Motley Fool Hidden Gems Investing - Motley Fool Money: 03.16.2012

Episode Date: March 16, 2012

S&P 500 dividends reach record levels. Goldman Sachs deals with a very public resignation.  Disney deals with a box office flop.  And Yahoo! sues Facebok.   Our analysts discuss those stories and share three stocks on their radar.  Plus, we talk big banks and Wall Street culture with Credit Agricole Securities Managing Director Mike Mayo, author of Exile on Wall Street: One Analyst's Fight to Save the Big Banks from Themselves. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week from Motley Fool Inside Value, Joe Maker, from Motley Fool Income Investor, James Early, and for Million Dollar Portfolio, Ron Gross. Gentlemen, good to see you. Good to see you, Chris. How are you doing, Chris? Nokia is working on a tablet computer. Yahoo is working on a lawsuit against Facebook.

And Goldman Sachs is working on its own image. We will get into all of that. Plus, as always, we've got a few stocks on our radar. But we are going to begin today not with the big macro, but with dividends. Bloomberg reporting this week that the dividends being paid by companies in the S&P 500 have reached a record level. James, did you throw a party when this news broke? Chris, I am not above being predictable.

So, yes, I am very giddy about this. Obviously, more dividends are great. This is so exciting, though, really, because companies are somewhere between lottery winners and professional athletes in their prudent use of cash. In other words, they tend to waste cash all the time. It's only under the guise of capital budgeting and spreadsheets and, frankly, ego. So the fact that they're actually giving this cash back is really inspiring. Ron, I know you're not quite the dividend guy that James is, but to James' point, is this really the best way you like to see companies allocating capital, as opposed to

acquisitions, share buybacks? Well, it's good to see because it means companies are feeling better about their business, better about the economy. So, that's first for me. Second, depending on where their stock happens to be at the time, if it represents a good value or a bad value, I would either like to see them repurchase shares or return money to shareholders in the form of a dividend. I like dividends. You can choose whether to take it in cash, you can choose whether to reinvest it back in the stock, which, if you're a long-term buy-and-hold kind of investor, that really accumulates stock over time. Joe?

Yeah, dividends are my weapon of choice on that. Share buybacks are something that companies almost universally screw up. It's so painful to watch. During the financial crisis, no one was buying back their stock at the absolute best time, and now everyone is dogpiling and buying back stock after the market's doubled. Nice thing about dividends, to Ron's point, is you can roll that cash back in the company if you want, but it's nice to go ahead and take it out of there. O' James, this seems like one of those rare things that is automatically a win for individual investors. Am I right about that, or is there some kind of downside, potentially?

Yes, you were right. O' Okay. As long as they remain tax-advantaged, it's extra good as well. If they ever become taxed as ordinary income, again, that would be less favorable. It's worth mentioning that a buyback can actually be better than a dividend. Again, as Joe said, if the price is low, because it does have a tax advantage to a dividend. But for the most part, they're done at terrible times. So this is essentially a win. We've talked plenty of times about big dividend payers, Johnson & Johnson, Coca-Cola.

Let's just go around the table real quick. What's a dividend stock that's sort of off the radar you think investors should know about, James? Chris, if you like big dividend payers, I will give you Stonemore Partners, which has a 9.4% yield. What's the company? Stonemore Partners, S-T-O-N is the ticker. It is an MLP, a master limited partnership, so read up about the accounting. This is the second largest cemetery operator in the U.S. So basically it has these plots, and when your time comes, you can arrange.

You can actually do pre-need or at-need, as they call it, depending on how you want to play things. But it's obviously not going anywhere anytime soon. It's a pretty steady company. But for those retirees who like dividends, I'd be careful of buying that one. No, I mean it. I'd be careful about buying that one in an IRA because it is an LP. Yeah, it's a little bit more tricky. You might end up getting a little bit of a tax problem.

What about you, Ron? Companies like Verizon pays a nice 5% or GlaxoSmithKline pays 5%. Really stable companies with interest rates near zero now. 5% is nice. Joe? Yeah, I'd go with Retail Opportunity Investment Corp. It's a small real estate company, as you might assume. It's a REIT, and it basically goes out and buys shopping centers, turns them around, sells them.

