Motley Fool Hidden Gems Investing - Motley Fool Money: 04.24.2009

Episode Date: April 24, 2009

Amazon.com, Apple, and Netflix report better than expected earnings. What does the future hold? Will Ford’s earnings drive investors back to the automaker? And when a CEO uses profanity, does that help or hurt a company’s stock? Find out in this week’s Motley Fool Money podcast. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Money. I'm Chris Hill, and I'm joined by Motley Fool Senior Analyst James Early, Seth Jason, and Shannon Zimmering. Guys, thanks for being here. Good to be with you, Chris. Coming up, we'll talk about the latest earnings news from Amazon, Apple, and Netflix. We'll offer up a few stock ideas and share a few beefs. But we begin with good news, relatively speaking, from a U.S. automaker. On Friday, Ford reported a smaller-than-expected loss, thanks to some heavy-duty cost-cutting. Shares were up sharply on Friday, but have still fallen around 40% over the last year. Shannon, what's the takeaway

for investors on this? Stay away is the takeaway for investors. I think the dynamic, and it's playing out all across the market, is, you know, the news was terrible, but it wasn't horrific. And so, consequently, we're really excited about this company. But there's no reason to be excited unless Ford gets a brain transplant. They're not really going to be competitive with smarter international automakers, Honda and Toyota in particular. I don't anticipate that that's going to happen, and so I don't think there's much there there with this story.

Yeah, this is a 39% revenue drop, which is always bad news. I mean, the analogy I use, Ford is like a stab man trying to run to the hospital before he runs out of blood. I mean, he's just waiting for the economy to pick up. That's quite a visual thing. There's a big distance there. All right, other big stories this week. Whoa, whoa, whoa, whoa.

Oh, I'm sorry. All right. One time I have something nice to say and to point at these two guys and say, what a couple of idiots. I share their bearishness to some degree because I sold my Ford shares and my Ford debt. Had I held them until today, they'd have been back up 100% from where I sold them. The news here is better than the headlines or than my colleagues might want to admit, I think, because the debt is up because people think, hey, Ford's not going to run out of cash. Ford, I think, is going to benefit from some public goodwill

because they're not really suckling at the government teat like the other automakers. And the fact that the other automakers look like they're going to be in reorganization sooner may send some customers Ford's way. Now, I don't hold any illusions that Ford is really a great, great competitor or that they're the best auto company out there. But I think there's always, every company is worth something. And I think Ford just might be worth more than we give it credit for. In this, the best of all possible worlds.

If that's your view, let me ask you, though. So to the extent that they are benefiting from the economic stimulus plan that has a provision that gives a rebate for the sales tax. I don't buy that. I don't buy that's helping at all right now. Well, but the market seems to be looking forward. But what are they looking forward to? And it seems to be a lot of atmospheric information around this rather than fundamental information. Cost-cutting is nice, but you can't cost-cut your way to profitability. You can cost-cut actually more than that, especially if your competitors are going out of business.

I think that gives Ford some leverage to come out and say to other folks who are on the hook and say, hey, you know what, you need to work with us. If it's a war of attrition, Ford will be the last to lose. That's the one. Ford might post a profit by 2011, they say. I mean, is that really good news? It doesn't matter to the people who hold the equity when it happens if the stock goes up. I cannot believe this is Seth talking.

All right, let's move on. Other big stories this week. We had President Obama leaning on the credit card companies about the interest rates they charge. We had Bank of America CEO Ken Lewis saying he was pressured by the government to complete the deal for Merrill Lynch, and some better-than-expected housing numbers released on Friday. In the wake of all that, James, what's the headline that caught your attention this week? To me, I can't get over this Ken Lewis and being pressured by Hank Paulson business. I mean, this is like something you'd see in North Korea, if the rumors are true. Oh, come on. It's not that. It's like Soviet Union, not North Korea.

