investing styles. As you point out, the market doesn't like uncertainty. It likes certainty. So one thing we have here is a quick result. That certainly helps rather than us piecing together over days and weeks who actually won. So this is a net positive

in the market size and also the certainty that comes with having seen the Trump administration in action, a dry run, if you will, for four years. So the market already understands the priorities that a new administration is going to bring. It's going to be one that is less harsh on the regulatory side. It will favor things like crypto. As you mentioned, there's a strong dollar element to that, a lot of talking up of the USD. Small caps could finally have their turn in the sun because of business climate that will just favor lower corporate tax or not, let's put it this way, not raising any corporate tax. And investors also, I think, just were expecting a longer wait, again, to circle back to that. With that out of the way, there's just some relief trade

going on as well as the specific types of trades that we collectively call the Trump trade. If we bring that down to what's going on with some individual companies, we see businesses with crypto upside like Coinbase and Robinhood up today. Also, a lot of businesses in the financial services segment up big today. Tesla up over 10% today. Elon Musk close with President Trump. I will offer up what I think is maybe a helpful note, and I am speaking to myself a little bit here as well as an investor.

The assumption going into a Trump administration would be lower taxes, probably tariff and trade elements, probably a little bit more of a friendly regulatory environment for businesses. But the administration and any administration does not exist in a vacuum. They inherit what's been going well, what's been going poorly, both in the United States and around the world. And that means that there are going to be a lot of factors that sway the priorities of this administration. And so I think as we are seeing headlines about sectors that will do well during a Trump administration, sectors that will do poorly during a Trump administration, we need to caution ourselves a little bit here this week, Asit.

I really like that, Dylan, because every election cycle, we do get money flowing in or flowing out based on the results. But that, in retrospect, is just always temporary. We have to get back to life. I mean, you and I are back to work today. I'm sure like a lot of people, we were up a little bit later than usual just to see what the results would be. And whether you're on either side of that vote. There's been a lot of mental concern regardless in what's going to happen because we as humans don't like uncertainty either. We want to see our candidate win. For some of us that happened, for some of us it didn't, but life goes on. And I think you're absolutely correct. Markets understand this inherently. So markets tend to focus on corporate

earnings, the bigger waves in society, what's going on on the macro front, what's going on in global trade geopolitics, all that quickly becomes the norm again. So I would say for people who are listening today, wondering how long will this exuberance go on? Personally, I don't think it'll go on that long. Things will return to normal. They'll normalize. And we go back to our jobs as being investors who are focused on companies first and foremost and their business prospects. I will say, I mean, we very intentionally published an episode this past weekend, Stocks to Buy No Matter Who is President. And that's because here at The Fool, we are net buyers of stocks. We are focused on following quality businesses, buying and holding them for

the long term. Nothing about what's going on today, this week, next week is going to change that. Totally. All right. As Americans waited for results on the 2024 election, investors finally got results from Super Micro Computer. One week ago, the company's auditor, Ernst & Young, resigned and they scheduled their earnings release for after the bell on election night. Asit, I'm going to say that that is not a great sign. Well, it's a good try. You got to give them credit. This is sort of amping up the old filing on a late Friday afternoon, your 8K earnings

release, or if you have bad news, I should say, because earnings are typically scheduled in advance, sort of bearing that before the weekend, or if there's some other big business news trying to get underneath that. So let's give management... look, management here has been beat up in the press a lot, and probably deservedly so. So let's give them credit for that timing. However, as it's painfully obvious here, the results were underwhelming. Supermicro gave a net sales figure range that's very small now, it's basically $5.9 billion to $6 billion, and they were guiding to almost $7 billion

their range before. That is related to what's going on. I read reports earlier that now Nvidia may be rerouting some of its orders from this server supplier to protect their own supply chain because they understand Supermicro is in a little bit of trouble here, maybe at risk of a delisting, and that has all kinds of follow-on effects. Yeah, these weren't great earnings. The stock is down today, but really the problems here are snowballing. I think so much is related to that initial short report by Hindenburg in August, followed by the resignation of Ernst & Young. And maybe, Dylan, we could chat about this for just a second here.

