Motley Fool Hidden Gems Investing - Motley Fool Money: 10.16.2009

Episode Date: October 16, 2009

Google reports record profits.  Bank of America reports a big loss.  Wal-mart throws the book at Amazon.com.   And Pepsi tries to pick up some new customers.   In this installment of Motley Fool Money, we give our take on the week’s business news and share three stocks on our radar. 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 and I'm joined by Motley Fool Senior Analyst Seth Jason and James Early. Guys, happy Friday. Hey, hey. No Shannon. No Shannon today. Shannon Zimmerman, our man, is up in New York at a Duke Street conference. Duke Street is the service. Duke Street's not in New York. That's here in Alexandria. That's the service that he runs. Before we begin, James, you run Income Investor. Seth, you run our Hidden Gems service. Any events coming up? Maybe like in Gaithersburg or Fairfax? It would be in Gaithersburg if it comes up. I think that's a great idea.

Actually, I did put a poll on our boards the other day asking if people wanted to meet up at Buffalo Wild Wings in College Park in the next month or so. Nice. Let me know. I'll show up there. All right. Good winks. All right. On today's show, we will talk Google's gain, Nokia's loss, big bank earnings, and the new Pepsi challenge. But we begin with Dow 10,000. That's right, the Dow crossed 10,000 this week, and it's now up more than 50% from its March lows. But if you're not feeling richer, you're probably not alone.

The rally has been fueled by institutions, not individual investors. That's according to a story in the Washington Post this week. Investors in mutual funds pulled more than $205 billion out of stock funds between September 2008 and March 2009, and only $56 billion has been returned to stock funds between April and August of this year. A lot of numbers there, but... Absolutely the norm.

Absolutely what happens every time this goes on. Not a shock to you. No, and it's why some of us were on the air as this whole thing was going down earlier saying, listen, you don't know when it's going to turn. It really is terrible, but keep putting money in. Take your measured investment approach. I was ridiculed for saying that.

James was probably ridiculed for saying that, but it's the only sound approach. Because you don't know when things are going to go down. You don't know when they're going to come back up. The only thing you know is that usually they get better. And I'll point out two things. First is simply that a lot of the names that are rallied the most are not high-quality stocks that you necessarily want to hold for the long term. I think a lot of the biggest gains have been concentrated in a few names.

And second, with this Dow 10,000 stuff, Dow is a price-weighted index. In other words, a stock with a higher share price basically constitutes more in the index. And it's kind of bizarre. I'm looking at a column by John Authors in the Financial Times, and he mentions that ExxonMobil, which is six times bigger than 3M, actually has a lower index weight. And IBM has a 9% share in the index just based on its stock price. So it's really an archaic index to begin with that is not an ideal measure of sentiment, but it's just so common we keep using it. It's actually like I find it akin to thinking that you're richer because you've got a dollar bill in your pocket instead of four quarters. It's kind of nonsense.

So ignore it, everybody. It is hard to ignore, though. I mean, the big round number, I mean, just the media really attracted to the whole notion of hitting 10,000, the rally. Yeah, but the media was attracted to Balloon Boy, too. It is sad that we— Remember what we're talking about here. We're talking about an industry with the attention span of a gannet. Can I say that?

I was attracted to Balloon Boy, too. Come on. It is amazing. We're all watching Balloon Boy. Ten years ago, ten years ago, the Dow first broke $10,000, and now here it is again. So equities have not had a great decade. All right, let's move on. Google reported the largest quarterly profit in its 11-year history.

Shares have more than doubled from their low. And Google CEO Eric Schmidt says the company is open to making some acquisition. He better be. So, guys, they got $22 billion in the piggy bank. What do you think they should go out and buy? Well, I'm the dividend guy. So I think they should go out and pay some dividends. We saw this with Microsoft.

We saw this with Apple. These tech companies grow and eventually mature and reach a point where they really have stabilized, but they keep hoarding the cash just based on their tech mindset. They're just going to keep growing their way out of the problem or just keep growing and growing and growing. And nothing wrong with slowing growth. Things change as time to mature and start returning that money to the shareholders. Yeah, and let's hope they don't do it through buybacks, which is one of the things that some knuckleheaded analysts were asking about on the call.

These are the people, Google, who just repriced those options. And now analysts are saying, yeah, so go ahead and punch us in the face another time and buy back stock and artificially raise the share price. I mean, it's just incredible. I actually, to get back to the acquisition thing, I think Google is sort of stuck. I don't think there's anything Google can buy that can move the needle because they are in so many places and have such a dominant position in search that I think they're going to be in antitrust trouble if they try to get anything big enough to move the needle, to say again. So I think they can only buy little stuff.

