Motley Fool Hidden Gems Investing - Motley Fool Money: 07.31.2009

Episode Date: July 31, 2009

Does Microsoft plus Yahoo! equal Google? Should investors heed the cautionary advice of one of Wall Street’s top money managers?  Is the housing market really recovering?  In this installment of Motley Fool Money, we'll tackle those questions, share three stock ideas, and discuss the relative merits of Amazon.com, Chipotle, Costco, eBay, McDonald's, and Starbucks.    Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Money. I'm Chris Hill. I'm joined by Motley Fool senior analysts Seth Jason, James Early, and Shannon Simmerman. Guys, good to see you. Good to see you, Chris. We are taping on Thursday morning this week because our colleague, our trusted engineer, is getting married this weekend. Steve, can can you confirm that that's still the case, that you are still actually getting married this weekend? Yes. Yes, I am. Okay, all right. We always like to double-check check that stuff. If that's not enthusiasm, I don't know. Wow. It's a 10 out of 10. Man, he is running down that aisle. It's enthusiasm and a little bit of exhaustion. Never mind.

It's a win-win, really. All right, we've got a lot to get to this week, including Microsoft and Yahoo's decision to team up against Google. Whether the housing market is half full or half foreclosed, the latest with Amazon, Apple, Chipotle, Starbucks, and as always, we'll share three stock ideas. But we begin with Jeremy Grantham, a man who's been dubbed the Permabear. Grantham is the co-founder of money management firm GMO. Guy's been in business for decades, and back in 2007, made a prediction warning against a global bubble. But now, Shannon, Grantham says the market has gotten too pricey. Says investors should reconsider their exposure to stocks and lean in the direction of U.S. blue chips. Should we be listening to this

guy? Jeremy Grantham is always well worth listening to, and he has a reputation for being a Herman Baer, but really just likes to analyze what's analyzable and invest accordingly. And he is super cautious. He's really good, too, at talking about the career risk that money managers run relative to the investment risk that investors run. And so, you know, money managers don't want to be out of sync with their peers. And so they're just as likely to make all the same mistakes as to make the right moves. So what Grantham does is to focus on fair value. It looks at it at the aggregate level. I have a bit of a beef with that aspect of his approach, but he's been right more often than not. Well, and didn't he get excited about stocks a few months back when nobody wanted

to get near them? Exactly right. So this isn't that he's been perma bear, perma bear, perma bear. He said, hey, everything's good. Everything got bad. And then he said, hey, things look cheap. And now he's saying, he's taking a script from us. We're the ones who have said, he's listening to the podcast. We've been saying things might be stretched. Yeah. So even optimists have to take a look at a rally that's seen the S&P up 40% since the March lows and compare that with economic reality earnings, which are looking better than you would have expected, but against drastically reduced expectations. So, that backdrop, I think, supports what Jeremy Grantham is arguing. I still remain skeptical of anyone who knows what's going on here. I mean, I think

we've got enough mixed signals. We can paint any picture we want. You know, consumer spending has been a huge, you know, 70% of our GDP, and consumers are now saving, which is actually a good thing, but technically not good for stocks in the short term. The Fed's surveys are looking good. So I think we just have to wait and see. I mean, yeah, he's probably right, but I'm cautious. But when you look at aggregate earnings and they're off 5%, but revenue is down 10%, what does that say? So that on some level, they're doing it through cost cutting. You can't cost cut forever. Correct. And it depends on what you mean by aggregate earnings too. I mean, if you've got indexes being buoyed or hauled down by those kind of funky bank earnings,

and some of those big earnings we saw from the banks recently were based on those bond write breakdowns, which let them claim earnings increases. Aggregate earnings are a problem. But some people, if you need to grab hold of an entire market, you have to grab some numbers that may not make sense on an individual level. Tons of one-time stuff. Yeah. And you can only hope that statistically it all washes out. I don't know that it does, but hopefully. Yeah. And so the important point too, and I think this is sort of a thread of criticism that's running through this conversation, is that a focus on aggregate earnings or just the aggregate market in general can be somewhat useful. But really, even if things

in the aggregate appear overvalued, there are always opportunities if you're willing to look for them and do bottom-up analysis. O'Reilly. Microsoft and Yahoo announced a 10-year deal this week that will have the two teaming up against Google. Yahoo will use Microsoft's Bing search engine technology, and Yahoo will sell premium search advertising for both companies. Guys, Google's got about 65% of the search market. Yahoo and Microsoft will now have a combined 30%. What is the takeaway for investors here? Not much, Chris. My formula is if you put two clans together, you still don't get a circus. Microsoft was losing money hand over fist for years in search.

