Motley Fool Hidden Gems Investing - Motley Fool Money: 03.27.2009

Episode Date: March 27, 2009

A good week for the stock market, so is it time to pop the champagne? With stocks like Amazon, Netflix, Chipotle and Best Buy on the rise, is now the time to buy? And what does the panel think of Treasury Secretary Tim Geithner’s bank rescue plan? We tackle those questions, share some beefs, highlight a few stocks on our radar, and debate the relative merits of Eliot Spitzer and Britney Spears. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Welcome to Motley Fool Money. We're here to talk about some of the week's big business news, offer up a few stock ideas, and share a few beefs. I'm Chris Hill, and I'm joined in the studio by Motley Fool Senior Analysts James Early, Seth Jason, and Shannon Zimmerman. Guys, thanks for being here. Good to be with you, Chris.

All right, good week for the stock market. Seth, time to pop the champagne, right? I don't know. Maybe a cheap cava, Prosecco. You know, something a little bit lower. lower shelf. We take it where we can get it, right? Sure. I'll pop the bottle, but I'm easy. I mean, I get excited if I find a tennis ball on the way home. This is a good week. A lot of the stocks I have been... Careful over there. I've been watching... A lot of the stocks I've been

watching are up significantly over the past two weeks. They may go back down where they were. I mean, the economy is not out of the rut yet, but the short-term movements, as folks out there may or may not know, don't really concern us much. What we're doing here is looking at the companies. Wait, what are you saying, Seth? I'm saying, I'm calling a bottom. It's never going any lower. And short-term movements don't matter? Oh, my entire investing strategy is ruined.

Exactly. And all we're seeing right now is the opposite of fear. We're seeing a little bit of exuberance. Whether or not it's warranted will work itself out in the long run. You can only tell in hindsight. So what we're doing here is we're still looking at the same companies we're looking at, and we're trying to figure out if they're bargains for the long term. Yep, just as there's irrational exuberance, there's irrational despair.

Maybe we've been living through a little of that, Although I am inclined to agree with Seth's assessment. Looking under the hood of that, though, it's interesting to see what maybe motivated the market's rally over the last couple of weeks. And there has been some interesting economic data. So housing sales, durable goods orders have been up modestly, but ahead of what the market had expected. But personal income, down. Initial jobless claims, up. And those are the metrics that matter.

So you have an economy that is fueled to the tune of two-thirds by consumer spending. And if people are, A, concerned about their jobs going away, and B, actually making less money and having less to spend, I think that Wall Street was looking for a reason to rally, had some in the data, particularly in the Treasury plan. But if you look long term, it doesn't seem sustainable based on fundamentals. When the economy bottoms out, or certainly when the stock market bottoms out, it will probably look much like this, where you have a mix of news. Instead of all bad, it's bad in some good. And that's what we're seeing now.

I don't know that we have enough to call a bottom. I do know that the stock market will begin to rally before the economy begins to formally rally. So, hey, maybe we're seeing the beginnings of that here. I'll take it, but I'm not jumping in just yet. Yeah, it's always more fun to be up than down. Well, it was a busy week for Tim Geithner. Earlier in the week, he outlined his bank rescue plan. Tim!

It'll subsidize investors who buy toxic assets from banks. But reaction to the plan was mixed. One analyst wrote in the Washington Post, quote, There's a Snake River Canyon-sized chasm between the value banks claim for their toxic assets and the sum any sentient non-daredevil investor would pay. James, do you agree with that? Whoa, can I cut in here first? How many of our listeners even know what he's talking about?

What poetic bar on Wall Street would pin such prose? Could he be two feet to my left? Shannon Zimmerman. Give that guy a job. That was our own Shannon Zimmerman in the Washington Post. And I couldn't agree with myself more. James? You are dating yourself with the Evel Knievel stuff.

The Snake River reference, that's really going back there. See, sentient non-Daredevil investors. I think we just need to find the non-sentient Daredevil investors, and then we're in business. I think we have two challenges. I mean, first of all, we'll see. It's the bottom line, and we'll just have to wait and see. We have two challenges. First is getting buyers to participate.