The resignation was so interesting because Ernst & Young really didn't point a red-hot finger at any one issue. But to translate their audit ease, they said, look, we can't rely on the assertions in these financial statements anymore. We don't recommend that anyone else does either." That's saying a lot, because auditors get paid to put their stamp on financial statements and to say, look, we've tested the assertions, so you can rely on these financial statements. It was very interesting communication saying that they couldn't rely not just on the financial statements, but the representations by the

audit committee. I want to chat about that a bit and maybe get your thoughts first on it. I was going to ask you, Asit, does that break your heart a little bit as a former auditor? Yeah, it does. Because I always think, look, if you can't rely on the financial statements after a damning report by a third party, which has just gone in there and done some research by rolling up their sleeves, like you as the auditor who has access to not just the financial statements, but also lots of schedules that the company is required to supply to you, so you can test those assertions. It breaks my heart that after the fact, so

often the auditors come and say, listen here, I've looked at these statements, I wouldn't rely on these. Come on, where were you? All these quarters, right? I think what's maybe equally or more troubling with that is, you mentioned the specter of Supermicro being delisted. That has happened before with this company. You go back to 2019, they faced similar issues, failing to file their 10-K on time. You look at the management team currently in place, same as back then, more or less. Founder and CEO Charles Liang was in charge then. The CFO of the company now, David Weigand, was the chief compliance officer since 2018. A lot of the folks that were there when this

company has previously experienced problems with this are calling the shots right now. Yes, I think this is something that was so persuasive in the Hindenburg report. They did talk about their assertion or their claim that the distribution of inventory sales was looking sketchy. Maybe they are channel stuffing, maybe Supermicro is just sending product to record sales, bad instances of timing. there, but just the fact that not even three years after all this fine and reprimand by the SEC, they went and hired back most of the same team. I think you're right, Dylan, that's so

bad to see and it's so disappointing. But here's something else. The idea that the, and I've used this word so many times in this conversation already, I'm going to bring it up But again, the idea that the auditor said they couldn't rely on the representations is specific, and it's something to be aware of. If you're an investor who's thinking, oh, maybe I buy this thing, it's so beat up, maybe it comes back. So, as an auditor, you've got to test very specific statements that a company makes. And these have to do with the rights to assets, your obligations on the marketplace, your allocations, your valuations, completeness of the assets, display of the financials, presentation of those financials. Each of these assertions, you really make sure you can understand and say, OK, they're legit. And taken as a whole, a person out there who's just a lay investor can read these financial statements and rely on them.

The fact that they didn't point to something specific and say, okay, look, the internal controls over financial reporting, they really need to be fixed here. The fact that they're walking away like these financials stink means to me or signals to me they cannot verify the completeness assertion. They don't know if inventory is indeed being shipped. They can't really nail down the revenue recognition piece. they don't understand or can't verify that the sales that are being recorded are legit. So this is a real red flag. Be careful out there if you want to trade this as maybe like a turnaround play. Wait, just be patient.

Be very careful here. Leading insurers know that fragmented operations don't cut it anymore. Policyholders expect more, and modern insurers meet those expectations with Add-In. From effortless premium collections to instant claims payouts, All right, while Supermicro is a former AI darling that has fallen on some hard times, the granddaddy of AI darlings keeps winning. This week, NVIDIA passed Apple to become the largest company in the world as we tape the chipmaker worth $3.5 trillion.

