Motley Fool Hidden Gems Investing - Motley Fool Money: 03.14.2014

Episode Date: March 14, 2014

Clothing retailers report some unfashionable earnings. GM deals with new questions.  And Amazon hikes the price of Prime.   Our analysts discuss these stories and share three stocks on their radar.  Plus, Motley Fool co-founder Tom Gardner weighs in on Apple, Tesla, and investing in outsiders. Learn more about your ad choices. Visit megaphone.fm/adchoices

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to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. From Motley Fool Supernova, Matt Argesinger, and for Million Dollar Portfolio, Ron Gross. Good to see you guys, as always do. Hey, hey, hey. We will look at the automotive industry and dip into the Fool mailbag. Motley Fool CEO Tom Gardner will stop by this week to share what he looks for in investments. And as always, we'll give you an inside look at the stocks on our radar.

But we begin this week with the retail industry. The troubles continue, particularly when it comes to apparel retail. Aeropostale hitting a 10-year low after their latest quarterly results. and Express. Their fourth quarter profit was a miss, Jason. They lowered guidance. We're going to talk retail writ large, but when you look at apparel retail, it is really getting ugly out there. Yeah. I mean, we're seeing sort of the two opposite ends of the spectrum here. And like you mentioned with Express and with Aeropostale, I mean, they are witnessing some really difficult

times right now. Top line revenues stagnant. The same store sales are falling. They're guiding for negative same-store sales here in the future. And, you know, I mean, there's just not a lot to look forward to with these companies in the coming year. And I think one of the problems is that they have such a small and sort of fickle market base to begin with. So, you look at Aeropostale, that's a teen retailer. And Express focuses essentially on folks in that 20- to 30-year-old range. So, they're just very limited from the very get-go. Add that to the fact that There are a million and one clothing retailers out there, and fashion is so fickle, especially at that age. I don't see any reason for investors to be too terribly optimistic about those companies, at least for the coming year.

But you look on the other side of the coin there with companies like Williams-Sonoma, for example, that really just killed it. And Williams-Sonoma, I think, is an interesting case here because, I mean, it's a bit of a higher price point, no question there. But you also see Williams-Sonoma really tackling that e-commerce space. And that direct-to-consumer movement is really what we're seeing. Companies like Nike and Under Armour and Williams-Sonoma, they're upping their game to sort of play on Amazon's turf there. And so their e-commerce sales for 2013 were around 44% of net sales. That's tremendous. I mean, that's really this higher margin revenue that's going to help them on the bottom line.

And that's why they're doing well. Ron, when I look at apparel stocks, and we've talked about this before, in any given one-year period, there's usually one that will do well. But at The Motley Fool, we like to look for long-term investments, and it just seems so cyclical. It almost seems like a guessing game when it comes to these stocks. It's a really, really tough business. And when things go bad, they kind of go bad fast, and this can snowball. Aeropostale, a really good example, not the right merchandise mix. Have to be promotional. You get hit with a bad winter weather. Things get even worse. You have to close stores. Then you start running into liquidity

problems. You don't have the balance sheet to keep things afloat. They had to go into the marketplace and raise $115 million in loans from a private equity player, Sycamore, just to keep the lights on, really, here, because they were going to get in trouble. These things really can turn. Maddie? I feel like we've been talking about apparel retailing for so long now. Is there a company not named Michael Kors in the apparel space that didn't have a great holiday. And I just feel like in this space, I feel like you could almost buy a basket of these. I'm not advising this at all, but I'm just saying you could buy a basket, I think, of these apparel companies, which have

all been so beaten down. And I feel like a year from now, your return might actually look pretty good. I don't know. I think that's reasonable. I mean, we saw the same thing with Gab just a few years ago. I mean, Gab stocks saw these record lows, basically. I mean, there's some cotton issues there. Yeah, I mean, I think there are some cases where you could look at least past sort of the short-term issues. Is there a brand there that really has some staying power? I don't know that I'd be looking at Aeropostale necessarily. I mean, I kind of look at that as sort of the radio shack of teen retail. I don't see many good things for them on the horizon. But there are some other names out there that are probably worth a look, you know, for some maybe dumpster diving

