Motley Fool Hidden Gems Investing - Motley Fool Money: 06.12.2009

Episode Date: June 12, 2009

Does a new CEO at Palm mean trouble for competitors like Apple and Research In Motion? What does the new “compensation czar” have in store for companies like Bank of America and Citigroup? And did you hear the one about the two guys caught trying to smuggle $134 billion in U.S. bonds into Switzerland? (No, it’s not the opening of a joke, it really happened.) We’ll tackle those questions, share 3 investment ideas, and air a few beefs.  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 Held. I'm joined by Motley Fool senior analysts Seth Jason, James Early, and Shannon Zimmerman. Guys, happy Friday. Happy Friday to you, Chris. All right, we've got a lot to get to, including piles of economic data and a new czar on the block. We'll talk about Palm's new CEO, an international heist story that is just begging to be made into a movie.

Plus, we'll share three stock ideas and air a few beefs. Shannon, let's start with the big macro. A lot of data came out this week, including things like consumer confidence rose to a nine-month high, oil prices hit an eight-month high, foreclosure filings fell 6% from April to May, U.S. import prices rose 1.3%. I mean, I could go on and on. You could. Please don't. Because Lord knows there might be people driving their car right now listening to this.

But what stood out for you? What caught your attention and why? Well, you mentioned that there were piles of economic data. Yeah, and one particular pile is the consumer confidence figure. We won't say what that pile is, but that doesn't really have any interest for me. Is that the pile on the south end of the northbound cow? I am going to defer to you on that. What was of interest to me is the bond market, and what's happening nowadays there is much more interesting to me than what's happening in the stock market. So the Treasury had two auctions, one for the 10-year, which went badly, one for the 30-year, which went well.

So how do you read those tea leaves? Basically, what is happening is that the anticipated effect of the Fed getting in and trying to soak up some of the supply isn't happening. And so that's sort of tamping down on the government's ability to stoke the economy. And setting aside whether or not you think it's a good thing that they're trying to prop up housing prices and drive mortgage rates down, that isn't happening now either. And so as you sort of take the measure of what's happening in the bond market, pay attention to those yields because the yield on the treasuries are closely associated with what people are going to have to pay when they try to access credit lines. The credit market is thawing in some areas. In other areas, it's not. And most particularly, it's not thawing for consumers, which is bad in an economy that's powered 70% by consumer spending.

Shannon, let me dive into this because I think this is my story of the week, too, here. Are you diving into a pile? I suppose I am. It's a different pile than the one Seth referenced, though. Basically, we've got two schools of thought on government bonds. One is when investors don't need the safe havens that they've been needing, they shy away, which is sort of the optimistic route. The other way to look at it is it's sort of like the U.S. is, when bonds don't go well, is getting its rates raised on its credit card. And the issue is what happens if we get a lower spending limit next?

You know, we had a 10-year that was bad, like you said, followed by a strong 30 years. It's very confusing, especially when some Fed watchers, whoever Fed watchers are, are expecting tightening. So I guess, what do you think is the theory here behind this? Well, I think that on some level, what the Fed is trying to do is to regain some of its credibility as it's gone on this buying spree. People have legitimate concerns. I mean, is the Fed going to be responsible and is it going to do its traditional job of fighting inflation? I think that they're trying to regain some of that credibility, but the market may be anticipating a rate increase happening sooner than it actually is going to happen.

I need to get in on this because as confusing as that is, if you just had all that data, you can see that even if you know the story there, you have no idea what to think. I was really struck this week by the way the press got some stories completely backward. And I'm going to have to pick on, and this isn't even my beef, an AP story by a writer named Janina Versa where she looked at the Beige Book, which is where the Fed comes out and says, here's how we think the economy is doing. And if you just look at the first paragraph of the Fed's Beige Book entry this week, it sounds bad. They say, you know, in seven out of 12 areas, things are getting worse or have

remained weak. And she comes out with a headline that says Fed survey sees signs of recession easing and only chooses to look at the five areas where they said not that things were getting better, but that the rate of decrepitude was getting better. So she's a glass half full kind of person? So she's looking at, what is it, the third derivative or something, who are our math people, and saying this is good. So folks, when you read this economic news and you see how stocks are reacting, and they actually went the opposite way, I believe, this day. It might be because the headline and the story you're seeing are just wrong. Yeah, that's exactly right. And so the financial press seems to have two modes, optimistic, pessimistic. And so right now,

