Motley Fool Hidden Gems Investing - Motley Fool Money: 08.07.2009

Episode Date: August 7, 2009

What do better-than-expected jobs numbers mean for investors? Are Apple and Google gearing up for a fight? Has China gone too far in its effort to deter investing scams? In this installment of Motley Fool Money, we tackle those questions, share three stocks on our radar, and offer up some fatherly advice. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Money. I'm Chris Ellen. I'm joined by Motley Fool Senior Analyst James Early, Shannon Zimmerman, and Tim Hanson. Guys, happy Friday. Happy Friday to you, Chris. Seth Jason is out this week because he decided that being there for the birth of his first child was somehow more important than being here for this podcast. I mean, can you believe it? What's with the priorities on this guy? Anyway, we've got a lot to get to this week, including things heating up between Google and Apple. AIG reports a quarterly profit. Yes, AIG. China does something that makes Bernie Madoff really, really glad he lives in America.

And as always, we'll share three stock ideas. But we begin with Friday's better-than-expected jobs numbers. The unemployment rate for July fell to 9.4%, down from June's 9.5%. The markets opened up sharply on the news, with the S&P hitting a 10-month high. Shannon, we got talk that the recession is easy. We've even got some talk out there that the recession may already be over. What's the takeaway for investors? Certainly neither of those. Should I give any more options? Well, I'm going to make up my own option, actually. So it is good news. There's just no getting around that. That's wonderful. Fewer people are out of work. And that in itself is terrific news. And it's especially good news

when you connect that dot to the fact that our economy is powered largely by consumer spending. But we're still within spending distance of 10%. Most economists seem to think that That's the figure that we're going to arrive at by the end of the year. And when consumers are not spending and they're saving more, that's ultimately a good thing for the long haul. But when the economy needs stimulating, that's not helping much of anything. And so from the investing perspective, people need to take a look at economic and corporate fundamental reality and compare that to a market that's risen by 40% since the March lows. Are there bargains out there to be had? Yes, absolutely.

But right now it pays to be choosy, and people should cultivate their inner stock snob. I was about to say that I was going to take a pin and prick Shannon's balloon just a little bit. But I don't think he even inflated his balloon too much with that answer. So let me say one thing, though, and this is knowledge not available elsewhere outside of Motley Fool Money podcast. Actually, it is, but it's still worth covering. There are actually two kinds of unemployment numbers. There's the regular unemployment number. That was the one that went from 9.5% to 9.4% where people call around and ask people, do you want a job and do you have one?

So it ignores people who might have backed out of the workforce to go to school or to have a baby. There's a separate number. A set. Exactly, a payroll number where you call employers and ask them, have you added jobs, cut jobs? That number is still down. They lost 247,000 jobs that way. So the numbers still aren't quite as good as people think. I mean, unemployment is way above the long-term average now.

It's gotten a little bit better, but it could stay above 9% for five years if the recession lasts that long. Well, so, I mean, in terms of the numbers, yeah, it definitely was not all good news. I mean, we had worse than expected retail numbers. Same-store sales in July fell 5.1%. Yeah, that speaks to the whole issue of consumer spending. Again, 70% of the economy is powered by consumer spending. And when people are holding back, and that was reflected in the retail numbers that came out for July, right, that's not going to simulate the economy. And even though, of course, it is good news that fewer people are out of work, depending on which metric you want to use to look at that.

People need to have some reality and have some perspective on the reality of the situation and not pop the cork in the champagne quite yet. James, we got some people out there saying the Cash for Clunkers program is one of the culprits in all this. Are you one of those? Yes, I am. Speaking of consumer spending and making laws, I mean, this is a boondoggle in my mind of the first order that subsidizes people who bought gas guzzlers and the companies that made them for so long. I mean, clearly, at a minimum, I have to say, the government just grossly underpriced this.

You know, we're getting, in some cases, perfectly good vehicles off the road and destroying them. I'm all for getting these gas guzzlers off, but I think this is a very poor way to do it. The fact that the money was gone in days is just kind of ridiculous. Well, I think the thing that I laughed about with that is that everybody down here in Washington is patting themselves on the back for giving away a billion dollars in less time than they expected. I mean, let's put that in perspective. All they did was give away a billion dollars. It's not that hard. You know, our colleague Vern was in the studio here before,

and he walked in with a six-pack and said, does anybody want a beer? We took them. I mean, it's not... Jim took seven. Well, you know, and Vern's out there patting himself on the back for buying beers. I don't know.

Good news, America. AIG, the giant insurer that is 80% owned by U.S. taxpayers, posted its first profit in nearly two years on Friday, sending shares as much as 23% higher. AIG still has to repay more than $80 billion in taxpayer loans. James, help me with the math here. This seems like a good thing for investors and taxpayers. Is it?

Well, first, let's put this perspective. Yeah, AIG is kind of a Lazarus of a stock. I mean, if you wanted to get rich quick, you bought AIG this week. It was up over 80%. Ironically, much of that came before the announcement. So I don't know what's going on there, but it's interesting. Cash for clunkers? Good point.