You know, Hank Paulson, who may or may not have been pressured by Greenspan, I mean, not Greenspan, Ben Bernanke, I should correct myself, we don't know, went to Bank of America. We know they were pressured by Merrill to begin with, but apparently Ken saw some things they didn't like, they wanted to back out, and they said, oh, no, if you back out, your job is gone, the board is out of there, something like that. So if that really happened, I mean, Ken Lewis was kind of sort of a Sophie's choice for him between country and company. And what does he do? So he became a patriot, albeit a sneaky patriot, we presume, and went ahead and bought Merrill Lynch, just keeping really quiet about the bad news. Was it for his country or for his job? We don't know. But we do know that the Bank of America shareholders meeting is coming up very soon.

And there are a lot of groups that have a lot of animosity towards Ken Lewis. This is great ammo for them. Yeah, and let's just hope it doesn't turn out like Sophie's Choice. That's quite the grim ending on that. Yeah, I know, between that and the staff man running to the hospital, you're coming up with some great images here. What we have here is a bully and kind of a cowardly toady, so it's really tough to figure out which is the more despicable.

Yeah, I'm surprised. I don't put it past Paulson because he wanted out a long time ago, so he was sort of going along with whatever was happening, I suppose. But Bernanke, I find it somewhat surprising, and I'd like to get more of the details around this story. I don't think that it really has much to do with whether or not the government should be more deeply involved with the problem of insolvent banks. I happen to think that they should be, and it looks like,

and this is a headline that attracted my attention. But be upfront about it. Full disclosure, I think it's a good idea, but there are some things policy-wise that you cannot do directly. You can't take a weak dollar policy directly, and you can't talk about, in this country, nationalization directly. So you have Tim Geithner, who I've taken some pot shots at, who now, I think, is gifted in the art of the rhetorical pratfall,

talking the dollar down by mumbling and fumbling his way in a direction of a policy that is good for U.S. companies at a time when we could use an extra boost. The big story, I think, and there's a lot of noise, but the big story of the week was the fact that the Obama administration is considering converting the loans that they have issued to banks for bailing them out of the situation to common shares, which would be, as one report puts it, a backdoor to nationalization. Open that door, go through it, clean up those balance sheets, and then put the banks back into the capitalist wilds. That's what needs to happen, And I think that now, maybe under the radar, it's going to happen.

You agree with that? Yeah. It's the front door, actually. I've been saying all along. I've been saying all along, buy the equity, make it clear to everybody, take them over, clean them up, chop them up, get them back onto the market. Seth, what about you? What's your headline of the week?

The one that jumped ahead now that you just mentioned is the so-called good news in new home sales. Everybody, the press reports these absolutely horribly. What's wrong with so-called good news? So-called good news. All you need to do is go to census.gov and look at the sales or look at the information that they actually publish on this, this so-called 0.6% drop, you know, better than expected. Anyone out there who's, I don't know, been in eighth grade science probably knows a little bit of something about error bars, margin of error. This is plus or minus 19%, okay?

That's your margin of error. That's why it's so-called good news. It could be a 20% drop almost. It could be nearly a 20% gain. We don't know. Now, how about we look, and that's from last month just, you look year over year, you're talking about a 30.6% difference to the downside with a 10.7% margin of error. So you're much surer that year over year this is still terrible news.

Don't believe these housing headlines. All of the media out there, I think, is just grasping to be able to say something positive about housing, and we've got nothing yet. And the market is buying into it as well. So existing home sales came in a bit below expectations. New home sales came in a bit above. But it's all just a bunch of sound and fury. We're still in, if not a free fall, still in free fall, but a slower free fall.

And the market seems to be cheering that. But I'm of the school that says, can't we just get this over with? Like a drunk, you've got to hit bottom before you can recover. And so to the extent that we're slowing down the hitting of bottom, that's a bad thing ultimately because we need to be able to bounce back from where we're ultimately going. There's no sign in terms of the macroeconomic data that things are improving substantially at all. Okay, lots of earnings news this week. So let's hit a few of the big names. We'll start with Apple, which reported better-than-expected earnings thanks to strong iPod sales.

