Motley Fool Hidden Gems Investing - Motley Fool Money: 08.21.2009

Episode Date: August 21, 2009

Amazon.com, Microsoft, and Yahoo! team up against a tech rival.  Starbucks announces that it's raising and lowering prices.  And the Fed Chief expresses some optimism about the near term.  In this installment of Motley Fool Money, we discuss those stories, share three stock ideas, and play a spirited game of "Which S&P 500 stocks have outperformed Google since Google went public five years ago?" Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Money. I'm Chris Held. I'm joined by Motley Fool Senior Analyst Seth Jason, Charlie Travers, and Shannon Zimmerman. Guys, happy Friday. Happy Friday to you, Chris. Glad to be here. On today's show, Amazon, Microsoft, and Yahoo team up against Google, Starbucks raises and lowers prices, and Palm says no to Steve Jobs. All that, plus we'll share three stock ideas. But we begin with some good news on the big macro front. The markets were up today after better than expected housing news. Ben Bernanke

said earlier today that, quote, prospects for a return to growth in the near term appear good, close quote. Wow, exciting. Shannon, do you agree with our esteemed Fed chief? Not so much, actually. You have to factor in, of course, that this guy is one of the chief architects of the so-called recovery and that he is up for being renewed as the Fed chairman. So maybe he has a bit of a vested interest. He wants that reappointment. Everything's great now, man. I think so. Are we closer to the end of the recession than its beginning? Sure. But this is an economy that's powered to the tune of 70% by consumer spending. Consumers aren't spending. Much higher than it ever used to be in the past as well, right?

Exactly. And unemployment's high, going to get higher. And so until that gets addressed, I don't really see how a robust recovery actually occurs. And so is the economy better than it was 12 months ago? Likely. Is it good? I would not give it that reading. Unlike the consistent bear over here, the hater, the economic hater, I'm looking at those housing numbers and I'm going, yeah, that's actually not so bad. That actually isn't terrible, this 7-ish percent increase in the rate of, remember, this is an annualized rate, so you never know what it really is. But it looks like we could be getting near the bottom in existing home sales, and that would be helpful. It would be helpful. Now, granted, we still have a lot of foreclosures and everything going through.

Prices are dropping like rocks, which is why. You can't grant it that way. I mean, that's massive. You know what? My editors came to me and said, Seth, you've just been negative so long. You've got to do a positive story. Which, as we've discussed, is the way that it actually works. Yeah, they write my checks.

So everything is fine from now on. Everything is fine just like that? Well, so yeah, the hilarity continues to ensue. the news that Seth is referring to, 7.2% increase in existing home sales. And it's hilarious. There's a story in Bloomberg today covering that. And of course, that's the lead. That's the headline. And then buried the third paragraph down. Oh, by the way, median prices fell 15%. Well, lo and behold, supply and demand still work. And they might not stop dropping for another two or three years. Exactly. You know what? These guys, now that I bought my house, I don't know why these guys

just can't just get off it. Jeez, come on, you guys. And this is the best of all possible worlds. All my property value, man. The other thing that's worth pointing out here, too, is that after all the scapegoating and ragging on subprime mortgages, prime mortgages are now leading the wave of foreclosure. Yeah, it was never about subprime. It was about people all over the economic spectrum borrowing more than they could afford. But the subprime angle was the story of the moment in terms of the things that your editors were requiring you to write about.

It's easy to blame poor people. Come on. Sure, exactly. On Thursday, Starbucks began charging as much as $0.30 more for some specialty drinks. So, bad news for all you Frappuccino lovers. The good news, Starbucks is lowering prices on some of its more popular drinks, including a drink called coffee. Shares of Starbucks up around 25% for the past year. It's coffee-flavored coffee, right?

Exactly. Charlie, is this a good move for Starbucks? Well, it's certainly in line with their schizophrenic decisions over the past year, simultaneously. I'm a shareholder, Charlie. That's not what I want to hear. I own shares myself. But they constantly reverse course and do two things at once. So why not raise and lower prices? They need to take a lead from McDonald's.

They've had great success with their McCafe because they have a special secret ingredient, corn syrup. Yeah. Yeah. Everything at McDonald's. I think everything at McDonald's. I even get that breakfast sandwich that has the corn syrup built into the bread. The napkins are wipes with corn syrup. Exactly.

It's great. I think Charlie probably has the same problem I do with Starbucks. It's come back quite a bit over the past few weeks, few months. And when I look at valuations on Starbucks, I have trouble making it worth a lot more than it is now. There seems to be a lot of growth built in. And I think I said this before, I'm looking for a way to get out of my shares. Totally agree. And in Million Dollar Portfolio, we actually did sell part of our position for that reason.