A lot of wealthy people in the Treasury Department. They had a profit of $2 billion. They took a total of $180 billion in government aid, including $80 billion in government loans. So they've got a little while before they climb out of this hole. I frankly have no idea how they're going to do it. I mean, they sold some assets recently for about $2.5 billion, so maybe that brings down that debt a little bit. But it's a long way to go, and they're not making that much money. In fact, their core operations weren't that good.

These were mostly mark-to-market gains, which are just simply improvements in the value of existing assets AIG holds. I mean, their core operations actually worsened. So you said it was a great time to get rich quick, just buying the stock this week. I mean, looking out over the next 6, 12, 24 months. You might get just as poor quickly. Yeah, I mean, AIG is probably a great indicator of how other financials are doing, of sort of, you know, a proxy for corporate credit in America, but I wouldn't use it for more than that.

I mean, this company is a company that's going to get ripped apart by the government sooner rather than later. I mean, there was an article in the Wall Street Journal just the other day talking about how the people that are going to get rich off this are the financial advisors who are going to help spin off all the different parts of the company. You know, at the end of the day, you know, AIG, probably a stock you don't want to play with, but somebody's going to make money.

It's probably just not going to be us. This week, Google CEO Eric Schmidt stepped down from Apple's board of directors, only the latest sign that things are heating up between the two companies. Guys, what's more surprising, that Schmidt stepped down from the board or that he was on Apple's board to begin with? Well, I think that this was inevitable at some point. It's almost like a comedian inviting a heckler on stage for a laugh. And Google's not joking when it comes to the operating system competition,

both for computers and for mobile devices, despite what Seth would say, were he here. Well, what do you think? I mean, are they on a collision course? Well, you know, a couple years ago, the reason they obviously got together was everybody hated Microsoft. Microsoft was the big giant and the old saying is the enemy of the enemy or the enemy of my enemy is my friend. And that was what you had with Google and Apple. As Shannon said, they're headed straight at each other, particularly in the mobile space. And, you know, I think Schmidt at this point was recusing himself from most of the important business and Apple meetings anyway.

So maybe Apple is just trying to save the director's fees. Yeah, I don't think even there are grand designs just yet. I think Google is just trying to stretch its reach as broadly as it can, like probably any company would, like Microsoft did. They're going to see where they end up. My money is not on Google for the long run. I mean, I think it's a great company, but I actually like Apple better. I'm a Mac maniac, so I have to say that, but I actually do like Apple. Okay.

Shannon, Tim, what about you? Over the next five years, if you had to hold one of these two stocks, what would you hold? Well, only because I know what Tim is going to say. I'm going to take the opposite side of that argument. That's a great reason for taking the opposite side. But I'm going to say Google, even though it's an ad sales company, it's an endlessly inventive ad sales company. At some point, one of these efforts that always seems to be underway and emerging from Google is going to take off, and maybe it will be the Chrome operating system.

Well, I'm going to take, obviously, the opposite side here and say you'd have to be brain-dead to want to own Google. Oh, wow. I mean, the company, put the operations aside, the way the company treats their shareholders is just so abhorrent. I mean, between their dual-class share structure, you know, the money they spend as they see fit, you know, on whether it's Larry Page's wife's company or on, you know, whatever alternative energy project they want to pursue. And then at the end of the day, you know, the option is repricing. I mean, they clearly don't care about outside shareholders. They care about themselves. Although the shareholders do get to use the search engine for free.

Hey, here's a couple of tips for all you business executives out there thinking about defrauding investors. One, you shouldn't do it. And two, you really shouldn't do it in China. China's state media reported the country executed two business people for defrauding investors out of more than $127 million. One of the defendants was a beauty parlor owner who had collected more than $100 million from investors by promising them monthly returns of up to 10%.

The second defendant took in the equivalent of $24 million after promising investors they could receive interest of up to 108 percent. Very specific there. Do we sell our newsletters in China? Tim, you're one of the advisors on our international investing service. You recently returned from a trip to China. What did you think when you saw this story? It's funny. The first time we went to China was in 2007. And we asked somebody, first meeting we had was, you know, American investors are really skeptical about China. how prevalent is fraud here? And we got a deadpan answer, basically said,

well, if you commit it, you're probably going to be executed. And that's a pretty big deterrent at the end of the day. That doesn't mean China has corporate governance issues, but they mean business when it comes to improving their standing in the world. Ultimately, at the end of the day, China would like to be part of the G2 with just the United States, and they know they have a long way to go to get there in terms of corporate governance and development and all those things.

But this is what they know how to do. They execute more people than any other country in the world. And when they're looking to solve a problem or deter a problem from happening, this is their strategy. I want to ask Tim a question as our in-house China expert. So you look at the rally, and there's been a big rally in emerging market stocks. And if the flight to risk, I guess you could call it, continues unabated, what happens to China as it's perceived as being a safer play on the emerging markets? Does the performance there cool down or the fact that it's not a monolith?

