Motley Fool Hidden Gems Investing - Motley Fool Money: 04.13.2012

Episode Date: April 13, 2012

Coinstar, Google, JPMorgan Chase, and Wells Fargo report earnings.  The U.S. Justice Department files suit against Apple.  And Burger King cooks up a new use for bacon.  Plus, we talk innovation with Economist correspondent Vijay Vaitheeswaran, author of Need, Speed and Greed: How the New Rules of Innovation Can Transform Businesses, Propel Nations to Greatness, and Tame the World's Most Wicked Problems. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week from Motley Fool income investor, James Early, and from Million Dollar portfolio, Charlie Travers and Ron Gross. Guys, good to see you, as always. And good to see you, Chris. We have got earnings from Google, Coinstar, and more. We've got Best Buy suddenly in need

of a new CEO. And as always, we've got a few stocks on our radar, but we will begin with the big macro. Guys, a bunch of headlines this week. Weekly jobless claims came in higher than expected. China's economy grew at its slowest pace in nearly three years, and inflation in March grew at just 0.3%. Ron Gross, I'll start with you. What is your big macro headline for investors? Yeah, I think I'll go with the China one. 8.1% growth just yesterday. It was a rumor that it would be 9%. People are really hoping that China engineers a soft landing, and that's what everyone's really focused on. That sounds like more of a thud. Yeah. Well, 8.1% is still pretty healthy. It's

above their 7.5% kind of goal, so still pretty good, but it's going to slowly start to come down, we'll definitely need to keep an eye on it. James, what's your headline? Chris, it is better to be right than be original. So I will side with Ron and say, I think China is also the big story. I heard that lending is picking up. And obviously, we've been sort of orbiting China. The US is still a bigger economy, but the growth is all about China. So whatever happens with China affects us all. Charlie Travers? I'm rotating over to the other side of the world in Europe. And everybody's been focused on the sovereign debt crisis for the past couple years. And we're starting to see some of the ripple effects of the government austerity on companies themselves. And there's some

interesting takeaways as to what this means for investors, particularly in the healthcare space, where these countries are deciding not to pay their bills just because they're broke. And so the decision is, do you pay your workers in the hospitals or do you pay the drug companies? And they've made their choice. For example, Spain is taking 800 days to pay companies like Merck and Novartis for their drugs. In total, these countries owe the pharmaceutical companies $20 billion. And there's no way they can collect. I was going to say, so do these countries essentially have the pharmaceutical companies just, like, right over a barrel? I think so, because they can't stop selling drugs.

The public uproar would be massive. Are these pharmaceutical companies allowing for this? Do they have a huge bad debt expense? Yeah, they're taking the proper accounting treatment for it, but yeah. Wow. That's intriguing. Yeah. Let's move on to earnings season, which officially kicked off this week.

And we'll start with Google. So, revenue up 24%, profits up 61%, and Google also announced a two-for-one stock split. Ron Gross, you own Google in a million-dollar portfolio. What do you think? Yeah, not too bad. Pretty solid quarter. If you strip out some of the one-time expenses, earnings were really up about 26%, not 61%. But paid clicks up 39%, offsetting a decline in cost per click of about 12%, which has some analysts kind of a little wary. But overall, that translated into nice revenue growth, and the company's doing really well.

The stock split, you know, stock splits are pretty meaningless usually. It does help solidify the founders' kind of control over the company. They have voting control, and they will maintain that control as a result of the non-voting stock that they're issuing in conjunction with the split. So, kind of a non-event for me. Yeah, Charlie, it seems like there's been a little bit of blowback against Larry Page and Serge Brin and the way that the stock split was structured. To Ron's point, it does solidify their control of the company. But taking the devil's advocate position, the company's done well with those