And can we sort of talk about that in big picture terms? Because that dynamic exists across the market. Oh, there are plenty of stocks that are now priced for great things that may not come. Ever, in the next 100 years. And so then you have to say, all right, so what is powering this rally? And on some level, it has to be technical, right? So money is flowing back into equity. Or corn syrup.

Mutual, yeah, or corn syrup. Dude, seriously, I think it could be caffeine. That could be powering the rally. Maybe, but at some point, fundamentalists like us may be frustrated by that, but the money that you make during a technical rally spins exactly the same way as it does when it's a fundamental-driven rally. So how do you account for that? How do you tack around it? I think you have to try and figure out when you're lucky and when you're smart.

Because over the long run, the luck runs out. Microsoft, Amazon, and Yahoo are teaming up with libraries and other groups to legally challenge Google's 2008 settlement with book authors and publishers. Under the $125 million deal, Google gets the right to scan, index, and display portions of books in exchange for a share of the ad revenues. Seth, Google says it's just making books available to the masses, man. They're only trying to help everybody. But critics say it's giving them too much power.

Who's right? Everybody's right. There's nothing I enjoy more than a scrawny geek fight, and this is the biggest scrawny geek fight we're going to see for a while. Of course, Microsoft and everybody else, Amazon, anyone who stands to lose anything to Google, they're doing the right thing by throwing the legal monkey wrench into the Google machinery if they can.

I think you do need to worry a little bit about Google because if it becomes so pervasive that the only way or the primary way to get a hold of a book is to work through them, then they've probably got too much power over information and over a section of our commercial lifeblood in general. And it reminds me today, I'm going to have to go to my favorite news source,

The Onion, which this week at least came out with a great video on how you can opt out of Google. And if you opt out of Google, basically Google comes by your house and moves you to a concentration camp. Go to The Onion and watch this. It's pretty funny. But people are right to worry a little bit about this. Google has such a lead that I think the government needs to keep a close eye on this kind of thing. Well, so in terms of being threatened, I mean, this is something that Google

is obviously looking to make money off of in a few different ways, whether it's ad revenue. No, they don't want to be evil and make money. I'm not saying it's being evil, but from an economic standpoint, we've got three big companies here, Microsoft, Amazon, Yahoo, who is the most threatened by this? I don't know if any of them are directly threatened. I'd be more worried if I were. I would really be more. No, not so much because I think Amazon can figure out, I mean, Amazon is going to come up in the search results for, you know, for the person to buy the book from, I believe. I think that I would worry the most if I were a book publisher, if I have to choose at this point between marketing

through Amazon or marketing through Google, and those are my only choices, then I'm a little more worried. Yeah, well, but the antitrust police are going to be coming fairly soon as Google branches out already into a browser, into an operating system, into the Android platform which could be Kindle-ized for this kind of material as well.

They're only trying to help us all. Well, you don't believe that, neither do I. But, you know, what they're basically doing is, remember how freaky it was when you first saw advertisements on stickers on fruit in the grocery store? Well, that's what they're doing. They're looking for, what's the next piece of fruit that we can put an ad on? This is obviously it. And they're building out a platform that's going to support that as a business line in a way that is much more robust than it appears to us now.

Yeah, I don't see how this is a big deal because it's a horrible user experience to read these books through Google. It's incredibly painful on your eyeballs. Yeah, now. If I'm making Kindles, I'm not worried about that. Speaking of fruit, time for everybody's favorite daytime drama, As the Apple Turns. Bloomberg reported earlier this week that in 2007, Palm rejected a proposal from Steve Jobs that the two companies not hire each other's employees.

Jobs was worried about losing key employees to Palm and said, quote, we must do whatever we can to stop this, close quote. What in the world was he thinking? They call that collusion. Might that be illegal in some way? I don't know. I'm not a lawyer. Sounds like it might be a little sketchy. And to Palm's credit, they pushed back immediately to just that effect.

Actually, this is likely illegal and there's no way we're going to consider it. I think the funny thing about this is there's a couple of ways that we looked at it at first. Our producer, Matt Greer, who's far too nice, was wondering if this wasn't just a way for Google to sort of call timeout or wave the yellow. Google, Apple, Apple. Okay, now we're talking about Apple. For Apple to wave the yellow flag and sort of stop everyone in their place while the race is still going and they're still winning. I wonder if it isn't Steve Jobs saying to himself, well, I know I'm kind of a jerk and I'm going to lose key personnel once in a while because of that. maybe I can sign them to a non-compete clause without their even knowing about it.

I'm just making things easier for them. I'll make a different sports analogy. Jobs is being like Lucy with the football, right? Snatching the job away right before someone can kick it through the uprights. Well, he actually does have a pretty good case for it. I mean, when you look at the people who have left Apple and gone to Palm, this past June, Palm named John Rubenstein as its CEO. He retired from Apple in 2005 as the head of their iPod division.