today. As Jason was saying, there are people that are putting up good numbers. So the weather isn't, you know, being blamed by everyone, whether it's Williams-Sonoma, comp store sales of 10.4 percent, Ulta, the beauty store, up 9.2 percent. There are some people that are putting up some really good numbers. Williams-Sonoma is really focusing on the kind of multi-channel. If the weather's bad, you can still hop online. So despite all the competition, whether it's Amazon, Sur La Table, Bed Bath & Beyond, they're still able to put up strong numbers, which is very impressive. Well, and Jason, we talked about this a little bit earlier in the week. You look at a company like Express, which is so heavily dependent on malls, it is so tied to malls. And that almost

seems like an automatic red flag when you're looking at retailers. That seems like, as an investor, that might want to be, that should be your first question. What kind of mall presence do you have? Because if it's significance, we've seen mall traffic just dropping steadily over the last few years. Yeah. And I don't know that that's necessarily going to be coming back anytime soon. I mean, people are just shopping in different ways now. And it's interesting also to look at the very high end of this retail space, companies like Tiffany, for example, are really still putting in great numbers. So there are some great performers out there. It's not all across the board. This week, Amazon.com made it official. The company raised the price of its Prime membership

service from $79 a year to $99 a year. There was an email that went out to members on Thursday. Matt, I got my email. I looked at it. I was surprised by the fact that Jeff Bezos, the CEO, didn't sign it um i don't necessarily see that as a bad thing i was just surprised by it i got the sense from our conversation earlier you didn't really like the email so much well i you know it was direct it was to the point it was short um you know it essentially amazon highlighted the reasons some of the reasons they're they've made the move and by the way kudos to jmo because i know you've been talking a while that this was inevitable and that you and you said 99 was going to be you know we talked about various prices multi-tiers but you know it ended up being 99

from $79. Yeah, the letter, it did the job. I just thought maybe with Amazon always putting the customer on such a high place in their consciousness that it would have been a little more fluff. I guess I was looking for a little fluff. Tell me, like, make me feel good about paying $20 more a year. Tell you you're handsome? Is that what you were looking for? Sure. It would have greased it a little bit. I mean, really, though, we're only talking about essentially someone paying about $6.50 now, they're going to start paying $8.25. since, you know, starting in April.

It's not, I mean, that is not a big move for most households. I mean, there's a lot of reports out there saying, oh, Amazon's going to lose 10% of their Prime members or 20% of their Prime members. I do not see that happening in the least. I mean, this is still, for $99, when you consider now all you get, you know, tens of millions of items that you can get shipped to you for, you know, in two days, 40,000 movies and TV shows, a potential music streaming service, all the other services you're getting with Amazon, it just seems like one of the best bargains out there.

Do you think if you're not a person that consumes the streaming part of this offering and you're just literally using it for the shipping, do you think most people, more than 50 percent, are doing well or would have spent more than $99 on shipping during the course of a year? I think so. Well, because if you look at the – apparently the average Prime member, the person who you think is probably the most engaged with Amazon, is spending somewhere around $1,500 a month. That's the estimate. A year. I'm sorry, a year on Amazon. And if you think, well, you know, depending on the kinds of things they're buying, though. And how many shipments.

Right, and how many shipments. You know, really, if you do the math, if you make five or seven shipments to yourself over the course of a year, it's pretty much paying for itself. Jason, we saw shares of Amazon up this week, so any fears that the stock was going to take a hit were allayed. I'm curious, though, do you think the stock was up because this move was widely telegraphed, we were expecting it, Or was it up because the price point came in at $99? Because Amazon had said previously, we're going to raise the price anywhere from $20 to $40, and they came in at the low end. Well, I mean, I think that that probably has a lot to do with it there. I think they came out with the right price point at $99 because perception here really is everything.

