Motley Fool Hidden Gems Investing - Motley Fool Money: 07.17.2009

Episode Date: July 17, 2009

Big banks rack up some big profits. Google's cloud rains on Twitter's parade. Wal-mart goes for the green. And Apple slaps Palm. In this installment of Motley Fool Money, we tackle those stories, share three stock ideas, and discuss the wisdom of Flannery O'Connor.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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BetMGM operates pursuant to an operating agreement with iGaming Ontario. But we begin with big news from the big banks. Bank of America, Citigroup, Goldman Sachs, and J.P. Morgan all reported big quarterly profits this week. Turns out, guys, that there's actually still big money to be made in trading in financial products and in helping companies raise money. James, let's start with Goldman. Record profits just six months after reporting its first loss as a public company. They got a big old chunk of TARP money last year, and now they're rolling in the dough this year. Amazing turnaround.

How did it happen? Well, I think you kind of answered your own question, Chris. I mean, they got the TARP money and they're partially betting with house money. But, and let me say that all the haters out there are saying, my gosh, what a shame. They're making all this money. But, you know, that was the point of the bailout

was to give them money to try and go do this stuff. Congress, Paulson, nobody knew at the time this was being planned, that the market would suddenly turn around for investment banking like it has. Investment banking is a very cyclical market dependent on trading volume. And let me clarify two things very quickly. First, there's a difference between investment banking and commercial banking, what you read in the headlines.

So J.P. Morgan, for example, did very, very well investment banking-wise, not so well commercial banking-wise. And that's pretty much true across the board. And second thing is a lot of these banks had a lot of special charges, one-time things going on that affected their earnings. Well, they were actually not even so much special charges as special benefits, right? I mean, they were selling Bank of America and Citigroup both sold off big chunks of assets. And then we're able to say, hey, look, we did better than last year, except that if you don't count the money they got by selling the furniture, they didn't really get a pay raise. Isn't that the arrangement that we struck with them, that the government would be friends with benefits?

Is that the... That is. And let's also be clear that we do want Citigroup and some of these others to slim down, because too big to fail has to go away, and so they have to do this. But just don't be fooled when, as a result of getting smaller, so that they can fail. Just don't be fooled by that process. Speaking of slim, can I just say Citigroup posted a $4.3 billion profit today, which sounds great, until you learn that $6.7 billion of that profit

came from selling a majority stake in Smith Barney. In other words, they were losing money aside from that. Well, and it's not surprising because the consumer credit portion at all these banks is kind of going down the tubes because, big surprise, now that people aren't employed, they're not paying their credit cards and other loans back either. Started with mortgages, now it's everything. Yeah, and it's important to remember the bank profits are always sort of smoke and mirrors, right? They're valuing their book at a certain level, and the problem of toxic assets has not gone away. And so, even though we've been distracted by some good news in the stock market and in the financial sector in particular, remember, that still is a black hole at the center of our universe. Does the health of the big banks tell us anything about the health of banks in general or just the economy writ large?

No. Not really. Wow, that was quick. You could argue that the surviving, you know, the investment banks are actually doing a little bit better business because, you know, they're the only game in town. I mean, this is trading revenue that largely drove this. And this is just off the rally we've seen. If next quarter or the quarter after that things tank, things slow down, these banks will be suffering again. All right.

Walmart is feeling green. The company announced this week it's launching a program to label all of its products by their environmental impact. The company will give a 15-question survey to its suppliers, which number more than 100,000 around the world. The questions will focus on energy, the climate, material efficiency, natural resources, people, and community. Shannon, is this about improving Walmart's image or its bottom line? Yeah, I think the only question they left out was whether or not the suppliers left the water running when they shaved in the morning they answered the survey. You shouldn't do that.

Nor should you flush, but come on. I mean, eventually. Eventually. This story is an interesting one as a PR stunt. I'm always into the theater of these kinds of developments, and there's a lot of theater here, but it has inspired a bunch of love letters in the financial media. Bloomberg apparently commissioned a poem,

and the article is just like a love sonnet. They have changed the game, the writer says, principled action by a self-interested company, and just to take it really over the top, this was but one small step for Walmart, a giant leap for planet Earth. Not at all. So it's not a bad idea. It's fine. But at the end of the day, the result is that suppliers can supply what they are offering Walmart right now.

They just have to disclose whether or not it conforms with these new standards that Walmart is asking them to conform to. And at the end of the day, too, the folks who shop at Walmart, and I certainly am one of them, are largely going to be motivated by price. And so disclosure doesn't work in politics. Disclosure doesn't work in terms of individual investors around proxy voting. And so why would we suspect it would work here? Maybe it will have some marginal impact. And Walmart is so big that marginal impact is where its growth can be. But in terms of some saving planet Earth, I'm not buying it. So just to be clear, they're not going to disqualify anyone.

