Motley Fool Hidden Gems Investing - Motley Fool Money: 10.30.2009

Episode Date: October 30, 2009

The economy grows more than expected in the third quarter.  Edmunds.com kicks the tires on the Cash for Clunkers program. Amazon.com, Target, and Wal-mart begin rationing deeply discounted books. And McDonald’s says goodbye to Iceland. In this installment of Motley Fool Money, we give our take on the week’s business news, debate the relative merits of Chunky candy, 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 Hilton. I'm joined by Motley Fool Senior Analysts Seth Jason, James Early, and Shannon Zimmerman. Guys, happy Friday. Happy Halloween. Happy Halloween, indeed. On today's show, the book-selling war is heating up, Warren Buffett wins a beauty contest,

and people in Iceland are now going to have to go a hell of a lot farther to find a Big Mac. Can you say Big Mac? Absolutely. It's a podcast. All that plus, as always, we'll share three stock ideas, but we begin with the big macro. GDP grew at an annual rate of 3.5% last quarter, the first positive quarterly growth in a year. Durable goods and residential real estate helped fuel the growth. Shannon, you've seen the numbers. What does it mean for investors?

Well, you know, Chris, I like to compare the economic reports to Weekend at Bernie's 2. Was that film perhaps better than expected? Sure. Was it still lousy? No doubt. Jobless claims, horrific. Spending and income, both down. The Federal Reserve pulling the plug on the Treasury purchase program, which is going to cause mortgage rates to float up. That's all better than expected, perhaps.

Still bad news. I have to disagree with Shannon. About Weekend at Bernie's? And here's why. That's not the thing from Weekend at Bernie's, which is why this is a great metaphor. It's because of the propping up a dead thing that went on. Sure, sure, sure. Durable goods, orders, housing.

Wait a minute. That's all government money flowing in to prop this up. The real test of the economy is going to be what happens when all of this government largesse runs out. And we've got savings still up. We've got incomes down. We have got spending down and consumer confidence down. Those things all go together. Unemployment is going to continue to rise for a while. It's going to be a while before anybody feels like the economy has turned the corner. James? I have to totally agree. I mean, we may be out of the recession, technically speaking, but don't pee on my leg and tell me it's raining. I mean, if I were a company and I were to deliver growth, like we've had GDP growth because of cash for clunkers, because of this home buyer credit, because of extremely low interest rates, forensic accountants and Wall Street analysts would be pouncing all over me as a company saying, these are low quality earnings, dirty earnings, you know, you can do better.

And granted, you know, we were like a hospital patient who needed life support, and life support is useful, but the real test is going to be what the economy looks like when all the stimulus is gone, and that may actually be pretty soon. You know, far be it for me to sing in the rain, but there is one little bit of good news that I think that we should focus on. Earlier on during the downturn, we focused on the way that inventory reductions could eventually have a dramatic impact on the way back up. How long that impact will last is in question, of course, but I think that we're beginning to see some of that as stores and businesses start to replenish the supplies. That's going to provide some kind of organic stimulus. Again, how long that will last is anyone's guess. Yeah, and you want to be careful if you see revenues at your favorite manufacturer shoot up a little bit more than you'd expect because after that inventory is replenished, If those rates come down to sort of in and out usage balance, then it's not going to be nearly as heady as the early growth might indicate.

The White House is upset at Edmunds.com for its analysis on the Cash for Clunkers program. Edmunds says the taxpayer cost for every incremental vehicle sold was $24,000. Edmunds says it's not disputing the number of vehicles sold, but the key question is how many of these sales would have occurred anyway. Anyway, Seth, do you think the White House has a legitimate beef here? No. I actually think they're a little – it's kind of a Nixonian sort of poor us going on there lashing out at the AP for jobs numbers, these job save numbers, these jobs created numbers. And actually, this is something that I've been looking at more from the housing side. analysts have said that every incremental extra house sold because of all of the incentives there

cost $80,000. And of course, if we do this new bill that's going through, which will expand this program to people of higher incomes, we may actually be looking at the same amount of money thrown at fewer homes, yet it may be $100,000, $125,000 per extra home sold coming up. This is not the greatest use. It's not really good public policy. But if you're trying to get elected, this is great policy because everybody loves free money as long as somebody else is paying. Well, first off, I think Motley Fool money needs to get into some kind of spat with the White House because clearly they'll respond. Good point.