Yahoo is barely profitable. They're not even really a search provider anymore. They're sort of an AOL, you know, fastest man driving to the graveyard kind of company. So, you know, yes, this helps Google in an antitrust sense because they've now got an officially a bigger competitor. I don't know where it goes from there. I mean, Yahoo clearly messed up not taking Microsoft's Better deal before, so now they're stuck with this. Yeah, I think it is worth pointing out. Once this deal was announced, Yahoo's stock fell 12%.

Well, they didn't get that boatload of money that Carol Bartz was saying they were going to extract from Microsoft. I don't think this is a big game changer either, but what it does for Yahoo is it means they don't have to spend a couple hundred million bucks a year taking care of their own search technology, which was sort of falling behind, I think. uh and for microsoft it gives them you know enough share that maybe they can kind of crawl out of the the money burning uh situation they've been in with this stuff because bing is actually a pretty

good page and a pretty good search engine uh i use both google and bing and yahoo all the time they all kind of give a slightly different set of results so the point for them is that with a little bit better share they can sell a little more ad against it and so that i think will be helpful they're not going to knock google off off the top of the of the pile because every but google is a verb it's just too ingrained in the culture right now why are they even trying though i mean it's been what 10 years as they've been trying searching and they just keep losing money at it i mean what's the point well that's how microsoft works with i mean you could say the same thing about microsoft office which before the podcast james was saying he even liked i mean

for a long time people said it wasn't on record he never admitted it they they sort of pick away at at places where they think they can make some money and do a good job. And sometimes they manage to do both. Yeah, well, this is the beginning of a series of surprises for Seth because I actually think it was a smart move for Microsoft. They buy market share in the space that they badly want to be in. And I'm not surprised that Yahoo tanked because basically they're giving up on what their core business was

and are going to be left with ad sales. And so at that point, what does that mean for Yahoo? I think if anybody can effect change in this space, it certainly is Microsoft. And so basically, you know, Google, as we've discussed in previous podcasts, remains an ad sales company. Microsoft is not that. This is another diversified revenue stream for them. And if over time, if they're patient, maybe they can affect a bigger change than they've already done with this arrangement. This week in housing, on Tuesday, the Standard & Poor's Case-Shiller Price Index showed that single-family home prices rose 0.5% from April to May, the first monthly increase since 2006.

And earlier in the week, the government reported an 11% rise in new home sales from May to June, the largest monthly gain in nine years. Seth, those numbers couldn't possibly be deceiving, could they? It's all ****. I mean, really, what is amazing to me is the way the press constantly gets these numbers wrong. It's as if they don't read the press release. Let's talk about the new residential sales first. The new residential sales press release, which any member of the business press corps can download, is two paragraphs long at the top. And it says right here, this is 11% plus or minus 13.2% above the May rate.

So what you're saying with that margin of error is you can't actually be sure whether it's an increase or a decrease. It could actually be a really huge increase. But it's also only a month-to-month increase. Is that kind of like when I said to you that time, I'm going to give you $20 plus or minus $50? Exactly. And year over year, which tells you how things are going versus last year, you're talking about a 21.3% lower total number of sales, and the margin of error there is plus or minus 11%, so you're pretty sure that it is down. Now, to turn to the Kay Schiller numbers, the press did not use the seasonally adjusted numbers. Now, real estate is a very seasonal business, so it's more accurate in this case to look at the seasonally adjusted numbers. And if you look at the seasonally adjusted Kay Schiller numbers, prices in their composite 10 and 20 were still dropping slightly month to month and down a lot more year over year.

So I think the press is looking for a story, a happy story. They've been saying mean things about real estate for so long. I think they're overlooking the facts in order to be able to tell the happy story. Things are getting a little bit better. The pace of decline is slowing, but that doesn't mean we're out of the woods. Yeah, that's exactly right. And the Jeremy Grantham concept of investment risk, that exists in the ranks of financial journalists as well. So these guys are pitching stories.

They want to be on A1. And so what do they want right now? Their editors are looking for happy, happy, joy, joy stories. Oh, look, we can massage this data so that it supports that. And then my editor says, yes, that's a part of the plan there, too. If that sounds like a goofy conspiracy theory, it is not. I have worked in newsrooms, and it actually works like that. All right, I got two points for you perma-bears.

First of all, Seth, you already bought your house, so there's no reason to— Well, you know, I can tell all my friends I was in at the bottom of the market because Washington is actually showing an uptick. I know, unbelievable. That's true. Second point, yes, the seasonally—first of all, the non-seasonally adjusted numbers were up slightly. The seasonally adjusted numbers, year-over-year numbers, were down just a little bit, but a little bit is literally 0.16%. I mean, for perspective, that sounds pretty good to me.

