Motley Fool Hidden Gems Investing - Motley Fool Money: 04.17.2009

Episode Date: April 17, 2009

eBay shows Skype the door. Google shows signs of slowing. And financial stocks show their better side. On this week’s Motley Fool Money we tackle those topics, offer a few stock ideas, share a few beefs, and question the wisdom of one company’s name. Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us, and actually travel with us at westjet.com slash 30 years. Welcome to Motley Fool Money. I'm Chris Hill, and I'm joined by Motley Fool Senior Analysts James Early, Seth Jason, and Shannon Zimmerman.

Guys, thanks for being here. Good to be with you, Chris. Coming up, we'll talk about Google's earnings, eBay's latest move, we'll offer up a few stock ideas, and share a few beefs. But we begin with better-than-expected earnings news this week from Citigroup, Goldman, J.P. Morgan, and GE. all are big players in the financial space. So, James, why don't you kick things off? Thanks, Chris. Let me point out one thing, that all these companies are very excited to get the good news out as soon as they can. You know, this is for a very simple reason. They want to look good in front of the government and in front of the taxpayers.

I'd maybe be doing the same thing if I were in their shoes, but the bottom line is they could be front-end loading some of the best news, and we could still see worse things to follow, especially when it comes to credit quality and things like that, which are at the mercy of estimates. Worth noting, though, to Citigroup's credit, they did not take any write-downs under the FAS 157 modification that got so much airtime. So, hey, good on them. And that's really the headline that most people are interested in. Actually, what's going on is that everyone is looking for good news. The media is out there going, hooray for Citigroup. And since I'm Mr. Sinek, I'll start with what I saw in the release as good news, which was that the tier one capital

ratio was way up. The cost cutting seems to be working. But there are horrors here beyond the the company's inability to use the word comprise correctly in its investor presentation. And the consumer credit trends are probably the scariest thing. Right now, net credit loss ratios on their credit card bids are 10%, and they're terrible for mortgages. And so, really, they're not out of the woods yet. And a lot of this is tracking unemployment fairly closely. But when you say 10%, I mean, put that in context.

I mean, is that way above average? Oh, yeah, it's way above average. Two or three times average. Yeah, two or three times average. You go back only a few quarters ago, a year and a half, and you're talking about 4%, 4.5%. So this is a major increase, and it's probably going to get worse. So this is something we mentioned last week, and I don't think we're out of the woods yet. I think this is one of those things people call a head fake.

I think that's exactly right, and we're not even halfway through the woods. James mentioned that they didn't take write-downs, and that's true. They haven't taken them yet. Better than expected is nice, but when you have an entire sector of the market that has systematically lowered expectations over the last year or two years, it's not very hard to impress folks, right? And so I think that going forward, people should bear in mind the absolute returns. A fund manager once told me that you can't eat relative performance.

This is all about relative performance, and people should focus on the absolute when trying to assess the viability of these companies. Yeah, and let's remember everybody out there who's a little newer to this game that what is expected is generally numbers that analysts are led to sort of by the nose, by the companies. Exactly. But guys, the one saving grace here is that Citigroup stock,

as with almost all bank stocks, is beaten down. So, you know, there are a lot of other people looking at the stock with the same opinion we have in saying, oh, there's more bad news to come.

I'm not saying it's an investment I will be making just yet, but, you know, if you're really aggressive, you could make money in this sector. A final point? No, I have a final point. Shannon and Seth.

Exactly right. Stock is beaten down, but yet over the last six weeks, the financial sector shot up to the tune of about 60%. And so a lot of that is just hope and goodwill. But how far can you get on hope and goodwill? At some point, the fundamentals have to come through. And it can't just be about relative performance, it has to be about absolute performance. And that's exactly right. The write downs are coming and greater loan losses are coming too. And to the point

about the stock being beaten down, the earnings that are being created by Citigroup right now are going to the people who have these preferreds, right? So they're in line, they're going to get any cash that's coming up for a while. So if you're holding onto the regular equity in the stock market, you're sort of last in line. Without the preferred dividend, they would have been net income positive. So that's correct. Yeah. Okay. Speaking of earnings, Google also reporting better than expected earnings this week. But it was the company's first decline in revenue compared with the previous quarter since Google went public in 2004. Shannon, what happened? Well, I've always been sort of a Google naysayer, particularly as a growth story. I think that they're an interesting