guys at the top. That is true. They've built what is no doubt a world-class technology business. I really admire what they said in the letter to shareholders about focusing on the long-term and not having the pressures of a short-term-minded investor base that tends to pop up from Wall Street. That said, I don't really like non-voting shares. And I'll give them a pass because they've proven that they are focused on building a great company. But in general, I wouldn't care for this. James, for a long time, Apple was the big company that wasn't paying a dividend. Does that now shift over to Google? I think it does, Chris, a little bit. Now, they're going to look like the odd man out. I mean, they've got a ton. I forgot

how much exactly cash they've got. $50 billion. $50 billion. Okay, yeah. That's outrageous. I mean, they should really, what are they going to buy? They really need to open their pockets. I mean, the thing is, though, the shareholder base is still sort of that short-term growth-oriented crowd. And so, that takes time. And I think as it changes, the demand will increase. Ron, just to close out on Google stock, market down on Friday for a variety of reasons. But as a result of that, Google stock was also down. You still like it where it is? Yeah. I mean, it wasn't down enough to make me think it's dirt cheap. We were happy to be owners of it. I don't think I'm buying it at these levels, but we're happy to hold it and let

them do what they do. Two big banks reporting earnings this week. JPMorgan Chase's profits were down 3%, but the company raised its dividend and announced a $15 billion share buyback plan, and Wells Fargo's profits were up 13%. James, what do you think of the big banks? Chris, there's a long and detailed narrative, and there's a cut to the Chase version, and I'll give you the long one first. Basically, banks are doing well because of the economy. Investment banking has bounced back up. Retail is doing pretty well also.

Both these banks, especially J.P. Morgan, really benefited from loosening or reducing their provision for loan losses. In other words, they expect that more people are going to pay them back than last quarter. I think J.P. Morgan went from $2.2 billion to $700 million. That's a pretty big reduction, and that goes into your earnings. You earn more when you do that. The reason I'm not jumping up and down is that if the economy goes well, the banks will do well. I think that'll happen. But if the economy sours, then we're going to really put to the test how well these banks have been marking their loans, marking their assets.

What do you think of the buyback plan? Because we've talked in this room before about how, on average, companies don't really do a great job of timing that $15 billion. I know it's a big Wall Street bank, but it's still $15 billion. Yeah, 90% chance a buyback is going to be done at a dumb price. But Jamie Dimon, in this case, has said he doesn't want to do it, or he's hinted he doesn't want to do it over $45 a share. So, at least he has some sort of a target in mind, which I think is admirable discipline. Wells Fargo is a recommended stock in a couple of Motley Fool services. How much of that is due to how they run their business?

And how much of that is due to the fact that this is what some people refer to as Warren Buffett's favorite stock? Berkshire Hathaway has a nice stake in Wells Fargo. I am not a mind reader, Chris, but I think Buffett weighs pretty heavily. I mean, we assume that if he's vetted, it must be good. Wells Fargo has a great reputation. The problem is that it absorbed Wachovia a couple years ago, and Wachovia does not have a great reputation. So that is sort of like the rotten core inside the otherwise good apple, and it's a question of which one will dominate. And so far, it's looking good.

I think Wells Fargo hasn't gotten into a lot of the investment banking issues, proprietary trading issues. They've kind of stuck to their bread and butter more so than some of the other banks that have either acquired investment banks or turned themselves into investment banks. So, that gives them a better reputation. Wells has been doing well recently in mortgages simply because the other banks have pulled back. And that just means more business for Wells Fargo. Shares of Coinstar up big on Friday after the company reported strong earnings and raised guidance for the year. CoinStar is the parent company of Redbox. Charlie, I guess I missed a memo.

I thought the DVD was dead. No, not quite. They're killing it. And they really nailed the beat and raise game. The stock is now at an all-time high. And I actually think it's still a good buy because of the strength of this Redbox business. The reason they were conservative on their guidance is they pushed through a price increase on the standard definition DVDs from $1 to $1.20 last fall, and they weren't quite sure

what the consumer response was going to be. Frankly, $1.20 for a day with a DVD is a dirt cheap price. It's a great day. Yeah. And so I can get a streaming video through various services. They're going to charge $4 or $5. Redbox is a great deal in comparison. And Redbox is 85% of Coinstar's revenue.