we've kind of entered the twilight zone of optimism, even though the economic data doesn't support it. Wait for the pessimism to roll back around. And all this does not apply to Motley Fool money. We are immune to journalistic criticism. All right. The job market for Czars continues to grow as President Obama appointed Kenneth Feinberg as the compensation czar. He's charged with helping to set the pay limits of the top 100 executives at the seven big financial firms that received large bailouts. He will also have the authority to set overall compensation, but not exact pay levels, for firms that received smaller bailouts. James, off the top of your head, is this good or bad for shareholders? Yeah. Well, I had to think about this, Chris, because at first it sounds like the beginning of like a bad or futuristic communist novel. You know, compensations are going to come in and socialize everybody to some degree. So I was about to have a nightmare about it. But then I thought a little bit more.

I don't like the idea of just restricting salary for the sake of restricting salary, which we've almost seemed to border on in certain respects lately. But I very much like the idea of matching pay to the period over which value is added or risk is accrued. And I think that's the goal here. In other words, if I'm a CEO taking a three-year action step to do something, and that's my period, that's my window, my compensation should ideally be spread over that three-year window. and I think, I think we might be moving in this direction. No, no, no. I speak for all CEOs everywhere when I say that purely you should get your, surely you should get all your compensation right up front for taking on risk.

Just in a big bag? In a big pile, in a bag with a dollar sign on it. And so then those risks that come along later after you've kind of moved along, that's somebody else's problem. I think there are basically two ways of thinking about this. You can say, well, you know what? The taxpayers have propped up these institutions, and so our government should have a say in the practices of them.

But the other side of that is, well, yeah, have a say in terms of how they get revamped around regulation, but don't let the government set salaries because that's best determined by the free market. I mostly agree with that. I don't think that the government should be involved in setting salaries. At the same time, if compensation packages are set up so that people are incentivized to take outsized risk, that's a problem, and we should have something to say about clamping down on that. Well, the thing is, I think the final point for me is that shareholders of every company need to take control of this process. I think right now we actually, and there's some legislation in the works, and I haven't seen it yet, so I don't know if it's any good, but we don't really have a good way for shareholders to get enough of their input into this process.

So while I think most of the people here don't really want to have to see every pay package being haggled over by Republicans versus Democrats or something, I think we all realize that, hey, we're the shareholders of these companies right now, and we really ought to be determining the pay or at least the broad outlines. But this goes further. Shareholders really need to come back and take more responsibility for what the people who run the companies are being paid. Yeah, I absolutely agree with Seth, except that that's in the best of all possible worlds. Present company excluded and folks who are listening excluded. But is that going to be the reality? Are shareholders really going to stand up and make sure that the compensation structures are done correctly? Sadly, the data shows that it probably won't.

All right, exit question. When you're looking to buy a stock, what is one thing that you like to see as part of the CEO's compensation? James, I'll start with you. I'll step outside your question, if that's not rude, and say I do like insider ownership. I think that's, in a way, that's compensation, and I think that's a pretty straightforward incentive. Yeah, I'm a big fan of performance incentives that are stretched over a lengthy period of time. Ten years would be ideal, not often the case, but around key metrics that really go to management effectiveness over a long period of time. Yeah, I think it depends on exactly what the management is there to do.

I mean, if you've got a guy who's a turnaround guy who comes in, then he's got shorter-term goals that you need to incent. If it's a founder, owner, or somebody who's been around a long time, then it's different. One of the companies I really like over at Hidden Gems is Fossil. And the CEO takes no pay. And not that fake Steve Jobs where he was for a while saying he got no pay but getting lots of stock and options. He got $52 a year. Yeah, like this guy was actually taking nothing. You know, no stock, zero for a while.

And there are folks because he had a lot of stock in the company as a founder. And so not everybody, that's not realistic to expect. But when you see that, you might want to sit up and take notice. This week, Palm introduced John Rubenstein as the company's new CEO in a fervent hope that he can return Palm to its former glory of a decade ago. Back then, Palm was one of the leaders in the PDA and smartphone market, and its stock traded above $650 a share. Today, the iPhone and BlackBerry are leading the pack, and Palm's stock can be found in the range of about $14 a share. Seth, is this a situation where Palm is so far out of the race

that any ground that Rubenstein helps them pick up is going to be seen as icing on the cake? You know, it's tough to compete with a decade ago, isn't it? I mean, a decade ago, I was cute and had hair. So you say. So I say. My mom told me. Uh, I, you know, I think we're in a position where my, my gag was going to be Palm.

