Motley Fool Hidden Gems Investing - Motley Fool Money: 05.08.2009

Episode Date: May 8, 2009

Does Uncle Sam get a passing grade on bank stress tests? Can Amazon’s new Kindle save the newspaper industry? Are McDonald’s new coffee drinks a serious threat to Starbucks? And is Marvel’s Squirrel Girl the heir apparent to Iron Man and The Incredible Hulk? 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

Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Because we have your number. Welcome to Motley Fool Money. I'm Chris Hill, and I'm joined by Motley Fool Senior Analyst James Early, Seth Jason, and Shannon Zimmerman. Guys, thanks for being here. Good to be with you. Coming up, we'll take a look at Amazon's latest Kindle, McDonald's latest sales, and Marvel's latest quarter. We'll share a few stock ideas and air a few beefs. But we begin with Mr. Market.

The week ended with investors feeling optimistic after better-than-expected jobs numbers. and after finally getting the results of those bank stress tests. Shannon, you're sharing that optimism, don't you? No. In a word, to quote the late, great Johnny Ryden, who's still kicking, but prefers to be called John Lydon for some reason, you ever get the feeling you've been cheated? U.S. taxpayers have been duped.

We really did have a need and an opportunity for an honest accounting of the health of these companies that we've poured so much money into, and that's the last thing we got. What we got was a dog and pony show. The answers were known in advance. I think you made the point it's an open book final. And leaked out one by one to test market reaction. Exactly. So trial balloons were floated and shot down or not, as the case might have been. And basically, the banks were actually in a position to be able to negotiate with the proctors, so-called, of the test

to make sure that the answers were going to be massaged in a way that was favorable to them. So nothing really happened beyond sort of political theater. And it might have been useful in terms of political theater, But in terms of actually getting to the merits or to the heart of the problem in our financial system, it did absolutely nothing. Yeah, I mean, this is step aerobics with one step. I mean, we knew that about the stress tests. You know, somebody tell me why this matters. I mean, that's kind of the punchline.

And another thing, to Shannon's point, there was not any real info that we gained from this. I mean, we all knew it well in advance. The government didn't want to disclose too much info for fear of spooking investors and having them withdraw all their money from a troubled-looking bank. So here we are. You know, we're supposed to drink the spiked punch and be happy, but I'm not. I don't know where to go with the metaphors. This is the three-card Monty of stress tests. Let's back up a bit to the intro and the unemployment number.

Better than expected. We're already running at a rate that is higher than the adverse case scenario for unemployment for the stress test. 8.9%. Right. 8.5% was baked in. Yeah. This is where we are already. I'm just going to try to be brief and say that this was insultingly bogus because they leaked this stuff out one by one, and for a while they've been floating the trial balloon of, oh, we will convert if some of these banks are short on capital.

We will convert some of these preferred shares that the U.S. government has into common equity. That is really just looking at the $10 you've already got in your pocket, calling it something else, and then pretending that it's enough. Listen, if you have enough capital, it already includes the preferred shares, then just come out and say it. I think they wanted to be able to pretend like they were being hard-nosed and say, well, they need a little bit more capital. Then they step back, they wave the magic wand. You change, basically, you change almost nothing except what you call these investments we've

already made. And then you say, voila, there's more capital. That's a crock. And I really think it is actually designed solely to get everybody more enthusiastic, maybe to pump up the bank shares so they can sell some real equity. And that, to me, is bogus. It's disingenuous. It's lying.

The stress tests were product of economists. And I always say, you show me a confident economist, and I'll show you an idiot. Unfortunately, they're all pretty confident about this, so I'm worried. Actually, there are some smart guys who are on the other side of that equation. And I'm not going to call myself a smart guy, but I'm with those, the Paul Krugmans and the Nouriel Roubini's of the world. So basically, I think coming out of this, beyond just the bogusness, as Seth puts it, of the exercise, there are really only bad outcomes that can follow. Is there anything positive that investors can take away from this news in terms of looking at this sector?