So they're looking strong right now. So who is the primary competitor here? Is it a company like Netflix? Or does Redbox essentially have the physical space to themselves? because they're not dealing with mailing DVDs in the way that Netflix is. Right, and Redbox is mostly popular new releases, and Netflix tends to lag a little bit there and rely more on the depth of their catalog. So it's a little apples and oranges.

You mentioned Coinstar's stock being at an all-time high. What do you think of the stock? Is it a little too rich to get in? No, I think the numbers are proving out that it's still a good deal. They're trading at about 15 times the cash flow they're going to generate this year, and given their growth prospects, I think that's reasonable. The computer industry lost a visionary this week. Coming up, we'll tell you about the remarkable life of Jack Tramiel. Stay right here. You're listening to Motley Fool Money.

Welcome back to Motley Fool Money. Chris Hill here in the studio with James Early, Charlie Travers, and Ron Gross. This week, the U.S. Justice Department filed a lawsuit against Apple and the five largest publishers in the United States, accusing them of collusion to artificially increase the price of e-books. Charlie Travers, I'll start with you. Three of the publishers have settled, therefore avoiding the proverbial costly legal battle. Apple released a statement saying, among other things, that it broke Amazon's monopolistic grip on the publishing industry. What do you think of this?

I think I side with the publishers who settled. That's not the kind of letter I'd want to get From the DOJ saying, we don't like how you're running your business. So what's going on is that Amazon on their e-books is using a retail pricing model where they set the price at $9.99 for the vast majority of their e-books. This is very customer friendly. It's consistent with Amazon's policies of delivering a great value to their customers. Apple, on the other hand, is letting the publisher set the price similar to what they do in their app store for software. And the prices are $2 to $5 higher. And the DOJ is alleging that Apple is engaging in collusion with the publishers to set those

prices artificially higher than they would otherwise be. Since the iPad launched two years ago, Amazon's market share in e-books has dropped from 90% to 60%. And it's really Apple's policy to get customers to pay more so they can get their 30% cut on sales. Ron, what do you think? From what I've read, the DOJ is going to have a harder time proving this case against Apple than they will with the publishers. And I think by seeing them having settled, that seems to be the case.

You know, it will hurt Apple's reputation if this ends up being the case. It's not going to be any major problem to their business. iTunes is less than 5% of Apple's revenue and e-books are a small fraction of that. So this is not a business problem for them. It could be reputational. Apple is just a platform here.

I mean, their role would seem to be more passive in any type of negotiation than the publishers. That's the way it appears to be. Yeah, from whatever, they possibly weren't even at the meeting where this alleged collusion took place. Well, and certainly Apple has the deep pockets. They can engage in as many legal battles as they want, I'm assuming. But is this the sort of thing where, you know, with Tim Cook at the helm, because this is a lawsuit based on activity when Steve Jobs was at the helm. With Tim Cook at the helm, do you think, based on what you've seen so far of him as CEO, that somewhere down the line he says, you know what, let's just end this one way or another?

It's certainly hard to predict. I think if they think they're in the right, they'll fight it all the way. Have we even seen enough of this guy to know what kind of personality he has? He's so generic. I mean, I'm sure he's a great guy, but I just ... Well, he certainly reached out to Wall Street and seems to care more about Wall Street's opinion more than jobs. He dresses similarly. No turtlenecks, though. Best Buy CEO Brian Dunn resigned abruptly this week amid an internal investigation into his personal conduct. Ron, Best Buy announced it is forming a search committee to find a new CEO in the next six to nine months.

That's their time frame. No hurry, guys. Is that soon enough? I would have moved a little quicker. They have an interim CEO in there now who's the former CFO of UnitedHealth. But I think they've got to move. As the CEO prior to this one said, he said, this almost could not have come at a worse moment. And that's perfectly right.

