Motley Fool Hidden Gems Investing - Motley Fool Money: 05.01.2009

Episode Date: May 1, 2009

Which stocks can help you inoculate your portfolio against swine flu fears? Should President Obama put the brakes on his criticism of Chrysler’s creditors? How much should investors bank on next week’s bank stress tests? And what do Congressional oversight panels have in common with mall cops? We answer these burning questions, plus offer 3 stocks on our radar in the latest edition of Motley Fool Money. 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 Analysts James Early, Seth Jason, and Shannon Zimmerman. Guys, thanks for being here. How do you do, Chris? Coming up, we'll talk about Chrysler and some stress tests that are actually not too stressful. We'll offer up a few stock ideas and share... The cow is early this week.

Until the cows come home. Let's just move on. And we'll share a few beefs. And while the show is about business and investing, we begin today with the dominant story of the week, the swine flu. It's almost 11 a.m. Friday morning Eastern time as we tape this, and there seem to be new reports every few hours. Seth, the swine flu is first and foremost a public health story, but this definitely has business implications. Well, everybody's looking originally in the media that we watch for ways to get rich quick on this. And I was trying to be in front of the story with the usual curmudgeonliness that you've all come to expect from me saying, whoa, whoa, whoa, wait a minute.

People were, of course, first saying, here are the vaccine makers or the flu medicine makers that you need to get into. And then they were saying, you know, maybe you should look at something like Netflix. People are going to stay at home and do more Netflix. I think these are all ridiculous, fad-chasing ideas, the kind of thing you should absolutely not be doing. Instead, you should probably look at the sort of stuff people were trying to sell at the time. Everyone was saying, ditch your Mexican stocks, ditch the airports in Mexico, ditch FEMSA, which is a huge powerhouse they sell, Coca-Cola, beer, have a giant chain of convenience stores.

Buy what people don't like. To get back to the medicine and the vaccine makers, I think this is predicated on a really bad assumption. The bad assumption is that, hey, if they sell a bunch more flu product, they're going to make a lot more money. Consider the people buying the food product, the entities buying the food product, governments who are going to say, we need a deal now. This is a public health issue.

And also the fact that if you are suddenly rushing more of these products into production, that doesn't say great things about how much it's going to cost you to produce. There are no windfalls here, I don't think. Look at what people hate. Go that way. Yeah, as much as it pains me to say so, Seth, that's exactly right. You should definitely go against the news flow. And what better way to do that than by investing in Mexican airports?

One of my colleagues here at The Fool, Andrew Sullivan, did some great work this week on three Mexican airports, and I'll save my favorite of those for the radar stock segment, but that's a great place to be looking right now, not just to take advantage of what's happening in terms of the sell-off related to international air traffic falling and also swine flu, but for the long haul as well. These are great near-monopoly companies, generate a ton of cash, give a ton of it back to their investors, and now looks like an interesting time to give them a close look. And guys, let me just get this straight. I mean, it's just kind of like the flu, right?

I mean, it's bad. Well, nobody knows enough to say, right? Yeah, I mean, right now I'm about ten times more worried about bee stings than the swine flea, although I say that my family did cancel its trip to New Jersey because of our infant son. But still, I mean, we don't have that much evidence that it's all that bad, although perception can be worse than reality sometimes. It seems like it's shut down much of Mexico. And it's possible that other emerging countries, perhaps with less ability to fight this, could be immobilized.

And ironically, that could affect GDP. So so it could have a real economic impact. Yeah. And that's exactly right. This is a tragic story for the places where it actually is a meaningful, tangible concern. But our own tendency to kind of let things that have really bad outcomes but are really unlikely to happen is so overdone around this that people should sort of concern themselves with whether or not they're going to take a bath tonight because the chances of you drowning in your bathtub are far greater than you contracting swine flu. So you're not following Joe Biden's advice and staying off of all public transportation, subways, et cetera? Joe Biden needs to shh. Nor am I bathing, so I'm going to try. Okay, okay, okay. News this week that Chrysler will file for Chapter 11 bankruptcy and be eligible for $8 billion in federal aid.

