Motley Fool Hidden Gems Investing - Motley Fool Money: 10.02.2009

Episode Date: October 2, 2009

Bank of America CEO Ken Lewis says goodbye, Starbucks rolls out instant coffee, and unemployment numbers on the rise. All that plus 3 stocks our panel is taking a close look at. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Welcome to Motley Fool Money. I'm Chris Hill, your host. I'm joined in studio by Motley Fool senior analysts, Seth Jason, James Early, and Shannon Zimmerman. Guys, happy Friday. Happy Friday to you, Chris. Hello. On today's show, we'll talk about Ken Lewis's goodbye, Starbucks instant coffee, and as always, we'll share three stock ideas. But let's begin with the big macro. Job numbers out today, not good. 263,000 added to the unemployment rolls. The unemployment rate now at 9.8%. That's the highest since June of 1983. Shannon?

Yeah, not a surprise for folks who've been paying attention to our podcast, or our economists, actually. So, everybody's stuck with a consensus estimate of 10% unemployment before the recession is really over. And last month's downtick was a bit of a statistical fluke. So I don't think it was much of a shocker. Yeah, this is, first of all, after the recession is over GDP wise, we expect because it's the way it always seems to work and will likely work that unemployment will continue to get worse because businesses will once they turn up, then they start hiring, there's a lag, that's just the way it's going to be. But this, this entire thing says a lot about what we can expect from consumer spending, which was

void by this cash for clunkers thing. We've been saying for a while, don't believe everything you see on every single stock in this rally. We're not back to normal yet, and this is just another indication that I think we were right about that. James? Can I just point out that according to my sources, out of those 263,000

jobs lost, 53,000 were actually government jobs. So obviously, probably no loss of productivity there. And also, it just makes the private sector job loss not too bad. Not too bad, actually. Sources close to James Early?

Sources close to James. Are your sources the same sources as the Magic 8-Ball? Maybe. Now, the Dow had its best quarter since 1998. We always hear the old song about the market being a leading indicator. It can always lead down and then lead that, too. Well, is that it? It can always lead back down, and people say, see, I told you.

I think it is a surprise in just absolute terms, but not on a relative basis. During the rally, the upswing of the market since March, riskier stocks have led the way. There's been a flight to risk, and Dow-caliber companies have fallen back. So I'm not surprised that they're maybe resurging as people pay closer attention to the economy. And it is the case. Even if you are somewhat skeptical about the recovery, and I think we all are somewhat skeptical about that, you can always find bargains on a relative basis anyway. The kinds of companies that are in the Dow, to me, look attractive in the aggregate.

Yeah. It's going to be slower money, but a little bit later to the party. Yeah. And don't forget, we had a giant drop, one of the biggest drops in history. When you come back from that, even if you don't come back all the way, that looks like a big increase. If you pick the very bottom and only look forward, things look great. Ken Lewis, the CEO of Bank of America, is stepping down at the end of the year. He took over in April 2001. And right now, the stock trades below where it was back then. James, You're our banking guy. What do you think about the tenure of Ken Lewis?

Well, Ken Lewis has basically been the Pac-Man of American banking, just buying up, gobbling up everything he could. And sort of like Alexander the Great, his domain ended when there were really no more worlds left to conquer. When there were no more of those power buttons to eat and turn everybody into an edible source. I mean, Bank of America has 12.2% of our nation's deposits. Officially, they're not supposed to have more than 10%. And it's sad, but he actually went against the grain throughout much of his acquisition career. But these last two, countrywide, and obviously, especially Merrill Lynch, just did him in.

It was a 40-year career, and he actually did a lot for the bank. He gets all the heat now, but he really built Bank of America into a big and pretty respectable bank. Well, he does get the heat, but he does get a lovely parting gift in the form of a $53 million pension. That might help. Yeah, which makes me feel comfortable saying, despite his 40-year career, good riddance. You know, we missed an opportunity in the midst of the crisis to have a major league house cleaning. So maybe it's going to happen organically. And a lot of these guys who should have been shown the door, they're going to be shown the door without the taint, as some would see it, of government intervention.

Ken Lewis is among the first of them. And from what we're seeing at other companies and other people who are major losers in this affair, there'll be another open door for some of them if they'd like to go to private equity, for instance. Well, who's going to take his place? Like, who should the next CEO be? And, I mean, as you said, James, we're talking about the biggest bank on the block. Are they going to hire someone from inside? Do they look for superstars? How they make this decision will tell us a lot.