They are in trouble from a business model perspective. Now they've got scandal in the CEO's office. Things are not going well over at Best Buy. So even though the stock has been cut in half in the last two years, you're not looking at this as a value opportunity? I'm not. I just don't like the business model. I don't like the business. Canada's budget proposal for the next year includes cutting thousands of civil servant jobs and eliminating the penny.

James Early, you love this move, don't you? Chris, I am so excited. You hate the penny. I've been waiting. Well, look, I'm an American, and I want the U.S. to do this. That's the real reason. I'm hoping it's going to leverage us. But the penny, all change, let me say it like this, all change has completely outlived its purpose, okay?

Inflation has made these small increments useless. It takes up weight in your pocket. It takes up time when you're waiting to get changed at the Baskin-Robbins. I don't know about Baskin-Robbins, but wherever you go to, you're waiting at the 7-Eleven to get your change. and the guy has to dole out, you know, eight cents. It's just ridiculous. They really need to eliminate it. We keep it for nostalgia.

But what about the nice take a penny, leave a penny kind of thing? It's just like the goodwill, maybe. Not good enough. Take a smile. I would not bother. I think, I don't know, it's not worth it to me. We're talking about Canada. As someone who owns a zinc producer, Horset Holdings,

and the penny is actually made of zinc, not copper, I am a little wary of the whole lot. I refuse on principle to follow the policies of a country that has coins named the loonie and the toonie. Yeah, I was going to say, to Ron's point, I read an article on Fortune magazine's website this week about not just the zinc producers, but the lobbyists in Washington, D.C., who represent the zinc producers. And all I'm going to say, James, is don't hold your breath. How about the Lincoln lobbyists? Can you imagine? Yeah. You have heard of Steve Jobs and Bill Gates, but there's a good chance you have not heard of Jack Tramiel.

He died earlier this month at the age of 84, and in the late 1970s and early 80s, he was considered a visionary of the computer industry in league with Jobs and Gates. Tramiel was the man behind Commodore Computers, which helped establish a mass market for PCs. In 1977, he introduced the Commodore PET, the first personal computer to cost less than $1,000. Ron, you had one of these, didn't you? I had the original VIC-20, which was the predecessor to the Commodore 64, and then I had the Commodore 64 as well, and it was amazing. I mean, the introduction of the home computer, it was a big deal, and I remember it very fondly.

Well, and I had never heard of this guy until I saw his obituary in the Washington Post. What an amazing life story. It was incredible. Yeah, and I think, you know, I've got to say this. One of the reasons he's so special, I think we're actually losing people like this. You know, the little rant here, but the school system, just the society, We're sort of homogenizing our kids a lot more than they used to be. And these kind of edgy, rough-around-the-edges type characters are the ones that go out and do things like this.

So I think this guy's really cool. Yeah, he was described as sort of a hard-charging, cigar-chomping salesman, which was really his profession. But, you know, what intrigued me, this is a guy who was born in Poland. At age 12, he's sent off to a concentration work camp, eventually comes to America, gets into the sales business, the typewriter business, and then Commodore Computer and Atari. Really, just an amazing story. Burger King is testing a new item in Nashville, Tennessee. It is the Bacon Sundae. Soft-serve ice cream, hot fudge sauce with bacon pieces on top, and a full strip of bacon sticking out the side like a straw. We'll get to the delicacy itself in a second, but

We talk in this room about companies in trouble needing a game changer. Charlie, is this a game changer for Burger King, do you think? They have actually lagged the competition on selling desserts. And one thing that the fast food patrons, which tend to be parents bringing kids in, is they want ice cream. And so I think it's a good move. Are you offended, though, if you're in Nashville? I mean, Burger King picked you to test this disgusting bacon. How dare you?

I bet they have a petition drive for it. I take umbrage with the bacon strip. I would have gone with crumbles. Does bacon go with ice cream in the first place? It's got crumbles on top and then a stick. You could use it as a spoon if you even wanted to. I knew a kid who put ketchup on his vanilla ice cream in school. This seems to be being the same league as putting bacon on it.