And $99 sounds a lot better than $100. And so investors like us can look at this and say, all right, we know that Amazon is going to take that bump, that little extra bit of money in that prime membership. and they're going to do productive things with it. So as an investor, I think you have to be very excited about that. We know that Bezos is very concerned about that last mile, and I'm convinced he's going to be investing heavily in that last mile to control more of that after what happened last holiday season. And I've said it before.

If you're concerned about the price increase in Prime, just overcome that by buying a few Amazon shares. Hang on to them. You're going to make your money back 10 times over, and you're going to still be able to participate in that Prime relationship without having to really worry about anything. anyway. Yeah, quickly, I think it's an indication of pricing power. We see it in Costco, which can raise their membership dollars here. We see it with Amazon. Warren Buffett famously says

it's probably one of his most, if not the most important thing he looks at at a company. And if this succeeds and we don't see a significant pullback and the retention rates stay good, then it's an indication that Amazon has pricing power and that's important to investors. And I bet you we see Netflix possibly take a little bit of advantage of this as well, Because I'm also convinced now that, I mean, Netflix could probably raise their price to $9.99 and see virtually no churn from that as well. Well, as long as they don't invoke the word quickster, it's probably going to go better than last time. Target's problems from the data breach last year continue to drag on. The company said this week that its computer security system had alerted it to suspicious activity after their network had been hacked.

But the company ultimately decided to ignore it. Molly Snyder, a spokeswoman for Target, said in a statement, with the benefit of hindsight, we are investigating whether if different judgments had been made, the outcome may have been different. You think? They have not handled this well from the outset. And I look at this statement and I ask the question, Ron, that I have asked before, where is the CEO in all of this? Where is Greg Steinhoffel? He really needs to be out in front on this. Yeah, he's not out in front. We've seen that the senior tech person had to resign after this is over. The company has not done a great job here from a public relations standpoint. And when I first started to think about the story, I first started to think, you know, I was a little bit kind of miffed. This is a disclosure issue. This is a judgment issue. Who's running this company? What's going on?

I did some more reading. These kinds of alerts that they get from their malware, from their spyware kind of vendors, you get hundreds of these a day if you're a company like Target. And usually, you shove it off. You say, that's not important, that's not important, that's not important. The one time it becomes important, oops, and it turns into something really bad. So the tech people are not saying this is really a big mess up. They're saying It's an unfortunate one, but Target really didn't screw up so bad. Coming up, General Motors learns that when the feds come knocking on your front door, it's not so they can give you candy and flowers.

Stay right here. This is Motley Fool Money. 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. Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser, Matt Argesinger, and Ron Gross. Last month, General Motors recalled 1.6 million vehicles over a problem with ignition switches that suddenly turned off and cut power. Now federal prosecutors are investigating whether GM is criminally responsible for not properly disclosing the problem, which first came to light 10 years ago.

And oh, by the way, Jason, subcommittees in both the U.S. House and Senate are planning for public hearings as well. And this is a story that's been out for a couple of weeks. But this week, we see the feds getting involved. We see the stocks really starting to take a little bit of a hit. Yeah, I mean, the thing that's concerning here is really how far the state's back. And they had known about issues here, not only GM, but the National Highway Traffic Safety Administration. And they were running tests anywhere between 2003, 2005 on this. And they just came back with the tests were inconclusive.

They knew something was wrong, but it was inconclusive. So, I mean, I kind of feel like if it's inconclusive, maybe doesn't that warrant a little further research as opposed to just kind of pushing it aside? And it seems like they decided to push it aside. So certainly GM is not the only culpable party here. But I do think that, you know, I've said this before. I think that CEO Mary Barra is in a good situation to the extent that former management really screwed this one up in a big way. I mean, they have just left GM hanging in so many different ways. She really is in a good position to respond to this well and to help sort of gain a little bit more reputation back to GM here.