Shannon, shares of Apple up around 40% over the last three months. Do you like the stock going forward? Well, and up about two weeks ago, since I called them out for special mention on this very podcast. I'm sure that had a lot to do with it. The iPod sales and Shannon Zimmerman's call on Motley Fool money. I just want folks to know I can move markets. If I buy something, the market goes down. That's my special knack.

So Apple, good results, great company. I think that the sort of story behind the story here is the way that analysts are just all, they have a big crush, and they have for the longest time on Apple. So much so there's an anecdote in the Times today about the way analysts were reading into the tone of voice that they use on the conference call. And not just, oh, did they seem enthusiastic, did they seem sort of downbeat. It was the tone of voice was enthusiastic. Consequently, hot products must be coming down the pike that we have not yet heard of.

Kremlinology with Apple. It's hilarious. I've always been worried about buying this stock, even when I've liked the price, because I always say to myself, look at all the shareholders and read what they write and listen to them. Do you want to be on the same side of the table deal-wise as these people who sound really crazy? They're like Star Trek convention fans. Yeah.

But isn't that saying something about the power of the company if it brainwashes the- But what does it say about the price you're paying? You know what I mean? As long as they can keep doing it, that's a brand. What they really should do, I think, is sort of use this as a springboard, all this good will and goosebumps that you use as a springboard into coming up with a compelling succession narrative. So Steve Jobs has been off the scene. The company's been quite productive while he's been away. That's a big worry. So everybody hopes that Steve Jobs comes back 100% healthy.

Apple anticipates that he will later this summer. Good, good, good. But eventually the guy is going to retire or do something else. And they need to figure out a way of taking advantage of what's happened right now and sort of putting out front some folks who are going to be in the front ranks in the company after Steve Jobs moves on. Never going to happen. Jobs' ego is too big to give everyone even a slice. You may be right, and that's unfortunate because it's a bigger company than just Steve Jobs.

Amazon.com also reporting better than expected earnings, thanks in part to strong demand for the Kindle. Yeah. In your face over there. I have a very tragic tale to tell. You are the biggest Kindle fan I know. I have sold, by the way, Amazon. I was just going to say, shares of Amazon.

Don't you talk over me. 60% over the last three months. How high are they since I pegged them on here? Didn't I talk about them on here? We're moving markets. We're moving markets with this podcast. Everybody, everything is up, okay? So don't read anything into it.

No, I think I said Amazon has always looked kind of crazy expensive to me. They came out with the Kindle. I said this is really, I think, a game changer. And actually, I saw a little bit of, I think, how the tide is turning on online shopping even more. And I think it's actually, they are extending their lead. They stopped burning so much cash, which they were always plowing back into reinvesting and equipment and everything. And so I haven't run the numbers lately.

And so I wouldn't say run out and buy it today. But this doesn't surprise me that Amazon is one of the few outperforming. And the Kindle is really a great product. My parents are now doing that. They live in the boondocks in northern Minnesota, and they can still get signal to wirelessly download their books. But how much is the Kindle responsible for the run-up that we've seen? Do they give those numbers?

I have no idea. Well, that's the thing. They don't give out hard numbers. Well, it's sort of interesting. I don't think you know. It's all about what can it do in the future. There was an interesting tidbit. So an analyst, I think at Merrill Lynch, came out and said that here's what we estimate the cost of putting one of these things together to be.

Five cents. Well, it was actually under $200, but not that far under $200. And Amazon was very quick to come out and say, oh, no, no, no, it costs us much more than that. And as the Amazon fetishist over here, how does that help their cause? I mean, is it a concession that they overpaid? Nobody knows what they actually – I mean, people are always trying to reverse engineer what Apple products cost as well by looking. And I don't think they ever have the story. Well, but about the Kindle, how does it serve Amazon in terms of driving investor interest in their stock and in their company?

How does it serve them to say, oh, no, no, no, we paid far more than what you estimate for the cost of building the Kindles And therefore, our margins, our profit margins are thinner than you think. I don't know that that's aimed at investors necessarily. It could be aimed at consumers. Nobody wants to think that they're paying a ton over the assembly cost. And I think that's why Apple has always taken a similar stance. Netflix also reporting better than expected earnings. And now, more than 10 million subscribers.