Chrysler will temporarily halt most of its production while it completes a deal with Fiat. President Obama blasted some hedge funds and investment firms who refused to accept the government's offer of about 29 cents on the dollar for around $6.9 billion in debt that Chrysler owed. Seth, you can't wait to talk about this. I was really shocked that the president got his huggies in a bunch over this and that he really went public with this in this way. Let's talk a little bit about the specifics here.

He's trying to demonize evil hedge funds here. And these are just investors who bought this debt at an already reduced rate. They have a fiduciary responsibility to drive a hard bargain. The truth is they were further in line than some of the other parties who are coming in and making deals. And so they have every reason to expect decent treatment. So to come in now and whine about the fact that they were the final stepping block, I think, is a little bit strange. And it's grandstanding. And if it's political theater, I think he could have avoided it.

The fact is that without people buying distressed debt like this and hoping that as senior creditors, the people first in line, that they will be treated properly in a bankruptcy proceeding, without people who do this, the secondary debt market, there is no primary debt market or the primary debt market would charge vastly higher interest rates and this would really kludge up commerce. So this is really backwards thinking and I think the president needs to stand down. I think he's ticked because he wanted to be seen as the dealmaker who helped them avoid a filing. The filing doesn't matter. They were already functionally bankrupt. They were already begging to be let off by their debt holders. This is just a different way of accomplishing the same thing. All right.

So now I'm very happy to be able to say that Seth is exactly wrong in two ways. First of all, you know that this is political theater and this is performance art. And Obama, if nothing else, is a fantastic performance artist when it comes to managing these things. There's a rhetorical, political reason why he opted to show temper, which he never does, in connection with what happened at Chrysler. And I think that that's telling in a couple of respects. First of all, we're treating the auto industry in exactly the way that we should be treating the banks. We frog-marched Rick Wagner out of Detroit, as we rightfully should, and now we force Chrysler into what's being called a surgical bankruptcy. And between those two bookends, we had what Seth was referring to in this effort to get hedge funds to come to the table and do a deal, and they wouldn't do it.

heard this one before. This is exactly the bank toxic asset story writ small. And if Obama is smart, and you know that he is smart, he'll see the writing on the wall around this, that the public-private partnership that is the latest TARP floated initiative is going to meet a similar fate. And I think that what's happening is that this drip, drip, drip approach that we're taking to solving the bank crisis, as opposed to the auto industry crisis, is eventually going to play out as a narrative that's being sculpted to lead people to the conclusion that, you know, these approaches that we have tried so far in good faith have not worked. Consequently, we need to adopt the model of the FDIC. Come in, seize these banks, clean up their balance sheets, return them to the

capitalist wilds from whence they came. That's the only solution that's going to work. That's the solution that is going to work in the auto industry, and that's the model that we should follow going forward. And guys, I drove a Fiat in Italy about a year ago, and I liked it. You know, and I think that's the best part of this bankruptcy is Fiat. Is you driving a Fiat around Italy? Exactly. Your head was sticking out through the moonroof. It was a huge windshield. I was in this bubble you know it was kind of cute um sort of like a mini cooper station wagon kind of thing um anyhow yeah i just have to say finally i mean i'm glad an american automaker finally went bankrupt and i feel like a jerk saying that but then again i don't um you know this was this is

time for this to happen we can do things we can't otherwise i don't like the fact that there's still eight billion in government aid um coming to this company i do like the fact that fact that fiat owns 20 now that could ramp to 35 it's worth pointing out the u.s government will own eight percent after this and the united auto workers will own 55 percent that is the actual thing that's the issue and that is why why the president i think came out and and why this this group of evil speculating hedge funds what was to be demonized because nobody wanted to to point out the the fact that the auto industry or the auto union sorry the people who are who are obama voters they're getting they were getting a better deal in the view of the hedge fund and and of