But it's going to be a tough uphill slog. Now, I haven't really followed the story very closely, but are they sort of – were able to get rid of a lot of these liabilities or at least their culpability for this with the bankruptcy that happened or the – I guess the – whatever you want to call it, the reorganization that happened in 2008 and 2009? I think that just jumped into a long line of problems that the company has been having. But I can't imagine that helped the situation at all. In 2013, auto dealers in New Jersey sold 500,000 vehicles. In the state of New Jersey, Tesla Motors sold 500. Not 500,000, just 500. And yet, New Jersey just became the latest state to ban the direct sale of Tesla's cars to consumers.

Matty, they have joined Texas and North Carolina and other states. Is this a distraction for Tesla Motors, or is this a significant problem? No, I think this is just a very short-term problem for Tesla. But I think it says there are bigger implications for exactly how people buy cars in this country. And the states, like New Jersey, that are doing this, that are kind of adhering to these arcane laws. I mean, people buy things these days, whether it's cars or an oven. I mean, they're used to being able to go online, see things, go to a showroom, check it out, try it, and then order it at their own convenience.

They don't want to go to a dealership which has thousands of cars and a bunch of pushy salesmen who are trying to get them to leave with a car. And I think that by sticking with these laws, these laws were enacted way back because auto companies at the time had a lot of leveraging power on dealerships and were able to push them around, force them to take inventory they didn't want to. So states enacted these protections against dealerships. But these dealerships have turned these into essentially monopoly situations

about how cars are actually sold in each state. And it's just something that I expect will not be in existence several years from now. But it's something that at least Tesla is putting a spotlight on it. You can always email us. Radioatfool.com is our email address. We got a bunch of responses to last week's show when we talked about what scent you would like to wake up to. And our man behind the glass, Steve Broido, asked, what about the smell of progress, my friends? From the Reverend Jacob Birch in Ontario, Canada, who wrote, the smell of progress?

That's sulfur. From Matt Benson in Tucson, Arizona, my wife is about to retire and start breeding dogs. What about waking up to the scent of puppy breath? And from Tom Turner in Texas, in all my years of listening, Steve had the best line I've ever heard. It's Saturday night and I'm still laughing. Thanks for everything you guys do. Let's bring in our man, Steve Broido, because it is that time to share the stocks that are

on our radar. Ron Gross, what do you got? I got X1, ticker symbol X-O-N-E. It's one of those high-flying 3D printing companies that have pulled back. This one is focused on industrial 3D printing. We've had our eye on it for a really long time. It's off 48% from its high. Barron's publication took a swipe at it during the week, saying these were overhyped and overvalued.

But we're interested in it, and they report on Wednesday, so I want to see what they say. Steve Bruno, question about X1? First off, thanks so much to our listeners for those lovely emails. They were terrific. Thank you very much. You made me feel good about myself for the first time in a long time. In terms of X1, my dad, I believe, is an X1 or has been. He's talked about it being very thinly traded or difficult to trade.

Do you have any information on that? Well, it is a small cap stock, about $590 million market cap. So that would probably speak to its liquidity. But, you know, it's certainly enough for the average investors to buy some shares. Matt, what do you got this week? Ron Gross talking 3D printer? I know. What world is he shocked in?

No, my stock is Caslight Health, ticker CSLT. This is a company that just IPO'd on Friday. I'm just going to say two things about it. $13 million in revenue last year. $13 million. After the IPO, $3.5 billion market cap. And that's a problem because... I don't even know what this company does.

They do health information in the cloud. There you go. But that's an extreme, crazy valuation to me. What do you think, Steve? Steve? Sell. that's what i was looking no question just going straight to sell jason we got about a minute left what do you got yeah we talked a little bit last week about coupons.com ipo ticker c-o-u-p uh you

know coupons represent a very big market opportunity out there and i think that as mobile technology continues to grow uh coupons.com stands to benefit from this i mean they're leading the way with the platform they have 700 uh consumer packaged goods partners with 2 000 brands and about 60 000 retailers across North America. So while I initially laughed this one off, it's actually a business I'm becoming a little bit more fond of. Steve, do I need to print them or can I show them the coupon on my phone? That's the beauty. You don't have to print it. You can just show them the coupon on your phone. And they also just made an acquisition where you can load those coupons on your payment cards like Visa, American Express, MasterCard. Is the URL coupons.com?

