Motley Fool Hidden Gems Investing - Motley Fool Money: 11.06.2009

Episode Date: November 6, 2009

The unemployment rate hits 10.2%.  Warren Buffett bets big on a railroad.  And the 500 largest non-financial companies in the US hold record amounts of cash.  We talk about what it means for investors, discuss the relative merits of Manhattan’s Pod Hotel, and share three stocks on our radar. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Money. I'm Chris Hill, and I'm joined in studio by Motley Fool Senior Analyst Seth Jason and James Ehrlich. Guys, good to see you. Happy Friday, Chris. And joining us from New York City, where he's up for a conference, our man Shannon Zimmerman. Shannon, how are you? I'm doing fine, Chris. Coming to you live from the Pod Hotel, where the rooms are one-third the size of normal hotel rooms and three times as expensive. Are you just towering over everyone at the Pod Hotel? I feel like Gulliver, yes, indeed. I want all of our listeners to know that times are tough.

And actually, Shannon, I'm not sure. You've been away a couple of days, but there is some contract renegotiations here. Actually, when you get back, you're going to be paid with knotted twine and abalone shells. So enjoy that Pod Hotel while you're there. Well, that's the currency at the Pod Hotel, so it'll work out perfectly. We've actually pulled up the Pod Hotel website. Oh, my God. It is women in tight shirts having pillow fights.

None of whom are in my room, honey. Wow. Sure, sure. Okay. Pass the savings on to you here at The Motley Fool. On this week's show, Warren Buffett makes a big bet, and Wall Street's latest scandal, and as always, three stocks on our radar, but we begin with the big macro. On Friday, the government shared the news that the unemployment rate has hit 10.2%, the first time it has gone over 10% since 1983. It gets even uglier when you consider, if you included people who have settled for part-time jobs or stopped looking for work,

the unemployment rate would be 17.5%. Guys, anyone up for a jobless recovery? Sounds like Spain or somewhere where this really happens. Yeah, it's always a jobless recovery, however. We've talked about that. They say it's an upturn, right? They're saying it's an upturn, but unemployment always lags. Yeah, at least it's a recovery.

Yeah, and this isn't really surprising to anyone who's been paying attention to our excellent prognostications here. But really, if you look at something like the retail sales report for October, you see the trailing edge of this. The cheap stores, your Costco, your BJ's, doing okay, maybe down slightly or nearly flat. But your specialty stores, an Abercrombie & Fitch or something like that, down 15%. Same-store sales, Needless Markup, Neiman Marcus Group, that is, down 6%. So department stores down. There are a few up, but really consumer confidence we saw is down.

this is going to continue. Well, another thing to add some color here, the key point is really to look busy if you're worried about your own job, because we've had job losses, but productivity per hour actually took the biggest year-over-year jump it has, I think, since the 40s when the statistics were first started recorded. So in other words, jobs are down, but employers are squeezing a lot more productivity out of the employees that are there, which is a positive sign, I think, overall for the economy. We're just running a tighter ship. The other piece of that, I think it was that YouTube outage that there was. A YouTube outage?

Shannon, what did you make of the news today? Well, I think that there's a psychological barrier that has been crossed. A lot of the economists have been saying that unemployment would peak around 10%. Well, now we've popped above 10%. The market, after a big rally yesterday, is up modestly today on that news, and I think that maybe folks think that we have cleared a hurdle. That, I think, remains to be seen at this conference. And Abby Joseph Cohen spoke, and I wasn't prepared to think of her as like a smart, thoughtful person,

but that's how she came across. And she's still a perma bull, but she's much more modest about that. And even in her presentation, she was anticipating single-digit stock market returns into 2010, certainly, and beyond that, perhaps. I'm sure she appreciates the incredibly faint praise. Yeah, that makes it a stock picker's market, as we call it, right? All right, exit question, guys. When investors are looking at all of the data here, is the glass half-empty or half-full for investors?

It's always half-full. It's always half-full if you are paying close attention to the individual companies you're investing in or if you are just blurring your eyes and indexing every month and enjoying life, playing with your baby, and just sticking with it. James? That's true. You know, that's true. I see it in the glass is half-full, but the question is, what's the size of the glass? I mean, how long will these good numbers last?