Netflix, no longer just about DVDs. It's also about VOD, as in Video On Demand. On Thursday, we asked Netflix CEO Reed Hastings about the biggest challenge his company faces on the VOD front. We need to spend more and more money with the studios to get more content. So that's the biggest barrier is, you know, it's spending more money with the studios. They do need more content. I love this service. I get it through my Xbox.

You actually need to run an Ethernet cable to get it to work. The wireless just can't handle the traffic if you want high def. But it is a great service, but the amount of content available is thin. So we still get our DVDs. They open it up a little bit more, and they'll be in the unstoppable position. Now, Seth, once the content is there, and I believe it will be there before too long, I mean, aren't there a lot of competitors in this business? I mean, in terms of just the technology.

I don't think there are. It's like a coin flip up in the air. Who else is doing it? Who's got the deals? So somebody else, I mean, couldn't they mount a pretty big challenge? Those guys generally only have a certain number of movies available at any one time, and it has to do with the way they've got broadband, right? So they can only send out, you know, I don't know how many channels worth of, you know, movies,

but, you know, you've got 10 or 20 or 30 or however many on-demand movies because they're sending them still through a broadband channel. I mean, Netflix, this is one of their challenges as well. They're sending Internet packets. So they can provide a much more specialized service, but it gets to you in a much slower fashion. So, yes, that is competition, but it's a different kind of competition, and I don't believe they're at loggerheads yet. Yeah, and I don't disagree with that assessment for right now, but I do think that Netflix will soon be the new blockbuster. And when that happens, it's going to take the form of wireless connectivity to your television set and to going from a company that actually is doing something that matters right now and doing it very well, very efficiently, to being a company where basically anybody can play.

So you're competing against the Hulas, the Juice, the YouTubes of the world. Those guys can't get their stuff to the TV the same way, though. They can't do it yet. But once you're able to have a wireless signal and see Internet broadcast on your television, then it's a different game entirely and maybe one that the studios can actually get into. I think that Netflix is in a fantastic position right now because they're clearly the dominant player in this space and doing it remarkably well. And they're in the position of being the chief distributor,

which gives them some leverage when it comes to negotiating licensing fees with the studios. Going forward, though, when it's more of a commodity service because everyone can have access to the technology that allows that, the studios themselves are going to be able to compete against Netflix, and I think that they will be well-heeled enough to pull it off. I think you're vastly underestimating the cost of sending this stuff out in definition high enough to actually work on a big-screen TV like most people run. Hulu is a great service, and I've been a big fan of theirs,

but you watch Hulu on a small screen. and I actually used to patch Hulu through to my big TV with my computer in back because that's the kind of nerd I am. It doesn't hold up. Neither does Apple TV, and they aren't even streaming wirelessly. Fidelity is going to matter less and less going forward. There's a whole generation of people who grew up watching YouTube. It's going to be different.

It doesn't matter because that TV is 50 inches, and it has to be good. And finally, Yahoo's quarterly earnings conference call featured some colorful language from new CEO Carol Bartz. You know, we sort of had a, you know, one product management person for every three engineers. So we had a lot of people running around telling engineers what to do, but nobody was doing anything. And so, excuse me, I knew that would slip out one of these times. Guys, I got to be honest, this makes me like her even more. She's working blue.

I don't see what the big deal is. Nice. Is it wrong that that was uncalled for? Is it wrong that that turned me on a little bit? Okay, but does the stock turn you on? I mean, yeah, this is all making news because she dropped the F-bomb on a conference call. The potty mouth that she used and that I just used probably doesn't have a place in conference calls. But what does have a place, I think, at Yahoo, and you and I talked about this back in the old days,

the video feed we used to do, I don't think Yahoo knew what it was doing, not in a sense of technically or anything. They didn't know what they were. And I think this is what she's getting at, that she was in charge of a company where there's stuff going on and no one really knows why. So I can understand her frustration. We all say those bad words. We say it here before we're on air, folks, or before we're recording. Speak for yourself, Seth.

