Motley Fool Hidden Gems Investing - Motley Fool Money: 10.23.2009

Episode Date: October 23, 2009

Amazon.com and Netflix report big earnings.  Microsoft unveils Windows 7.  And the “Pay Czar” gets down to business.  In this installment of Motley Fool Money, we tackle those topics, talk about a new study on the relationship between housework and sex, and share three stock ideas.       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 in studio by Motley Fool senior analysts Seth Jason, James Early, and Shannon Zimmerman. Guys, happy Friday. Happy Friday to you, Chris. Is it happy? Oh, it's happy. I'm happy. Stocks are moving down late here.

Oh, just you wait. We'll get to that. Bargains galore. One of us is extremely happy. On this week's show, we've got earnings from Yahoo, Netflix, Microsoft, and Mickey D's. We've got a salary-slashing Paysar. And as always, we've got three stocks on our radar. But we begin with Amazon, reporting much better than expected earnings. The stock is up more than 20% today. Ended the quarter with 98 million active customers. And Amazon said the Kindle is the company's best-selling product, but didn't really provide any specifics around that. And I'm really happy because I'm an Amazon shareholder.

I was very surprised. I mean, that's really incredible. If you think about it, that means it's selling better than the iPod, not probably all iPods together, but any individual iPod. And you've got to figure any individual model iPod. No, that's slicing the balloon a little thin there. They must move a lot of those. Well, they've clearly rekindled desire among American consumers.

Ah, good. I like it. I like it. I mean, that's actually pretty incredible. And I don't know if we talked last week. I can't remember. I've had a lot of cold medicine. If we talked about the new Barnes & Noble reader recently. The Nook, which looked pretty interesting to me, but I wonder if Amazon isn't so far ahead right now, if this thing is really selling like that,

they can afford to just keep the prices low and essentially freeze the Nook out. I mean, they may have won the game already. Yeah, if they make it a commodity product, then who's going to play in that space? I think that James and I might be the last two humans not to own a Kindle. My wife has one coming in the mail.

Oh, I'll be the last human. In looking at the company and the crazy stock price pop today, Amazon has almost everything that I'd love to see in a company that I want to invest in. Seriously talented management, no debt or a little negligible debt, and growth prospects aplenty. But you look at that valuation, it's just crazy. They're 60 times current earnings, 20 times cash flow. 20 times free cash flow or so.

And you look at insider activity, they're not buying shares. They're holding what they have on the margins. They're net sellers. But at this valuation, even great companies can be lousy investments, and I think that Amazon is a lousy investment right now. I will say I like that international sales are about 47% of their total sales. That actually impressed me, but I am concerned long-term about Walmart's entry into this business. I think that could be something to watch for, especially if you're already concerned about the valuation. I would like to point out that I was concerned about Amazon's valuation when it was, I think, about $50 or $40 a share, or not so long ago.

How'd that work out for you? Yeah. Now that it's north of 110. Exit question. Back in the day, you mentioned Barnes & Noble. That's who Amazon was really competing with and gunning for, Barnes & Noble, Borders. Is that still their competition today, or are they aiming for something bigger? James is right.

They're the new Walmart. It works both ways. It's everybody. There's all kinds of products, yeah. Microsoft shares up today after reporting stronger than expected earnings. Sales were actually down in part because Microsoft is deferring revenue on its Windows 7's upgrades. And yes, Windows 7 launched on Thursday. How do we think Microsoft did?