Is there anything Jensen Huang can't do at this point, Asit? Well, you know, I'd like to see him beat me in a foot race. No, joking. I would think that Jensen Huang could beat me in a foot race with his leather jacket on. Yeah, I don't know if there's much more that he can do or can't do at this point. I will say, though, it's interesting that the Dow waited so long to put NVIDIA in, and it could be that the Dow is what it seems, sort of an old school index that waits until a company is in its absolute prime, but the best days of fervent growth may be behind. So, you've got this really solid earnings play that could rise some more. It's just a little weird to me how long the Dow often seems to wait versus, say, the S&P 500

in identifying the companies that are going to lead the future. What did you think on seeing that? We had speculated back when they had announced the stock split earlier this year, that 10-for-1 split, that the Dow inclusion was coming and that they were paving the way for that. the high share price being prohibitive for it entering the index because it is a share price weighted index. I think it's a win if you want the average to be representative of activity and importance in the market and for companies. What I think is fascinating about this is as the largest company in the world, NVIDIA will be the largest component of the S&P 500, 7%. In the Dow, it will

be in the bottom half and only make up about 2.5% of the index. Yeah, Dylan, I seem to remember you pointing out to me that United Health Group would have a lot more sway over the future of the Dow than a company like Nvidia, which just seems a little backward, as much as I admire United Health Group as a company. And maybe in the ultimate sign of the times, Nvidia replacing Intel in the Dow. That is the company that will be exiting. If you're looking at the market cap side of things, Intel, a $100 billion company, NVIDIA, 35X larger with its current market cap. What's interesting enough, though, NVIDIA

has about $100 billion in trailing 12-month revenue, Intel about $50. The size and scale of these businesses swings pretty dramatically. I think it's interesting to think about how market cap plays into the way that we represent the economy in one way, but sales tells a very different picture for a company like NVIDIA because so much growth is being priced into it. In a weird way, the Dow normalizes for that. I think the Dow does. I think it's also interesting that over time, the Dow's focus on earnings capability also is telling on how the economy changes, because we should remember here that Intel in the 90s was the Nvidia of its day. As much as it may surprise

some younger investors to hear this, the hype was even bigger. Intel was thought to be this juggernaut that would never give up share. And few people, there were some voices back in the 90s, but few people thought that its business would become as commoditized as it did. And the same might happen to NVIDIA. So I'll be so interested to see if we take another stretch where 30 years later NVIDIA is in the Dow, what it contributes to the movement of the Dow and whether it's still relevant. I'm sort of guessing it's got a shot at being relevant though. I think so. I think there's a chance. To your earlier point on the types of companies that the Dow tends to focus on and tends to bring into the index, there are six new entrants in

the past decade, if you include Nvidia just being added soon. We have Apple in 2015, Salesforce in 2020, Honeywell in 2020, Amgen in 2020, and Amazon in 2024. A very different look than the traditionally industrial index. Yeah. And I think that industrial today means something different than it did in the 1920s or all throughout the 20th century. So yeah, I guess maybe one day it might be more appropriate to change the industrial's name, but it still has so much, I don't know, pizzazz, the Dow Jones industrials. It has a real ring to it, doesn't it? If you use a walking cane like I do. I am going to throw a trivia question at you. I promise, listeners, I did not prepare Asit for this one, so I'm curious where he goes with this.

Do you know the longest-running company in the Dow? It entered the index in 1932. Oh, my gosh. I mean, I would have to say this would be – would it be AT&T? Is AT&T still in the Dow? Entered as the Bell Company? Something like that? It's Procter & Gamble.

Oh, wow. Not traditionally an industrial company. So, even going back to the longest-running one, there's a little bit of a misnomer there in the name, I suppose. That's so great. And it goes to show, I think, what Warren Buffett has preached for so many years, like these staple businesses. And I can't remember Berkshire's investments in Procter & Gamble over the years, but the idea that big consumer goods companies, staples, they're great companies if you have duration on your side. If If you don't, what does it matter? But if you've got multi-decade duration on your side

as an investor and you're going to pass some stock off to relatives when you go, they're not bad companies. But let's just say this also, there are so many companies that were more specialized than Procter & Gamble that just never made it. They stayed in decades, but then look at Whirlpool and so many parts of GE which have been spun off and actually are no longer in the Dow. All right, bringing us home today, a company that may be at odds with the consumer-packaged goods you were just talking about and some of those snack foods, we're going to have a little bit of a read on the weight loss drug market.