They've done a phenomenal job, boosted the dividend quite a bit, and I think there's a long growth runway there. Goldman Sachs made headlines this week when Greg Smith, an executive at Goldman Sachs, resigned from the firm in a letter published in the New York Times. He said Goldman Sachs had changed into a, quote, toxic and destructive environment where the firm's interests were placed ahead of the client's interests. Ron, first and foremost, what did you think, as someone who used to work on Wall Street, what did you think when you first saw this letter? I was getting emails from my Wall Street buddies all day about it. I think as long as the company

is not doing something illegal, and you're really elevating yourself to whistleblower status, it's rather unprofessional to air your dirty laundry or your grievances in public like that. So I didn't think that was something that he should have done. You know, more power to him if he wants to, you know, leave a lucrative job because of his ethics, you know, no longer allow him to work in that kind of environment. Good for him. I don't think you need to go to the New York Times. But even if he's not alleging any wrongdoing or any criminality and he wasn't in his letter, if you're a client of Goldman Sachs and you see that, aren't you picking up the phone and calling them? I've had dealings with Goldman Sachs in

the past. These are hard-working, very ... they're an elite investment bank. They're very good at what they do. They're very smart. They don't make business and win clients by screwing clients. So, that wouldn't be a very good business model. Now, let's not be naive. Investment banks are in this business to make money, and a lot of it. So, they certainly are looking out for themselves as well. But they do a pretty good job when they come to the table to represent their clients. Joe, Goldman Sachs is a stock you've recommended. What did you think of the letter? Well, my first impression was, well, I guess this guy just saw Jerry Maguire a couple months

ago, and now feels really bad about his life. But getting past the cynical side, I do think it was a little, kind of a degree of being naive here with this guy. But I will say that obviously they do need to take care of their clients. To Ron's point, I think they are taking care of their clients. Everyone recognizes Goldman as basically being the best of breed on Wall Street, and they get business because they're the best and they're the smartest. That's why I'm invested with them, and the stock is cheap as sin. But I don't think that they're destroying the business model in quite the same way that this guy makes it sound. But, you know, if they do continually keep tripping up clients in a very public way and having incidents like this,

you know, it might cost them business, but it's certainly also not doing the stock any favors. I was stunned to hear that an investment bank may be putting its own interest before its clients. But, you know, so that piece is not news. I mean, maybe this guy took 12 years to sort of sort that out. I think that the bigger thing here, this is a one-off that's not a big deal. But if we are seeing with Occupy Wall Street, with this general push sort of against wealth, against finance, a pullback from, let's say, fewer top graduates want to work at Goldman Sachs. Maybe some clients are going to stay there, but certainly like a public client of Goldman, I'm sure they have some government type business. Those clients might be more sensitive to these bad headlines.

By itself, it's not much, but if it's an indication of some sort of a trend, then it means something. Joe, just in terms of Goldman's stock, and you alluded to this, you think this is a big deal, a little deal, no deal? I think it's ultimately a no deal. The stock fell about 3.5% the day the letter came out, and it popped back up most of that the next day. I think five years from now, we won't remember this guy's name. A month from now, we won't remember this guy's name. Greg Smith. Greg Smith. I'm going to tattoo it on.

If you want to jot that down. Sure. Sure. This week in tablet computers, Nokia's chief of design said he is spending one-third of his time on a Windows 8 tablet to compete with Apple's iPad. Joe, I also think I heard something this week, speaking of the iPad, about them finally going on sale. Some fruit company. Yeah. What do you think about this, about Nokia really going after the tablet market when it seems like they don't really have a strong foothold in the phone market that they once had.

I don't like their chances, but I like their gusto. And I do think it's a smart move for them to go after it. They're really tight partners with Microsoft, and Microsoft really badly wants to make Windows 8 a success on tablets, and they're willing to subsidize that to make that happen. And a lot of people would naturally be cynical about using a tablet with Windows 8. Everyone's very happy with iPads. It's an amazing value. But there is a lot of opportunity in terms of Office being on tablets and having a more integrated Windows experience that most people are used to. And it fits into the broader ecosystem that most of us are plugged into. So, I do think there's a shot here for them to make some headway.