Well, Microsoft results were just like Apple's, only worse. They were actually positive compared to what the market was expecting. But Apple really blew out the quarter. Yeah, we'll see what Windows 7 does. I think that's going to be the key. This is the weird horse race that people like to talk about all the time. Microsoft sells two things, software, or one thing, software. It's about three different pieces of software that it sells,

the OS, Office, and then some server stuff. I mean, those are really the big things. So to compare it to Apple, people love to do that because they love, because that is the competition they see in their living room with the computers, but it's not a very good comparison. And they do have the Zoom. Well, I was going to say, does it make sense at some point for Microsoft to just abandon things like the Zoom?

and really focus on its core competency? Well, people might have said that about the Xbox, and that would probably be a mistake. So, I mean, the Xbox, I didn't look at these numbers in detail to pull out the Xbox stuff. These numbers are, this is, let's be honest, Microsoft is not going to be a fast-growing company. It's already so huge, and it's got such a huge market share

that there's absolutely no way it can grow at 20%, 30%, 40% rates ever. So if you invest in Microsoft, you're there for cash flow, and you're probably hoping that that dividend continues to come in. So a dividend investor like James Early is probably very interested in Microsoft. Anyone purchase Windows 7 yet? You're the only user, I think. I'm a Mac guy. And it's just the release candidate version, but it's great.

In some ways, they seem like an old-school company whose great days of growth are behind them. But it really is a sleek, sort of lean-to-mean operating system to compete with Snow Leopard. And in terms of media sharing in your home, it's pretty sophisticated. Even Mossberg liked it. He said Apple was no longer better than, he said it was no longer worse than the Apple OS, which is incredible. I dropped my coffee. But there are problems. I mean, there are 17 different flavors of this operating system, and not all of the flavors have all of the cool functionality.

Is it 17? I thought they brought it down to three. It's 31, actually. Okay. Over the next five years, what do you like better as a stock, Microsoft or Apple? and, not to be morbid, keep in mind Steve Jobs' health over the next five years. Well, and it is such a Jobs-centric company, and I don't know. I mean, can Apple continue to innovate in the way that they do

and actually get traction around their innovations? Maybe. They've been pretty remarkable at that so far. A lot of what's going on for them is something similar to what's going on with Google. People want to be a part of that story, and so that gets ahead of the fundamentals. If that gets ahead of the fundamentals, then no, I think that Microsoft will out-earn them. James? Yeah, on the PC, not the PC, but the computer end of Apple, I actually see it more as not just them so much doing great now,

but sort of catching up from previous dumb decisions they made a long time ago, sort of earning their rightful market share. They're still not that large compared to Microsoft. I would say for the growth stock, certainly Apple, but as Seth points out, for a dividend stock, Microsoft could evolve into something pretty nice. Okay, way to stay on the fence there. If you're buying a stock for a stream of cash flow, you want Microsoft. If you're buying a stock hoping that somebody's going to buy it from you later for more money than Apple.

All right. A lot more earnings this week. Let me get your quick take on a few. McDonald's, better than expected earnings. U.S. operations delivered 6% earnings growth aided by its Angus burgers and McCafe espresso-based drinks. When you say Angus, it's not just the Angus burger. It's an Angus third-pound burger, Chris. Americans love a big burger.

I'm going to break a little news. They're working on a sandwich that includes an entire canned ham. In time for Thanksgiving. The average American male has four pounds, I think, of undigested red meat in his colon. No, no. Come on. That's not even in wiki. I bet that gets cut out.

I just wanted to say it. I just wanted to say it. Snopes.com, ladies and gentlemen. Third-pound burger. Yeah. This is an interesting thing to me. It wasn't – what McDonald's has done is sort of what Britney Spears did, if you think about it. Remember when Britney Spears was only a joke, and then people kind of started to like her in an ironic way,

and then people just started to like her? McDonald's coffee actually becoming a growth engine and somewhat respected. It used to be a joke. People only drank it if they had to or if they were very old and looking for a free cup. Now people stop there for the coffee. It's pretty amazing, actually. I actually love watered-down diner coffee. So the old school McDonald's, that was me.

Yahoo, better than expected earnings, but revenue still down. And yet, Yahoo raised its outlook for the rest of the year. Any thoughts? Anyone besides me miss the fact that CEO Carol Bartz was not on the conference call because she was sick? F-bomb was not on the call? I was following more closely the lap dance story, actually, Chris. If you just Google for Yahoo lap dance, and ironically, Google for Yahoo is search time of the times, I guess. Shouldn't you be using Bing?

