Motley Fool Hidden Gems Investing - Motley Fool Money: 05.15.2009

Episode Date: May 15, 2009

Has Google gone to the dark side in its latest search for profits? After a $1.4 billion fine, are the chips down for Intel? Will TARP boost the bottom line for investors in insurance companies and community banks? And should investors buy eBay’s latest bid? We answer those questions, air a few beefs, and share a few stock ideas in the latest installment 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 Analyst James Early and Shannon Zimmerman. Guys, thanks for being here with me and not our colleague Seth Jason, who is in Italy right now on vacation. Yeah, we missed you, Seth. Coming up, we'll take a look at Google's dark side and eBay's free love. We'll look at whether it's a good time to invest in insurance companies, share a few stock ideas, and air a few beefs. But we begin with Mr. Market. Last week's optimism gave way to this week's worse-than-expected

retail numbers. A reminder that investors may not want to pop the champagne just yet. We also had news that Chrysler was shutting down almost 800 dealerships, and that GM was closing down 1,100 of its dealerships. Shannon, what was the big story that caught your eye this week in terms of the market? Well, I actually think it is time to pop champagne. It seems rational that the market responded, at least today and on Wednesday, in the way that it did around real-deal economic data. So, we've kind of gotten addicted to news that wasn't as bad as we expected, and that's caused the market to be on this rush of irrational exuberance. So, finally, they got checked, and the retail numbers came in worse than expected.

But if anybody was paying attention, they knew that this was going to happen eventually. So, income has been declining for a while. people will remain concerned about their jobs, and so they're not spending. Well, that's a shock. That's a surprise. And so the market got a dose of bad news, but that's actually good news because it's behaving more rationally. How long this will last, who knows? Now, when bad news is good news and good news might be bad news,

you could argue that we've got a lot of head-faking going on here. The analogy that I think of is from the movie The Princess Bride, which is sort of a medieval comedy movie where this guy sits down with another guy, an adversary, both with glasses of wine or something, and he's like, wait a minute, should I drink this? You might've poisoned it. In which case I should switch the drinks and drink yours. But maybe you anticipating my switching might've poisoned yours instead, or maybe you knew that I would anticipate your anticipation. And so it kind of goes back and forth and back and forth. And I think that's what's going on here. I mean, we've got green

shoots, we've got brown shoots. I think we just need to step back and take a few sleeping pills and wake up when this is over and it'll all be better in the long run. Yeah, I think that's right, and the market is a discounting machine, and the market will turn up before the overall economy does, but it has to be looking forward to something, and so far, there's nothing that is there to be looked forward to. Shannon, what did you make of the news coming out of GM and Chrysler? Well, so, at the level of folks who lost their jobs and the communities that have those dealerships as a part of their business infrastructure, it's very sad news. There's just no getting around that. It was inevitable, though. The trajectory of U.S. auto sales has been on a steep decline for a good long while now, and so this was inevitable. But it's good news in the sense that it's almost like inventory reduction. Businesses have been on an inventory reduction vendor for a while, and so they're doing that in response to anemic demand, and so that's a telling detail right there.

But it also sets the stage for at least a sharper recovery whenever that really happens and consumers start spending and businesses have to restock the shelves. The inventory in this case is dealerships, and so you have to shut those down. And as sad at the individual level as it certainly is, it's ultimately a good thing in a capitalist economy. This is necessary. Toyota, for instance, has far fewer dealerships than Chrysler does, less than half as many. Yet they are, I think, number one or number two in market share in the U.S. I mean, they just don't need this many dealerships. So GM, likewise, is going to cut between 1,000 and 3,000 dealerships.

I think that's great. I don't think it's time to invest. It's just best to sit back and watch this Viking funeral pyre burn, and then once the ashes have cleared, we'll see what the auto industry looks like. Why do I have this sense that James is channeling Seth just a little bit? All right, late in the week, news that some of the major insurance companies will qualify for TARP money. Those names include Hartford, Prudential, and Allstate. But, James, we're also hearing reports that some of these companies may choose not to accept the money.