Oh, I think there is. I think there's one positive for the U.S. taxpayers as investors, which is that now if there's a conversion to equity, first of all, then you get voting rights. And so all these changes you make by dictate from above, you actually have more of a right to make. The other thing is that if there's upside in the stock, which there could be, then at least you get that. As preferred shareholders, you have a stream of income, maybe, except that I had a feeling that the government would forgive that and that we'd get nothing in return. So that is a possible upside for taxpayers as investors. Yeah, I think that the fundamental reform that needed to happen, there's concern that maybe the opportunity for that has passed because now the crisis appears to be passing, but that's not the case at all.

The same problem that we had back in the fall of 2008 is with us right now. We've just punted the ball a little further down the field. You never want to let a crisis go to waste, and the fear is that maybe we have, but the looming problem of insolvency continues to loom, and if that's not addressed, the day of reckoning is either going to be much bigger than it otherwise would be, or it'll be sooner than people think right now. Okay, this week Amazon introduced the Kindle DX, which is like the Kindle, only with a bigger screen and, not surprisingly, a bigger price tag.

Seth, you're our resident Kindle fanboy. Have you taken it out for a test spin? Well put, Chris. Yeah, I don't have one of these, obviously. I laughed when I saw this because it looks like a joke version of the Kindle 2. It's just a really large Kindle. It looks like a prop from a movie or something, like a sight gag. I've actually thought for a while that this was going to be a good idea.

My wife is a teacher and has always wondered if it would be possible for these textbooks to be kindled in some way. They're not where they need to be yet. You're going to need to have color screens. The screens are going to have to have a little bit better response in terms of graphics and maybe being able to magnify what's going on in this if it's going to work as a textbook reader in the end. But I think it's a necessary step. And I would ignore some of the criticism out there where people are saying, well, you know, you should have handwriting recognition on it,

and it should give you back rubs and do all this. That's just not possible with the current technology. So the Kindle is really about focus. It's about making a device that is a very good reader that lasts a long time on a battery charge and that is really easy on your eyes. And netbooks, laptops don't do that. The Kindle does. I think this will be a successful experiment, but it's only the beginning.

And can I just be the curmudgeon here and say, you know, do we really need another screen to stare at all day long? I mean, we already have, you know, so much on digital. I mean, I guess it's eventually going to move that way. I mean, $500, so don't drop it in the toilet. You know, I see this popular with college kids, with the senior market who might like large print. You know, I think eventually we will get there. I mean, right now the publishers don't like the idea of this 30% revenue share on the material, and that's going to be a big hurdle.

But just going back to my original curmudgeon point, I don't know if you guys have seen the movie WALL-E, where humans have evolved to these kind of floating blobs who just stare at this singular screen all day. Wait, aren't we already there? Exactly. But you're looking at paper, and that's the difference here. The reason that it's not just another screen is that Kindle is not a funnel to short attention span theater like Twitter or YouTube or any of that. It really is something where you download text and read it.

So it competes with paper. It doesn't compete with everything else. But we'll have to see about that. We talked about this a couple of podcasts back. You know, technology has a way of shaping what it is that we do. And so you think you come to it with one set of uses, and then your interaction with it changes the way that you actually use it. What about newspapers? I mean, part of the story with the Kindle DX is that the newspaper industry can finally have a little bit of a platform here with this one that Amazon has discounted subscriptions to the Washington Post, the New York Times.

Is there any light at the end of the tunnel for the newspaper industry? No, says the Kindle guy. Who would read a newspaper on the Kindle if he weren't in front of a computer all day? But actually, most people are in front of computers all day, and that's where they're going to get their news. I don't think this saves the newspaper industry. I think it plugs a hole, but they need to figure out how to make the Internet work. Yeah, I mean, news has gone away from the centralized model of news per city. I mean, it's much more specialized, and it's better thanks to the Internet.