Well, clearly it's not because Burger King isn't testing soft-serve ice cream with ketchup on top. You can do that on your own. And they say this is something that they're just going to test it for a few months in Nashville. And if it works, they're going to roll it out to all markets this summer. So, Charlie, I was going to say, maybe you and I hit the road and head down to Nashville. But, you know, we'll just wait it out. Hopefully, we'll count on the good people of Nashville to make this a success. Make the right choice, people.

Is there a right choice? I like it. It sounds so sincere. I was going to say, it's like this sincere moral plea that Charlie is making. But to be fair, Charlie, we were talking before the taping. You've actually had bacon-flavored ice cream. and ... It doesn't translate. You can't just mix the bacon flavor into the ice cream itself. I think having the strip on there.

Okay, so infusing it, no, but as a topping. But bacon does work with chocolate pretty well, and if it's with the hot fudge on top of the ice cream, you may have something here. Steve, you have an opinion on that? I'm a big fan of bacon and ice cream, so I think it's really a win-win. Well, there you go, America. If it's a success and it rolls out to market, we'll go to the closest Burger King this summer. I'm in. Sign me up. All right.

That sounds good. All right. Charlie Travers, James Early, Ron Gross, guys. We'll see you a little later in the show. Coming up, how the new rules of innovation can transform business. Don't go away. It's time for bacon. Bacon.

Oh, yeah. So good. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Thanks to the globalization and Googlization of the world economy, clever ideas from every corner of the world now have the chance to be taken seriously, even if they'd come from people without fancy credentials. So writes Vijay Vaitheeswaran.

He's an award-winning global correspondent for The Economist, and his latest book is Need, Speed, and Greed, how the new rules of innovation can transform businesses, propel nations to greatness, and tame the world's most wicked problems. Vijay, thanks for being here. Oh, it's great to be with you. So, as I indicated, this is not your first book. You've written a couple of others. What got you interested in this topic, and why did you write the book? You know, a couple of reasons.

First, it seemed to me that innovation is a topic that everyone loves to talk about, but in fact is a topic that's full of misconceptions, myths, and just downright sort of misguided ideas. And so I just wanted to set the record straight on what I actually think this very big and important thing is by explaining what innovation isn't, and we can talk about that in a moment, and not what it is. And that points to sort of the second reason why I was motivated. There's something big happening with how we innovate. That is, meta-innovation, the very rules of innovation themselves,

are changing, I argue. And this is important because we live in an age of very difficult problems, wicked global problems. And so when I look around me and the job that I do at The Economist, I've been at The Economist for 20 years, covering lots of the problems in energy, in health care, in development. And these are terrible problems, and we need to accelerate the pace of innovation. And to do that, we first have to agree on what we mean by innovation. So what do we mean by innovation?

Well, simply put, it's not invention. And a lot of times, it's conflated with technology, for example. and a lot of my old technology friends from my MIT days get very enthusiastic about gadgets and gizmos. Wow, that's almost hard to believe. Exactly. Patents, for example, or PhDs, even governments and how they define innovation,

they often will list the number of engineers that graduate. The National Academies in America and other countries will say the number of PhDs that are produced or China, which is very big on so-called indigenous innovation, they want to be an innovation superpower, they'll list the number of papers that are published and the number of new technology patents they get. In my view, this gets it completely wrong. These are inputs into a process. They're not the output. Those things are good. They might help. But fundamentally, innovation is fresh thinking, which may or may not involve technology that creates value. And

the harder part of that equation is actually the connection with value creation. Because when you create value, let's say you're a private sector company, the value would be created for your shareholders and for your customers. But you could be a social enterprise, one of the new dynamic breed of NGOs that are more market-minded. They'd be creating value for their stakeholders. Even governments are doing some things right, and where they've embraced sort of open government protocols and innovative approaches, they create value for the citizens. But the hard part is creating value. It's not coming up with the technology, or if you're in Wall Street, for example, coming up with a derivative or a new kind of creative financial product that's

very clever. That's not innovation just because you came up with something clever. Show me the value created. Show me how durable the value is. And in particular, I challenge us to say, what's the value that's created towards solving some of the world's most difficult problems? Let's hold a higher bar for when we talk about innovation. One of the things you do in this book is you really challenge some of the conventional thinking when it comes to innovation and business. So I want to get at a couple of those. And let me just start with the notion that the rise of China and India as innovation powerhouses is inevitably going to come at the expense of the West. Now, at The Motley Fool, when we look at China, we're looking at Chinese companies like Baidu and Sina, but we're also looking at companies that have succeeded, like Yum Brands and McDonald's, where a company like Google, which is such a powerhouse, has really struggled in China.