Are we going to get, you know, sort of draining out all the stimulus, and then what? I mean, we are coming off the back of a lot of money being pumped into the system. But, hey, I'm an optimist, too. Shannon? Yeah, well, and remember, too, that, you know, the stock market is a discounting machine. And so a lot of the recovery, which seems fairly fragile to me right now, has likely been priced in. We're still looking at a market that's up about 60% off its March lows. And that is in anticipation of what we're sort of experiencing in a very tepid way right now.

Shannon, your point sounds very intelligent, but I'm still looking at a picture of a bare midriff girl jumping up and down on her bed at the Pod Hotel. I think I passed her in the hall coming from the elevator. Is that Shannon on the webcam? Moving on. In what he called an all-in wager on the future of the U.S. economy, Warren Buffett is betting big on the future of railroads.

On Tuesday, Buffett agreed to buy 131-year-old Burlington Northern Santa Fe in a cash and stock deal that has Berkshire spending around $26 billion for the 77% of the railroad that it doesn't already own. As part of the deal, Buffett is splitting Berkshire's Class B shares 50 to 1 to pay Burlington Northern shareholders. Is this a good move? Well, it's the only move they can make, I think, to get out of the partials, although there may have been another way around that. Remember, a B share, and I own one of those, is $3,500 and change these days somewhere in that region. The thing that's interesting to me, I think it's a bad move for the shareholder meeting

or it's a crazy move because there were people who bought, you know, scraped their money together to buy a B share just so they could get a ticket to that shareholder meeting. Now anybody with $60 is going to be able to do it. It's going to be chaos there. And for perspective, the B shares were the poor man's A shares. Yeah, and the poor man, the A shares are in the $100,000 range. But to get to the railroad buy, this is one of the few businesses out there I think that's sort of big enough and on the block for Buffett to purchase. And it is kind of a macroeconomic bet.

I'm not sure that the price was all that great. And I'm actually mad at him because we have a railroad at Hidden Gems, Genesee, Wyoming, which always looked a little pricey to us. We were thinking about it. And then this happened, and every railroad popped. And so everybody now thinks, oh, all these railroads are going to go. That's not true. But this has been kind of a game changer. And I think that the sort of paroxysms we're getting about what this means are overthinking it.

Buffett is looking for a place to put $30 billion. This is a good long-term bet on the economy, and the price was okay. Shannon, was there any talk of this at the conference you were at, and what was your take on the deal? The Buffett deal did not come up at the conference. And actually, I agree with Seth in terms of valuation. I think you look at the multiples, and it's somewhat surprising that this was attractive to Warren Buffett. But, you know, he's a fundamental investor, and so he is a smart guy. Following him has been a smart move over the course of many years.

So I have to trust that there is a valuation fundamental case baked in. But I think that because that's not apparent, there's another dynamic that we should probably mention. You know, Buffett is sort of cultivating his own narrative. Nobody knows when he's going to retire. It's going to happen at some point. How does he want to go out? This is a big, bold play. You know, there's something about a train, and it's an all-in wager on the American economy.

He's a master thespian on some level, and I think this is reflective of that. And I think the arguments that this is a bet on long-term increases in oil prices are also fairly on the mark because railroads are hit by fuel costs like everybody else, but not to the same extent. I question a little bit of the economic. I mean, it's a very widespread argument, but real traffic is down, I think, 13% year over year. Burlington Northern, prior to this acquisition announcement, had underperformed the S&P 500 year to date. If you really just wanted to bet on the U.S. economy, I think there are a lot more direct ways to do it. I think he just partly also just thought this was a good buy.

Nothing wrong with that, but it's just a little bit different motive, too. Typically at The Motley Fool, when it comes to the topic of stock splits, we say, well, it doesn't matter because you're cutting the pizza into eight pieces, not four. But does it matter in this case? Is there more of a benefit? There'll be a little more action, but I don't think it really changes anything. Yeah, I mean, it would only change somebody who, in terms of an individual investor, who just couldn't afford one B share. And there are some people out there possibly,

but as Seth said, there are probably net drains on the conference. I think that's right. I mean, there are ways of buying fractional shares of Berkshire if you go through certain brokerage platforms. But I think that a lot of people, rightly or wrongly, look at that and think, oh, I can't pay that much for a single share of stock. But Berkshire is such a story stock, now that it's going to be, what, around $60 a pop, might gravitate toward it. A lot of companies are sitting on their wallets, according to the Wall Street Journal. Companies are holding more cash and a greater percentage of their assets in cash than at any time in the past 40 years.