I also would be very skeptical of it happening. O'Reilly. James? James. I'm so excited I can barely concentrate. O'Reilly. I am curious to see where it will be priced. James. Yeah. That's really interesting. O'Reilly. Will it be in line with the iPad, or will they try to play some games there? Ron, I know Microsoft is a company you follow closely. Just in terms of Microsoft's relationship with Nokia, how important is that relationship for Microsoft, for shareholders

like me? How successful does Nokia need to be for it to make a meaningful impact on Microsoft's bottom line? Well, we like Microsoft exclusive of their deal with Nokia, just from their bread and butter products, and we think the the stock is cheap. Our models show that. If they can make headway with the Nokia phone, or even if this tablet were to make some headway, then the stock is really cheap. You now have growth drivers in Microsoft that you haven't had in years, but we're not counting on that. Yeah, one quiet way these guys are really winning Microsoft and mobile is, they're getting licensing fees on Android phones, and they're strong-arming all these manufacturers in something

like $5 licensing fees per phone. Well, a few hundred thousand phones a day being pumped out with $5, that's some pretty sweet revenue that goes straight to the bottom line. Ironically, they probably make a lot more money on other people's phones than they do their own. O' Coming up, Yahoo! may have discovered a brand new revenue stream, suing Facebook. Details next. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in the studio with Joe Mager, James Hurley, and Ron Gross. Guys, this week Yahoo filed a lawsuit in federal court accusing Facebook of infringing on 10 of Yahoo's patents. Joe, Facebook's IPO is expected sometime in May. How much of a problem is this going to be?

Well, when you can't beat them, sue them. And that seems to be the strategy here at Yahoo. Whatever it takes. The new CEO, Scott Thompson, coming over from PayPal, is looking for every way to wring out some extra value out of the company. In that respect, I like this move. I don't think it'll prove all that successful, but the timing is great in terms of sticking a knife to Facebook's throat, because they're going to need to, or strive to, get this settled before the IPO, because it is an overhanging issue. I do think you'll see Facebook end up wiggling out of it. From what I've read on expert analysis on this, it seems that

the patents that they're claiming are overwhelmingly vague, kind of stuff like, I invented the internet. That's a little extreme, but the general gist is, at worst, Yahoo might be able to wring some money out of Facebook right before their IPO, because they're really sensitive at this time, and they don't want to have to deal with any outstanding risk, and investors don't want that. O' Is this going to change the bottom line for either of these companies in a meaningful way? No, I think it'll be an incremental licensing fee kind of revenue thing. I mean,

Yahoo has much bigger fish to fry here. They're supposedly going to undertake a massive restructuring shortly, which I'm sure will include a lot of layoffs. They have an activist investor that is hot on their heels, as we said, a new CEO, and major problems with people yelling for them to sell their Asian assets. So they've got to get their act together. James? Chris, for me, the more depressing thing is just the state of patents in the software industry in general.

I mean, Yahoo is equivalently patented breathing air in the Internet sense. I mean, one of these patents is for customizing views of information associated with a user, which is sort of just giving different people different views on the screen. It's so generic these days. How much weight do you guys give patent portfolios? I mean, there are certainly companies out there like IBM and Qualcomm that just have huge patent portfolios. It means a ton for their bottom line. How much does that factor into investment decisions? Oh, it does for me.

In some cases, you get a research in motion, where I think the most valuable part of the company is the patents, and at some point it's going to be sold for that. Same thing with Motorola, which Google bought, because basically, Google showed up to a gunfight and was carrying a straw, and they needed to buy Motorola to shore up its patent portfolio. Now that they have them, they are able to more effectively bargain with the Apples of the world, with Microsoft, etc. These guys are all going to ultimately come together and reach some sort of cross-settlement, I think. But in the meantime, it's important to have that protection.