You live there. What do you think is the key for an American company trying to succeed in China? For American companies trying to do business in China, first of all, be very careful. Know who your partners are. It is a wild west. But remember, the wild west holds some analogies in that it was a dangerous place. You didn't know who was going to be riding up to your wagons. You needed to be careful who your partners and allies were

and who was going to run off with your property or your wife. But equally, the west was tamed. Ultimately, the lesson of how the American West was won is not a sexy story, but it was with barbed wire, right? It was when barbed wire was laid out across the prairies, it created property rights. And we had demarcated property, and people began to defend their turf as if it were private property rather than treat it like a commons, which could be abused. And I think that sort of evolution is happening in China, where it is a Wild West, and there's been something of a grab of assets within the political system

and economic system in China. And when people come in from the outside, you get into bed with somebody. If you don't quite know who your partner is and you don't know who the chump is, it's like in a game of poker. If you don't know who the chump is, the chump is you. And so many a foreigner has lost money. Many a foreign company has been squeezed out. And you don't hear about most of this in the press.

They do it quietly, and they don't reveal their losses. And I know a number of off-the-record stories about that. So I would say be very careful, but equally be aware that China itself is changing for this reason, that the Chinese themselves are increasingly coming up with homegrown inventions that are value creating, and they want to go overseas and convert them into value creating innovations, to use my definition of innovation, only when it creates value. And what does that mean? That means they're actually pushing their own legal system to respect IP more than they

would have in the past. And I think this is the change that's happening in China that's most dramatic and underreported is, yes, it's a wild west. People will steal your IP. But increasingly, companies like Huawei, for example, the technology company, actually, their bitterest IP lawsuits are not with Microsoft or some of the Western companies that accuse them of stealing stuff and vice versa. It's with their crosstown rival, the VTE, which is now one of the world's biggest handset makers. and these two are suing each other in local courts for China to respect its IP laws, that to me is actually a very positive sign because they're changing Chinese culture and attitudes towards IP.

That's the biggest thing you should know about doing business in China. Let's stick with China for a moment. From an economics perspective, what do you think is the biggest misconception about China? I think at once the biggest idea and the biggest misconception is the idea that China's rise will change everything, and that's true. It is a much bigger force, for example, than Japan's rise 30 years ago. China's continental in scale, it has much greater potential to be an economy like the United States, a dominant and rising superpower. But the fallacy that's embedded with this is the notion that innovation is a zero-sum game, the idea that's common now in America that if China is up, then America must be down, that China's trade successes must be because, like with NAFTA, that fucking sound is taking our jobs, when in fact the picture is much more nuanced and much more complicated. I firmly believe, and I think a lot of economic evidence shows,

that global innovation does not have to be a zero-sum game. China's rise can be a rising tide that lifts many boats, but it will lift our vessel only if we patch the holes in our vessel first. And that's my argument to my fellow Americans, that is, see China's rise as an opportunity, but let's not forget that we have some work to do at home in shoring up the innovation ecosystem that has been so great in the 20th century, among other things, our educational system, our infrastructure. And these are areas where we need to, in our immigration policy, to be honest,

and maybe controversial, we used to get it right in all these areas, and we've been either neglectful or worse in these areas. And so if we get that right and put in place policies that begin to address these problems, then I think we can go from strength to strength. and rather than see it as zero-sum game. You're listening to Motley Fool Money, talking with Vijay Vaitheeswaran, author of the new book, Need, Speed, and Greed, How the New Rules of Innovation Can Transform Businesses,