Ask for the outtakes. Probably shouldn't say it, but it actually gives me a lot more hope for the company. All right. It's time for What's Your Beef? Time to tee off on a stock, a person, a company, an idea. Shannon, I will start with you. Well, I actually have a number of beefs, and I'm trying to, even now, think of the one that I wanted to zero in on. And I guess it's going to have to be Amazon and the Kindle.

A recurring theme. You can't have a beef three times. No, three times a charm. Third time's a charm. Just, you know, so my mother-in-law is a big fan, and I've been able to actually use the Kindle. It is a remarkable device. There's no doubt about it. I still think that my iTouch, even though it's cramped and it's small and it represents a bigger challenge when it comes to reading things, is fully functional, and I enjoy that. My concern, though, is this is really the iPod of e-books, and Amazon is sort of the iTunes of e-books as well. And so in the same way that even like a, you know, a hey, kids, get off my lawn guy like me who grew up listening to full albums is now a cherry picker of songs,

what is this going to do just technologically to the way that we read things? There's always sort of a way in which technology informs aesthetics. And so, you know, the sonnet form emerged because there was paper that was exactly that size. You all need to remember Shannon's actually an English PhD. Exactly. Like dusty leather books. That's what he's getting at, right? That and just the way that technology shapes what is possible and what is impossible.

And so now as Kindle makes it possible to read novels instantly, and maybe as a generation of people who grew up reading novels, we do that. What happens to subsequent generations who maybe don't have the sustained interest or the interest that's required to read an entire novel because you can jump so quickly to the thing that you want to read, what happens? Do things become smaller and smaller and maybe less insightful because some subjects, believe it or not, are complicated and interesting enough that they require an expansive form?

Does that form go away thanks to the massive technology that is being embraced by people who have Kindles like Seth? So bound book is to scroll as Kindle is to bound book? I'll only note that I read, and everybody I know who has a Kindle reads a lot more because of it. I'm not talking about you. I'm talking about another dozen people I know. But people who are 20 years your junior, a fairly large crowd. I'm a geezer, so everybody I know is younger than I am.

All right, James? Okay, turn up your volume because I'm going to talk about accounting, specifically a rule called FAS 159. I'll get comfortable. And this was put out in 2007. Nobody really talked about it much. But here's why it matters now. Banks are using this rule to record significant additions to their net income, and it's a very, very strange rule. These are the same banks that poo-pooed mark-to-market accounting when it came to their own assets, when they thought their asset values were too low.

But yet they're using this, which is sort of the most insidious version of mark-to-market accounting possible to affect the value of their liabilities. And let me explain very quickly how it works. So if a company issues a bond for $1,000, okay, originally, later on, the company becomes more sketchy. That bond trades down to, let's say, $700 on the open market. They get to add that $300 to earnings, even though the company didn't do anything good. In fact, they became worse. They added this to earnings. Now, the tradeoff is, you know, when their bond trades up, they have to take it away.

And that's what actually happened to Morgan Stanley. But Citigroup and Bank of America each added $2.7 and $2.2 billion to the net income recently thanks to this FAS-159. And for the most part, because the media doesn't like to talk about complicated accounting topics, this is just sort of a brush off in the stories. Oh, accounting treatments affected earnings. But wait a minute. Earnings were better than expected, right? Yeah, because the companies themselves actually were doing worse than expected, and the bond market is punishing them. So this is bizarre, and this rule should not exist, in my view,

and this is very ironic that it's the same companies that don't like fair value accounting when it comes to their assets. They actually love it when it comes to their liabilities. Yeah, so that's a serious, grave issue. I'm really glad that you have raised it. I have a very serious and grave question. Can you say poo-poo and assets in the same paragraph? We like to work blue.