And Kindle helps that angle of it. I just don't think the newspapers are necessarily the beneficiaries. Yeah, and it's obviously a very popular device. And to me, the interesting story coming out of this is the way they may be able to tap into the education market. But Adele has gone down that path as well, and Gateway earlier on. And what they found out eventually is that it's a commodity business. There's not a lot of there there in terms of revenue, and I don't know that that's going to be a big bang for the amount of effort that Amazon is going to put into it. But those guys were in a commodity product with no actual hook and relationship with publishers.

And so this is the iPod-type model here where you've got the relationships is the key for this. We'll see. All right, a couple other well-known brands making news this week. We'll start with McDonald's. Same store sales in the U.S. were up 6% in April, thanks in part to chicken snack wraps and new coffee drinks. Shannon? I love them both. At the same time?

I like to dip my chicken snack wrap into my latte. Breakfast of kings. You know, I've actually had one cup of the coffee, and it was a latte. They asked me, did I want a flavor? And I said no, and they seemed surprised. I like coffee-flavored coffee, so I got it. It was good. It wasn't as good as Starbucks, I would say.

And for a long time, I resisted Starbucks. And then they shifted to what, I forget what they're, is it Pike's Roast? Is that what they're pushing now? Yeah, and I actually quite like that because it doesn't taste to me like they have burned the beans. But for a long time before Starbucks, I was a fan of Dunkin' Donuts. This, to me, is comparable to Dunkin' Donuts. Good for McDonald's for actually coming up with a product that can compete. Is Starbucks in trouble?

I think eventually it's going to peel away some of the market share for Starbucks, and Starbucks will ultimately have to compete on price to peel that back. And so, yeah, once you start doing that, you're not a hot growth stock anymore. But then Starbucks has sort of jumped that shark anyway. No way. No way. No, no, no. I actually think that McDonald's coffee or even Dunkin' Donuts can be better. But people kind of go to Starbucks for a different experience. And I'm not saying it's the greatest experience in the world,

but I think people who go to McDonald's are happy sitting in those Formica chairs and getting their quick coffee. And people who go to Starbucks are more interested in a different kind of setting, even if they're only standing there for five minutes while they get their coffee and sugar it. When was the last time you saw somebody at McDonald's on his laptop? I mean, there's actually a whole industry of chair building. They do it by time. So you can buy a 15-minute chair, a 30-minute chair, an hour-long chair, depending on how long you want somebody to stay in the restaurant.

McDonald's, I believe, buys the 15-minute plastic, uncomfortable chairs because they want to get you out and somebody else in. And the restaurants are very cold to turn you around. But just one point of that. I don't think that McDonald's is going to take a huge amount of market share away from Starbucks. Peeling away some of it is probably going to happen just on price. And where Starbucks is right now, that's a problem. Marvel reported better-than-expected earnings

thanks to continued revenue from the Incredible Hulk and Iron Man DVDs, and thanks to licensing. Marvel's next self-produced films are Iron Man 2, which will be released next year, and Thor, which will be released in 2011. They've got kind of a deep bench over at Marvel, don't they? Well, they always like to say 5,000 or 8,000 or 143,000 characters, most of whom made one-panel cameos at some point in time.

So they've only got a few properties, it's dozens maybe, that can have this kind of draw. The interesting thing about Marvel is that in some respects the quality of the movie doesn't matter at some point. I have talked to people who just think this latest Wolverine movie is awful, and that really won't matter all that much under the right circumstances. So it's a pretty enviable business position to be in, and they've done a good job.