You will see some interesting photos And we at Motley Fool Money should have been invited to this party Let me say But apparently they do this every year And oddly enough, I could almost see Carol Bartz endorsing This is a Taiwanese kind of shindig For the Yahoo folks over there They have this

These exotic dancers come And I guess this year they finally got in some sort of PR trouble for it Well, that's almost hard to believe that they got in trouble for that I mean, exotic dancers at a company event? We had lap dances in here this morning with breakfast. Where was that for that? Yeah, but Mac was doing them, so it was less fun.

All right, so let me try to yank this out of junior high school. So very poor year-over-year results, but up sequentially relative to the last quarter. What does that say? Maybe that says that the ad market is finally going to turn around. But in this space, only the strong survive. Everybody gets weak eventually. Google is the dominant player, 97% of their revenue coming from ad sales. That's going to have a corrosive effect over time.

I think that, in some ways, Yahoo is a canary in a coal mine. And Carol Bartz, people wondering, has she turned Yahoo around? Well, can you really say that? I had a strange thought. Maybe it's all those people who got fired and are no longer drawing salaries. Maybe they're the ones that should get credit for doing this. And let's just keep in mind that you cannot cost-cut your way to growth. Eventually, you run out of people.

Right. Final earnings story, Netflix, better than expected earnings and revenue. It added another 510,000 subscribers, and the stock was up big today. Yeah, so I was thinking about this sort of big-picture style. If you think of Netflix and their core product is you order a DVD that arrives in the mail, then that is dead. Physical storage is eventually going to be dead sooner rather than later, I suspect. But really, that's not their product. Their product is this experience that you have with them, a pretty nice web interface, very slick presentation, basically friction-free.

So who can compete with that? nobody's going to be able to come and do what they do in terms of physically mailing things back and forth, but you could find a rival that would reduce the friction even from there. Comcast, any of the cable companies, once they have the licensing agreements in place that would allow them to have the inventory

that Netflix does with the DVDs, that's a serious competitive threat to these guys. That's going to take forever because Hollywood is so slow about working these deals because they think they're going to be able to reap more profits from the traditional model that they have in place right now and I think that's pricing of the stock. It looks expensive but the longer those deals take to get struck,

the better it is for Netflix. And remember that Netflix is way ahead on intelligence and knowing what to suggest to people, which is what keeps them coming back. And the cable companies don't have that information, really probably aren't collecting it in any organized way. And that is the main thing in the experience. It's part of the experience at Amazon as well.

The software gets to know you and suggest things that you're likely to buy. So Netflix has really a huge lead here. And because they're streaming through the Xbox, That's how I watch almost about 85%, 90% of my Netflix viewing is now streaming online from their service through the Xbox to the big TV. We barely use the DVDs. They are already in the place that this entire industry is moving to, and they are the leader there. So I don't – expensive, I think they're the disruptor.

I think you buy them today. Let me just ask you a quick question, though. With that fancy algorithm, both you guys, is that really – I mean, yes, that's cool, but is that a reason to stay? Like, if a competitor were offering 20% cheaper prices, I mean, is it really that good, or is it just kind of like a nice bonus? I think that once you have a competitor that's competing with Netflix on price, it becomes such a thin margin business, unless you're the company that has the market share and the dominant experience with consumers. It's not going to be worth your while. I don't think that people are going to get into it on price.

Yeah, I don't know if anybody wants to start that war. Yeah. According to reports, Obama administration pay czar Ken Feinberg is cutting pay for executives at some of the bailed-out companies. Wall Street Journal reported that Feinberg rejected many of the pay packages for AIG's top employees, including those in the financial products unit. Now, I know this will come as a shock to you, but some on Wall Street have said that this will lead to a brain drain as the talent flees. I mean, are we scared? Are we afraid for Wall Street? I read something on the, I believe it was the Wall Street Journal that said, these guys are going to go to European companies.