I think actually it's the smellofprogress.com, but I'll check that. Jason Moser, Matt Argersinger, Ron Gross. Guys, thanks for being here. Thanks, Greg. Thanks. Up next, Motley Fool CEO and co-founder Tom Gardner shares his thoughts on Tesla Motors and who he thinks Apple's next CEO should be. Stay right here.

You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Tom Gardner is the co-founder, co-chairman of the board, and CEO here at The Motley Fool. And he joins me in studio. Good to see you. Hey, Chris. Great to be here.

I should mention that in addition to all of that, you're also the lead advisor of Motley Fool One, which is our all-access service. And there's a lot of exciting stuff going on with the service. I want to get to that. in a moment. But first, I wanted to touch on a couple of things. And let's start with the market in general, because you've said over the last couple of months that you'd be more than fine with the market dropping 10% in a given year, in this given year. Desperate for it to happen. Well, and earlier in the week, we saw Seth Klarman, the hedge fund manager, come out and

talk about how he thinks this is an overheated market. And just to set the context, Seth Klarman is not a guy who really seeks the spotlight. This is not Carl Icahn who's tweeting and going on CNBC, that sort of thing. First, I'm curious what you thought of Klarman's comments. And second, do you think we're going to get that 10% correction that you're desperately hoping for? I think Seth Klarman is like the one of your two parents when you were growing up who came in with the early announcement that it was bedtime. And it was like, yeah, right. Well, you know, kind of, right?

It's like, yes, I'm preparing for bed. But this one parent for me lacks the authority to make it happen right now. So they're signaling that it's going to happen. I mean, it's not lacking authority, just whatever. It's the dynamics of the household. You get that warning shot. you know, it's bedtime, and you know you've got another 40 minutes if you can scramble around, keep your game going a couple extra turns. And that's sort of Seth Klarman coming out now and

letting us know that the market is starting to look a little bit richly valued. And remember that Seth is, I mean, I don't know Seth, so I shouldn't say it's Seth. Mr. Klarman is a pretty deep value investor. He's often substantially in cash and very selectively buys awesome situations. and his returns are incredible. He's got amazing returns. So first thing is not a good idea to just dismiss him out of hand, but I would recognize that he invests very differently than most people. He's not a Peter Lynch growth investor. I think there are many, many growth situations that he's missed just because they aren't his cup of tea. So I think we all have to recognize what we're particularly good at as investors and try and

deepen that expertise and understand the context and the consequences of the way that we invest. So the consequences of the way Seth Klarman invests is that he will often sell a little too soon or miss a growth company. But that's fine. Bernard Baruch was an amazing investor. He crushed the market and he said, I made so much money because I always sold too soon. So against that, you have Warren Buffett saying the best time to sell is never. So, so much of investing is developing your philosophy and your principles, understanding which circumstance they will work most effectively, and in certain cases, accepting the consequences that the market's not going to be great for you given how you invest.

I would say that my approach right now says that we're in the bottom of the sixth inning on the maybe top of the seventh inning on the great market that we've had over the last five years. I don't feel any impending doom, but I don't think that this is as great a time to be looking for pure growth companies as it was a few innings ago. Earlier this week, New Jersey became the latest state to ban the direct sale of Tesla Motors vehicles to consumers. That is another stock that's had an amazing run. Investors, myself included, would love to see a 10% drop in that stock so I could get in at a lower price. But I'm curious, when you see that, and New Jersey is following the footsteps of states like Texas and North Carolina, what goes through your mind as someone who studies businesses when you see this specific effect to target a company?

First, I always dislike it. I always have a negative reaction. I remember there's a company that has been sort of competing in the world of the veterinarian business trying to allow you to buy some veterinarian supplements and medications online. But no, it has to come through a vet. And some of the medications they're selling, it's like it doesn't have to go through a vet. It's just that that's the competitive structure and the rules have been set up that way and those aren't fair rules. That's not a good system for competition. So overall, my first reaction is negative.