Earlier this month, a guy named Jeff Zwirner left Apple and became Palm's brand design chief. But again, for a guy who comes off as smart and tough, this story struck me as just kind of a weak move. Yeah, because you would think that even Steve Jobs would know that the law trumps his own ego. And it's certainly unseemly. And in the past, it's been a part of his charm. This is not too charming. All right. As we head into the next week, guys, give me one stock that is on your radar.

Shannon, I'll start with you. Zimmer Holdings, and not just because my uncle owns the company either. Your uncle doesn't own the company. He's missing a syllable. Does he know that? He lopped that off. He lopped that off. Because he was ashamed of you?

That's a joke. That's a joke. So, yeah, so Zimmer Holdings is a major player in the orthopedic implant space. I actually am a big fan of Stryker, which is its lead rival. rival. But right now, Zimmer Holdings, if anything, has a more attractive valuation profile, trading at about 13 times trailing earnings and 12 times its average free cash flow over the last three years. And both of those metrics are below the broader markets. And so if you are not an owner of Stryker or Zimmer Holdings, and you want to think about increasing your exposure to what

is a very lucrative niche in the medical world, take a look at Zimmer Holdings. The ticker is ZMH. Orthopedics, so we're talking like knee replacements, hip replacements? Basically bionic man stuff, yes. Awesome. Charlie? In contrast, I'll give you one stock that is not a buying opportunity which would be PacSun, which had absolutely horrid earnings yesterday. Same store sales were down about 24%. This company is hemorrhaging money. Basically, you can take away that people just don't want to buy their crap.

all right we brought charlie on because he's so long-winded in mince's words that's right he never says what he really thinks and crunches the numbers really well it's hard to read him we thought it would be a fun experience for everybody all right seth well charlie teed up on on pac sun or pacific sun where so i'm going to stick with that theme and talk about one of their suppliers which is a company called volcom which is a board sports and uh kind of the boarding lifestyle uh producer now you're talking like snowboarding not monopoly snowboarding exactly you got your snowboarding you got your skateboarding maybe there's a cooler name for that i'm obviously not cool enough to know what that would be and and also surfing which is i believe where they

got the whole start there you go and we have this over in the hidden gems uh portfolio and they have not done all that well as of late partially because pacific sunware was one of their major partners but also the big retailers who were other carriers there in other words almost all their top large customers, destocked like crazy because when retailers aren't selling a lot of stuff, they want to keep their inventories even thinner. So if retailers are selling, I don't know, let's pick a number, 20% less stuff, let's call it Volcom stuff, and they're worried, Volcom might sell 40% less stuff. And that is indeed what happened with some of the major customers like Pacific Sunware and others. Volcom, however, has the advantage that it is a relatively

small focused company. They sell to a lot of independent board sports stores, which is where the kids who buy a lot of this stuff like to do their shopping. So we think they really have a pretty good chance of coming out of this consumer recession pretty well. They've also got a really strong balance sheet and trading at a pretty attractive valuation. So Pacific Sunware, I agree, troubled. Volcom, one of their strongest brands that you see at Pacific Sunware and other places, worth a look. All right, guys, before we get out of here, one other thing of note this week. This week was the five-year anniversary of Google going public. Since they went public in August 2004, only six companies in the S&P 500 have outperformed Google's stock over

the last five years. Let's see if you can name them. Apple. Six companies. Apple is one. Way to go. What else you got? You got anything? Steve, you got anything for me here? Claire's Boutique. Claire's Boutique? What is the ticker symbol on Claire's Boutique? It used to be CLE.

Awesome. A-W-E. You kind of trailed off there. Research in Motion? Research in Motion? Oh, I'm so sorry. No. Thank you for playing.

We do have some lovely parting gifts. Intuitive Surgical. Yes, Charlie. I was going to be so disappointed if you didn't know that one. Apple, Intuitive Surgical. Apple II. Western Digital. Monsanto.

Range Resources and the ever popular Southwestern Energy Nobody would have guessed any of those I am so disappointed in all of you but especially you Shannon because you didn't get a single one. I didn't get one, that's right and I don't even like researching. And by the way if anyone out there would love to see how handsome I

am, see the handsomeness behind the voice if you go to CNBC and closing bell from what was the 20th. From Thursday You were talking Google. You can see some bald guy talking about the Google with Maria Bartiromo. The money honey. Yeah, she actually pities me in the segment. You have to

listen close, but it's there. She also plugs your service many, many, many times. Yeah, I try not to say hidden gems in here too often because I don't want to sound like a shameless commerce type, but she doesn't have a problem with that. She went hog wild. It's okay if she wants to do it. Thank you, Maria. Checks in the mail. All right.

Seth Jason, Charlie Travers, Shannon Zimmerman. Guys, thanks for being here. Thank 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 decisions. And remember, the conversation continues 24-7 at fool.com. I'm Chris Hill, and we'll see you next time.