I've got to admit. But that's a difference in the change of decline. It's not a difference in the decline. Correct. So we're talking about different spots. In other words, the direction is still down. But it could turn and go back up quickly. Yeah, you've still got sort of, I guess, the first derivative would be an upward vector, right?

Exactly. I mean, that's a positive. And yes, granted, it's just a little bit of an uptick, but I think everything starts as a little bit of an uptick. Yeah. My issue isn't so much that we shouldn't look for a little bit of happy, because this is a little bit better than what we've seen. It's just insane to me that the business press, these people are supposedly literate, couldn't get this right. And have a little nuance in your stories, folks. Come on. All right. Let's do some quick takes. I'll give you a group of three stocks and say, over the next five years, which stock

you think is going to be the best performer. I'm going to start with retail. The three stocks are Amazon, Costco, and eBay, over the next five years. Shannon, I'll start with you. Yeah, well, it's definitely not eBay. And I think it could possibly be Amazon, but I've got this mad crush going right now on consumer stable stocks, so I'm going to say Costco. A great company, you know, sells things that people need, not just what they want, although So some of the stuff they sell also is what you want. There's a great keyboard that I recently bought for my daughter, and she really wanted that.

Because you don't know if it's going to be there next time you go. Exactly right. There's a mystery of that. So it's not the cheapest stock in that space. I like Walmart and Procter & Gamble as well in terms of the valuation profile, but I'll say Costco. Yeah. Amazon and eBay are going to eat each other's lunch. Costco is going to squeak by and win.

I think Amazon is eating eBay's lunch. And even though it's expensive, I think it's going to do better. Costco, maybe, but I'm going to go with Amazon because that's the sexier one. All right. Well, speaking of eating lunch, next category is food. Let's go with Chipotle, McDonald's, and Starbucks over the next five years. James? I'd really like to go off the menu altogether and skip restaurants.

I just don't think it's a tough business. But Chipotle I'd go with. I think the other two are a little more played out. But, you know, Chipotle, yes, it has the newness and the sexiness going for it, but it's got a lot more growing room too. You know, I'm going to go with the one I haven't looked at so recently. So I'm going to go with Ignorance and say McDonald's. I've looked a lot at Chipotle because we have it over in Hidden Gems,

and the valuation is getting near the high end of what I consider a good buy, still a good hold because they may surprise and probably will, but it's not cheap. And I've been looking to sell my Starbucks. And every time I do a valuation, I have a hard time coming up with a valuation that meets where it is now. And so I think I'm going to be looking at selling that stock. That leaves McDonald's. All right. Yeah, I agree with that assessment of Starbucks, particularly because I've now brought in a French press to work.

And so their share price is going to decline. I know, it's going to come to your desk in the morning and start going to Starbucks. By all means, come on by. But Chipotle is definitely the one of those three that I think is going to be the better performer over the next five years. So we talked last week about the outstanding second quarter results. And basically, if that company can make it here amid these very tough economic times, it can make it anywhere. All right, let's close with operating systems. Apple, Microsoft, and Google over the next five years.

And yes, I was sort of like reaching a little bit with the whole Google operating system. Remember, it's not an OS. It's a, what do they call it, a kernel. It's not even a kernel. It's the other thing on top of it. It's a shell. It's a shell. It's a sergeant.

It's a drill sergeant. Shannon, what do you think? Well, I'm going to continue to shock Seth and say it's Microsoft. Apple is very cool, but it spins out the wazoo to maintain that bleeding edginess. And one of my colleagues here at The Fool recently said that Apple is stuck on a hamster wheel of innovation, and I think that's exactly right. Google is endlessly inventive, too, but it's an ad sales company, and I don't see how they're going to disrupt that, and that leaves Microsoft,

which is sort of consistent with my crush on consumer staples right now, is almost a staple stock. And it's trading with a below-market multiple just on the eve of the release of Windows 7, which, if that goes along the lines of the control burn of hype that's been around it in the run-up to this, it's going to be a big hit. Now, another dirty-off Mike secret is Shannon is thinking of downloading a release candidate and nerding it up and trying this stuff out before it even hits the base. So these haters in here... On his Mac, though.

On his Mac. Exactly right. Let's be clear. In other words, that Mac OS just doesn't do it for them. Okay. James, owner of three Macs. Owner of three Macs. If it's a hamster wheel, I'm loving it.

I can't remember the last crash I've had with a Mac. I would almost pay extra not to have to use Windows at work. I like Apple as an operating system and as a stock better than the other two. I think Microsoft is going to irrationally pursue search money or search losses to win. I do not know. Apple, I think, is the safer bet. If we're talking about share percentages, I think Apple will gain slightly over the years. But if we're talking about absolute numbers of operating systems out there, I think it has to be Microsoft.