Last week, Eli Lilly reported earnings provided some guidance that were below expectations due to underperformance in its Zepbound and Moonjaro weight loss and diabetes drugs. Asit, this week, competitor Novo Nordisk out with earnings and news that their blockbuster weight drug, Wegovy, posted better-than-expected results. What's going on in the weight loss market? I think the tug here is between what investors want really long-term out of this market and what these companies can produce. Right now, the results are phenomenal. Sales of Wegovy beat estimates by a little bit. I think they came in at $2.5 billion, and maybe the consensus

on sales of those drugs, of that drug in particular, sorry, was $2.3 billion. So that helped ease the market concerns a little bit. But on the other hand, a Zempic sales, also made by Novo Nordisk, fell a little bit short. And here's what investors are left with. Okay, you've got this class of drugs, which seems like a miracle class of drugs, and you've got this planet of people who are not that healthy. So shouldn't companies like Novo Nordisk and Eli just be able to sail into the sunset by supplying these drugs? And the answer is more complicated because there's still a lot of capital investment on the manufacturing side that has to be worked through billions of dollars in manufacturing capacity. And also right now, the compounding

of these drugs by pharmacies is being allowed by the FDA in the US, the biggest and strongest market for the GLP class ones, both for diabetes and weight loss. So on the compounding side, you've got the potential for lots of small outfits to take away some of the share that rightfully investors want to be in the hands of Novo Nordisk and Eli Lilly. And that's what I worry about a lot if I'm looking at this as a long-term investment. They could still be blockbuster drugs, but will they be those sort of mega blockbusters that carry these companies for a long time? And so much of that relies on how the FDA looks at these drugs in the future as well. So, I think the picture is murky after this, although overall, Novo Nordisk, maybe, even

though the stock is down a little bit this year, maybe those numbers reassured investors a little bit about the near-term trajectory for these drugs. It feels like this industry is generally heading in the right direction, but that we are at this, okay, what does this actually look like at scale type moment, where all of these people who are supplying these drugs need the storage options, the cold storage options to be able to make those drugs available and hold up. They need to get their inventory levels right when it comes to how much they should be stocking. They need to understand what their recycle and refresh rates are going to be. And this is, I guess, the growing pains that come with figuring some of those things

out and understanding exactly what a more steady state demand might look like. Yeah, Dylan, and that's complicated by the stuff that's in the pipeline, the R&D pipeline. What else can these drugs be used for? There's some evidence that there may be some cardiovascular therapies that could result from this class of drugs in the years to come. So that has to be balanced in there too. And for investors, this all becomes really complicated. But we should note that the major manufacturers of these drugs aren't just focused on TLP-1

drugs and they've been great investments. Again, let's go back since we're talking duration today, let's go back decades. People who held Eli Lilly in the 1990s are doing just fine today if they're able to hold that company. I think once you get to a certain scale in the pharmaceutical industry, you've got staying power and you have the R&D capabilities and the manufacturing capabilities for the next big thing. They may be for those who look beyond a five-year time horizon, that classic Motley Fool, hold for at least five years. I mean, if you're looking out 10 years or 15 years, I would say that the GLP drugs are a signal to buy these companies and to hold them. The fact that they've been able to capitalize so quickly on that. And we should also lump in here

something that has nothing to do with these drugs, but look at mRNA companies that came of age during COVID. So there's some signals out there right now in the healthcare industry that say it's sort of always like it has been. Companies who can hire the best scientists, have big balance sheets, have that capacity to manufacture, have good marketing organizations that market to the doctors, they're not bad. I mean, buy them and sort of forget about them. I have a few like that in my own portfolio. All right, Asit Sharma, I know you and I were both up late last night. Let's get some sleep. Thanks for joining me today. Let's do it. Thanks a lot. Fools, 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 The Motley Fool's editorial standards and are not approved by advertisers. The Motley Fool only picks products it'd personally recommend to friends like you. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow. you