Ron? Yeah, when I value a company, if I'm doing it from a cash flow perspective, then I assume the patents are what allows the company to achieve those cash flows, and I pretty much ignore them. If I'm looking at a company from an asset perspective, then you can try to delve into what perhaps those patents are worth, and you can look at the balance sheet at the intangible assets and actually give them credit, whereas we often discount the value of intangibles.

Disney's latest movie, John Carter, cost $350 million to produce and market. The opening box office in the U.S., $30 million. Ron, I'm a shareholder. As am I. As are my children. How disappointed should I be? It's not great. It has done almost $120 million worldwide, and it will continue to go up. Great. Another $200 million.

Analysts are looking at somewhere between a $50 million and $150 million write-down, which certainly isn't good. To put it into perspective, the studio entertainment business of Disney is by far not their biggest business. Thank God. They only do about $618 million of operating income in that business, versus $8.8 billion of segment operating income for the company overall. A little less this year, too. Yeah, so this will be even less, but it's not like it's their network business,

ESPN and ABC and things like that, that are all of a sudden taking big hits, which would be an even bigger deal. Do you have a guilty movie pleasure? A guilty pleasure movie? A guilty pleasure movie? The really bad Superman 3 with Richard Pryor. Oh. I'll watch it if it's on.

That's outstanding. That's outstandingly bad. That was one of the rare cases where the trailer completely gives away what happens in the movie. James? Chris, I'm torn between Nine and a Half Weeks and Notting Hill. I mean, they're both solid for different reasons. I might go with Notting Hill.

You a Grant fan? I am. You are, interesting. Well, I watch like one movie a year, but I'll make it a Hugh Grant movie. I will say, those are two really solid date movies right there. Joe? How about You've Got Mail? Tom Hanks?

It was the not as good Sleepless in Seattle, which is not as good, what's the Harry Met Sally? That's right, that's right. Steve Roto? I can't decide if Cable Guy is a guilty pleasure or a proud pleasure. Yeah, that's some good stuff. I'm going to go with guilty pleasure for you on that one. You, Chris?

Waterworld. Waterworld, I saw it in the theater. That's very guilty. I was the guy. To this day, I will defend Waterworld. You can always drop us an email at radioatfool.com. At the end of last week's show, when we talked about Joe heading off for his bachelor party, I asked people to drop some email to us about bachelor parties, and we got some great responses.

Can we read most of them? Sort of, you know, what's a memorable bachelor party experience from Jonathan Shipley. Have you ever seen your father and your future father-in-law playing in a giant bouncy house? I did, at my bachelor party. From Rick in Texas, sent us an email about a party in which he got sick and passed out, and then the groom was beaten so badly with belts that the wedding was nearly canceled. The lesson? Never attend a bachelor party full of military academy graduates.

Wow. I think there are more lessons than that in there. Probably. And finally, from Michelle, she sent us a great email about what she called the standard stripper at the bachelor party attended by a bunch of 20 and 30-something Dungeons and Dragons players. But the best part of her email, she wrote, you guys gave me the exquisite experience of striking my father speechless when we got into a discussion about the Facebook IPO, and I more or less sounded like I knew what I was talking about. Nice. Always happy to help out in that regard. In the minute and a half or so we have left, Joe's getting married.

This is Joe's last show before he goes off to get married. We're all married. Let's just go around. Ron Gross, a little marital advice for our man Joe? I'm taking notes, Ron. As soon as you're done here, go right to your computer, open up your Microsoft Outlook, put down a recurring appointment for your anniversary yearly. You need a pop-up.

Ron, I've already done that. That's smart. Then I got nothing for you. That's smart. James? My advice to Steve, Chris, as you recall, I think, was don't try to squeeze water from a rock, which sounded more jaded than it was. It's just about finding fulfillment. So maybe the better way to say it is some people tend to put the brakes on their personal progress when they get into a marriage.