What do you do with that if you're an investor? Yeah, it was pretty funny because, yeah, we were hearing now rumors that Prudential and Allstate are now refusing, not just saying they're refusing the TARP money, which is ironic, that they applied for the TARP money. Now they're going to say, hey, things have changed. Maybe we don't like the conditions that were imposed. But there's an argument. There's a little bit of a straw man being set up here to beat down and make them look good. You know, bottom line with the insurance companies, stay away. They're very exposed to the capital markets, as stable as they are as companies.

Their accounting is less cash-based than banks. They're regulated by states and not by the federal government. So it's going to be harder to impose some sort of one-size-fits-all solution here. The big risk, though, the big risk that the government is worried about is people making a run on the insurance companies to cash out their policies. And that could cause a lot of selling and hurt a lot of people. If you have a policy, you're fine, but I just wouldn't invest. Yeah, and that would have a gigantic ripple effect, too, because of the way insurance companies make their money by investing the float.

So, we'll see what they do. You know, there is a lot of stagecraft that's gone on around all of these TARP initiatives, and we'll see if they actually don't take the money that they ask for. In some ways, it reminds me of the banks that say, oh, well, we're going to pay that TARP money back just as soon as we possibly can, and then that's three, five, ten years on down the line, and we'll see if that actually happens, too. There is a way in which they're sort of burnishing their reputations, burnishing their appearance before shareholders, but the reality of it may be quite different. Well, rounding this out, word this week that the Obama administration plans to use some of the bailout money repaid by large banks to provide capital for community banks. Is that going to be welcomed by the community banks?

Probably not. It's kind of ironic that we're using the big banks, certainly the big brothers' radioactive hand-me-downs for the little sibling. I mean, the big banks didn't want them, so why would the little ones want them? I mean, it is a positive that banks are able to pay them back. Right, because we're the ones getting paid back. Exactly, yeah, but not anymore if they go right back out the door. Community banks are generally more conservative. They don't have all the securitization going on.

However, their Achilles heels, they are a lot more exposed to local real estate markets. So some will need it. I think most won't, and I think most will refuse it. Yeah, and I hope, of course, that the ones who need it actually avail themselves of it. It almost reminds me of the political story where you had some governor saying, no, no, no. It has nothing to do with the fact that presidential aspirations, but I'm not going to accept the stimulus money because it's so it's so wasteful. And then the story trickles on and on and on. And except for a couple of cases, they all took the money.

You know, no, no, no shocker there. So to the extent that they are exposed to the local real estate market and community banks are and to the extent that their communities are down in the dumps as a result of that, one hopes that they would take what the government is offering and make the most of it for their for their the folks they serve. Bad week for Intel. The European Commission fined the company more than $1.4 billion for anti-competitive practices. The commission alleges that Intel used illegal rebates and other tactics to limit chip sales by AMD. Shannon, what does this mean for shareholders of Intel and AMD? Well, right now, nothing, because I think that's accounted for in the share prices of both companies. Longer term, it actually could mean something. But this is an amazing story. It's a massive, massive fine.

And the allegations, and we should emphasize that they are allegations, are really quite salacious. Basically, it amounts to the accusations, again, that are alleged, Intel almost bribing people to not do deals with AMD, or if they have deals, to postpone them, or maybe even consider canceling them. So they're actually incentivizing them financially to not do business with AMD. That's a big deal allegation. So the fine has been levied. That money has gone into a bank account. The appeals process may take years, and the fine may grow over the course of those years.

Interestingly, though, setting aside the merits that we can't know right now of the case, the person who heads up the EU's competition commission characterized Intel as now being a patron of the European taxpayer. And so you have to wonder, what is the agenda here? So if it's true, the allegations, and this is a genuine antitrust initiative, well, that's great. But so why say this other thing that makes it seem like, oh, by the way, thank you. Why say, hey, Intel, you're our sugar daddy. Exactly, exactly. But we'll see how it pans out over time.