First of all, no, they're not. Second of all, let them try. They'll make less there. They pay their executives much less there. They could just go to Goldman Sachs or someplace like that. I mean, Kenneth Feinberg specifically is just regulating the pay on companies that have taken direct government money. There's a separate package that the Fed might want to regulate pay on,

or just regulate pay to make sure it doesn't encourage undue risk-taking among the 28 largest financial institutions, but the Feinberg thing is just confined to actual government money recipients. And ironically, I think this is going to create a huge incentive for them to just repay the government money as fast as they can. That's what it'll do. Pay it back. Go ahead. We'll take it back. Well, the problem with that is that if they're not really as strong,

they're going to want to cut corners on how strong they are in order to get it back. Right. That is the big problem. It sort of speaks to the bigger picture here, the utter shamelessness of this. It's about time that something with teeth happened, And these teeth are mostly false because the amount of money that is involved is not that high. But I'm damn right. I mean, so these institutions owe the fact that they're still up and running to the U.S. taxpayer. And yet they're going to come out with pay packages and big compensation packages to include bonuses that are as egregious as this.

I mean, I don't know. It feels like populism, but it's populism that is actually mindful. Let me say one thing here, though, that I agree. You know, these guys were jerks and should be punished. But the problem is there's, quote, these guys, and then there are the companies, which are actually owned by the shareholders. So because of free agency, basically, people can just go anywhere they want to, to Goldman Sachs, to J.P. Morgan, et cetera. There's probably very little guarantee that the actual people paying the price, in fact, the people who probably cause the most damage will be the first ones to leave, I bet. So the people stuck holding the bag are going to be the shareholders with these companies staffed by lower-paid, less effective employees.

That's my concern. I don't feel sorry for shareholders who are holding shares in companies that depend on government largesse to remain viable, which is most of these big banks right now. And this just speaks to the fact that too big to fail has got to go. I think all three of us agree on that. And let's just really hope that somebody out there has the guts to pull these things apart. Yeah, I think that that moment has passed, at least for right now, that what was the quotation coming out of the White House when it broke? You never want to let a good crisis go to waste. I think they wasted this one.

Well, and you mentioned that this largely has false teeth. Would the teeth be stronger if Ken Feinberg had some goons? Like, don't you think, if you're the pay czar, don't you want a couple of hired goons on the payroll so you can, you know, like, start getting your, you know? Yeah, I think so. Tim Geithner doesn't look like he could, well. Exactly.

I'll fight him on the playground. Yeah, the three wusses sitting, well, four wusses at this table could take Geithner. Sales of existing U.S. homes increased by a record 9.4% in September as people took advantage of a tax credit for first-time buyers before it expires. Congress is considering whether to extend the credit. Should they? As a proud American homeowner, I certainly hope they do. Reinflate that bubble.

There's nothing in it for you. There's zilch in it for you. If I want to sell my home and somebody's going to have an additional incentive to come and buy it, that means I can dial my price up a little bit higher. You're not going anywhere. This is actually pretty interesting good news. The question is how much of it is artificial demand because of these incentives. In three words, cash for clunkers.

In September, first-time buyers were 42% of home purchases. That's pretty high. Yeah. But can I just turn to the National Association of Realtors again? Oh. Rip on Lawrence Yoon and the National Association of Realtors. Gather around the fireplace, kids. They are shameless.

There is nothing that is bad enough for Lawrence Yoon. There is just torn apart by dogs, you know, a circle in hell of Dante's, you know, knee-deep in duty, headfirst, sorry. These things are all too good for Mr. Lawrence Yoon. These are the kinds of things that he is saying, which are the kinds of things that got people in trouble during the housing bubble. Without a firm foundation for middle-class wealth recovery, people, your house is a place to live. It is not an investment. It is not a retirement account. It is a place to live.