The 500 largest non-financial U.S. companies are holding nearly 10% of their assets in cash and short-term investments. That's up from 7.9% a year ago. That seems like a pretty big leap, guys, in terms of just the two percentage points over a year. What is the takeaway for investors there? It's pretty interesting. First of all, obviously, these businesses don't expect big deflation anytime soon. Second thing, it's sort of like, I guess, a taut bowstring. I mean, there's a lot of potential energy with this cash, and these businesses will want to spend it, or preferably, and I said this as a dividend investor, maybe funnel it back to shareholders.

Interesting point, and that can obviously boost stock prices. I think there's certainly a parallel, too, with individual and institutional investors sitting on cash as well. I will make one philosophical point on this point, and that is simply that I think the average company is holding now somewhere around 10% of its assets in cash, whereas the average IT firm is holding about 27%, which is far more, and I think pretty unnecessary. It's been sort of the standard thing in IT just to hold a lot of cash, and it just doesn't make sense. Well, yeah, a lot of IT companies have done that because traditionally when there was a down cycle, they were burning like crazy, and we have a couple of those at Hidden Gems that you have to watch for that. But, you know, an IT or a tech company like Google or Apple, those—

They just don't want to admit that they've grown up. and they need to be returning that cash to shareholders. There's a good reason that some of these smaller companies are going to hoard cash, and that is that they really can't expect decent financing terms from banks anytime soon. Banks are getting a lot of cheap money as a result of government behavior, but they are tightening the screws on the people they give it to, which is to be expected at a time when loans are defaulting and everybody is afraid. But a lot of this reaction is just people saying,

whoa, we don't know when credit is going to loosen up. It's loosened up enough that the system isn't choked, but it's not loose enough that it makes borrowing as cheap as it used to be. In the meantime, they're going to sit on more cash. Yeah, that's exactly right, and that was a hot topic here, the fact that, you know, we don't have a liquidity. At the Pod Hotel? Saving a little cash? I was talking with three of the girls down in the lobby, as a matter of fact. They were sitting on a lot of cash as well. But that's true, I think.

We don't have a liquidity crisis anymore, but banks are not lending in the way that they need to to really stimulate the economy. Businesses are erring on the side of caution. And it's interesting to me, I actually didn't know that figure, 27% in cash on the IT side, that's sort of telling, but that's a sector that's reliant on business spending. It's telling about what they're seeing or what they're not seeing. James' earlier point about the institutional and fund money that is on the sidelines, high cash positions there as well, and that's a sign of caution. But also, as that money comes back into the market, we like to focus on fundamentals, and rightfully so.

But there are ancillary things that move markets, and when and if that cash comes back in, you can see another pop that really wasn't related to fundamentals, but just was a function of a technical, which is all this money that is on the sidelines. Yep, and I should say these are from a Wall Street Journal article I read today, just to give credit and assign blame. Some big Wall Street firms are taking heat after it was reported they got the hard-to-get swine flu vaccine. According to health officials, Citigroup received 1,200 doses, more than half of what it requested, and Goldman Sachs received 200 of the 5,400 doses it asked for. Guys, to put that into context, New York's Memorial Sloan Kettering Cancer Center only received 200 of the more than 27,000 doses it requested for its workers. Citigroup and Goldman Sachs say the vaccines will only go to those in high-risk groups. But props to Morgan Stanley, who went a step farther. They turned over their entire supply to local hospitals.

Props to Morgan Stanley for not putting their hand into the lawnmower. This is insane. I have every reason to believe that these banks will try, I guess, to get most of this to the people who deserve it. But what really burns me up is why are these guys so important that they can't go to the clinic with everybody else and wait in line with everybody else? My wife with our baby had to wait in line for six hours for one of these because the clinics down here only get 250 doses a day. They're turning away pregnant women, small children every day. Except investment bankers. Yeah, but not investment bankers at Goldman Sachs who are obviously too important to wait in line.