Yeah, if you make a product where things blow up and people want to come out and see it, then that's a good product apparently because it exports well too. But Thor, if they have a deep bench, Thor's got to be on the B team, right? I was a big fan of Marvel, and I love Spider-Man, love Iron Man, and I used to love these big blockbuster films, but not so much anymore because they seem to be more about the special effects than the narrative. And the thing about Marvel, especially back when the battle was between Marvel and DC,

Marvel always had the better storylines because you had these real-deal characters who actually had problems, whereas DC's superheroes, they never could be harmed, really. Superman is the classic example. I am looking forward, though, to the new Star Trek film, though. It looks phenomenal, and I can't wait to see who they get to play, Yeoman Janice Rand, who was my first childhood crush. Wow. Yeah, for investors at some point, you know, Marvel's been doing so well

that beating expectations will become the expectation, and it could almost become a victim of its own success. Yeah, I'm not sure what I'm more impressed by is Shannon's first childhood crush or James' knowledge of the chair-building industry, which kind of, I'll be honest, that freaked me out a little bit. You know, Seth, you don't think they have a deep bench, but let me just throw this out at you. As you said, they have the right,

Marvel has the rights to more than 5,000 superheroes. Some of them are obscure, so let me just throw this out there. 5,000 and only some of them. The extras, yeah. I would bet that 4,800 are obscure. Of the following three, which one is not a Marvel character? The Mind Worm, Wyatt Wingfoot, or Squirrel Girl? Holy cow.

The Mind Worm. I'll go with Squirrel Girl. Whatever's left. You know what? All three of them are actually Marvel's three heroes. Trick question. I got this from Wikipedia. Squirrel Girl is originally from Los Angeles, California.

She is first seen ambushing Iron Man in a forest. She hopes to impress the veteran hero, wishing him to take her under his wing as his sidekick. I had heard of Squirrel Girl, actually. Oh, wait. It gets better. The 14-year-old mutant introduces herself and her pet squirrel, Monkey Joe, and displays her various abilities, all of which are squirrel-themed. What does that mean?

She can climb trees very quickly. She can be on telephones. Just don't get her near a bird feeder. She eats the bird feed out of her head. Really strong tail. She can dig in my tomatoes and get a blowgun dart through her, sorry. Hey, now. And again, just to be clear, I got that off of Wikipedia.

I don't have that knowledge at my fingertips. I don't want my man card revoked. Well, the good news is it might not even be true then. That's right. The Stephen Colbert nation may have had something to do with those superheroes. All right, it's time for What's Your Beef? Time to sound off on a company, a person, a topic of your choosing, and we'll start with Shannon Zimmerman.

Well, so I want to reheat a beef from last week. I talked about how the rally. Reheated beef. In the microwave or stovetop? Stovetop for me. Foreman. I talked about the rally being ridiculous, which I believe, and I wrote an article for fool.com to that effect.

It got a fair amount of attention and a lot of pot shots, and that comes with the territory and a little bit of praise, for which I would like to thank my dad. Thanks, Dad. But basically, my point wasn't that all stocks going up made no sense. What makes no sense is that the rising tide of the market has lifted the leakies of boats. Certainly when you have a market that is as sold off as this one is, you're going to be able to find bargains. But the fact that these leaky boats have been lifted makes no sense to me. When you analyze what's analyzable about them, you find out that there's no real good, strong, fundamental investment case. That is not to

say at all that stocks like IBM or Solera, for instance, that have popped quite nicely over the last three months didn't deserve that rise. I think that they definitely do. So you have to be careful about how you cherry pick the winners and the idea that the market is shot up in the way that it has just sort of willy-nilly is the thing that I find ridiculous. Can I tag onto that really quickly? And if you are always cheering for the entire market to go up, I think you need to take a look in the mirror and ask yourself whether you really are an investor. And that sounds harsh, but around here where I think we've got a lot of really good investors, people are more nervous when the market's going up for no reason,

and they're much more excited when it's down because that's where you find your bargains and lowest cost basis wins. We're looking at this long term. Right. James Early? Sure. I have a quick macro kind of beef. Our recent treasury auction didn't go as well as we thought,

and that got some people talking about China and how much China owns the U.S. And I just wanted to clarify a few things. First of all, I love China. It's where I buy all my infant formula and dog food and pharmaceuticals. But the Chinese ownership of U.S. treasuries is a little bit overblown. China only owns about 6.5% of our treasuries. The U.S. government itself owns half. I mean, it's like the sound of playing tennis with yourself, right?