And I really think Google is maturing. The top line growth this quarter was single digits. People aren't used to that. And that's fine, and they absolutely should start paying a dividend. I don't think they will. Well, and let's keep in mind, just last week we were talking about the story that Eric Schmidt admitted to his board of directors that he basically paid double for YouTube.

Oh, they claim now that it'll be profitable in the near future. But do we want more of the same? Yeah, do you want the guy who paid double for YouTube? Sign us up for some more of that, please. I think you'll get more of that. I think it'll just be in smaller amounts. Let's move on to financials. The Bank of America reported a big loss

because of declining consumer credit and weakness in its commercial banking business. Earlier in the week, J.P. Morgan reported a much better-than-expected $3.6 billion quarterly profit thanks to bond trading revenue. Goldman Sachs also reporting stronger than expected earnings. And Citigroup reported a loss but said it would have been profitable if not for the conversion of government-preferred shares to Comisoc.

James, big picture, what does it mean for investors? We've got really two things going on, sort of a rich bank, poor bank situation, with J.P. Morgan and Goldman on one side, and then Citigroup and Bank of America on the other side, headed by Vikram Pandit and Ken Lewis. And I think those guys probably wish they could float away in a tinfoil balloon right about now. Really, the issue is, though, investment banking versus commercial banking. And the retail commercial banking is not doing very well.

And that's really bad, not just for the big banks, but for a lot of small and regional banks out there. The trading and the – well, trading is a few things. One is simply transaction money. If I trade, you pay a certain commission. Second thing is inventory. And when the inventory in these banks' balance sheets floats up with the market, that's good for them. And then third, they also trade for their own accounts. And all three of those things did very, very well, as they should when the market goes up.

So basically, the banks that were exposed to that did well. The banks that didn't have that didn't do well. Yeah, and I think that the difference between what happens if you're trading and sort of scalping points on a rising market and what happens if you're providing consumer banking services, which is what is supposed to be going on now that all these investment banks are pretending to be consumer banks, So it really shows you how hard hit you are. If you're one of these people who actually works for a living, if you were trading for a living, good for you. You ruined the world economy and everything, but you can put your feet up because the last quarter was good.

But all of those credit card losses at Bank of America, they're almost as big as there was over a billion dollars. And I think it was $1.6 billion they lost in mortgages. I mean, it's huge. People are having a hard time paying their bills. The banks are going to suffer for that. And it's a real indication of the split between trading and between real life. And I don't know what's going to happen about it. Banks have gotten too big, too big to fail.

Larry Summers today actually said that we need a complete turnaround on this. He called on banks to think about doing something for their country, which made me snarf juice all over my keyboard because, of course, they're not going to do it. Somebody's going to have to step in. I think that too big to fail has to be broken up. Banks that are too big to fail have to be broken up. And I don't know when or if we're ever going to get enough guts in government to get it done. Well, yeah, to Seth's point, it's almost amazing the Bank of America just had a $1 billion net loss for the quarter,

given I think it was $9.6 billion in bad debt losses total. I did hear a rumor, though, that the loss would have been $2 billion had the PASAR not cracked down on Ken Lewis's bonus. But to bring that up, Ken Lewis is not receiving any salary this year. He actually has to pay back what he's made so far and doesn't get a bonus. Now, he still gets almost $70 million when he leaves the bank, but this puts him more in line with Vikram from Citigroup, who actually just gets a dollar. I believe it's a dollar for this year.

We're not worried about those guys, though, are we? We're not too worried about them filing for unemployment. It's really terrible in this country. You run a bank into the ground, and suddenly nobody's paying you. It's unbelievable. Nokia reported its first loss for the quarter since the company started quarterly reporting in 1996. It's been struggling against Apple and research in motion.

So guys, we've got Apple versus research in motion versus Nokia versus Google-powered phones. How does this whole area shake out for you? I think I'm on record here. I've said a couple of times that I think Apple is going to wrap up almost the entire smartphone market, or so much of it that others will just be marginalized, because having opened up the platform with that pretty powerful chip

and that pretty powerful operating system to all those applications, you're kind of nuts if you buy any other type of smartphone because you're really limiting the number of cool alternate functions that you can accomplish with that little thing. And Google is trying to combat that with Android, which they are trying to get some development going, but nobody's going to catch Apple in that space. And I think they're eventually going to run research in motion

into a marginal position. Nokia, I think, will be down there. Motorola's already there. I think it's Apple's game to lose. Walmart announced this week it would sell 10 new books for just $10 a piece on Walmart.com. Amazon responded by matching the price,

so Walmart dropped its prices to $9. The books include Stephen King's Under the Dome and Sarah Palin's Going Rogue. Guys, who's the big winner in all this? Is it Walmart? Is it Amazon? Is it... Sarah Palin.