But the thing is we really don't know yet who's right. I mean, I tend to side with Edmunds whose argument basically is we just suck demand up from the future into the present. Now, that may seem like a total neutral wash, but it's not necessarily in that there could be psychological benefits. there could be sort of a kickstart benefit, but if there's not, and if car sales just fall flat for the next several quarters and we're back to the way things were before, if not worse, then clearly Edmunds is really right. And early indications from the spending numbers are that that was the case.

Warren Buffett has been named the best investor in the all-important Bloomberg Terminal Subscribers Poll. PIMCO's Bill Gross finished second, followed by George Soros and Norell Rabbini. Now, for our Motley Fool Conversations podcast this week, I talked with Alice Schroeder, the author of The Snowball, the number one New York Times bestselling biography of Warren Buffett. And I asked her what the biggest misconception about Warren Buffett is. On the business side, I think the biggest misconception about him is that he's a, quote, buy and hold forever investor.

And, you know, he's never said that. But people take little snippets of slices of things that he said and they sort of turn them into mantras or slogans. it doesn't really work, because Warren himself is quite opportunistic, and he does trade, and he does adapt. And so, you know, anybody who thought that you could sort of buy four or five big cap growth stocks at a fair price, and then you could just sit back and just go to sleep, I mean, that's not worked out very well, and he would be the first to say so. Well, that is the trope, and we're guilty here at The Motley Fool. One of our conference rooms has a quotation for Warren Buffett. His name for Warren Buffett.

And it says our favorite holding period is forever. I think that you need to separate the aspiration from the reality. It's good to try and hold a fine growing company for a long, long period of time. That is that keeps you from trading in and out and it can help save you from yourself. But the idea that you can not pay any attention at all is indeed is indeed a bad one. And, you know, sometimes the market is willing to pay you too much for your goods. it's all right to go ahead and sell. Yeah, especially in basically a flat market.

When everything's rising, obviously, it makes sense to hold. From 1982 to 2006, 2007, that was probably a great idea. But if it's a flat market, you've got to watch the valuations a little bit more. But, Chris, I have a question for you really quick. I noticed Alice started her quote with the biggest business misconception about Warren Buffett. Was there a personal one also? There was a personal one. And, you know, to hear the entire interview with Alice Schroeder, you should go to MotleyFoolConversations.com.

Oh, wow. Had to get in a shameless plug for it. It is actually a very compelling interview, in part because of the personal side. So much of what she wrote about that was truly revealing and newsworthy was Warren Buffett, the person. But as with that snippet, she's sort of upending a lot of the received wisdom about Buffett, some of which he has cultivated himself, right? There's this very carefully cultivated narrative that he has sort of nurtured along the way, and she's sort of debunking a lot of that.

And one of the things that did come out in the interview is he's not really a tech guy. He doesn't use email, so there's pretty much no chance he's listening to Motley Fool, unfortunately. Apparently, he doesn't check his voicemail either. All right. McDonald's is leaving Iceland after the collapse of the krona, the Icelandic currency. Costs have doubled in the last year, and the restaurants would have to raise their prices by 20% to remain open. That works out to $6.36 per Big Mac. That's bad times in Iceland.

Well, first of all, I've got to put this in perspective, though, Chris. Iceland has about 300,000 people total, and frankly, we have more fans at certain NASCAR events than 300,000 people. They are closing all three McDonald's there for perspective. Now, that may be good for Icelandic health. It's probably not good for tourism, given what I've heard about Icelandic food. But overall, the McDonald's story itself is almost a non-event in Iceland. Iceland, if anybody out there needs a really interesting read on the sort of complex yet also simple problem that happened in Iceland, you should check Vanity Fair April 2009 for a Michael Lewis article.