I think that's a mistake because if you don't bring your strongest self to the marriage, you're just baggage. So that's my advice, whatever that means. That's pretty deep. It's not as actionable as Ron's tip, though. I'll give you one actionable tip, and then we'll turn it over to Steve. Everything ages, but not everything grows old. And something that never grows old, surprising your wife with flowers. That never grows old.

So just file that one away. Steve Broido, first of all, how did James' advice to you work out? Because you're recently married. Yeah, fairly recently. We now have a child, too. It worked out great. So it appears that it did work out great. So as a recently married person, advice for Joe?

So I'm going to look down the road for you, Joe. If you decide to have children and your son or daughter is crying, just ask if the kid is hungry. Women seem to love that. If you just say, is he hungry? Yeah, yeah. And look at the wife, too, as you do that. Steve, how long would you tell Joe to wait before having children after getting married? I would wait at least six to ten days.

Joe Mager, James Early, Ron Gross, guys, we'll see you later in the show. Coming up, does Wall Street need to change its ways? We'll talk to banking analyst Mike Mayo right after this. You're listening to Motley Fool Money. If you spend it, please be wiser. If you save it, you're a miser. Well, you're cuckoo. Funny, funny, funny, what money can do.

Welcome back to Motley Fool Money. I'm Chris Hill. In 2008, Fortune magazine named Mike Mayo one of eight people who saw the financial crisis coming. He's currently a banking analyst with CLSA and author of the book Exile on Wall Street, one analyst's fight to save the big banks from themselves. Mike, welcome back to the show. Thanks for having me. I want to start with a story that is generating a lot of buzz this week, and this is the rather public resignation of Greg Smith, a VP at Goldman Sachs. He resigned via an editorial in

the New York Times. Smith said that Goldman had morphed into a, quote, toxic and destructive environment where corporate greed trumps client interests. And again, I'm quoting here, he wrote, it makes me ill how callously people talk about ripping their clients off. What was your reaction to the editorial when you first saw it? And what's your reaction to those criticisms? My reaction was a big wow. It was five in the morning. I'm on the exercise bike reading the editorial. And I've never seen anything like that. I mean, you've heard all sorts of expressions for how you leave a job, but I certainly haven't seen that on Wall Street. And as I thought about this article, it's really a statement about the industry as a whole. So you

mentioned my book. So this is one person at one bank. And as you know, I've worked at six big banks analyzing the industry for a quarter of a century. And this idea of greed trumping client interest, that was the root cause of the financial crisis. And not just during the financial crisis, but the 20 years before, and importantly, what's still taking place today. And so you see greed trumping client interest when you look at the rating agencies or accounting firms or the regulators or the government or a lot of Wall Street analysts. So here you have an individual coming out and saying, greed is still trumping client interest, and I'm on the inside, look at me, but I really see that as a signal of a broader issue for the financial industry. And the extent

that the news has taken off shows you the debate is still taking place. Now, not surprisingly, some folks have come out on the other side in opposition to Greg Smith. And there was an editorial in Bloomberg that was headlined, yes, Mr. Smith, Goldman Sachs is all about making money. And let me just read you the first line of the editorial. Apparently, when Greg Smith arrived at Goldman Sachs Group almost 12 years ago, the legendary investment firm was something like the Make-A-Wish Foundation, existing only to bring light and peace and happiness to the world. To that point, do you think there's been a significant change in how Goldman has conducted its business over the last 12 years? Or is this more of a case of one person,

and in this case, Greg Smith, changing over time? I think it's a statement on how the whole industry has progressed over the last two decades. So when you say our goal is to make money, and I have an incident in my book where someone said our goal is to make money. How are you doing that, Mike? And my answer to the person, it was one of the dealmakers trying to get me to do deals instead of doing independent research, my answer to that person was, in the short term or in the long term?