My second reaction is positive because I'm like, what happens when you say this book is banned or, oh, no, we – this group is outraged at this movie. Everybody wants to see it. Everybody is curious about it. Why? What's the big deal? Why do they not want me to see a Tesla? They don't want me to be able to test drive a Tesla. It's against the law to test drive a Tesla in this state.

I mean that just makes me excited to go see what it's all about. So I think that spurs consumer enthusiasm. Listen, the U.S. has been trained. Our population has been trained on open markets. We've grown up with them. So when we hear that, all of the people that are placing that constraint get negative associations in the minds of most people. And I think that it won't be but a speed bump for Tesla. You wrote recently on Fool.com that you would love to see Apple make a godfather offer to Tesla Motors and install Elon Musk as CEO.

Maybe love. I mean, yeah, maybe. Maybe so. I don't want to put words in your mouth. I think that Elon Musk has a very different perspective on our experience and our little lifetime in the grand sweep of human history and the planet's history. I think he – from listening to his interviews, I don't think you could spend a better hour or four hours of your life if you want to learn about business and innovation and investing than to go onto YouTube, search Elon Musk, and just watch everything you can. I mean he is the most interesting business leader that I've ever encountered, and I put Steve Jobs in second place right behind him in terms of people that I would just love to hear talk about why they're doing what they're doing. so to me what musk lacks is unlimited capital he's having to go out and do the financing for the battery factory so he's having to think about that and i guess the reason that i love the idea of apple buying tesla is that i would like i mean musk is young he's in his early 40s

but i would like him to have the greatest imaginable impact he can have on the world and spending time thinking about financing that is not using his brain to the greatest potential that uh um that that that he can and we can so and overall i think apple would i would suggest they install musk as ceo tim cook returns to ceo he's the best ceo in tech in company in maybe american history steve ballmer's right up there too i just don't think that ceo was necessarily the right role for them but they're they're both amazing people as as business leaders. And so, yeah, I think it would be awesome

to have Musk, unlimited capital, take his vision on fire. People say, well, he doesn't want to maintain the Apple product line. He's thinking too far in the future. Great. That's what Apple, I mean, Apple was pushing so far in the future.

Steve Jobs didn't want to maintain the iPod. That wasn't like, he's like, wow, we need to maintain the iPod. He was pushing for the next one, the next one, the next one. I think automobiles and Apple and Tesla and Musk, pretty cool. You're listening to Motley Fool Money,

talking with Tom Gardner, co-founder, co-chairman of the board, and CEO at The Motley Fool. As I mentioned, you are also the lead advisor at Motley Fool One, which is the all-access service. It only opens up to new members twice a year, and that's happening this month. For anyone interested in kicking the tires, you can go to foolone.com. That's one-o-n-e, foolone.com, and you can get access to the Motley Fool One member lobby, which gives you a sneak preview of the service, the Q&A center, all sorts of things, including the video vault so you can watch exclusive interviews that Tom has conducted with CEOs, thought leaders. You sat down with Will Thorndyke, less well-known than Malcolm Gladwell,

author of a book called The Outsiders. And in it, he examines the success of eight companies which over the long term have beaten the market. And And what's a little surprising is that some of these companies are largely unknown. What are some of the attributes of these outsider companies that, as investors, we should maybe start to look for? Well, Will Thorndyke manages a private equity firm and has for more than 20 years called Housatonic Partners. He was three or four years ahead of me in school, so I knew him as a teenager. He was a great football player. And his private equity firm has returned something between 20% and 25% a year for 20 years.