Apparently, the initial interest is there, but people are worried about some sort of retroactive clawback. The bigger issue is clearing values. What prices will these sell for? And I think that's the crux of Shannon's quote. On one hand, banks want to really unload these toxic assets. They fear marking at low market prices. That's what they don't want. On the other hand, this is like a heads-you-win-tails-I-lose scenario for a lot of these companies that might use this money.

In other words, they get free leverage, in essence, from the government without sharing proportionately the downside. And they don't have to put much in. Correct. And then they don't have to take on the risks. So I wonder if they're going to pay too much for those assets. What do you think? You think it's possible? We'll have to see.

I mean, that's definitely – and then we're going to have some disgruntled taxpayers and maybe – Wait until they find out. Yeah, wait until they find out that, like, a lot of the same people who got us going one way are going to get rich going back the other way. You're going to see some anger, although maybe by that time the economy is in good shape. Nobody seems to care during happy times what's going on. It really is a case of meet the new plan, same as the old plan. So it's the Paulson goal and objective sort of put together in a shiny new package. And looking at it more, it really is interesting to see the way that the problem has sort of been enshrined in the solution.

Essentially what Treasury has done is to create a new structured investment vehicle, right? So they take toxic assets, add a compulsory investor in the form of taxpayers, add risk control in the form of non-recourse loans, put it together. What do you have? Well, it's AAA security, right? Everybody has to come in because they're, in a sense, being, not in a sense, in a clear way, being economically incentivized to go ahead and take the plunge because the risk for them is nothing. They can walk away from these loans if the assets crater. Can I just say the one good thing about this is it is not going directly through Congress. That was the whole point, to be a little bit evasive.

And, you know, at 2.30 in the morning the other night, I had nothing to do. I actually was holding my baby son, and I was watching C-SPAN and a repeat of Bernanke. I bet that put him right to sleep. Oh, gosh, and Tim Geithner. Actually, then he started crying. This was it's just so ridiculous. I mean, there's so much grandstanding and it's so it's so scripted and it's just a little bit of dog and pony show. So I think he's smart. I think I think we're to not be going through them. And that's probably an incentive for people to join this this this this particular program, because Congress is one step removed.

I think the other thing is that that this is going to obfuscate the prices. Right. I mean, the price discovery, I think we're probably right that they're going to pay a little more for these than they otherwise would because the taxpayers are holding the bag. And so what that does, not only is it a direct subsidy, but it means that the other stuff that they can't get rid of or that they might have to mark to market is not marked down as low as it might otherwise have to be marked. And that saves them a lot of other problems in terms of how much capital they need to have, et cetera. Yeah, can I ask my esteemed colleagues a question? I've been short financials for the last two of our broadcasts here, and there's a way in which, at least for short-term speculators, none of which are here at the table, of course, financials become much more interesting, do they not, over the short term? If you have this taxpayer-supported safety net under these companies, do they become better investments in the near term, even though over the long haul they're insolvent, and that's probably where we're headed? Here's the whole point of this. These bad assets are already on the bank's books. So that's there. The whole point is to convince potential capital providers of the banks to have more confidence in them. So to Seth's point, if this does not, if these are taken as sort of fake halfway there market prices, that's not going to be enough to convince them.

So, if that's the case, no. If there is the opinion that it does actually set some legitimate clearing prices, then yes, it's probably a big positive. And the stock market rallied, what, 7% the day this was announced. Well, there was some non-Geithner news this week. Shares of Best Buy were up sharply after the company reported better-than-expected fourth-quarter profits. Best Buy's earnings forecast for the year was also higher than projected. Best Buy is now up about 40% over the last three months. Guys, stocks like Amazon, Chipotle, Netflix, all up sharply over the last three months. What do you make of that? Hey, man, didn't I talk about dynamic materials in here a few weeks? That was about 100% or something the past few weeks.