And it's called Wall Street and the Tundra. And he explains how Iceland, well, according to one quote, turned into a giant hedge fund. But what Iceland did is it grew its banking system at this incredible rate. At one point, everybody in Iceland was borrowing. Banks in Iceland were taking deposits from all over Europe. When the currency went nuts, the entire country was upside down. In the meantime, Icelanders had leveraged up their debts 850% of GDP. It was absolutely insane.

It's all explained in a very amusing fashion, as you'd expect from Lewis in this article. So take a look at that. And again, it's not surprising that McDonald's would want to get out of there because if you've only got three stores and you can't offer people what is for McDonald's, sort of the value menu, just get out. Yeah, it just reminds me, Robin Williams once said that cocaine addiction is God's way of telling you you have too much money.

If McDonald's is leaving your country, that's God's way of telling you you don't have nearly enough. So these guys, they have some woes. If they could only figure out a way to securitize Bjork, they'd be set. She's worth a million in prizes. Now, let's talk about the geopolitical implications here. According to Thomas Friedman,

no two countries that both had McDonald's had fought a war against each other since each got its McDonald's. So now that they have no more McDonald's- It's on, baby. I was going to say, should we just invade? Should we just take over and turn Iceland into our own personal NASCAR playground? I think I want the Freakonomics people to examine that so-called correlation.

All right. First, we had an online book price war between Walmart, Amazon, and Target. Now those companies are limiting the number of copies of bargain books that customers can buy. The aim is to stop other booksellers from buying cheap copies and reselling them. Walmart has limited online customers to two copies of certain bargain books. Amazon has a three-copy limit. Target has a five-copy limit. So if you're looking to make a quick turnaround buck on books, it looks like Target is your best bet here.

You can add them all up, too. Yeah, exactly. Is this going to pay off for any of them? I mean, is this really that big an issue for them? There's something that's going on. The same thing that went on in the music industry and is still in some ways continuing and what is starting to happen in the world of film as well as happening now in books with the advent of e-books and online retailers. For me, I like books. I like finance.

I like the way in which this kind of frames books as a certain currency. I think the currency should float. Let it go for what it will. All right. If we had to take this to a Ray Bradbury level and we get into book rationing, you get one book and that's it. What book are you picking? Yeah, Kurt Vonnegut, Breakfast of Champions. Really?

Yes. Wow, okay. That was quick. That was quicker than expected. Seth? One book? You get one book. That's a tough question.

It's a desert island question. One of the hardest questions I've been asked in years, actually. I can't answer that. So no model full books. I'm going to have to go with maybe Boccaccio, the Decameron. All right. James? I'm actually, I read a lot.

I actually read the Bible every day. I read a lot of philosophical kind of stuff and math stuff. new kind of book, I mean, aside from the Sarah Palin. We cannot get away from it. I really can't, no. What do you read multiple times? That's why I went with Boccaccio. I really don't read anything multiple times.

I really don't. I just move on. Steve, anything you want to jump in on here? I mean, one book. It'd probably be some sort of software manual. I know that's lame, but I actually do really enjoy reading them. So you're imagining you're on a desert island equipped with, like, you know. Ideally, if that was an option.

Computers and. After Effects 7, but no computer. Understood. All right. We should move on then. Guys, it's Halloween, so you can go trick or treat if you want. Give me one stock that is on your radar. Well, you know, with the public option, a piece of health care legislation back in the mix

and apparently going to be in both the House and the Senate bills, now is a very interesting time to think about what's going to happen. And all these institutional money managers, fund managers, they tend to stick pretty close to the index's sector weights. And so money that is pulled out of insurers might go somewhere else. Just think about that. You know, where is that going to go? We talked on this podcast a few weeks back about Inventive Health, which is a very interesting company for lots of reasons against this backdrop, looking to control costs. And lots of folks are going to be interested in that if and when the public option passes.