It's going to take a really long while. And one other sort of footnote to this is if they do finally levy the fine and Intel has to pay it, that money will go to the competition commission itself as part of its budget. Yeah. I mean, I remember the last time I was fined $1.4 billion. It was not easy. That was a bad week for you, wasn't it? Yeah, exactly. It was actually 1.1 billion euros, and Intel just better be glad that the exchange rate has fallen as it's such. I mean, Europeans do like patron saints, and now they've got one more. Just to put this in perspective.

Or patron sugar daddies. Exactly. This is about a quarter of Intel's yearly net income, so it's not insignificant. I mean, Intel does have about 70% of the microprocessor market. They love monopolies. I mean, if you want to think of a wrestling analogy, Intel is sort of like the bad guy wrestler. I mean, the guy who can't win unless he cheats, arguably, arguably. You know, kind of the Microsoft of microprocessors, and obviously they're great friends for good cause. You know, I don't think this is going to be a major dent to Intel's operations going forward.

I think that's the bottom line. It's just such a dominant business. Well, but that's an interesting point, because if this really, if these allegations turn out to be true and sort of part and parcel of Intel's business practices, and depending on the body that is interpreting the practice, it's legal or not, it could hamper their work overseas to grow their market share. Yeah, I would actually like that, yeah, if that happened. Just as an aside, as you said, Shannon, the fine is going to go into an account for, you know, maybe years. So, if you're the appeals court and you got to decide, would you leave it in the bank account or would you invest it in Intel stock or AMD stock? Well, actually, I would short financials. That's what I would do.

Nice, nice. Very nice. All right. Google is getting hit with a lot of criticism and a class action lawsuit over its plans to allow companies to bid for the trade names of their competitors as advertising keywords. So, for example, Dell could bid to have its own ads appear when users search for Hewlett-Packard or HP. So what do you think, Shannon? Is this a move to the dark side, or is this just good, smart, tough business? This is 21st century capitalism.

Get used to it. So I love this story because the players are interesting, but also what the president will establish will be interesting as well. So the claim is that this is somehow a misappropriation of copyright. It's not. If I invented something, a battery-operated lint brush set, and I said it's the George Foreman Grill of lint brushes, that would be a misappropriation of copyright. Buying someone's name and having your company's name come up first in search results is not a misappropriation.

It's smart capitalism. And you only wish this would be more interesting if the folks bringing the lawsuit actually had any merit. I think they're annoyed, but tough luck. That's just the way it works now. So we can't say that this is the George Foreman Grill of financial podcasts? no but you can say george foreman okay it's kind of weird though i mean they are very directly using the gravitational pull of these brand names these companies have worked so hard to build up

now the counter argument might be you know you go to the the cvs and you see something product is like tylenol or a cologne smells like chanel except it doesn't um and and and and that's that's fair and legitimate. I mean, but those are sort of obvious blatant imitators. You know, when you have competitors that are, you know, have their own brand names, I mean, I don't know. I mean, I guess I agree with Shannon mostly, but it just, it feels icky to me. It feels icky and I think it's going to hurt Google to some degree at some level. Maybe in terms of its reputation, it does smell bad like a Chanel knockoff, perhaps. A new twist from eBay. Beginning June 16th, eBay will allow sellers to list their first five items

in any given 30-day period for free. The catch is that eBay will be taking a higher fee on items that are actually sold. In the words of our colleague analyst Rick Munarez, eBay is getting rid of the cover charge but jacking up the drink prices. James? Yeah, eBay is trying to pack the house. More technically, they're trying to front load their inventory and just get a whole bunch of items in,

this critical mass that everyone's going to come check out. And that's what eBay did to begin with. I mean, that's why they're the pre-made auction house. So it sort of makes sense from that angle. I like it from an experimental standpoint, but I think it's probably the biggest non-event of the week. I don't see this as a needle mover. It's interesting. It's good that users can still opt for the old setup so they don't have to do this if they don't want to.