Who, what, what's Palm, but that's, that's really their problem. They're sort of perceived as, as a has been company. They've been sort of overrun, uh, on the cool side by the iPhone, um, maybe by the Blackberry on the functionality side. And then on the kind of, uh, you know, entry level smartphone side by various, uh, various Linux based smartphones or windows mobile phones that don't really have much, much popularity, but they're out there offering the kinds of things that Palm really used to do. So I don't know that there is a way to get back to the glory days whatsoever. I've looked at the

pre, which is the new product, and it looks like a perfectly capable product and actually better than most of what you see out there today. But I really suspect that they're not going to get back to that position. And with a stock that's gone up, how many hundred percent over the past few months? It is apparently a tin bagger since December. Yeah, I would have to think that probably the easy money there has been made. Yeah. I mean, I have to agree. I mean, studies show that in general, laggards actually can be good stocks. An academic trio named Lekanashok, Schliefer, and Vishny found that value stocks beat glamour stocks by 7.3 percentage points per year. The problem is that Palm is not a value stock. It's sort of the also-ran

growth stock, and there's a very high risk of obsolescence in technology in the smartphones. We've seen how fast things move, and I just think it's not the name to be in. Well, I'm going to have to say something positive about this just to sort of satisfy my inner contrarian. I do think that bringing this guy on board is interesting tactically, if not operationally. They probably got as much free media as an ad buy would have, you know, with the amount that he was paid. And it only cost 10 times as much. So maybe the economics of it don't work out, but they did get a lot of free attention from the right audience. And to be clear, I mean, Rubenstein's been at Palm for a couple of years.

But before that, he was at Apple. He was part of the team that developed the iPod and rolled out the iMac and all that. On that front, though, I think that Seth and James are exactly right. So, you know, the iPhone and the iTouch is sort of one of the hearts and minds of everybody who doesn't require a tactile keyboard. But be careful. Apple's coming for your fingers. I don't like the sound of that. And finally, we get to by far the most entertaining story this week in international finance.

Japan's Ministry of Foreign Affairs is investigating reports that two of its citizens were detained in Italy over allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. There were news reports that Italian police found bond certificates hidden at the bottom of luggage the two individuals were carrying on a train that stopped near the Swiss border. Guys, just jump in on any part of this. It's worse than the bottom of luggage. According to the Italian story I've got here, and this is actually, I was in Como, which is only a few miles from here, just earlier in the month, and that's all I can say about this.

Well, isn't that interesting? It's interesting. And all of a sudden, $134 billion worth of U.S. bonds have gone missing? And you are from the U.S. And my luggage did come back lighter. No, actually, the story I got out of Italy, and I've been trying to find out if this is a hoax or what, says scomparto, which I think means a hidden compartment, more than just in the bottom of luggage. But I saw this like it was in a message board somewhere referenced,

and I looked, and every place I looked, it looked like a really fly-by-night story. It was on like gold bug blogs and kind of weird places. But I did find it in a couple of reputable Italian newspapers' websites. I still can't decide if this is a hoax, an Internet hoax, or if it's counterfeiting, or if it's, no matter what it is, it's really interesting and weird. A hundred and some billion dollars worth of stuff? Who would try to counterfeit that? From what I've read, it's got to be one of three things, or likely.

One, they're stolen, in which case, where is the owner? Nobody's spoken up. Two, they're counterfeit. Or three, some national government is sneakily trying to sell some bonds on the sly, which is kind of bizarre. But my question, if it's counterfeit, which seems to be the predominant hypothesis, I mean, what are you going to do with $134 billion? I mean, why not just stop it at $50 or $60 billion?

Because it's not plausible. Back, you know, guys know this. When you go to the sorority parties at your friend's colleges, and you're trying to pick up girls with some lame story, you learn early on. Speak for yourself, Sam. I had lame stories. You learn early on that the lie has to be big if you want everyone to believe it. Maybe $50 billion isn't a big enough counterfeit or a big enough lie.

So who are they going to sell them to? I have no idea. This is just more evidence, as folks can hear, as if more evidence were needed, that the world of bonds is far more interesting than the world of stocks. All right, it's time for What's Your Beef? Time to tee off on a stock, a person, a company, a concept. Shannon, let's start with you. What's your beef this week?