Propel Nations to Greatness, and Tame the World's Most Wicked Problems. What surprised you the most when you were working on the book? I think, in a sense, the dynamism of the emerging economies in frugal engineering. And I'll tell you what I mean. I mean, when I heard of ideas about frugal engineering, this is a concept that's been around for a while. The great management thinker C.K. Prahalad, who passed away recently, has championed bottom-of-the-pyramid investments for 20 years, right? I mean, that's true, and companies have been out there trying to find ways to sell to consumers in poor countries

and also increasingly picking up on ideas from those markets and bringing them back. But that sort of cheap and cheerful was the notion I had of frugal engineering because these markets tend to be quite frugal. But a lot of middle-class people used to be poor very recently, so they don't like wasting money, and they're very value-conscious. But the revelation for me was as I traveled around and talked to lots of companies in, for example, medical devices innovation, what I found was cheap and cheerful can often be cheaper and much better

than what's happening in the West. because the innovators that are coming up, because they have huge middle class, they have technical sophistication because they have lots of engineers and good high-class technology at their disposal, they're actually able to leapfrog into coming up with better products, whereas some of the Western companies that are doing traditional innovation in a space like medical devices, where if you look at these gigantic scanners that come out every year, medical devices is the only industry, I think,

other than defense, where innovation means a little bit better and a lot more expensive. And I think your listeners would expect their cell phones, their cars, their TVs to be cheaper and smaller and better every year, right? That's what innovation is supposed to mean, but not when it comes to the medical technology, right? Every year it's just way more expensive and just a little bit better. That's the real disruptive potential, I think, coming in from these frugal innovators out of China and India. They're coming up with smaller, better, portable kinds of scanners and other technologies, ultrasound machines that are going to blow away the markets, I think, in the developed world in a positive sense. I think, frankly, the U.S. health care system could benefit tremendously from some of these disruptive innovators. And the only question about which disruptive innovator is going to do it is whether they're going to be using forks or chopsticks.

The conclusion of your book is entitled, We Are All Innovators Now. So with that in mind, what is one thing that anyone listening can take to their boss or to their company or their manager and with an intent of trying to foster innovation within their own company or organization? I'd say we are living in a world in which innovation is much more democratic, much more open. Ask yourself in your organization, what are we doing to tap the potential of 7 billion innovators in waiting? And I'll give a couple of quick examples, if you'll allow me. When Netflix wanted to improve its algorithm for predicting what movies you and I like, they put out a million-dollar prize a couple of years ago. I'm sure some of your listeners remember this. They said anybody who can come up with a better algorithm by 10% will give you a million dollars.

And they figured just some computer science guys would come up and they might try. Maybe they'll get lucky. Tens of thousands of people came out of the woodwork from around the world, from all fields. I mean, grannies and teenagers, people from around the world in all walks of life, not just computer guys. And it became an open, transparent competition on the web. And people began to collaborate. And not only did they get winners that surpassed the 10% threshold, but when the team came to the United States to collect the money, all of the members of that team had never before met in one place at one time. They had met online and collaborated to come up with that solution.

That should open the eyes of every company out there that thinks that the smartest people in the room are inside their company. They're not. Even NASA, a government agency, has learned from this. And when they wanted to develop the new glove for the astronauts a couple of years ago, they said, you know what, instead of just offering it to the usual circle of sort of beltway bandits and defense contractors, why don't we make this open to anybody in the world? And so they went to a prize platform known as InnoCentive, which is open to any company that wants to join up

and allows anyone in the world to become a potential solver of these kinds of puzzles. and the winner who came up with the best design was not a multi-billion dollar corporation he was an unemployed sail maker from Maine who came up with the best design and now not only is his design the glove for the next generation of astronauts but he has created a company and a whole ecosystem

of other people who bid around him and who didn't get the prize but who came in second and third in effect launched a new set of industries take that back to your company around the water cooler and see how that sparks the possibilities at your own company let's wrap up with a round of buy, sell or hold

let's start with buy, sell or hold the first mover advantage I'd buy the first mover advantage but I would also concurrently buy failure to go with it I'm a big believer in taking a lot of risks

moving fast but learning how to fail gracefully. That's really the trick to the future. Buy, sell, or hold the future of Starbucks in China. I'm a big believer in both Starbucks and in China drinking coffee, so yes, I'm going to buy. As a Starbucks shareholder, I'm happy to hear that. Buy, sell, or hold driverless cars.