Goldman Sachs has an expression, they want to be long-term greedy. In other words, to be long-term greedy means treating all of your stakeholders, your clients, your customers, the regulators, your employees, your investors very well, because otherwise your profits today will fall by the wayside. So who knows the position of this person within the firm? I'm sure we'll get more news as the days go on. But I'd say for the industry as a whole, it became a lot more short-term greedy, whether it was more leverage or more financial innovation that was pushed off on customers or all the host of reasons that led to the crisis. I was going to say, before the crisis, Goldman was held up as this big Wall Street bank that had integrity. Was that reputation deserved? Do you think it was overblown? And where do you think Goldman's reputation stands relative to the other big banks now? I continue to see these

isolated events as a microcosm for the industry as a whole. And that's why I wrote the book. It's It's the only book I've ever written. It's the only book I'll ever write because these are not isolated events. And so in this case, the whole industry has lost a degree of integrity. The confidence in the banking industry is at one of the lowest levels it's been at. It's like less than one in four Americans have confidence in the banking system. Now, that might improve. It's on the mend a little bit here.

So to the extent that someone comes out from a bank saying, hey, they don't have integrity, It's an aha moment. That's what we were suspecting about the banking industry. How do you think the other big banks are reacting internally to this public dressing down of Goldman Sachs? Because it would not be unreasonable for someone at Bank of America or Citigroup or one of the other big Wall Street banks to hold up Greg Smith's resignation letter that was published in the New York Times and say, we've got to find a way, as discreetly as possible, to use this to our advantage, to go to potential clients and say, look at this guy who took down Goldman Sachs in the New York Times. We're not like that here.

Yeah, I read one quote saying, you know, Goldman Sachs is doomed. It was from one of the Goldman competitors. So it's no question that, you know, people at other big banks might be high-fiving in the in the the trading aisles um but you know they might also be saying i'm glad it's not us um because what comes around does go around but i look before i moved to new york and my son liked the yankees you know i hated the yankees and every everyone outside of new york you know seems to hate the yankees because they're the best team and tell you the truth goldman sachs has been about the best in the businesses where they operate they rank number one in dealmaking. They still rank number one in dealmaking. So it's just easier to hate the

number one team in the league. You're listening to Motley Fool Money, talking with banking analyst Mike Mayo, author of the book Exile on Wall Street, One Analyst's Fight to Save the Big Banks from Themselves. Just to wrap up on Greg Smith and his resignation, because you're no stranger to stirring up a hornet's nest when it comes to the big banks. When you were working at Credit Suisse in 1999, you issued a call to sell the entire U.S. banking sector. Kind of controversial at the time. Where does someone like Greg Smith go now that he has essentially blasted Goldman Sachs on his way out the door? Yeah, that's what's remarkable about what he did. Is this professional suicide? Or will you still have an opportunity to stay in the business? And I've been fired.

I've been almost, what I thought, fired. I've been at a firm that was shut down. And many times along the way, I just got lucky for being critical of the big banks and still being able to get employed. And this is a drama that's likely to continue to play out. You mentioned your book. one of the things you wrote about is one of the other big Wall Street banks, Citigroup. You call them the poster child for the financial industry's problems. What are a couple of the biggest problems when you look across the big banks on Wall Street, and how do we fix them? Well, when I was on your show last time, I think I mentioned the chairman of Citigroup and all the problems that he had over the years, and he's leaving now. So

So I said one issue is lack of accountability at the big banks. And last time, and I'll say it again, for the three years before the most recent one, you had CEOs of some big banks making over $20 million when their banks lost money. That's not capitalism. That's entitlement. It's fine to make a lot of money if you earn it. But when you don't earn it and get it anyway, that's when it sends a signal to the outsiders that the system is rigged. In some cases, the compensation has been rigged.

So accountability is right up front there, and we need to do better at that. And one way to do better with that is to give shareholders more authority to have a say at these corporations. The shareholders, the owners of the company, if you own more than a few percent of the shares for a couple of years, you should have more say over the compensation, more say over the composition of the board of directors, and sometimes even more say over the strategy. You raise a point that is something that we've debated here at The Motley Fool, And I think that we can't be the only ones debating it. And it's this whole notion of sort of the line of capitalism, because you've got Bloomberg

coming out and saying, well, duh, yeah, Goldman Sachs is about making money. Where do you draw the line between what is essentially healthy capitalism, rewarding good behavior, for lack of a better term, and capitalism that's just run amok? there is an expression in the torah that says don't put a stumbling block before the blind and what that means is don't invite participants to make mistakes and i'll compare that to there's a new commercial out michael douglas as a spokesperson for the sec saying don't be like gordon gecko well guess what gordon gecko is going to live forever.

