Motley Fool Hidden Gems Investing - Motley Fool Money: 04.09.2009

Episode Date: April 9, 2009

Wells Fargo banks big profits. Amazon.com and Apple face the music. The SEC considers hemming some shorts. And Segway and GM introduce their pet PUMA. On this week’s Motley Fool Money, we tackle those topics, offer a few stock ideas, share a few beefs, and sample some Brandy.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Welcome to Motley Fool Money. I'm Chris Hill, and I'm joined by Motley Fool Senior Analyst James Early, Seth Jason, and Shannon Zimmerman. Guys, thanks for being here. Good to be with you, Chris. Coming up, we will talk Apple versus Amazon, offer up a few stock ideas, and share a few beefs. But we begin with the week's big business news. A good day for the market on Thursday after Wells Fargo issued a surprise profit announcement. That would be the same Wells Fargo that received $25 billion in government bailout money. James, what do you make of all

this? Well, Chris, the whole point of this bailout money was to jumpstart lending, and Wells Fargo is very well aware of that. And I counted five mentions of the word taxpayer in their brief little press release. And this was not the formal earnings announcement with all the information. This was just a press release with some key points just to sort of, I guess, win public sentiment and investor sentiment. So it's good. And Wells is the first of the big banks to report for the first quarter. This is a good sign. I mean, we'll take good news, nothing wrong with that. But the big problem remains all the bad assets still on their books. And for that, we have to wait and see. Can we give credit to where credit is actually due, though? I mean, I don't

think this has anything to do with Wells necessarily, or will any of the profit coming up at any of these other banks. But how about those taxpayer-funded treasury buy-downs that have created the frenzy in refinancing that is pumping all this business to the banks. The news, just in terms of operating results from Wells Fargo, is certainly better news than when Citibank, about a month ago, sparked this rally with very sketchy news of profitability as well. Operating results appear to be strong. They seem to be doing a good job of digesting Wachovia. The problem for Wells Fargo is that it remains a bank. And so further loan losses are coming. And then the big elephant in the room, I suppose, are whether or not the Geithner

plan is going to work, and whether or not the mark to dream on accounting is going to continue for the foreseeable future. If those things don't fire for the banks, well, then what's going on now, which is a 60% run-up over the last month, that's going to dissipate pretty quickly. Yeah, we've got bad news on the way, I think, and not just at Wells Fargo, but everywhere with credit card charge-offs that are going to be ramping up. This is not over, and a good quarter isn't the end of the story. James, final word.

Although, Wells Fargo actually had only half the write-downs this quarter of last quarter, And I will say, in defense of these banks, not that I'm a fan of the mark to dream on accounting, but Wells Fargo said it was not a big factor. Citigroup said it was not going to affect them much. So we'll see. Markdowns on the mortgages? On whatever the new rules allow. We'll see how they change their mind.

Okay. Other major stories this week. Insurance companies may be eligible for TARP money. Wholesalers cut inventories by the biggest amount in 17 years. Mortgage applications continue to rise. And the SEC is considering reinstating the uptick rule, which means you couldn't short a stock unless its last price movement was up. Seth, I'll start with you. As an investor, what was the big headline of this week for you?

I don't know which one matters most for investors. The one that ticks me off the most as an investor, or I'm just going to say as a thinking person who likes data before conclusions, the whole uptick rule thing to me is absolutely amazing. Now, why is that? Well, because you've got the SEC coming together, I think, like a bunch of weather vanes. The people in Congress are, well, these darn short sellers are knocking down stock prices. And you've got a lot of people who, quite frankly, I don't think should even be in the market if they think short sellers are their problem. And they come together, and Ms. Shapiro, who runs the SEC, even comes out and says, we don't have any empirical evidence showing that the removal of the uptick rule is responsible for the drop in stock prices.

And then they come out and say, but we're going to consider doing this anyway. So it just makes absolutely no sense. You can't blame flies for manure. The reason stocks are down is that a lot of companies got some very bad news for a very long time, and then you got a lot of pessimism, and that's what makes markets go down. You don't need short sellers to do it for you. Short sellers are actually your friend. They're the people who tell you what's wrong with companies,

and they are also the people, if they get it wrong, who knock the price down so that you can pick the shares up cheap. Speaking of flies and manure, and I'm thinking of Boy Scout camp and latrines when I think of this, but just to play the devil's advocate, because I agree with you. I agree with you that it's pretty inconsequential. At most, it might affect a couple of stocks for short periods of time when the price drops suddenly.

But for the market as a whole, it's not a big thing. But is there any harm in this? Do you think this is anything wrong? I mean, yes, it's just one more thing to slightly slow down the momentum of the shorts. But is this really going to hurt? Well, I think anything that impedes the free flow of information and pricing information is bad. And I would just propose that what we might actually need instead is a downtick rule.

Rather than worry about what the short sellers, who are usually very smart and they're professionals, rather than worry about them, let's protect all the rubes out there whose idea of how to invest is to only see stock prices go up. Let's let them only buy stocks after the price has moved down a little bit. Maybe we wouldn't have so much trouble with bubbles. I love it. And even if the effect is only on the margins, I mean, to the extent that we're expending a lot of energy focusing on something that doesn't have any impact, that's oxygen in the room that could be better used around things that actually do have an impact on the market. Shannon, before we move on to retail, what was the big headline of the week for you?