company, endlessly innovative, and I use their services a gazillion times a day, at least, and we probably all do. But basically, their revenue model is an ad sales model, which is deeply cyclical. And they're super effective in the ad sales space, but they don't have a lot of control over that. It's going to ebb and flow with the overall economy. So that's why I've not been willing in the past. I still don't own shares, but I have been willing to certainly pay up for the sake of owning shares. Watching the management team manage through the downturn, though, has been kind of interesting. I think that they've done a pretty effective job at rating and cost. And I didn't expect that that would be a strength of Google. And it has turned

out so far to be disappointing a little bit, I guess, relative to analyst expectations. But I think in terms of looking more qualitatively at what management has been able to accomplish, pretty effective stuff. I think it's funny that you bring in a new financial guy to do some of the cost cutting, get rid of a few bodies so that your sort of hippie trippy former leaders can run around in their bare feet and go, it's his fault, man. Don't be evil, just find someone else to do it. Exactly. They hired the man. Yeah. Hey, if you're going to hire, you got to hire evil, too. All right. A big bankruptcy this week. General Growth, the second largest mall operator in the United States, filed for Chapter 11. But the company says that shoppers won't notice. Seth,

someone's got to notice, don't they? Shoppers won't notice because the folks who hold the debt are going to take control of the corporation. They're going to go through a bankruptcy. So you really won't see anything on the other side. Actually, if you want to look for silver linings, and I'm not very good at that, right? But retailers and other people who need to rent spaces in these places are probably going to see some good deals coming up, not just in general growth properties, but in other places because the business for those folks is bad

and they are going to need to cut rates. This was the second biggest mall owner in the U.S. And for those who haven't bothered to read the whole story, which is a little bit boring, this is just an example that everybody fell into the same trap during the housing bubble. Everybody borrowed too much. And what happened to General Growth is they couldn't pay back their debt, really probably never planned to.

They're one of these companies that always just sort of rolled debt well. When people won't roll you new debt to pay off your old debt, which is what happened, you get pinched and you go bankrupt just like this. But if this means we're going to have fewer shopping malls out there, I will be all for it. I just can't stand shopping. I hate it. But let me say one thing else, though. This could be, in terms of the bank topic, I mean, And if this portends worse problems for commercial real estate, which it may well do,

it could be bad news for a lot of the, particularly the smaller and more local banks that tend to be very heavily exposed to the real estate market. So we'll just have to see, but this could be a bad omen for those guys. I thought this was a very useful story because the financial media can only carpet bomb one story at a time. And so it was useful to sort of get some attention directed off the residential real estate story and on to the retail space real estate story, which is in dire straits, as Seth and James have both suggested. Yeah, and James Early's manifesto from his shack will be on sale at Amazon.

In hindsight, was it a mistake to name the company General Growth? I always thought that was hilarious. I lived in Chicago for a while, and I would pass their very lavish building on the way to work each morning, which is right there on the Chicago River. And to see this really ornate structure with General Growth, I felt like I was in that Terry Gilliam film, Brazil. It was strangely generic and surreal at the same time.

And finally, eBay's doing some cutting. eBay announced this week it will be spinning off Skype, the internet telephony company that never quite lived up to expectations. eBay says it's planning an IPO for Skype sometime next year. Does this make eBay more attractive for investors? Yeah, I definitely think so. You know, Skype was an interesting play, badly played by eBay, but an interesting play.

On an emerging technology at a time when they wanted to be associated with that, but eBay is no longer emerging. They're the incumbent, and they need to do something to protect their incumbency. They're looking a lot more like Sears than they are some sort of bleeding-edge Internet company, and they have some sprucing up to do. Can I just say from page two of my manifesto, one of the dumbest things companies do is just buy other companies. Even in an investment banking book I have notes that four out of five acquisitions don't work out,

and that's wrong from an investment banker's standpoint because they all work out very well for the bankers themselves. But for the companies, managers tend to grossly overestimate synergies and what's going to happen. This one was obviously a dud from the outset. Yeah, and the story was supposedly that people would decide they were maybe interested in my spork collection, and then we would get together on Skype and discuss it.

Nobody wants to discuss this stuff with a wacko who's doing the bidding. Heavy breathing or something. All right, it's time for What's Your Beef? Speaking of wackos. Time to tee off on a stock, a company, a person, a concept. Shannon, what's your beef this week? Well, to me, it's not a beef, it's props. So that's the moo of joy.