All right. As we head into August, give me one stock that's on your radar. Well, surprise, surprise. It's Microsoft. And for all the reasons that I just mentioned. Who are you today? Are you like the pod person version of Shannon Zimmerman? I was looking at it.

I think what Seth said is brilliant. I agree with Seth. He's been smoking out of my bong. Yeah, I'm now receiving, like Seth, a generous stipend from Redmond Washington, so we're good to go. Yeah, just where it is in the product release cycle, again, if Windows 7 holds up to the hype, it's going to be a big hit. And it's a beaten down valuation of a fantastic company that makes products people have to have. I like it in those terms, even though, yes, I, too, am an iMac owner. James?

Chris, I have a whole country on my radar, and that is China. And I'm going to borrow a point from my friend Vitaly Katlinson, who sent me a good email about this. You know, Chinese power consumption has been declining, which you'd expect for an industrial country in recession. However, the Chinese numbers, you know, the productivity numbers are up, up, up. I don't trust their data. I don't know what the analogy is, maybe any more than I would trust their data on a young gymnast or something. But I think China is fudging its numbers. They've got a lot of hype around them.

I would stay away. Okay. Yeah, I think China. Yeah, China, there's a lot going on there. So just to be clear, James, you're shorting China. Yeah, I'm shorting China. And send all that email to jamesearley at fool.com. The rest of us love China and don't want to see any sort of Chinese assassins outside our houses, you know, trying to make things right.

Can I just push back? We talked earlier in the week with Global Games advisor Tim Hanson, and we had a really interesting conversation about the way there used to be this sort of ethical debate quandary. Every time the Most Favored Nation status agreement with China was up for renewal, where did that conversation go? Did it just disappear into the reality of capitalist ether? I believe so. Yeah. I am –

Case closed. Done. Let's move on. Wow. I've been looking at Under Armour because we've got – You're wearing Under Armour. I'm wearing Under Armour, sure. I never thought I would see the day.

Neither would I because I thought their stuff was expensive. but I had to go I'll tell the brief story I had to go to Italy and I didn't want to look like a complete slob but I didn't want to be uncomfortable so I said

these Under Armour golf shirts will keep the sweat off me and make me look somewhat presentable and they do they were worth every penny emphasis on the somewhat I have to say

what's that somewhat presentable well there's only so much a shirt can cover the do-rag is another matter if I wore another one over my face you guys might be a lot happier

but that actually gets me to the point on Under Armour is they their results came out this week their revenue growth was sort of tepid overall, but their apparel revenue growth was in the mid

teens, which I think is a pretty good showing in this environment. And apparel really is the key for them. It's higher margin and it's also the engine they use to expand their reach into other sports, into other segments. In other words, what they do is they first start making apparel for those people. And once that apparel is accepted and often really loved, then they move in with something like shoes, which they did in running. And the only reason they could go into running is because they had created authenticity for runners with the running apparel they made, which is really top-notch. Under Armour is just about impossible to value on any, I think, sort of regular metric

because you're looking at a long, fat tail, or you're hoping for a long, fat tail. These days, I think it's gotten a bit more expensive, but it's still worth a hard look, and we're going to take a harder look at it over at Hidden Gems. All right. As we mentioned at the top of the show, our engineer, Steve Roito, is getting married this weekend. Yay!

So as we close out, how about one piece of marriage advice for Steve? Just one little nugget. All three of you guys are married. Wow. Shannon. And our wives are listening. Yeah, they're listening, so make it good. Guy advice, radio advice, or real stuff?

Just anything you think Steve might benefit from. And it could be, hey, he's got the wedding coming up. It could be about the wedding. It could be about the reception. I can go first. All right, please do. Norm's Beer and Wine, Vienna, Virginia. That's it?

That's all I need to give them. Get liquored up? You're getting married? Get liquored up? That's right. Okay. And after. I'll be predictable and say she's always right.

Don't forget that. Yeah, so Steve, you've heard of the phrase sex and drugs and rock and roll? Yes. What are drugs and rock and roll without the possibility of sex? It's ****. Whoa. We can't use that. We can't use that.

Kristen can't hear that. Well, don't worry. I'm sure Steve will edit that out. All right, Kristen, your wife won't hear that. It'll be fine. No, seriously, always consider whether you would rather be right or whether you'd rather be happy. I mean, I have some stuff, but it's way too sentimental.

No, I like the stuff that you said. Well, to me, the big sort of insight was that you can't really expect your partner to intuit what you're up to or your needs. They're not your mom. They're your wife. And so say out loud what you want. Yeah. That's a good start.

Definitely. I think we have the makings of a whole new podcast. Yeah, actually. You're our third caller. Seth Jason, James Early, Shannon Zimmerman. Guys, 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. We'll see you next time. We'll be right back.