I guess if I had to sort of cherry pick my favorite detail, it's the inventory reduction. So, you know, even if wholesalers are taking price hits, they're making moves to make sure that their supply is in line with anemic demand. And I think that, and Seth will probably get us into a little bit of the details of this, but I think that that has a lot to do with what's happened in retail, the retail sector lately. That sector, you know, financials are up about 60% over the last month. Retail stocks, consumer discretionary stocks are up about 35%. Wall Street seems to be looking past anemic demand and focusing on things like the inventory reduction, which will bring supply into alignment with demand.

And if that's the case, in the future, you know, when the economy does begin to rise again, you could get a virtuous cycle, right? So they have to race to replenish the supply that is now not available, which means that they get to rehire workers, which means that there are greater revenues and tax revenues, and so the economy doesn't look like it's such a basket case. I think that that's actually sort of a pipe dream right now, or at least a very rosy scenario. But in terms of what Wall Street appears to be pricing in, that's the train that's leaving the station. Okay, speaking of retail, consumers still aren't buying. Most U.S. retailers posted lower same-store sales in March.

Abercrombie & Fitch reported the biggest drop, 34% decline. Walmart sales rose, but not as much as expected, so the stock got hit. Seth, please make sense of the retail world. I don't know. That poor Abercrombie. Is the pre-teen thong not selling well for him this season? Apparently not. You know, I don't really know that you can take a look at any of these numbers for a single month and read too much into them. They go all over the place, and there are companies out there

who have just given up reporting these month-to-month numbers because they're so volatile. That doesn't sound like great news to me from Abercrombie, and I'm actually a fan of how they've run that business over the years. But the bottom line is you can't judge any of this by what happens over one month. And actually, the monthly sales numbers to me, especially as they regard retail or apparel, are usually a great opportunity for volatility in the stock.

So when you find a company that you really believe in, these numbers are a great chance for you to get the stock cheap if you believe that it's going to move. Seth, can I just ask, is that an Abercrombie sweater you've got there? This sweater came from Target and cost $6. All right, moving on. It is a variable pricing cage match. Apple, Amazon, and Walmart have all adjusted prices on digital song downloads, raising some prices while lowering others. Apple, the leader of the pack, has moved from selling all songs for $0.99 to a tiered model where songs cost $0.69, $0.99, and $1.29. Record companies determine the pricing of their songs within that tier.

So we'll turn to our resident music critic, Shannon Zimmerman. Shannon, what do you make of it? Well, the labels have wanted this in the worst way for the longest time, and Apple gave it to them in the worst way. So instead of the single price bucket, now they have three. But at the 69-cent level, labels weren't making any money on that stuff anyway. That's all catalog. It's, you know, Brandy, you're a fine girl. You know, that kind of stuff that people pretty much aren't buying unless they're perhaps me or my father,

who's obsessed with Looking Glass, the artist behind Brandy, you're a fine girl. So to me, this just sort of underscores why Apple is such a powerful company, not just in terms of the leverage that it has because it is one of the key distributors of music right now, But in terms of the brand enhancement that this has sort of conferred on them. So they made this conversation, which is a ridiculous conversation that should have been settled long ago, last five years. Labels have wanted this for that long. And the fact that it took this long to get so little really underscores that Apple is the 800-pound gorilla in the room. And that the labels, at least in terms of retail sales, they have other avenues for revenue.

But at least in terms of retail sales, the labels pretty much are going to be yanked around by the chain, by Steve Jobs and company. Does this mean, though, that the gorilla is short a banana or two? I mean, is this a sign that Apple is losing its power in the market, that they have to go to this plan? I don't think so at all. I mean, to the extent that the brand-new best-selling hits are going to be the ones that go for $1.29 a pop, that's where most of the revenue now is anyway. And so Apple will have a bigger slice of that pie, as will the label. So they get more revenue.

They get their brand enhanced. They looked like they were a friend of the consumers because they wanted that simplified pricing structure. And it took the labels five years to actually get this done. And finally, news this week that Segway is partnering with GM to sell a two-wheel, two-seater mini car. The self-balancing electric car can travel up to 35 miles on as little as 60 cents worth of electricity. The codename for the project is PUMA, Personal Urban Mobility and Accessibility, because apparently POS was taken. Seth, you love a bicycle. You must be thrilled about this. When I read about the specs and what they were trying to accomplish here, you know, a small, simple device that could, you know, have this range.

We have that already. It's called a bicycle. But the good thing about it is it's not overly managed by the government, so you can actually ride it on the road. This thing doesn't have a prayer of making it on the streets because it would have to add so much safety equipment that, you know, you'd add hundreds of pounds to it probably. And so at the same time, you're not going to get it on bike paths. You're not going to have it on sidewalks. It's the most ridiculous thing I've ever seen. And if this is what GM wants to trot out as an example of the way it's forward thinking, then somebody just needs to shoot whatever's left of GM and really kill it for good. I think we've got to give credit where credit is due, though.