I'm going to hold. I've seen the Google driverless cars, and I love driving too much to give up completely. So I grudgingly will hold that I won't sell, but let's wait and see. The book is Need, Speed, and Greed, How the New Rules of Innovation Can Transform Businesses, Propel Nations to Greatness, and Tame the World's Most Wicked Problems. E.J., thanks so much for being here. Thanks for having me. Coming up, we'll give you an inside look at the stocks on our radar.

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. I'm Chris Hill, and back in the studio with me, James Early, Charlie Travers, and Ron Gross. Guys, that time again, time for the stocks on our radar. Ron Gross, you're up first. and be aware, we will be bringing in our man Steve Broido from the other side of the glass

with a question for you. Chris, I'm intrigued by a company called KEMIT, ticker symbol K-E-M, and they're a small-cap manufacturer of capacitors, which are little devices used in all electronics. Not flux capacitors. They store electricity, right? Yes, they store electricity. It looks unbelievably cheap to me, three times EBITDA, three times cash flow.

The problem that may be here is that capacitors are a commodity, And that's really what I need to dig into because this could be a value trap. All right. Steve Brodeau, a question for Ron? Ron, can you explain the role of a capacitor in electronics? Of course I could, but we don't have time right now. That's what I thought. They help with sudden boosts of power.

Like if you need a lot of power in your battery, your power supply can't. So it stores up the energy. Yeah, it's sort of like having a water line and having a bathtub in the middle of the water line and then the water line continues. So if you suddenly drink a lot or take a lot of water, it'll pull from the bathtub. See, you didn't even see my lips move and James just. I'm an engineering kind of guy. James Early? Chris, I am eyeballing Guangzhou Railroad. The ticker is GSH. This is actually a dividend stock in China, 4.1% yield. It's pretty cheap on a multiple basis relative to other railroads. It is a five-star stock in our Motley Fool caps database, but it's in China. So that's the piece that I've got to kind of wrestle with.

Steve, how does topography play into railroads? Isn't China have a lot of various just tall mountains and such? Doesn't that make railroads difficult to build? Yeah, the most, I guess, topographically speaking, the most difficult regions are the least populated as a rule. China is a big country. I would say the bigger issue for these guys is the advent of roads. There are just many more roads being built because in the old days, Chinese just didn't have cars. Now they do. So the question is, how much of this passenger traffic is going to divert from railroads to just roads? Charlie?

I've been keeping my eye on Enernoc, tickers E-N-O-C. The stock has been utterly annihilated over the last two years. It's down 80%. What I like about the business is that they have technology to make the electric grid more efficient. And so particularly in the high peak summer months when everyone is running their air conditioners, The utilities can either fire up costly backup power plants, or they can use a demand response system from Eternok to get customers to lower their usage on non-essential devices to spread the existing power capacity around everybody else. The stock is now trading at just a buck over tangible book, so it seems like there's a flow here and a lot of upside. And how we'll train is topography, if that's what you're saying. Steve, the word's right out of my mouth, Ron.

My question for you, how long will it be before I'm generating all the energy I need inside my own home? Never. Never. Unless you're, maybe James could. Yeah, not you. Stationary biking. Yeah. All right.

We'll end there. Charlie Travers, James Early, Ron Gross. Guys, thanks for being here. Thanks, Chris. Thanks to our guest this week, Vijay Vaitheeswaran. For commentary throughout the week, check out our daily podcast, Market Foolery, on iTunes. 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.