Oh, wow. I'm very excited about a certain development. The Wall Street Journal, one of, well, two great papers, I guess, in this country, has rolled out an application on the iTunes Store, or app, as the kids like to call them, apparently. And even though you have to go and pay at the newsstand, Or even if you subscribe to the Wall Street Journal online, it's absolutely free if you download the application and download the Wall Street Journal before you leave your house for your morning commute, as I do each and every morning. How long that's going to persist, I don't know. But I'm loving it for now.

It's not, again, a beef, but my prop of the week. Can I get the move joy one more time? Yes. Go paperless. All right. James. I've got an easy target this week. You know, the other day I finally put my infant son to sleep after like four hours of whaling,

and the phone rings, and it's a telemarketer. And just to be clear, it was your son doing the whaling, not you. Correct, correct. Yeah, yeah, my beef's not that bad. So I thought I was on this do-not-call list. Maybe I wasn't. But this is an antiquated practice that must be stopped. I mean, just wasting tons of people's time. I mean, I'm sorry for such a personal beef, but I just can't stand it. I think a lot of other people feel the same way.

We're getting some good insight into James Early, the man, this week. James' beard is down at the bottom of the table just wearing this taping. It's grown about a foot. Hey, kids, get off my lawn. All right, Seth. I have been struck this week. I was glad to finally see an article in the Washington Post saying what I have been thinking for the past few days, which is that if you listen to some of these bank CEOs and bank leaders, Goldman Sachs, Jamie Dimon,

over at J.P. Morgan whining about how they've been tarred or how they have this scarlet letter associated with them for having taken tarp money and how it's their duty or how they really want to pay this public money back because they don't feel it's fair that the government is stepping in telling them what to do now that they've taken all this money. And this is just a bunch of the craziest whining I've ever seen. And what the Post story pointed out is these guys are talking about giving back

if they're allowed to, only the portion of the money that has strings attached, only the portion that gives Treasury a voice into what's going on, and the portion that gets them the most flack from the public. All of the other public handouts that they're taking, you know, with their hand behind their back or through the back door, they're not talking about shutting those off. And so this, to me, is just a bunch of self-serving junk. And anybody out there who's listening to this, it's pitchforks and torches times again.

Come over to my house. I'm going to buy a whole pile. We'll march on Wall Street. All right. Let's look at one stock on your radar for the next week. Shana? Sure. It's Precision Cast Parts. We've been doing a lot of work on this one lately. It's a major player in the aerospace and industrial materials sector. Ticker symbol is PCP. Beaten down hard over the last year for good reason. Air traffic is down. Production cuts at Boeing are apparently coming. And about 55% of the company's revenue is derived from aerospace.

However, if you look at the valuation profile, it seems to be in the sweet spot for purchases in terms of its history. And I think that now is a really good time for long-term patient investors to give a close look to Precision Cast Parts, PCP is the ticker. Okay, great. James? Mine is very simple. I'm going to say check out a bond ETF. I'm not going to say which one, but a lot of bonds out there. Yeah, how helpful is that? A lot of bonds out there are trading at obscene levels of pricing and massive default.

I hope they're wrong. Hopefully, for everyone's sake, they're wrong. So you can capitalize on this. A bond ETF, watch for inflation, though. Just to get in on that, James could not be more right. There is a chasm-wide yield spread between corporates and junk bonds in particular and treasuries. It looks like the debt deal of the century to me, too. Wow. So just, like, throw the bond ETFs on a board and just throw a dart? Party at Seth's house, yeah.

All right. Seth Jason. I was sort of at a loss until Shannon started talking about airplanes and things, and then it popped into my head. Grupo Aeroportuario del Sereste. This is a Mexican airport group. As an airport group, they have a monopoly. That's one of the beautiful things about airports. Are you speaking the language of love?

I am. Spanish, Mexican Spanish. And they own the Cancun Airport or operate the Cancun Airport as well as some others. And right now there's a lot of really grim news coming out about the border, about drug wars in Mexico, and I think that that's bad and it needs to be taken care of. But I also think it's really overdone. At the same time, we're seeing some small decreases in the amount of passenger traffic. Tourism is the big thing for ASR. That's the ticker for this group because Cancun is a tourist airport.

But in the long run, these folks are the only game in town. They make a ton of cash when they're doing well. I mean, right now, they're still paying a dividend yield in the 6% range. I own shares, have for a long time, have been very happy, have made a lot of money on them. They're beaten down now. They're not always going to be that beat up. All right, Seth, Jason, James, Arlie, Shannon, Zimmerman, guys, thanks for being here. Thank you, 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.