course obama needs to treat those people with kid gloves because he depends on them but to get to fiat and what they're contributing to this deal i think it's pretty interesting they're basically contributing no capital at all they are getting 20 up front and then they are getting earnouts or you could call them earnouts a five percent each based on delivering a car that chrysler can sell in the u.s that gets 40 miles a gallon they already have those cars they're they're they get another 5% for delivering an engine that's a high-efficiency small engine. They already obviously

have those. And the final thing they get is... Tires? They've got to deliver tires? By giving Chrysler access to their distribution network, they get the final 5%. And of course they're going to do that. So these are hurdles that are kind of laying on the ground,

or they're down in a hole. You can step over them if you're an ant. And the rust coating is thrown in for free. Yeah. I can't let this go. So, Seth, I think as being very selective in the part of the story that he wants to tell. Yes, the United Auto Workers is a constituency of the Democrats. So too is Wall Street. Where did Tim Geithner come from and his guys?

They're in bed with a lot of partners, shall we say. And so to say that this was exclusively motivated by a desire to grandstand on behalf of a constituency I think is just misguided. Well, you're just proving my point. They are in bed with these guys, but they're turning it around in this specific case and giving misleading sound bites to try and make it sound like they're not. This is a useful example for Obama to hold out as an example for the folks who ought to be playing ball on the other side of the fence, on the financial side of the fence. The amount of money that was involved is so small, and it's interesting that the hedge fund investors wanted to play hardball around this on principle.

I think that they're cutting off their noses to spite their collective face, and they will regret it. It's a little more than that. If you're going to have a micromanaging, hissy-fit president, then you're going to have trouble bringing other ambassadors. Appoint the board members of Chrysler in. To me, that's a big deal. If you're just going to lob in hand grenades, I'm going to lob them right back. The point is you're going to have trouble getting people to bring private money to the table if you're going to turn around and undo contracts.

We're having difficulty getting people to bring private money to the table when we are subsidizing those people to do exactly that. So this is a bankrupt solution. This was the only outfit that wasn't getting a subsidy to bring the money to the table. There was a whole class of hedge funds that play in restructurings, and they look for situations just like this. This is their game. and the field is being taken away from them.

So I'm not saying that I love these guys. I'm just saying that there are unintended consequences to changing the rules on them, and nobody in the administration wants to admit that. I actually don't disagree with that, but the rules weren't changed. They balked. They didn't play ball, and so the rules remain the same. Whether or not that was to their advantage, we'll see. Seth, if Shannon had swine flu, he'd cough on you. Guys, please, if you can, please try to contain your disappointment,

but the government is delaying results of the banking stress tests until next week. Oh, I wonder how that's going to come out. Non-stressful stress. Shannon and I can hug because we'll agree on this one. Yeah, I think we will. James, what should investors make of the stress tests? Not much. Mac and I were talking, Mac from our studio here the other day,

about these sort of non-stressful stress tests. I mean, if people were expecting a boot camp type workout, These are more the sweat and the oldies version. They're like water aerobics? Exactly, yeah, aqua power workout. You know, it's sort of like, and this is slightly exaggerating, but if the base case unemployment was 8%, you know, the stress test is 9% or something like that. You can go to the Federal Reserve website and get all the details.

It's a pretty good write-up on the plan, but these aren't that stressful. We are hearing conflicting rumors about what's going to come out of them. You know, Bank of America and Citi need more capital. Do other people? Huffington Post says yes, but then some other Wall Street analysts have said no. So it will be interesting, and regardless of how wimpy they are, and they are wimpy, the government's decision to sort of act on them, we won't know the details, but we could see some ramifications.