Well, you have two factors that play there. The first is that I think a lot of Chinese stocks have gotten ahead of themselves. I'll agree with that, just particularly in the real estate sector, the banking sector. There's real problems that are going to show up on the horizon. But you have to remember, even though as people are fleeing back out into risky markets, the other thing they're going to start fleeing is the dollar, I suspect. And so China, the RMB, even though it's not freely convertible, probably holds value better than most other currencies.

And so that protects it a little bit. I'm a China skeptic. I think it's a great big in-run waiting to happen. I don't trust the accounting there. Obviously, there's a ton of growth. You trust the accounting here? More than I trust the accounting there. No one is going to get executed here, at least.

Maybe that makes me feel better. I was going to say, that should probably make you feel worse. I have to ponder that. But in the meantime, I mean, let's think about how they do their numbers. I mean, basically, as my friend Vitaly Katsentilson points out, China tends to count their growth figures when the government releases funds or when the money is spent versus when the actual consumer buys something. In other words, when a stimulus happens. So that's fishy.

We had reports last week that the state figures were differing from the national figures. I mean, you know, there's a Wall Street Journal article even yesterday on a human interest level, the prisoners of drywall about this guy who has his house made with Chinese drywall emitting these sulfuric fumes that are toxic and, you know, he doesn't know what to do. So I think just China has a lot of its act to clean up. Definitely, definitely there will be fortunes to be made. But I think that the power share is gold drag, and China ETF is up 62% this year versus 11% for the S&P. I just worry that it's a little bit rich right now. All right.

As we head into the next week, guys, give me one stock that's on your radar. Shannon, we'll start with you. So this is an unlikely radar stock for me, but it's Sprint Nextel, and it's up more than 100% on a year-to-date basis. And just sort of doing some back-of-the-envelope calculations, it still looks like a bargain. Definitely not for the faint of heart. It's been profitability challenge over the last couple of years, but it's a free cash flow. Not a cow, exactly, but it cranks out a lot of free cash flow. A calf? A heifer?

It's a calf. I would give it that. And about $18 billion in revenue during fiscal 2008. Not a great year, obviously. So looking at where it's trading now, which is below $4 a pop, it looks like a bargain, about 40% of this back-of-the-envelope calculation discount to intrinsic value. So now I'm going to start using the front of the envelope in an Excel spreadsheet to get serious about it. Okay. Front of the envelope, CAF. Got it. James? It's a $4 stock. I like it. Yeah. If you're a believer in this nascent recovery,

one thing you might want to do is go to the riskier stocks. One of them is Sassol. It's a South African company that converts coal to fuel and is trying to convert natural gas to liquid fuel as well. Ticker is SSL. It is definitely risky, but it's a commodity play, and it will definitely soar if the economy picks back up. Tim Hanson? Well, I'm going to talk about a little company that might benefit from this whole AIG breakup we were talking about earlier, and that's a company called NSTAR Group, ticker ESGR. And basically what they do is buy insurance lines that nobody wants anymore, and they buy them for less than their fair value and then close them out. Any company that's selling insurance lines, well, that makes it a target-rich environment for the good people at Bermuda-based NSTAR.

Okay, so I mentioned at the top that Seth isn't here this week because he and his wife had their first child, and mother and daughter and Seth are all doing well. And so we like to offer advice for a new father. And I think it would be really easy for you, Shannon, or you, James, or me, because we're all fathers. I think it would be easy for us to offer Seth some advice. So let's go contrarian. Tim, you're married, but you don't have any kids. We're getting signals from the control room here. And you have a cat.

A big cat. A big cat. And Steve. That counts. Steve, you've been married for six days. Yes. You also have a cat. I have two cats.

Two cats. Wow, okay. That makes him 100% more qualified. Exactly. So I think we'll start with Tim. Advice for Seth Jason, new father. Don't drop the baby. Wow, that's straight to the point.

It's hard to argue with that advice. My brother, short story, on the way over from the hospital, my brother got to carry me in. My brother was 10 at the time. Cut the corner too short. Clipped off the top of my head. I kid you not, blood the whole nine yards. God, that explains so much.

Clipped or clipped off. I'm picturing something very different. There was no decapitation, but I don't remember the pain, but my mom says I was not happy about it. Steve, what do you got for Seth? Let's see. I don't know a ton about children. I would say baby-proof things.

It seems like those little rascals get into all kinds of trouble. Cover that Drano. Cover the Drano. Baby-proof things. Really? That's what you're coming with? That's all I got for you right now. Does that mean, like, tape the corners of the table with duct tape?

Did anybody do that? The glass is probably a bad idea. Glass tables never seem good. It's a whole industry now. There's no taping. You buy special devices to cover those corners, buddy. Ah, fancy. And Steve, like flammable stuff too?

Keep that away from the baby? It's probably a good idea. All right. Tim Hanson, Dave's Early Shit. It's every week. Guys, thanks for being here. Good to be with you, 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 decision. and remember the conversation continues 24 7 at fool.com i'm chris hill we'll see you next time