Well, maybe not a lot. It'll tell us something about how Bank of America views the post-banking crisis climate of the superstar CEO. I like Charles Barkley. I like the former NBA player. Former California gubernatorial candidate Gary Coleman, actually, was in the mix. I'm kidding. But there are a lot of people internally and externally. One thing I should point out, though, that if you are a customer and are sick of fees,

not only might regulators take some of those fees away, but Ken Lewis was not a big believer in service, and he was a big believer in fee income, bounce check fees, maintenance fees, this, that, and the other. So it's possible that the new guy or lady who comes in will focus a little bit more on service and might take a little bit better care of the customer. I will short that idea right now. So he goes down in Bank of America history as the guy who upped your fees? Maybe, yeah.

You know what, every banking executive- Unless you're a shareholder. Every banking executive in the last decade or so goes down that way. Steve, you're a Bank of America shareholder, aren't you? I am. Any interest in the job? Not right now. No, I'm good.

That's good. We like you sticking around here. I'm up around 96% of my position, by the way. Oh, wow. As of today. We'll see how it goes at the end. You should come over on this guy. I was going to say, let's get him on the other side of the class.

All right. Starbucks rolled out its instant coffee via. Howard Schultz, the founder, president, chairman, CEO, had this to say. He said, quote, we are so confident that you won't be able to tell the difference between Starbucks via and our brewed coffee. We're inviting customers into our stores to see if they can tell the difference. Can I start on this? Oh, absolutely. First of all, I've never been a fan of Starbucks faux Italian, especially the way everything is mispronounced so horribly.

But via, in Italy, if somebody says via, it's sort of like, get the hell out of here. I really didn't get out of my face is what it means. Well, based on some of the reviews I've seen of the instant coffee, maybe that's the— One of our colleagues had a very dry remark about being really glad to have gotten the free sample because it reinforced how horrible it was, and now he didn't have to spend money to find that out. Exactly, yeah. Our colleague Don Kruger in Motley Fool Asset Management. I have a snarky remark, and I've never believed completely the Starbucks overseas story. I think there is some expansion possibility there.

But by a very strange quirk, I happen to know there are some countries like Chile where people are really into instant coffee for some reason. Maybe this is an avenue, and I'm actually half serious about this. Maybe this is an avenue in some of those places. And I'm not the Starbucks guru here. I only go in there when I have to use the bathroom. But is this not an effort to tap the corporate market? Maybe office coffee machines could use this instant coffee? Well, I mean, that's the thing.

Well, first of all, but you have to ask for a key at Starbucks. Not the one across the street. Oh, okay. All right. I think it's just an effort to, maybe it's sort of like getting advertising into people's cupboards. If you can get them to put this in there, even if it tastes bad, every time they open the cupboard, the brand name is sort of staring them in the face. That might be it. Although I think it might have more to do with the fact that the instant coffee market is a $21 billion market. Oh, it's possibly that.

Are you kidding me? $21 billion. Yeah, much of it is abroad. I think this was sort of their play to have a bigger presence in Europe, especially. I think of Europe as a continent of coffee snobs, but apparently a lot of people are drinking instant coffee. Yeah, and quite seriously, as far as Starbucks valuation goes, I sold my shares a while back because at around 19 and change, no matter how I modeled the growth going forward, it seemed pretty richly valued, so that was it. Okay, on that note, over the next five years, if you had to hold Starbucks or another mainstream consumer

that's really made a push into coffee, McDonald's. I'm guessing you would pick McDonald's. I think I might actually go with McDonald's. I haven't looked at the numbers recently, but I think I'm going to have to go with McDonald's. James? I side with Seth. Yeah, McDonald's.

Yeah, I think it's McDonald's too. Cheap beats expensive over the next five years. And if Starbucks tries to compete on price, they'll lose that battle too. Oracle CEO Larry Ellison making headlines at an event where he was ripping on the notion of cloud computing. Let me just read the quote here.

my objection to cloud computing is the fact that cloud computing is not only the future of computing it is the present and the entire past google's now cloud computing everybody's cloud computing all it is is a computer attached to a network what are you talking about that's a fantastic dramatic reading chris i think you have a whole other career you know if this was a video podcast i would have strapped on a finally looked satanic that would have been even better i love that comment. Every time a cranky old man points out that the new new thing is really an old thing, an angel gets its wings.

Plus, he thought of it first. To be fair to him, I think he was making fun more of the hype, right, than actually of... Yeah, which we've engaged in a little bit here. He is right in some ways. This is not actually something that is all that new. However, it is something that you're

going to see more of going forward. So long as we get better connections maybe from our iPhones over the networks and things, there are applications that just work better in a cloud or a network sort of situation. So we're going to see more of this, but it's not going to live up to the hype that we've seen. Yeah, and I think that is the new thing, the sort of coming ubiquity of being able to access word processors or spreadsheet applications via the clouds rather than off your local hard drive.