But to be fair, you don't know how many small children work at Goldman Sachs. They might have a lot of small kids working there. There are a lot of small egos at Goldman Sachs. I think the fundamental spirit was simply to get these vaccines out to different businesses that had a lot of people, and investment banks are among them. But the question is, why did they get so many even before the hospitals did, too? And the answer is because they are connected through ties of moolah. It's just crazy.

I mean, at this point, you would think that their spider sense would be tingling. oh, this is a bad move PR-wise, but apparently it didn't, and it's just a crazy story to me. I've got the pitchforks, the tar, and the feathers, Shannon. I'm going to come by the Pod Hotel tomorrow. Well, they won't be there. Monday, we'll hit Goldman Sachs. The Pod Hotel owes us some advertising money, I think. I think so, although I guess it's true that there's no such thing as bad advertising

because we've dropped the name about 50 times, but always in sort of a slightly negative context. All right, exit question. Certainly the last couple of years on Wall Street, we've seen some pretty extraordinary stuff related to executive compensation, firms employing high-risk strategies. So let's just go around the horn real quick here. If you could develop a vaccine to cure something on Wall Street, it doesn't have to be medicinal, just something that is ailing Wall Street, what would you be looking to cure? it would it would quite simply to to be to make these guys less you know that's that's straight into the point james uh maybe male pattern baldness because that could have ramifications it's something i'm dealing with myself now as well um no i really

don't oh yeah i think certainly there's a lot of hubris and there's a lot of of of just plain all over spending and entitlement. The anti-hubris vaccine, I like it. Shannon? Whatever defect is responsible for this impulse to create securities out of things that shouldn't be securitized, or at least not in this Frankenstein monster kind of way, a structured investment vehicle kind of way, that doesn't work. And to the extent that we go back to that business as usual, I think that we just set ourselves back up for what we experienced over the last two years. So if I could vaccinate him for that, it would be that and then also rabies. Okay, so you're going twofer.

Steve, do you want to jump in here? Sure. If I had to vaccinate against anything, it would be Wall Street's desire to stay in incredibly large hotel rooms. I wish I knew of a place they could stay instead. I know. The place we went to advertise. Yeah, I knew of one once. Small rooms.

It's to my tongue. All right, as we head into the next week, give me one stock that is on your radar. Shannon, we will head up to the Pod Hotel in New York City and start with you. Well, I want to make a broad point. So basically, a few months back, I think James and I both were making a fairly equity-like case for fixed income, high yield in particular for me. Now is a good time, if you have an equity-like reason for getting into that asset class, now is a good time to rethink that because there may be an equity-like reason for getting out.

You know, at one point, yields were just at historic levels, and the spreads between high-yield bonds and investment-grade stuff was just gargantuan. That isn't the case so much anymore. And so there is always the long-term case for having exposure to fixed income. But if it was on valuation grounds that you got into that asset class, take a look at it now because there's not nearly as compelling a valuation case. James? Chris, I saw Ford's numbers the other day. And at first I actually thought it was some kind of computer error that their sales were up 3% in October.

But hey, you've got to give credit where credit is due. And this is past the Cash for Clunkers party. This is the hangover, and they're actually doing pretty well, legitimately, not just all financing money, too. I mean, this is something that I'm frankly impressed by. I'm not impressed enough to run out and buy shares yet, but I am watching. Seth? I have to revisit the low-end apparel retailers, the Aeropostal. I've talked about them a few times in the past weeks and months.

And when this retail report came out, Aeropostal had posted 3% comps gain, I believe it was. It's in front of me here. Yeah, let's just call it 3%. That's what the story says. And they got clobbered because that wasn't quite up to Wall Street's standards. I still think that the retail report shows people are moving down market. But as always, you need to be careful of the valuations in these places. And if a stock is priced 4%, 5%, 6%, 7%, 8% growth and it comes through with 3%,

there's going to be some downsides. So be careful when you're looking at these stocks. But do, I think for now, still continue to look at the down market retailers. they are the ones where people are shopping. Okay. And James and Seth, before we finish up, any last thoughts on the Pod Hotel that you want to share? Are there any more photos on the website?

We've just seen that. I'm going to have to go, guys. I've got to go meet some friends down in the lobby. Wow. Pillow fights. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. Good to be with you.

Chris. Wow. 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.