But China owns a fairly small amount. I mean, 6.5% is probably the percentage of weight your average cheese whiz eating American might lose on a week-long backpacking trip. So it's really not as extreme as people are making it out to be. Thank you for the image. So, Jason. I don't know. Is it kosher to kick GM in the groin when it's already down and sort of clutching at its groin? Oh, sure.

Okay, why not? I was tipped off to this by Deal Breaker, which is a great market blog, but only if you like the occasional swear words and a lot of snarkiness. The management at GM is sort of begging the U.S. government for more incentives. In other words, the money you give us directly isn't good enough, but you should follow the example of, hey, a China or somebody like that and incentivize consumers out there to buy cars, which is just another direct subsidy. And I just, I mean, it's pitiful. And I wonder to myself, at what point in time did the supposed capitalists in this room, in the boardroom at GM, in the executive suite, become like more socialist than the most socialist union member you could probably find? This is top-down Kremlin-type stuff. They don't even do this in the Soviet Union anymore because we don't have that.

And speaking of that, speaking of socialism, you know, GM is griping now that they're mad about so much media coverage about how bad they're doing because they think it's scaring people away from buying cars. And that's the equivalent of having your hair on fire and saying, oh, don't look, don't look, nothing to see here. I mean, come on, you brought it on yourself, GM, as a factoid. Yeah, they lit their own hair on fire. The Financial Times reported that GM has now lost more money than it's made over its entire life. So, yeah, bottom line, GM, boo-friggity-hoo. All right.

As we head into the next week, give me one stock that's on your radar. I've been spending a lot of time this week on energy stocks, and it's an area of the market that folks should really think carefully about before they dive into because they likely have substantial energy exposure already. If you have a portfolio, if you own mutual funds for which the S&P 500 is a reasonable proxy, you probably have about 13% of your assets already invested in energy. And with that sector, typically bigger is better because the economies of scale and the cost of doing business there really do matter.

However, if you are perhaps underweight energy and are interested in exploring that area, here's a company that may not be on your radar, National Oil Well Varco. Ticker is NOV, and it makes equipment for oil and gas drilling and production. Best-in-class operator, obviously tethered to a very volatile commodity. But, again, if you want to diversify out of those household names into a different but still compelling kind of company, this is one to take a look at but look very quickly. It's up about 40% on the year so far and is on the verge of moving out of that valuation sweep spot. James Early?

GM. No, I'm only kidding. Hopefully you get the borrow to short. Procter & Gamble is something you might want to take a look at. It recently raised its dividend 10%. It's one of those can't-go-wrong stocks that owns a whole bunch of consumer brands. All right. Seth Jason. Blackboard. If you have kids in school or if you're in college, this is a company that is one of the leading providers of educational software. Distance learning, the kind of thing that doesn't let you say the dog ate your homework because actually the teacher has posted the PDFs online, hosts online discussions.

The dog ate my PDF. That's not going to fly. Dog ate your Kindle DX. Yeah, and they came out with some okay-looking results this past week. And also they announced that they are buying one of their smaller competitors, which is Angel Learning, which is one that I've been hoping they would buy for a while because consolidating this market could actually help them out, allow them some cross-sells and everything. There's still open-source competition with Moodle, but actually Blackboard has a really good record of keeping their clients, something like a 92% to 93% retention rate.

And I wish the stock, frankly, I wish the stock would drop down in the mid-20s so we could do another buy again. But keep an eye on this one because it is volatile. If it gets down there, I think you're in good shape. Yeah, I taught for a while and had experience with both Angel and Blackboard, and Blackboard is a terrific product, and the acquisition was an intelligent one. But at some point, do schools get to ask for the antitrust discount because they're rolling up all these guys?

Well, this is actually where I thought about this, and Blackboard is probably very thankful for open-source Moodle because there's really no way that the FTC can come down on them when there's this open source alternative. Yep. All right. Seth Jason, James Early, Shannon Zinron, thanks for being here. Thanks, 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. We'll be right back.