And I think that Microsoft is aware of this. Windows is a bit of a crockpot, and we've moved on to the George Foreman grill era. And I think the release candidate version of Windows 7 that I've been playing around with is very media-centric in terms of what it's capable of doing. The application piece is what it is, but I think that Microsoft understands that's going away. Larry Ellison has seemed to have struck a slightly lower profile over the last few years compared to his big, high-tech counterparts like Steve Jobs and Eric Schmidt at Google. where do you get just from the standpoint of a ceo and a leader where do you guys put ellison wow silence all i can think of are those giant boats of his and the personnel and everything let's just be honest i mean oracle and database and all that that enterprise software that they

do and the acquisitions they made it's just not as sexy as the consumer oriented stuff that some of these other Steve Jobs have done. Although somebody like Ellison may have made a bigger difference, actually, in people's day-to-day lives, you wouldn't really know it, or his company made the difference. When people think of, wow, what's the technology that affects me, they think of things like their

iPod. Not to get personal, but I've heard he's like a big cheapskate with charity compared to most other CEOs of similar wealth. When you've got boats that cost as much as his, you don't have a whole lot left over. Maybe he's saving it up for one big donation. Or a bigger yacht. More likely. All right, before we get to

stocks on our radar. I think it's worth noting that earlier today, the International Olympic Committee voted on the 2016 Summer Games. Rio de Janeiro was the big winner over Madrid in the final vote. Chicago, which London oddsmakers had as the prohibited favorite, Chicago voted out in the first round. Don't even get Shannon and I started on that. I want to hear from the Midwest guys first. The former Chicago residents? Yeah, I think it's a ploy. It's a vast Obama conspiracy. Basically, he's

being propped up by Europe dissing him. Or the international community dissing him, rather. So it's going to work to his advantage ultimately. So it's a political game for a box? Absolutely. Through and through. Well, there are winners and losers in this, as far as Chicago. The people in Chicago stand to lose out. Kind of bad.

Mobsters, maybe the politicians who support them. There's a lot of that in Chicago. Winners, the taxpayers in Chicago who are always footing the bill for this kind of junk. Yeah, can I just point out that the Olympics are not always a financial windfall. In 1970, this is according to Wikipedia, my go-to source, Montreal Mayor Jean Drapeau predicted, quote, the Olympics can no more have a deficit than a man can have a baby. Thirty years later, Montreal was still paying for the 1976 Olympics.

So it's not always a party. I don't know that it – I think there's always a party, but I think there's a big hangover. Congratulations, Illinois taxpayers. You won. All right. As we head into next week, Shannon, what is one stock that is on your radar? Well, it's a stock that's literally on my radar, not as a watch list stock, but Moody's is quite interesting right now. You know, Buffett, a big owner of Moody's, has been dialing down his exposure over the course of the year on business fundamentals. And yet on Tuesday, Moody's popped by 11 percent on one little scrap of good news after the drip, drip, drip of awful news. Interesting to watch. Are the business fundamentals as strong as the market seems to think based on Tuesday's action?

I don't think so, but we'll see. Sounds like the market's pretty moody. I'm paid to be here, folks. Not that much, though. James? I will give you one stock. Its name is California Water. The ticker is CWT. This is an income investor recommendation. It's about an $800 million market cap, so it's fairly small, about a 3% yield. And this is one of the few, or a relatively small number, of investor-owned water utilities in this country. This happens to serve mostly central to northern California.

I just spoke with the CFO yesterday. He's a great guy. I was very impressed. They were able to pass through a lot of costs to their repairs. They have decoupled from water usage, which is a complicated way of saying they don't require people using more and more and more and more water to make more money. So they can actually encourage their customers to conserve, which is useful in arid California. So it's a very stable stock. It's not going to the moon anytime soon, but I don't see it plummeting either.

Wow, can I steal that idea for Hidden Gems? Is that all right? That sounds really good. I wanted to joke about Chili's bringing back the Baby Back Ribs jingle. That's right, it's back. That infectious jingle. I know, as made famous by Fat Bastard. Yes, yes.

So I wanted to be able to make fun of them for that, although it probably makes some sense. Nostalgia is big, and that jingle was impossible to get out of your head. So then I thought, well, maybe I can make fun of the parent company, Brinker International. The ticker is EAT. And then as I look at the numbers and they're in front of me right now, it actually looks like a pretty decent value. This is a company that grew a lot by spending a lot on capital expenditures over the past

few years. But if you dial back, look at the free cash flow, assume that they're not going to blow all of that cash that was coming in on new locations, because let's be honest, we are over-restauranted in this country. it actually looks like a stock that is worth more like $20, $18, $22 a share, trading around $15 right now. You can probably do worse than that, and you get a 3% yield in the meantime. And the ticker symbol is EAT?

EAT. E-A-T. Not to be confused with yum? Not to be confused with yum, no. All right, Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. Good to be with you. That's it for 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 week.