There's no one going to fail the 15-question survey. That's right. Shannon's seal puppy steaks will still be for sale in the frozen food aisle. And they're thawing out at home right now. They just won't have a very happy face label on them. Right next to the panda kebabs. Child labor flip-flops. Nobody is out of the game.

They just have to disclose. And so if you've got a lot of time on your hands to read the fine print, then maybe you'll be motivated. I think it's probably not likely to happen. Twitter discovered the dark side of cloud computing this week when someone hacked into a Twitter executive's Google Docs application. The hacker sent 310 alleged internal documents to TechCrunch, a popular technology blog, which published some of the details.

What did we learn? Well, we learned that Twitter is worrying a lot about Facebook, Google, and other competitors, and we learned that Twitter's overall goal is to reach one billion users and find a way to make some money off each one of them. Seth, how much did you love this story? I plotsed myself with Glee. This thing was so funny. First of all, it pokes a hole in the whole cloud computing cavalcade of joyfulness,

this, which cloud computing is a nice idea, but people are so caught up with whatever Google does. So there are other people who have cloud computing applications who I think do a much better job than Google with its kind of old-fashioned apps. Name one, Seth. Who might that be? Well, you've got Microsoft. Oh, really? You've got people like Salesforce.com. There are lots and lots of people in this space. And what happened here, I don't even think you can call it hacking. I think it was just

guessing a stupid password. From one report I read, the password was- Which is not hacking, of course. Yeah, was happiness. If you use words like that for your password, you're in trouble. What this teaches you is that cloud computing can be incredibly dangerous. Can you imagine GE or somebody like that putting information like this in a spot where it's that easily accessible? I don't think it will ever happen. But to me, there's more comedy value here than anything else. First of all, the idea that Twitter will have a billion users, I can't remember the time frame for that. I'm looking at some meeting notes. The next 15 seconds, I think.

The next 15 seconds. Never? How about never? How about never? Is never the time frame? Here's some meeting notes from what's called a strategy meeting, and it says here, audience size, colon, first to a billion equals awesome. That is the kind of high-level thinking that I'm pretty sure has Google and everybody shaking in their boots.

But that would also require, I believe, more than half the people who are currently on the Internet worldwide to suddenly be using Twitter. And from another report I read, they thought they would be doing $1.4 billion worth of revenue by 2013, something like that. It was in the not-too-far-away future, and they don't have any right now. So this is really, this is the epitome of the underpants gnome business model, which as if you folks out there don't remember, this is a South Park theme where there are these underpants gnomes who may or may not be very similar to a lot of tech companies. And their business plan was step one, collect underpants. And then I think step three, profit. And I think that was the plan. No step two.

Yeah. It pains me to agree with Seth, but you know, privacy has already become passe. At some point, security will become passe as well. And about that password. Free market of ideas. Free market of ideas. Ideas want to be free, Seth. I don't know if you knew that.

But the password, I think that it was happiness with one P, and the P was capitalized. So the guy was trying. Really clever. That's it. Oh, okay. Is there anything that you guys would put up there in the clouds in terms of personal information?

There's nothing I would not put. I am so clean. It's all out there. Wow. I mean, it's okay. I think it's a good solution for people. I mean, what if you're a small church, running a small church or a school or something like that?

I think if you have documents that aren't really sensitive, that's probably perfectly fine. a family, a group of people, an investment club. This is probably a great solution for you. But sensitive documents, I think people are going to think twice. All right, guys, before we talk stocks, what other headlines caught your attention this week? Shannon, let's start with you. I'm going to roll several stories up into one. Sausage grinder meets health care reform. The third of five House committees that have to pass legislation around health care reform has done so,

and it includes a strong public option. I think that's exactly the right way to go, because without that financial incentive that a public option will provide, private industry won't have the incentive that they need to get their house in order around admin costs. James, what do you got? Speaking of efficiencies and lack thereof, I'm going with California, which has issued IOUs to pay a lot of its employees and other obligations. It simply ran out of money, so it had to do this. They can't reach a common ground on the budget.

It's very interesting because if things get really bad with the national economy, will other states do this? Will the government bail them out? It's certainly a bad sign. And so it's going to be something to watch to see what happens with these IOUs. Being a little alarmist, you don't want a fake check from California? I mean, come on. You know they're good for it.

In 50 years, it might be a collector's item. You used to be cool, dude. What happened to that? All right, Seth, what was on your radar this week? I got to go back to Apple. Of course. Because they're just so pleasant to deal with in the world of technology. I don't know if everybody out there saw the news that there's an iTunes update,

and it fixes some bugs including a bug called the palm pre this is a phone this is a phone we discussed one of the few entries that one of the few non-apple non-iphone entries into the space in the past half year or year or so that has actually excited people at all and i think obviously still at a much lower level than any iphone and one of the reasons people liked it was that it had the ability to play an iTunes library. And Apple, in this update to iTunes, said basically that this update disables devices falsely pretending to be iPods, including the Palm Pre,