But bottom line, by removing the covered charge, you do place more of a Hail Mary incentive on selling this thing in the end. So maybe we'll see some more interesting items pop up. I agree with James. It is a non-event. And it does seem to me that eBay, at the level of its income statement, is sort of playing at the margins of its revenue stream. That's going to be the practical impact in terms of the business operations. But it does give us an opportunity to say what a gifted analogy spinner Rick is and to extend it just a little bit. It's always easier to get people to drink more once they're inside the bar and liquored up than it is to get them to pay a higher cover charge when they're sober.

So on the margins, it's probably a smart move. All right. It's time for What's Your Beef? time to go off on a stock a company a person a concept james what's your beef this week chris the wall street journal reported this was the second most popular article the other day that the u.s is contemplating a soda tax to pay for health care now i love this i'm usually you do pretty hands-off with government intervention but i love this yeah first of all we are crazy soda drinkers it's terrible for us it's causing uh insulin resistance adult onset diabetes sodas or largest source of refined sugar.

In 1942, we drank 60 cans a year on average. 1997, we drank 576 cans a year. I'm proud to say that James Early drinks zero cans per year on average. Yeah, I think you're pulling our average down, and I'm trying to jack it up. Although when I was a baby, my reward for being good was Coke in a bottle. So where does that leave me? See, and look how good you turned out. And I'm pretty normal, guys.

That's how you say it. Yeah, soda is sort of the cigarettes for children. It's terrible. There are correlations with childhood obesity and additional soda being consumed. The average teenage boy drinks 24 ounces of soda a day. The obesity rate has, I think, doubled in the last 10 years among our children and teens, and I think soda is a big reason why. So I hate to be so Gestapo, but it must be stopped somehow.

All right, so I wish so much that I did not agree with what James just said, but I do. So if someone were here, perhaps Seth, he might make the point that, well, this is just another example of the nanny state gone too far. And it does raise interesting questions about where you draw the line. So do you tax people for not going to bed at a reasonable hour so they get eight hours of sleep? And so it's arbitrary in some ways, but the statistics are compelling. And so rather than nanny state, I would say it's sort of a science-driven public policy, and that's smart for all concerned. Shannon, what's your beef this week? My beef is whatever happened to the conversation about the public-private partnership that was

going to rescue the banks in terms of closing this valuation chasm between their toxic assets and what investors would pay. That was a hot topic. People were all excited about that going to be the thing that finally did seal the deal. We talked to Damon Silvers, who's one of the congressional oversight panel members. He wasn't that enthusiastic about it, really couldn't speak to how successful it was being. I think we now know it's not being successful at all. There's been a news blackout, and maybe it's been obscured by the rally, and so it's kind of gone to the back burner. But I, for one, would love to know what's up with that and if that's still plan A, or I'm sorry, plan what, L at this point? Exactly. All right,

as we head into the second half of May, give me one stock that's on your radar, James. Chris Walmart reported some pretty decent earnings this week. They're gaining market share. Their profit itself didn't move too much, but their profitability is looking good. They are reducing the number of brands they carry to sort of streamline their stores, which I think is a good idea. You know, I actually don't like it. I don't try to go there too much, but it's a very effective company. Yeah. And actually, James and I do sit in the same cube, but we prepare for these podcasts independently. And it turns out that lo and behold, Walmart is my stock that's on my radar as well, for a lot of the reasons that James just articulated. So yeah, earnings

were flat, revenue was flattish, although I think that it was a nice gain if you account for the currency, the impact of currency. But to me, it's exactly the kind of company that is going to benefit from a sustained recovery whenever a sustained recovery begins to happen. Because I think folks will come back into the market in a sustained way around these beaten down blue chips that have very compelling valuations. The risk-reward premium will change over time as their multiples expand. But Walmart, Costco, these kinds of companies look like very juicy pieces of low hanging fruit right now. All right, James Early, Shannon Zimmerman, guys, thanks for being here. Thank you, Chris. Thanks for listening to this

edition of Motley Fool Money. As always, people on this 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.