I like J&J right now. Broadly diversified, cheap, good dividend payer, just a solid stock to hold. It might be the recipient of a lot of fun money if they do pull out of insurers. James? Yep, fun money sounds good to me. J&J is actually a recommendation of my income investor newsletter service. But there's been some scary news this week around oil companies with Exxon's profit down 68%, Shell's 73%, BP 50%. Same old thing, basically, across the board.

This sounds bad on paper, but a lot of it is simply because oil prices have come down from $100, $150 a year ago to $70, $80 most recently. Or actually, for the past quarter, it was actually lower prices that were driving these earnings. So if you are a long-term bull in oil, as I actually am, now could be an interesting time to buy. I actually like the companies with deep water experience like Petrobras, a Brazilian company. PBR is the ticker there, and Statoil. Love PBR. Yeah, the future of oil is not easy to extract light crude. It's deep sludge way, way under the ocean.

And companies that have expertise in pulling it out are going to do well. Seth? Well, maybe I should just go with Transocean, which is the expert at finding that deep water oil. What's that ticker? RIG? RIG is the ticker. Actually, I'm going to go back to the consumer discretionaries just because we had a lot of reports the last few days. And one that we hold over at Hidden Gems Volcom, which is surf and skate shorts and apparel. Which you're actually wearing today.

Yeah. If I were wearing it, it wouldn't be a good investment. They had a surprisingly good announcement yesterday on their Q3 earnings. They surprised everybody. They guided ahead for the next quarter a little bit lower than most people were expecting. I'm not quite sure what the whole story is there. But more importantly, they're sort of seeing the end, they say, of the real sort of the desert. They're coming out of the desert and the stock was getting hit last time I looked today.

And I think it's a good time to take a look at the consumer discretionary stocks who maybe are getting these short term smacks and take a look at what actually happened in Q3. Take a look at what they think is going to happen going forward, because a while ago we were saying some of these are priced for recovery that is too optimistic. We don't believe it. There are some out there that are right now priced for recovery that may be too pessimistic. So take a look. Final Halloween question, since I know we all will be trick-or-treating this weekend. Absolutely. Favorite candy when you're trick-or-treating?

Kurt Vonnegut, Breakfast of Champions. No, no, no. That was the book. Wait, oh, oh. Favorite candy? I don't know. Hershey's with almonds. I like that.

Really? No, no, no. A Chunky. I like Chunky. See, I always thought Chunky was just kind of a weak idea for candy, because it's just It's chocolate, but it's like, yeah, we'll just make it thicker. But it's differently shaped. Wow, so you're easily impressed.

James? Peppermint patty. I'm going to go with peppermint patty. It's a nice, clean, refreshing taste. Nice. A low-fat candy as well. If I want to keep the bridge work intact, then it's going to have to be some kind of a chocolate with almonds.

But if you're not worried and you don't mind pulling out fillings or anything, there's just nothing better than the Milk Duds. Ooh, Milk Duds. Steve? How much time do we have? Because I can go for all of them. Sandy, who sits very near to us, It just gave me a big thing of Pez.

She collects Pez dispensers, so she handed me off about, I don't know, 12, 15 little Pez guys. So that's going to be a very nice weekend for me. And do you have enough to share with everyone in the class today? I don't want to get crazy. I can maybe. Do you have an interesting dispenser? Do you have the Richard Nixon Pez head? She probably does.

Apparently, Sandy Rothman, who sits very near to us, collects them, and she's got several hundreds. Oh, that's very well made. Big ticket item. With Pez in a software book, your weekend couldn't get any better. You and the missus, you are going to live it up big. Now, Chris, what about you? Pixie sticks? No, no.

Junior mints. Love the little box of junior mints. That was really the only time I ever saw them was at Halloween, so had to go that way. They still make those? I haven't seen them in a while. They're good. Absolutely. Come by my desk.

You can get them at really old theaters. Exactly. All right. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. You're welcome, 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. We'll see you next time.