which I just think is absolutely hilarious. It's an admission that they don't want to compete, even though I think all of us here would agree that the Pre isn't really that much of a threat to the iPhone. I don't know why they don't just leave them alone, except that, hey, this is their football. They can take it home. At some point, actually, if they try to pull this kind of thing,

they may be in for some antitrust visits from the government. But right now, they're probably safe elbowing people out and playing Microsoft. Yeah, exactly. I was just going to say Mr. Microsoft. Was it not Microsoft that had its own Internet Explorer disabled in like 19 seconds in a court of law when they tried to bake it into their Windows system, saying it was an inseparable part of the... Oh, no, it was the European Union, which demanded they remove it, and also Windows Media Player, which, of course, nobody uses

because that was such a threat. And then they demanded they publish a different version without those things, which then went on to sell zero copies. Right. All right. We've got some big-name companies reporting earnings next week. Shannon, what's one stock that's on your radar? Well, my big-name company has already reported earnings,

and it's one that I think I called out for special mention three or four months ago, and it definitely deserves an encore appearance here. So IBM, and that ticker, by the way, is IBM. One more time, please. It's just a great wide- I'm old school. I call it International Business Machines. Are you old school or just old?

Both. Okay. Yeah, me too. Everybody's a comedian. Anyway, it had second quarter earnings that beat estimates, and they've guided up for 2009. And this is largely on cost control because revenue was ticking down. But they are firing on all fundamental cylinders, so it's great to see them cycle through this part of the market as well as upswings. And so, to me, it just strikes, in addition to being fundamentally strong, it strikes exactly the kind of profile of a company that I think will benefit when there is a sustained economic and market recovery,

a beaten-down blue-chip operator that is really unassailable and is always going to get its market share in any industry that it goes into. James? I've got a little company that most people probably haven't heard of. It's Bank of Nova Scotia. Canadian banks are a lot safer. We're banking oligopoly there. They have tight lending standards relative to the U.S. But a lot of people tend to think Canada is just going to follow what's happened to the U.S. in banking because I think they think that happens in other areas of life.

So, you know, Bank of Nova Scotia is not trading where I think it should be, but it's a quality stock, you know, not exposed in subprime and all that kind of stuff. So B&S is the ticker. Seth? I was hoping to take a look at some, you know, a stock, a company that is well-known, might be beaten down because of what's going on in the economy and say, hey, this is a great story. So I was looking at FedEx and I had my handy graphs here and I look at it and I go, where's the cash flow? Wow. I mean, they're spending all their operating cash flow on capital spending. That may be the right move right now.

Maybe they need all sorts of airplanes and trucks and all of this great stuff so that when the economy turns, they have it all and the cash will just rain out of here. But for now, FedEx has had dwindling cash flows. Wow. I mean, really, since back in 2005, 2006, things peaked a little bit and then have been dribbling back. Folks, if FedEx looks cheap to you, you better really – There's a reason. There could be a reason. And this is similar.

James, you were saying something about UPS is pulling something kind of far. Yeah, and I have to say, I mean, UPS is a recommendation of my income investor service, but all the same, I was looking at its returns, and return on equity is a very common measure. That's actually ticked up recently, but I looked at why, And it's only because debt has gone from 24% to 140% or something like that. Basically, UPS is sagging profitability-wise, but it's just borrowing tons of money to keep fueling these projects. They'll keep their returns on equity up. So we'll see how long it lasts.

Yeah, we're saying we're not sure these people will deliver for you. Sure enough, before I close things out, Shannon, do you have one final comment? Well, so yeah, this refers to last week's podcast. And as Einstein once said, I'm pretty sure it was Einstein. Anyone who has never made a mistake has never tried anything new, and the thing that I tried new last week was to name drop a reference to one of my favorite Southern writers, Flannery O'Connor. I attributed to her a statement that purportedly was made by Freud, and my podcast partnership called me out in real time. And then we received an email as well from a listener who was listening very closely. Thank you very much. You pointed out that really what the quotation was, was related to a novel that Flannery O'Connor had written called Wise Blood and a hat that one of the characters wore.

And the story that I heard, which is probably not true, but it's a good story anyway. All stories that are good aren't true. And I think that's right, was that Flannery O'Connor was asked about the symbolism of the hat. And she echoed Freud's statement for which there is no attribution to Freud. I just want to reiterate that sometimes a hat is just a hat. So that was the flub up. Thank you very much, listener, for listening so closely. And please keep the cards and letters coming.

We love the feedback, even if it's only to point out the errors of my ways. I mean, you folks really have no excuse. There must be hundreds of errors per podcast that you can correct us on. So just send them in. Just drop us a note. MotleyFoolMoney at Fool.com. Just drop us a note. All right.

Seth Jason, James Early, Shannon Zimmerman, thanks for being here. Thank you, Chris. Thanks for listening to this edition of Motley Fool Money. You can check out past episodes at MotleyFoolMoney.com. And if you click open iTunes, you can listen to Motley Fool Conversations, our latest addition to the Fool podcast family. 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. Thank you.