All right, Seth. I'm going to do one of those hooray things, And I'm even going to do it for President Obama, or B.O., as I call him, which doesn't get me a lot of happy love mail. But he's taken on the banks, and I don't think he's so much interested in making sure that the credit card interest rates are low, although it would be nice if they were, is the fact that they are really scummy about what they tell you about these. And I'm going to tell you a story from my house the other day. My wife, bless her heart, and she's pregnant. She shouldn't get upset like this.

We got one of those things we get once a week from Citigroup, Citibank, with those fake checks inside that are actually a cash advance check on your account. And they say, it's not a check. It's, you know, a dream. It's a dream wedding. Pay off debt. Well, I mean, come on. The cash advance rate is, you know, in the teens, the only debt you could pay off with

this and possibly make any sense is if you owed a loan shark. But unless you have people trying to break your knees at your door, using these things is insane. And this is the kind of practice that has to stop. And I am actually glad that President Obama is going to lean on these guys. There's no excuse for it. Okay. As we head into the next week, Shannon, give me one stock on your radar.

Well, it's not a stock. It's a bond. It's not even really a bond. It's a bond fund. It's Vanguard Inflation. And it's not even a bond fund. It's actually a movie. I saw Monsters vs. Aliens, and I love it.

They're nested boxes, and soon I will get to it. No, it's Vanguard Inflation Protected Securities Fund, which is a fantastic fund managed by a team. that includes Ken Volper, who's a great sort of bond and fixed income guru. It's a good, very interesting asset class to be in right now because in our vaguely deflationary times, it's a good buying opportunity because I think that we all agree that on down the road, and maybe not even that far down the road, higher levels of inflation are almost inevitable as the lighter fluid of economic stimulus finally lights up and there are more dollars circulating and consequently they are worth less and inflation arrives. And so the securities that this fund

invest in are designed to rise in value along with inflation, and you can buy them directly, which may be a good way to go, but you can also buy them through this fund, which is a fantastic way to go because in addition to benefiting from the mechanism that causes them to rise when inflation does, Volpert and his co-manager are quite crafty in terms of making trades and sort of having capital appreciation as a part of their plan. So in addition to the fixed income payment that you get out of the investment, you also get the possibility that they'll be crafty traders, which they have been over time. So Vanguard Inflation Protected Securities, VIP SX is the ticker. James? I got to admit, guys, you guys are warming me up to Apple. This is really a strong

brand. And if you look at the companies that have lasted over time, Coca-Cola, Pepsi, Procter & Gamble has a lot of good brands. Brand is a huge driver of returns. You know, there's nothing different about, I mean, Coke underperforms Pepsi in taste tests, but it's the brand that keeps it going. And if Apple can keep this up, granted, that's not a given, that could really mean something even 10, 20 years down the road. Okay. Seth, Jason? All those Roy Rogers investors out there are snickering at you right now. No, speaking of Roy Rogers, and you know that was a huge chain, everybody, right? I love Roy Rogers.

And it's still around a little bit, but are there any equity holders? I want to issue a broad, can I do a broad warning? A broad warning. I don't want to make it sound like that. I just want to note that restaurant stocks have been kind of on a tear lately, at least a lot of the ones i follow and i'm going to talk about one that i really love we love it over in the service that i run here at the motley fool with my co-advisor and it's buffalo wild wings and we think this is a great stock it's a very well run chain it has gone up it has run up a lot lately trading at 42 and change and everybody is very excited and it's not the only restaurant stock that is just trading a little bit richly for my taste i'm not saying run out and sell all these

stocks but do your homework before you buy into this restaurant stock rally because the macro socioeconomic news I'm seeing does not suggest that everything is okay already. And so a little caution is warranted, not only on Buffalo Wild Wings, hang on to it, but watch, but on a lot of these other restaurant stocks. Do your homework. Okay. Seth Jason, James Early, Shannon Zimmerman, thanks for being here. Good to be with you. You're welcome. Thank you. Thanks for listening to this edition of Motley Fool Money. As always, people on this program may have interests 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.

Remember, the conversation continues 24-7 at fool.com and you can check out our Twitter feed at twitter.com slash themotleyfool. I'm Chris Hill. We'll see you next time.