You will always have greed. And so it's the job of the people in charge of the market structure to make sure the incentives are in place to not encourage a stumbling block before the blind. And so healthy capitalism is where those incentives are properly aligned. And so rating agencies and accounting firms getting paid too much by the companies they analyze. Wall Street firms getting paid too much for independent research by being nice to the companies in ways they shouldn't be.

Regulators having extra incentives to be nice to the companies so they can get a nice job when they finish. Politicians being extra nice so they can get more campaign contributions. These are all stumbling blocks before the blind, and these require more structural changes than what we've had, and we've only made a little bit of progress. So that's at one level healthy capitalism versus unhealthy capitalism. You're listening to Motley Fool Money, talking with Mike Mayo, author of the book Exile on Wall Street, One Analyst's Fight to Save the Big Banks from Themselves. The big banks earlier this week got arguably some good news.

The Fed announced the results of the latest round of stress tests on U.S. banks. And of the 19 largest banks, 15 passed the test, which tested the bank's ability to handle sort of a depression-type scenario, 50% drop in stocks, 21% drop in housing, unemployment at 13%. You're a banking analyst. What did you make of those results? It could have been worse. I think the industry's come a long way from the crisis. Capital ratios Those are almost double from where they were a few years ago. The Fed has found its way to go ahead and allow banks to return more money to the investors in the banks. It's not perfect, though.

In a true stress scenario, is it enough? If you have the tail risk coming out of Europe at some point, then I think the stress test might not have adequately reflected the full potential stress on the system. And so the risk of lending to counterparties, other banks, in periods of times of stress, I think the Fed was a little bit liberal in some of even their stress assumptions. Looking at those banks as an investor, are there ones that you like? Are there ones that are absolutely on your avoid list? I mean, it's tempting, and I don't know one one hundredth about the banking industry that you do, but it's tempting to just look at the four that didn't pass the test, you know, Citigroup, SunTrust, Ally Financial, MetLife, to look at them and say, you know what, they're automatically on the avoid list. Well, I have a preference for quality banks right now. I still think there's enough uncertainties out there that something can go wrong.

And at least I want a quality bank that knows how to react to changing circumstances. And so I think on your show last time I said Wells Fargo, and it's come up some since then, but they increased their dividend a lot. It's a solid bank. They don't swing for the fences. And I think as investors, you're not swinging for the fences either. Do you ever think about just switching over your coverage to another industry? Something that's just much more transparent, like retail or something like that?

You know, I shot an email to a couple other analysts here who cover technology and other names like that. But, you know, the long-term hope is that with the stress test, with the regulators, that you create a solid banking system, a safe bank with a lot more capital, steady earning stream, nice flow of dividends back to investors. and that's where the interests of the regulators intersect with the interests of investors. Because if you get that, then you're back to the banking industry of the 1950s when valuations were a whole lot higher. So the main point is you don't need a lot of growth for the stock prices to increase.

You just need for the management of these banks to get that memo and not mess up and make sure the incentives are properly aligned. Unfortunately, we're not there now, but I could see a day before I retire when they get there. Of course, I'm not retiring for a while. You're listening to Motley Fool Money, talking with banking analyst Mike Mayo. Time to wrap up with a round of Buy, Sell, or Hold. A lot of new technologies emerging in the mobile payment space. Buy, Sell, or Hold, the future of cash.

Sell. We're getting rid of paper money just like that? Well, I just think in terms of some of the leaders in the industry, you're having a lot more electronification, and it's happening a lot faster. And my colleague down the hall covers from the online brokers, you know, half of their cash deposits are through mobile devices already. I mean, what happens in 20 years from now? So, you know, increment, we're going to have more electronification.