Ticker symbol boom. Yeah, ticker symbol boom. A lot of stocks have done this, and precisely probably because people were just so afraid of everything that they were selling everything they had. Everybody was getting out. So who knows what the real value of these stocks is over the long term. It's really tough to say. But right now, we're in mood swings, and we're in the opposite mood swing of where we were.

I think this is the time for quality. I mean, there are a lot of stocks that are up a little bit. The stocks you mentioned, Chris, are among the better ones, I think. The better retailers, the better companies out there are doing better. The worst ones are doing worse. It's as simple as that. I think that is exactly right. And in the case of Amazon and Netflix in particular, if you were looking for the market to return to some sense of normalcy and focus on fundamentals,

It's very encouraging to see companies like that that are financially strong with growth prospects aplenty doing as well as those companies have. And I think that they also illustrate what's likely to be true over the next few years, that the value of dominance as a competitive advantage has always been massive. It's going to become more massive still. And Best Buy got a great assist from Circuit City going bankrupt. So way to fail. They probably sent them like a gift basket or flowers or something like that. All right. With that in mind, we finish up the first quarter of 2009 next week.

Give me one stock that is on your radar for next week. Chris, if somebody's in the retail mindset, I'll toss out Limited Brands. It owns Victoria's Secret, and it's actually been around since the 1960s. It's compounded wealth. Leslie Wexner is the guy who started it, and he's still there. Strong stock and pays a decent dividend, too. Shannon? Yeah, I'll chip in Dolby, just a dominant player in the audio technology space.

Double-digit revenue over each of the last revenue growth over the last seven years, and canyon-wide profit margins. You might even say they're Snake River Canyon. Snake River Canyon, sure. Seth? I'm going to talk about a stock that's a little scary, and so you don't know which way it's headed, but it's something I find very interesting, and it's Autoliv,

and they are a big seatbelt, airbag, car safety equipment manufacturer, and so everybody by now thinks I'm a complete idiot because, of course, car sales have cratered. They're at rates we have not seen since the early 80s, and a lot of people assume they're not coming back anytime soon. The company also had to announce or announced an equity offering, which is not the kind of thing that always inspires confidence. And I've been going back and forth on whether or not that meant that they were in a liquidity pinch. Do they have enough money to actually keep operations running?

I'm tending right now to sort of take management's explanation at face value, which is, yes, we do have the money. We're just asking for more so we can enhance our capital position. But if car sales simply get less horrid by the end of next year, this is going to be one of the survivors in that space because the smaller competitors are going to fall away. And I think in that case, it's going to be a good returner, but it's a wild card. So if it moves from horrid to miserable, that's a net positive for this company? I believe so.

We'll keep our eyes on less terrible news out of the auto industry. All right, it's that time once again. It's time for What's Your Beef? time to weigh in on a stock a person a company anything that's really got your goat this week if i could mix you know meats sure speaking of meats chris i was actually a vegetarian for about six and a half years and and then i i came welcome back oh thank you thank you you know and one thing i always thought is i didn't have any problem with anti-hunters as long as they were vegetarians my logic was very simple that you know a deer let's say that you hunt has a much better life than a

than a factory-farmed cow. So a little bit in that same line of thinking, I'm going to attack some of the populist sentiment out there that's so anti-Wall Street. I mean, a lot of these people are themselves in arrears in their mortgages. They're driving fancy Mercedeses or SUVs that they bought with a home equity loan. It's not Wall Street. It's them, too. It's us. I mean, we need to look in the mirror and realize that Wall Street was an enabler, but it was not the root cause.

Seth, do you want to jump in with a beef of your own? Can I just tag on to that one? Absolutely. Mine is related to home prices. Double beef. No, mine is related to home prices and the government's de facto admission that everybody overpaid, and so they're taking these extraordinary measures, buying up treasuries, doing everything they can, subsidizing this other investment in order to try and drive interest rates down,

and they actually seem to be right now a bit lower for refinance. There's a lot more incentive on getting people refinanced. And what that does to price discovery for people who might want to be buying a home for the first time, because basically if the people out there are getting really low rates and you hear stories of people getting refinances at 3.5% in some strange situations, well, if you stroll into that neighborhood and you can only get a 5% loan, then essentially you really need to be bidding about 20% below the cost of what those other people have on their mortgage. And nobody really wants to talk about that because everybody wants to pretend house prices are going to bottom or they're going to stay where they are.