So it's just wait and see. I think it's funny that you're already having denials of the rumors. Of course, everybody has been in the past couple of weeks talking about wanting to pay back that dirty TARP money because they don't want anyone micromanaging them, yet at the same time we're hearing rumors that they need more capital. So I don't think a lot of that TARP money is coming back anytime soon, and I don't think they should allow them to pay it back. Yeah, no, I absolutely agree with that,

and I also agree that the stress test was not stressful. It was designed so that the outcome was known in advance. So this is just, again, more theater, and I'm not exactly sure what the end of this particular play is, but to the extent that Banks' conditions were known and Washington kind of had a dog and pony show to exhibit that, Well, I guess that's useful for folks who weren't obsessively tuned into the story like we are. But beyond that, I don't know what the value was.

Quick final note. Sure. The thing that started the avalanche, home prices, are already tracking, I believe, at or worse than the lousy case scenario. So, in other words, the bad case scenario is happening in the place that was considered the most important, the one that started the avalanche. But Seth, the rate of decline has slowed. I know. That was what was supposed to be the good news this week. Instead of dropping at 20 percent, it was 19.5 percent this week. That's not such great news. Speaking of TARP money, among other things, the Congressional Oversight Panel is tasked with overseeing the TARP money. Earlier this week, we talked with panel co-chair Damon Silvers and asked him what leverage the panel had over the Treasury.

well you know the panel uh people say people say when i tell them i'm on the harp oversight board they say you mean you control the money and that's of course not true we don't control the money um our power is literally the power of the pen damon silvers uh seems to be very clear-eyed about the extent of his power yeah no it was a great interview he's a smart guy and was very clear up front to say look i'm going to be speaking for myself. That's the policy that we've adopted for all of the panelists. And he was very candid and forthcoming. There was a little secret decoder ring action that you had to conduct to understand exactly what he was saying, because it seemed clear to me, and James was with me in

the interview, so I'd love to get your take on this as well, that the latest TARP initiative, that public-private partnership that we were talking about, doesn't seem like a very good idea to him, nor does it seem to be a good idea to the people who would seemingly benefit from it, both the investors and the bankers. Now, did he say that, or is that you just sort of picking up Yeah, that's definitely me sort of reading between the lines, but I said that to him, and he didn't disagree. I've heard similar interviews from him, and I concur with that. It's important to remember here that this tarp cop is really sort of the mall security of the bailout,

with no weapons, not even mace. All they can do is get in the media and talk about it, which counts for something. But yeah, I don't think he's a big believer in it, but I think he thinks we've got to start somewhere, and that's what we're doing. Does that mean that Seth Rogen or Kevin James is going to be playing David Silvers in the movie? All right, it's time for What's Your Beef? Time to tee off on a stock, a company, a person, a concept.

And Shannon, we'll start with you. What's your beef this week? My beef. And it can't be me. That's my ongoing beef. It can't be another panelist. No, my beef is this rally is ridiculous. And as happy as I am as the next investor to see the value of my portfolio rise,

rise. We're on a bender again, and the shiny, happy future that we're looking to is ignoring the grim urgency of now. Unemployment is high, going to get a lot higher, maybe double-digit higher before the recession is all said and done. GDP has fallen off a cliff with a second consecutive quarter of a decline of more than 6%. And then the news this week, I guess, that consumer spending rose for the quarter is just completely misread. So yes, it rose during January around a very specific set of circumstances. It was flat in February, and in March, the month that is closest to where we are, it actually fell. So the one bright and shining macroeconomic point that you can take out of this is that inventory reductions continue, and that will be good news

once consumers actually have real legitimate reasons to spend again. But right now, it's just sort of tracking anemic demand, and that's where we are. And so the rally is, particularly in financial stocks, which have rallied the hardest, is really just ridiculous, and that's my beef. James? I'm going to go back to Fiat and have a positive beef. You know, we live in a supersized America. You know, we eat at buffets, we drive big cars, we live in big houses, we're big consumers. But, you know, if gradually American automakers fail and it looks like GM will be next

and we get a further influx of foreign cars or foreign car thinking, you know, i.e. smaller, you know, maybe we'll start moving away from our big cars and our big houses. And I think that would be a good thing. Seth? Wow. I think I'm all out of beefs. I don't think I have anything left to complain about today. Obama's reaction to this was sort of my primary beef.