The buzz has died down, and the New York Knicks have had a rough couple of weeks. Buy, sell, or hold Jeremy Lin. I am a buy. Really? Oh, yeah. I mean, this guy, just don't mess with the working formula. Unfortunately, you know, what choice did you have here? So, you know, whether it's with the Knicks or somebody else, let him do his thing.

It's one of the most popular shows on Broadway, Buy, Sell, or Hold, The Book of Mormon. Buy. Have you seen it? Yeah, I mean, it was hilarious. And, yeah, it's some shows. I definitely recommend it if you come to New York. And finally, he's got the number one album in America, and his latest tour begins March 18th. Buy, Sell, or Hold, Bruce Springsteen.

Oh, boy. I think, you know, my son went from a buy to a sell on him, and we went to his concert. But anyone my age, it's a strong buy. It's a decade. It's a generational buy. The book is Exile on Wall Street, One Analyst's Fight to Save the Big Banks from Themselves. Mike Mayo, thanks so much for being here again. Thanks for having me.

Hey, if you're looking for market commentary and analysis throughout the week, check out our daily podcast, Market Foolery. It's on iTunes and online at marketfoolery.com. And as always, we'd love to hear from you. Drop us an email. That's radioatfool.com. Coming up, we'll give you an inside look at the stocks on our radar. You're listening to 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. I'm Chris Hill, and back in the studio with me, Joe Maker, James Early, and Ron Gross. Guys, that time again, time for the stocks that are on our radar. Ron Gross, you're up first. Not a typical stock for me. I'm digging into OpenTable. Ticker symbol O-P-E-N. Stock is down 66% from its 52-week

high. They have a virtual monopoly on the restaurant reservation business. Relatively new company, relatively new industry in that sense. But they are profitable, which I like. Cash flow is coming in. So, I'm going to dig in and see what we have here. O'Reilly. Stock down that much. Sounds like a value play. O'Reilly. Well, that's what got my attention. O'Reilly. Well, it was selling for like 11 times sales. O'Reilly. Right. But now it's only a $900 million market cap company. So, could be something. Let's bring in our man, Steve Broido, from the other side of the glass.

Question for Ron about OpenTable? Sure. What could OpenTable scale into? I know, obviously, restaurant reservations. What's the next logical step for their business? First, they'll go international. So they'll spread out in the U.S. as much as they can. Then they'll go overseas and sticking with restaurants.

After restaurants, I'm not sure. You can go after things like Travelocity or TripAdvisor or things like that. But I think they'll stick, at least for many, many years, with international expansion in restaurants. James Early? Chris, if Joe follows Steve's advice, he might need Hasbro in a little bit, some toys for kids. It's an II rec. It started in 1923 when two brothers by the name of Hassenfeld bought out a textile business, and their big hit was Mr. Potato Head later on in G.I. Joe.

So I like it, 30 percent upside by my model and a 3.4 percent, excuse me, yield. Steve? How's Hasbro done with gaming online? They're more the licensor. Mattel is more like the owned property. So, Hasbro let someone else, like a movie company, create the character. And then they jump in and say, okay, we'll make the backpacks, the games, the trinkets, the pens, dispensers, whatever. Maybe some John Carter toys.

Maybe not. Joe Mager, stock on your radar? I'm going to go with JPMorgan Chase. This week they announced a $15 billion buyback authorization. Huge dividend increase to go along with that. I think banks at large are cheap, and I think JPMorgan is going to recover eventually from one higher interest rate. so they'll get more money, higher net interest margins on what they lend. And two, investment banking activity will pick back up, more M&A, and they'll get more money on that.

Steve? Do you think the tide is shifting with this Goldman exec who came out on banks, or could that affect JPMorgan Chase at all? If it did, it would probably be a positive, just because they might incrementally lose some clients, and they're a big boy there. And Jamie Dimon, the CEO, has got a lot of positive praise in the press. All right, Joe Mager, James Early, Ron Gross. Guys, thanks for being here.

Thank you, Chris. Thanks to our guest this week, Mike Mayo. And for video highlights, you can go to FoolTV.com. That's FoolTV.com. That's it for this edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill.

Thanks for listening. We'll see you next week.