Sarah Palin. Going rouge. I was thinking about this fight and I don't think Walmart wins this fight. It depends on what you define as the battlefield here. If we're just talking about 10 or a couple of dozen bestselling books, then I think this puts a crimp in Amazon. I don't know how much of Amazon's revenue and profit comes from a small number of bestselling books. That would be interesting to know. But one of the reasons people go to Amazon is because there's kind of a vetting process because there are a lot of reviews there and it is a website that is actually pretty good at determining what kind of merchandise you are interested in and walmart is not shall we say a place known for uh it's it's online literary following and how dare you say

how dare and walmart has never been particularly good about about suggesting what i might want to buy from them so if this is just about those 10 books maybe a small problem but there's no way Walmart is going to displace Amazon's entire business model by going cheap. But isn't that something, I mean, yes, Amazon clearly has the lead for now in those categories, but Walmart's got a lot of money and it's got a lot of customers. And maybe in two years, they could probably have 80 or 90% of that, I wonder. I don't know. I don't know that people who buy a lot of books are really thinking of switching to Walmart. Maybe I'm wrong on that, but my gut feeling is that Walmart is going to do better

selling stuff like, you know, kitchen cleaner and 100 pounds of spare ribs at a time than it is the latest Thomas Pynchon novel. Excellent question. Who's going to sell more books, Stephen King with Under the Dome or Governor Palin with Going Rogue? My bet is on Going Rogue. Or Going Rouge, as you said.

Yeah, I think it's going to be Going Rouge because there's just a lot of anger in this country and angry people like to read. You know what? There are also a lot of creepy people in this country and they're going to stand up. Freudian slip. They're going to stand up for my man, for my home state of Maine, Stephen King.

So I'm going to go with Stephen King on that one. Finally, Pepsi is taking heat for its iPhone application, speaking of apps, that gives men tips on how to seduce women. The Amp Up Before You Score campaign is promoting the Amp Energy drink, and here's how it works. Pepsi's iTunes app claims to help men pick up any one of 24 types of women, such as sorority girl, cougar, rebound girl, or my personal favorite, punk rock girl. Users can choose the type of women they have their eye on and then get coached on facts that might be useful. For example, to pick up an artsy type of woman, the app recommends the following pickup line. You know the Mona Lisa has no eyebrows. I wonder what else she shaves.

The app then takes the coaching a step further, encouraging users who score to post the details for their friends on Facebook and Twitter. Good Lord. I mean, does Pepsi win just by getting the attention here, or is this actually an image problem for Pepsi? And we wonder why America's losing to the rest of the world. This is where our energies are focused. I got a hard time being worked up about this. It's so obviously a joke. Anybody using one of these is going to deserve to get, you know, kicked in the stomach and knows it, okay?

So this is what they win because they got us talking about it. They got people arguing about it. From what I've seen, it wasn't all that offensive. Maybe they ought to just come out with an app that tells women how to pick up 24 different kinds of guys, although I guess the pickup line needs to only be for every single one of them. Hey, what's your name? Or just hey. Hi, my name is.

Worst pickup line you've heard or used? Wow. The only thing I ever tried was walking around with it like a golden retriever. That works pretty well. Really? In a bar? In a bar. All right.

As we head into the next week, give me one stock that is on your radar. James, we'll start with you. You know, I'm still tempted by this Walmart long-term thesis. I just think it's a solid company. I ordered something from them. I decided to start biking to the subway. So I figured, well, let me get this cheap bike that nobody's going to want to steal. So I'll buy it from Walmart.

And there were some complications with the ordering, but their customer service was so good on the internet, I was just blown away. And ironically, my bike got stolen like a week into riding. So I'm glad I didn't spend too much money. But I was actually impressed with their service. So I still like Walmart. All right. Seth?

We've been beating the drum in here trying to warn people about real estate, both commercial and residential, and how we don't think the problems are over there for companies exposed to or depending on that market. And a hidden gem company that isn't doing so well the past month, down 23% or so, is called American Reprographics. They are largely exposed to the commercial market. Pretty much they print, I guess you could just say they print blueprints for people. And there's not a lot of that business right now. They had to rework some of their covenants.

They had to lower their guidance, and the stock has suffered as a result. So I think people need to be very careful in that area. I would also advise them to be careful of another hidden gem, Stewart Information Services, which is a title insurance outfit, which had to announce an equity offering to raise some cash. I think that those are sort of indicators of what's to come and that the worst is not over. So be careful out there.

So you think these are bad companies without... No, no, no, not bad companies. Risky companies. I think they're risky companies. and I think American Reprographics is a pretty good company in a really bad space right now. Title insurers, having just bought a house, I got a problem with their business all around. Okay. Seth Jason, James Hurley. 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, make your own decisions, and stay away from balloons. and remember the conversation continues 24 7 at fool.com i'm chris hill we'll see you next time