And I think I'm also with Shannon. I don't trust this rally. I have been looking at stocks, and I have a lot of companies that I like. And I look at them now, and I look at where they are priced today versus a few weeks ago. And it makes a lot of assumptions about earnings going forward that I'm not really willing to make, especially when I read between the lines economically. Tread carefully, folks. There are cheaper stocks out there than the ones making headlines for going up,

and that's my beef. Everyone has gone to hooray for everything, and we're going to have to go back. All right, as we head into the first full week of May, Shannon, give me one stock that's on your radar. One of the Mexican airports that I was referring to before. I won't try to mangle the pronunciation in Spanish, but it's Southeast Airport Group, ticker ASR. Again, a near monopoly generates a lot of cash, returns a lot of that to its investors,

and I think now is a really interesting time to take a look at the group. And this particular company, because its valuations seem to me to be the most attractive. James? I'm going to go with Magellan Midstream Partners. This is a boring, boring master limited partnership. In other words, it's a pipeline company that ships fuel, but these tend to be pretty steady businesses. They've had good distribution growth and yielding between 5% and 10%, depending on the price, But, you know, 8%, pretty good yield.

Seth? ASR is a great stock. Thank you, Shannon. I own it. I've owned it for years. It's like a love-in. I've owned it for years. That's a little weird.

The trick with these things, I'm going to say, is to buy when people are freaking out. And around hurricane time is also a great time. But I'm going to talk about Under Armour. And everybody knows who they are, I think. The maker of- Sportswear. Sportswear of athletic apparel, very famous for the tight wicking shirts. They released earnings recently, and it was one of those, ooh, the analysts are surprised

that revenues were higher than expected, the earnings were better than expected. I don't read too much into that. It was mostly a factor of Under Armour shipping more of its new running shoe product than analysts were really able to guess. But since it's a new product, the fact that they didn't get the guess right is no big deal. What was maybe more impressive is that their apparel shipments, which had been growing huge for years, were only up a couple of percent.

But in this climate, that's actually pretty good. Everybody else is seeing double-digit declines. What most impressed me, however, is the way that Under Armour, which has been a real growth vehicle, is looking more deeply at itself as a long-term ongoing business. The way it's managing inventory, the way it is managing other working capital, the way it's looking at its manufacturing to try and take out costs, and also the way it's marketing its new products. They're coming out with a new soccer boot, as they're called in the business. And one of the analysts on the call was really flummoxed because they were talking about a really soft launch for this. They're not going to go out and pound their chests. And he said, well, so this is, you know, a change.

Or he couldn't understand why they wouldn't do this. And the reasons are quite obvious. Under Armour is not managed by idiots. They realize that this is a hyper-competitive market. I like it already. Yeah. And if you go in there and you thump your chest, you are going to be laughed at. So they're doing what they've actually done in the past in other markets, which is they put out some product.

They try and put out a very good product. They do it on a limited basis, let word of mouth go, and try and kind of work their way in from the edges. And this has worked very well for them in the past. I think it'll continue to work well for them in the future. And I really like the stock. Putting a valuation on it is the hardest part. It just looks expensive.

But can you screen for managerial idiocy? Is that possible? I wish we could. Did you think their tight-fitting, sporty apparel, and I don't know what percent of their business that is, but is that going to go the way of tracksuits? Remember from the late 80s, they were so cool. I really hope it does because one of the reasons I used to hate Under Armour

were these skinny fat guys I saw on the running thing that were really scrawny shoulders and then a gut kind of all sweaty. It just accentuates that. I don't know why they wear these. Yeah, but they sell a lot more of the loose stuff nowadays. Okay, got it. All right, Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. Absolutely.

Thank you. 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. I'm Chris Hill, and we'll see you next time.