If you pay it off judiciously, it can operate a little bit like a savings account that's deferred. It is not a way to make money. And until the National Association of Realtors stops with this line of BS, I think every news organization in the country should stop quoting them. You know, the National Association of Realtors does a lot of radio advertising in the D.C. area. Excellent. I'm guessing they're not going to be doing any advertising on our podcast. Let's get Lawrence Yoon in here.

All right. finally, according to a new study published by the Journal of Family Issues, the more housework you do, the more often you are likely to have sex with your spouse. Wives in the study spent an average of 41.8 hours a week on housework. Husbands spent 23.4 hours. So guys, let's just go around the table real quick here. How much time are you spending on housework? And what's your best move in terms of housework? What's your strong suit? And I'll start with you, Shannon. Well, I'm instantly going to dial it up. I do a fair amount of housework.

Give us a percentage. How many hours? Three percent. Three percent. Excellent. And what's your specialty? Is it cooking? Is it cleaning?

Is it bathrooms? Windows? I like to supervise. Wow. You got nothing. You got no game, man. James? I'm pretty good at supervising, too, but I like laundry.

That's my kind of special thing. Nice. I don't know why. You got a tip for anyone listening who wants to get their whites whiter and their colors brighter? I don't, but if you turn your clothes inside out, the colors don't fade. Like crisscross? As much. Wow.

Seth? No, this explains why James keeps offering to come over to my house and mop the floors. But how does it explain that? I don't know. I used to do more housework. My wife is staying home with the baby these days, and so she gets stuck with more of that now. So I would say I probably was doing my half before, depending on what counts as housework, and I'm sure it's down to 25% or less these days.

And your strong suit? I like to fix the bicycles, change the oil. I'm lawn, garbage, stuff like that, some vacuuming. Here's my tip on ironing. When you're ironing. Don't do it, exactly. No, no, no. Brooks Brothers iron-free shirts.

No, no. Here's the tip. Do it while you're watching TV. Do it while you're watching football, something like that. It breaks up the action of both. But you look fairly well wrinkled. You're either not washing... I didn't iron this.

I'm just saying other shirts. I don't have to look good for you. This is audio. Steve, what do you got? I'm doing most of the housework. And if Tara's listening out there, I would love for that to change. No way. Really?

You're doing most? Like 80%? I do most of the housework. Well, there may be some disagreeing. Right now, she's yelling at her iPod, which cannot hear us. But yeah, I'm doing a lot of... I'm doing the litter boxes. I'm doing the bathrooms.

Yeah. I know a guy wearing headphones who is getting cut off. All right. We'll ask you, too. Strongsuit, what's your best move? I'm really good with the bathroom. I will knock it out, man. Wow.

80%? Maybe 60, 70. I'm hedging that. By that, you mean like 30. And by that, he means 10. All right, guys. As we head into the next week, Halloween week, give me one stock that's on your radar.

It can be scary if you want it to be. Well, no, I'm going to go back to one from before. It's ETF, TIP is the ticker symbol, iShares, Treasury Inflation Protected Securities. I think that now we're still in vaguely deflationary times. Inflation is coming probably maybe later rather than sooner, but eventually it's going to come. Now is a good time to buy into a depressed asset class. James? I'm going to go with CRH.

This is an Irish building materials company. It's definitely a scary stock in that it's exposed to macroeconomic factors. But, you know, it's paid its dues in a lot of respects. It's actually very well run, has strong returns. It'll certainly catch any winds of sort of a macroeconomic rebound. In case anyone's wondering, the housing bubble in Ireland really sort of surpassed what we had here. Maybe as bad as Spain, somewhere in that region. It's pretty bad, yeah.

Yeah, pretty bad. I'm putting the hairy eyeball on solar. And it could be any solar stock just about. But SunTech Power I'm looking at right now, wow, I've got these graphs on my computer screen, free cash flow, all pointing down into the negatives. When you've got companies like that, everybody's scrambling to sell the same thing, valued at a couple of billion dollars, burning money. Buyer beware. All right. That'll do it. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. You're welcome. Thanks, Chris.

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, and we'll see you next time. Steve, coming strong on Tara. It's true.