So Will Thorndike is an outsider. And some of the qualities to look for – it's always great to remind ourselves that this is happening out there in the investment world, that we can worry about what's happening in one market period or another or whether there's going to be a 10% correction. And you have somebody like Will Thorndike, 20% to 25% a year going back 20 years through the two of the worst bear markets. to be 10 years apart in American history. So what are some of the factors to look for? Well, Will says he spends 30% to 50% of his time before buying a public company stock studying the CEO. That's incredible. I mean, you think of all the obsession in the financial media or earnings quarter, what's happening, what are the numbers, all the rest. 30% to 50% of the time of somebody who literally crushes the averages is on just the CEO. So I find that very interesting

and important. Number two, the organizations are very decentralized. So the CEO is often sitting in an office of 15 people with an employee base at the overall company of 17,000. So the person is not empire building. They're not making acquisitions. They don't want to be on the cover of magazines. They often don't give interviews. The four outsider companies that we're looking for in the Motley Fool One experience that we're having together over the next couple of weeks, we're going to pick our favorite one on April 1st for new members and Motley Fool One. We pretty much couldn't get an interview with any of the CEOs. I had lunch with Rich Handler, the CEO of Lucadia, but it's actually a litmus test that you've got an outsider

CEO if they pretty much just are focused on working and building their company. And maybe one or two other things. They know how to use their capital effectively given the circumstances that they face. So each of these companies comes at things from a very different situation. General dynamics was a disaster when the new CEO came in and turned it around. It's been an unbelievable investment. Henry Singleton ran a company called Teledyne. I think his returns were north of 20% a year for 25 plus years. And he repurchased 90% of the company's stock in the public markets. And one of the things Will points out is you actually don't want a company that has a regular share buyback program, like every month or every quarter, they're buying some stock back

to balance out the options they're granting. You want somebody who goes in and makes a huge tender offer to buy back a huge amount of stock when the price is low. And that's what somebody like Henry Singleton did. So these outsider CEOs of these outsider companies, they are, in the best sense of the word, financial engineers. They're engineers. They're engineering their company with an understanding of how to play the financial game. And that's been shown to deliver incredible returns for investors. You mentioned Lucadia National. That is a company that I had not ever heard of until the last month or so for people like me who are just learning about this. One of the quotes we have on the walls here at The Motley Fool is Peter Lynch in our Peter Lynch conference room.

And the quote is, never invest an idea that you can't illustrate with a crayon. What does the crayon drawing of Lucadia National look like? I think it's like a boat with with a bunch of cargo on it. Maybe it's it's not. We kind of started this conversation with the fact that Seth Klarman invests one way, other people invest another way. And you need to understand the principles and philosophies that you're using for your approach. So Peter Lynch has that approach. And I think that's very helpful, particularly for a lot of individual investors that should be focusing on the fact that the U.S. economy is driven 70 percent by consumer facing companies. And that's where we can find

great stocks to invest in. You never have to go beyond that zone to have a great investment career. Just look at a company like Panera or Starbucks or Apple or all these companies we have a direct relationship with. Lucadia, not so much. Lucadia is a baby Berkshire. So the approach is to buy companies in unrelated industries based on valuation, the ability to strengthen the operations of that company, the ability to use the cash flow of that business to make other acquisitions. So you'll have a company intentionally, for example, buying other businesses that have tremendous operating losses because they think they can turn the company around and, oh, by the way, they'll pay a little extra than anyone else would because they're going

to use all those existing operating losses to offset the gains they have as a tax offset. So this is the mindset of the outsider CEO. They're looking at it like a big board game and they're trying to figure – so Lucadia is a holding company. They have sort of one of the largest beef processing businesses. The largest business is Jeffries. That's an investment bank. Essentially what they're doing is they're looking around for opportunities like Buffett does and Buffett ends up with See's Candy, Geico, Coca-Cola, Wells Fargo. So it's the mindset of investor.