First of all, it's something different. You know, it's the first GM thing that doesn't look like the same tired American. It's half a golf cart. GM is sort of the Sears wardrobe of the car industry. They all look the same. This is different. This is unique. It's cute.

And, you know, if people ride little motorized cars around the Walmart, I mean, I think we'll definitely see demand for this sort of thing. Yeah, I wouldn't want to be hit by a Hummer when I'm driving one, but. I think it's cute. Why wouldn't you just drive a golf cart instead? You don't need gyroscopes for the golf cart. You got four wheels. We've already got them. Do they make street legal golf carts?

That's my question. There are people who do, actually. You can go to some of these retirement communities, and you see that's all people drive. All right. It's time for What's Your Beef? Time to tee off on a stock, a person, a company, a concept, anything. James, we'll start with you. Chris, my beef is simply scapegoating.

The short-selling rule, I think, is our latest iteration of that. Someone's got to be to blame. Something is always somebody's fault. And that may be true, but I think it's our fault as investors, as consumers. And I think the more we scapegoat, the more we push momentum in the wrong direction. Shannon? Well, so, yeah, my beef, I guess, has to do with something that is my fault. So last week I was in Manhattan for a conference, and because I'm a cheapskate

and because I needed Internet access on the way up, I took a bus line that shall remain nameless that provides Wi-Fi up and down I-95. And so it was great until we got just to the Lincoln Tunnel, and the trip was a smashing success literally because our bus smashed into a New Jersey Transit Authority bus that was parked on the side of the road. How it ended up not being our driver's fault, I'll never know because it was a slow motion smash in and the police report came and an hour and a half later, it turned out to be the other guy's fault who was just off on the side of the road. You should have known better than to park. Yeah, I guess it all worked out

well for us. So the conference was fantastic, had a really good time. And then I was going to take the return trip back on the bus as well, overslept. All right. And so I missed my bus. And so I had to take Amtrak and had no Wi-Fi. Why on earth does Amtrak not provide Wi-Fi? And their business cars, at least, would be the easiest thing to do in the world. It would be utterly cheap. And they could probably charge more for tickets from business travelers who would want to do what I wanted to do, which is to work. But instead, I ended up drooling on the person who was sleeping next to me. Lucky them. Seth? My beef is this new car. It's two wheels. No, I'm going to have to go along similar lines with James. It's not just scapegoating,

but it's actually just the lack of critical thinking that goes on in the investment world and in our country in general. People love to jump to conclusions without actually getting any facts. And this isn't the easiest thing to learn, I guess. And maybe I was lucky. I went to one of those hippie, trippy colleges where all we did is sit around and discuss things. But really, folks, if you're out there investing, what you need to do is gather a body of information and comb through it first before you make up your mind. Don't make snap judgments about anything, about a stock, about policy, none of it.

All right, let's close with one stock on your radar for the next week. James? Chris, if you're an aggressive, money-hungry kind of investor. Oh, I am. Oh, good, good, good. Who wants to capitalize on natural gas prices? is one place, Chesapeake Energy. It only has 1.45% yield, which is a little lower than my normal kind of zone, but its return on equity has been whacked thanks to low gas

prices, and I just don't think they're going to stay this low for this long. Ticker is CHK. Great. Shannon? Yeah, I have a little known company called Apple. For a lot of the reasons that I was talking about earlier on, the variable pricing concession is just ridiculously great news for the company, both in terms of its brand and in terms of the additional revenue it will generate. And then you look at its valuation profile, you have a great company with a lot of cash flow trading at a substantial discount in terms of PE to its historical average. And then

even right now, relative to its typical industry rival, at a discount in terms of price to cash flow. So you've got a great company like Apple. Here comes the next generation iPhone later this June. A bunch of people are going to be first-time purchasers. A lot of people are going to re-up around this. I think now is a great time to take a close look at Apple. Seth? General Motors? I have a General Motors. Can we invest in this segue, folks? I've been looking at a lot of restaurants lately, partly because we have some restaurant suppliers at the newsletter that I'm involved with, also because we have some restaurants. And one that came to mind because

my neighbor just purchased this stock sitting next to me in the office is Sonic. And I've seen actually a lot of restaurants are posting better than expected sales. And so it seems that consumers out there are either trading down from higher priced restaurants or they're trading down from vacations or what or whatever you have and they're still going to a lot of the restaurants and sonic of course runs these really kind of fun drive-ins uh and they have a pretty good menu i've always liked the i've always liked the food there i've always liked the business it was always kind of expensive you look at it now it's been vacillating uh the past few months between you know six and twelve dollars i think we're up at the higher end of that range right now but i still think it's a

stock that's really worth a look, and it's still got some growth ahead of it. Okay. James Early, Shannon Zimmerman, Seth Jason. Guys, thanks for being here. Good to be with you. Thanks for listening to this edition of Motley Fool Money. As always, people on this 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. You and me

Yeah, your eyes Could steal a sailor From the sea Brandy Where's the braided chain Made of finest silver From the north of Spain