But essentially, so long as there's a ton of free money working on refinances and bringing them down really low, you need to be bidding less for these houses. Shannon? Yeah, for me, my beef will be repriced stock options. So when they're properly implemented, stock options can be a great way of a company aligning its interests with those of its shareholders. But they can obviously be abused in innumerable ways. And one of them is to reprice them. And so, lo and behold, you have companies like Intel, Google, even Starbucks saying to their employees who rightfully think of it not as a tool of alignment necessarily, but as a piece of their compensation and don't want to see their comp slashed in the way that it's been done over the last couple of years due to the market's volatility and downward slide. But to the extent that companies still hold out stock options as a way of aligning, pitching it to shareholders as a way of aligning their interest with those of the folks who invest in their companies, that's just a bogus claim.

And folks should be well aware of that whenever they hear management talking good things about the stock option programs they have. All right. We'll close this week with some buy, sell, or hold. I'll present you with a person, a place, or thing. You tell me if it were a stock, would you be buying, selling, or holding? And we'll start. This guy's gotten some chatter lately that, you know, a Wall Street outsider who might be brought in to reform Wall Street, buy, sell, or hold, Elliot Spitzer. I can barely remember.

Isn't this the guy with the hooker, the young hooker? He's also known as the former governor of New York. And a great crusader, a reformer of... Aren't his 15 minutes up? Apparently not. Spitzer has already proven that he's in this for the grandstanding. I don't think you hire him to do anything except maybe run a show like... What's his name?

Like the Jerry Springer show. If you can give him one of them, then buy. But otherwise, sell. Seth, you should have that cynical reflex looked into, I think, actually. Eliot Spitzer was a great reformer. And if we are all defined by our foibles, then we're all going to look pretty... Foible? Yeah.

Foible. Pretty lame. Spitzer made a mistake. A guy once said, it's Ernie General who's running around with underage hookers? Come on. I don't believe she was underage. I think that's wrong. She was under his age.

But a great guy, particularly when it came to the mutual fund scandal, which has sort of fallen by the wayside in terms of our financial markets memory. But a good guy there. Interesting stuff that he's doing on Slate right now. And I am definitely a buy. on Elliott Spitzer. Hugh Grant rebounded from it. So can Elliott Spitzer. I think he's a good guy. Deserves a second chance. Bye. Okay. You know, there's always a lot of talk about possible inflation, but James, buy, sell, or hold deflation. Near term, I'm buying deflation. We still have

very slow moving money, which doesn't do much for prices, but we are pumping money like there's no tomorrow into the system. And eventually, that's going to turn around and give us inflation. Yeah. And for me, I'm going to invest in James early because that's my take exactly. I mean, we've got the deflation now, especially in things like home prices. We're seeing rents go down. We've seen it in energy. And so I don't really actually buy the giant inflation comeback. I used to be a little more on that side.

But I think the Fed, if they're not asleep at the switch, they have the tools to combat that. They don't really have very good tools to combat deflation, as we've seen. Yeah. All right. Finally, she's trying to reform her act as well. Buy, sell, or hold? Britney Spears. James?

I'm still a reform believer. I'm going to say bye, particularly if Elliot Spitzer is involved. Shannon? I'm always willing to hold Britney Spears. Nice. I can't top either one of those. I'm just sorry. I'm going to give a punt.

Seth Jason, James Early, Shannon Zimmerman, thanks for being here. Sure thing, Chris. Thanks for listening to this edition of Motley Fool Money. As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. Do your homework and make your own decisions. And remember, the conversation continues 24-7 at fool.com. I'm Chris Hill, and we'll see you next time.