And really that is Thorndike's basic point in The Outsiders is that you don't have to have this to have a great business to invest in, but it really helps if your CEO is an investor. If they really look at the world and they realize how to evaluate future opportunities, place a proper valuation, and use capital effectively. Coming up, more with Tom Gardner right after this. You're listening to Motley Fool Money. Welcome back to Motley Fool Money, talking with Motley Fool co-founder and CEO Tom Gardner. What do you look for when you're evaluating leadership in a company, and specifically the CEO? Number one is that they are truly passionate about what they're doing. and 95 of the time that means that they are truly passionate about the industry

and the products or services that that company is offering or could offer the five percent of the time that i've encountered where that isn't true and have ended up with a great investment is like a company alderwoods which is funeral homes and it was taken over by or they brought a new ceo new leadership and they basically said when we talked to them this is going back about 10 years this is a great stock i think stock went up like four times in four years after we bought it, they said, you know, we don't know really a darn thing about funeral homes. We're not passionate about funeral homes. We're turnaround guys and gals. So we come in, we turn a supermarket business around, then we jump over and turn. So their passion is to turn

things around. And that would be the 5% of the time. The other 95% of the time, I want to know Selim Basul at Middleby is obsessed with ovens. I want to know that Howard Schultz is passionate about coffee and the experience of being in a Starbucks. I want to know that Monty Moran And Stephen Ells cared deeply about high-quality food, a different way of fast food, a healthier version, and a really awesome throughput and efficiency to their restaurants at Chipotle. So number one is passion. Number two – and passion is in evidence. I mean how can you tell, right? Every CEO is passionate.

Well, one way is how long have they been in the industry? How long have they been at the company? Are they jumping around like they're getting searched by a recruiting firm for new titles and compensation opportunities at different levels? or are they really in an industry because they care deeply about it? Do they have a meaningful stake in the business? And are they creating a culture that people want to follow them and go to work at? So I look at Glassdoor. I look at the ratings of every public company.

I compare them to the other companies in their industry, and it starts to show you businesses that are great for long-term investment like Facebook or Whole Foods or Google. I mean these places are shining examples of a workplace that people are excited to go. Like their stress level goes down when they go to work. right? Their happiness rises. They're given autonomy. They have great rewards, but it's mostly about the purpose that they're on and the people they get to work with and the challenges of their job. And, you know, if you look at Glassdoor, if you look at the data of Gallup

surveys, at least 75% of companies are doing this totally or mostly wrong. So there's a huge competitive long-term advantage in the top quartile that are getting it right, thinking about it intensely and have a leader that cares about the people that are working there every day. You mentioned the passion. I'm glad you mentioned the tenure because when you were ticking off those names, one of the names that came to my mind was Sally Smith, the longtime CEO at Buffalo Wild Wings, because I think that in addition to, well, you want to make sure that they're there, they also have that experience where they're just not going to get rattled quarter after quarter. You've got that experienced captain at the helm of the ship. You know, the beauty is if you can find that person early on. Right. If you learn that they don't get rattled because they've been there for 27 years and they're going to be leaving in five years. Thankfully, Sally is in her in her early 50s and she's got she's totally diehard at Buffalo Wild Wings. So the dream is to find somebody like Mark Zuckerberg early on. In 20 years, Mark Zuckerberg will be Jeff Bezos' age. I mean, that's unbelievable.

I mean, should Mark choose to remain at the helm of Facebook for the next 20 years? I think Facebook, Cheryl, I think every stakeholder at Facebook, except privacy advocates perhaps, have an incredible experience ahead of them. You can go to fool1.com to check out the Motley Fool 1 member lobby. More information about the four outsider stocks that Tom is considering for his everlasting portfolio. And as I mentioned, the Video Vault interviews with CEOs from Costco, Chipotle, Buffalo Wild Wings. And you will learn how to access and benefit from all the Motley Fool's different services like Million Dollar Portfolio, Pro, Supernova, in a way that frankly is easier than it's ever been before. Tom Gardner, co-founder, co-chairman of the board, and CEO. Thanks for being here.

Thanks, Chris. That's going to do it for this week's edition of Motley Fool Money. Remember, you can always drop us an email, radioatfool.com. That's radioatfool.com. And you can follow us on Twitter, at Motley Fool Money. Our engineer is Steve Broido. The show is mixed by Rick Engdahl. Our producer is Matt Greer.

I'm Chris Hill. Thanks for listening. We'll see you next week.