I am deeply concerned about the direction of the health care reform conversation, particularly around the public plan option, which seems to be still on the table but being watered down so much so that it's not going to have any kind of practical impact. I know that, and myself included, sometimes folks will have a knee-jerk reaction against government intervention in spaces that are dominated, rightfully so, by private enterprise. But ask yourself and compare reality to reality. Has private industry done a good job in this space? And the answer is absolutely no.

They need a public plan to keep them honest. we have a system that 31% of the healthcare dollars spent are spent on admin costs. Why is that? Well, it's the most inefficient system imaginable the way we run it now. And without a public plan option that would incentivize companies to be more efficient, they're not going to be more efficient. They haven't been to this point. James? Chris, I don't have a very big beef, but I will say that I have to disagree a little bit with the Supreme Court's decision to basically brush off the Chrysler debt holders. I mean, these are not necessarily the finest of investors if they are Chrysler debt holders to begin with. But I still don't think we should

be ignoring a bankruptcy law like that. All right. Seth? I've had so much cold medicine the last couple of days. So I have an anti-beef. Oh, okay. What is that? A tofu or a steamed vegetable? I just want to give a shout out to the New York Times for putting up the first buy versus rent kind of perspective home purchaser calculator I've ever seen that actually lets people factor in negative home price appreciation and therefore make a better informed decision. Almost all of the calculators I've ever seen have always assumed positive home price appreciation.

So if you go to the New York Times, you could just go buy and rent in their search box, and you'll get to this calculator, and you'll get some real help. Sign of the times. All right, it's time. All right, it's time for Stocks on Our Radar, sponsored by Motley Fool Inside Value. Invest like an adult. For a free 30-day trial, go to InsideValue.Fool.com. Shannon, as we head into the second half of June, what's one stock that's on your radar? Well, this is not a stock, but it's a mutual fund. It's Royce Special Equity. The ticker is R-Y-S-E-X.

And it's managed by one of my favorite fund managers, Charlie Dreyfuss. And he's a deep value manager in a terrific value shop, Royce Funds. And his fund, like most, has posted a loss over the last 12 months. But it's a loss of less than 6% against a broader market loss of 27%. And it's a small-cap fund, so we should do apples-to-apples comparison. The Russell 2000 has lost about 25% over that period. Not the world's most exciting fund at all. One shareholder told Dreyfus that investing with him was like watching grass grow,

but it's a great fund that targets an area of the market that has led the way out of the last seven recessions. Just a little point of market history trivia. James? Chris, I'm going to go risky this week. You know, oil has gone up almost to $75 a barrel, which makes some sense because I think the marginal cost somewhere averages in the 60s. So that's a practical move. If you want to jump on that bandwagon, there's actually logic to doing that.

Dinbury Resources, the ticker is DNR, is a stock to consider. It's a domestic company here in the U.S. It's an oil and natural gas company, but it has the largest carbon dioxide reserves east of the Mississippi. And this is used for extraction of the remaining oil in previously pumped wells. So when you want to go back in and blast out every little piece of oil, this is what you use. So high oil prices, if they keep rising, will benefit Denbury as will any sort of energy policy aimed at domestic energy security. Seth? Wow.

Are hippies going with some kind of an oil thing over here? You just bring those oil derricks to James' favorite park. I'm actually going back to the housing well here. There's a company in the housing and construction space that I absolutely love called Simpson Manufacturing. They make a lot of the metal pieces that you use to tie together rafters or pieces of decks or attach framework to concrete to the basements or to the foundations. And it's a really great company. The chair is old Barclay Simpson, who just tells the absolute truth on the conference calls in such a way that he has you laughing and cringing all at the same time. And you really just want to hold stock in this guy's company.

He's that great. The trouble I have with the company is just the price right now. Uh, even if there's a housing rebound, I don't think it's gonna be anything like what we saw for a while. And currently, by, by the way I look at, at Simpson, it looks like it's priced for, for, you know, 15 to 16 to 20% growth, you know, out from here. And I just don't think there's any way to go back to that. And, and over the, over the housing bubble, Simpson only got growth that was in that range. So if you didn't get that, if you got that growth in the housing bubble, do you expect to have another housing bubble? I don't think so. So Simpson is a great company to

watch. Watch the price. If you can get it in the mid-teens, great. Right now, watch out. Okay. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. Good to be with you, Chris. Thanks for listening to this edition of Motley Fool Money. You can check out past episodes at MotleyFoolMoney.com. 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. We'll see you next time. We'll be right back.