Motley Fool Hidden Gems Investing - Motley Fool Money: 11.09.2012

Episode Date: November 9, 2012

What does President Obama's re-election mean for investors? Is McDonald's losing its mojo? Is Amazon's latest move a big threat to Netflix?  Our analysts tackle those questions and share some stocks on their radar. Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week from Motley Fool Inside Value, Joe Mager. From Motley Fool income investor, James Early, and for Million Dollar Portfolio, Ron Gross. Gentlemen, good to see you as always. Hey, good to see you, Chris. The video streaming industry just got more interesting, and a couple of internet stocks

just got cheaper. We will dig into all of that, plus, as always, give you a look at the stocks on our radar. But we begin with the big macro, and this week, in case you missed it, we had a presidential election. If you missed it. President Obama was re-elected on Tuesday night, and Ron Gross, I'll start with you. that was Tuesday night. Wednesday morning, the market fell about two and a half percent. What did you make of that? Well, I think the election served as a really nice distraction for everyone.

And when we woke up the next morning, everyone realized, including the media, that we actually have to focus once again on the fiscal cliff and the European mess, which are real problems, and they're coming quick. And the market just sold off. James? I disagree, actually. I think that the- I'm sorry. I'm sorry. You're not allowed to do so. Show's over. I don't disagree with those being thematic issues. I think, though, that it was actually a pretty close race coming into the election. There was a good chance perceived by Wall Street that Mitt Romney was going to win.

When that didn't happen, we saw a lot of the stocks selling off. I mean, the predictable happened, though, overall. I mean, hospitals rose, right, because Mitt Romney was going to back off on Dodd-Frank and Obamacare. So we saw banks fall. We saw hospitals rise, kind of as we expected. I think the two are tied, if I may. If Romney had come in, the fiscal cliff may have been solved in a different way than the bipartisan, hopefully, way it will be solved now. So, for example, maybe capital gains and dividend tax increases would not even be coming or not as severe as we're probably likely to have. So obviously, I think everything is kind of tied together.

Do you think the opposite happens if a deal is reached between the president and the Congress on the fiscal cliff, if they reach some kind of amicable agreement to solve that, do you think we're going to see an opposite effect? And basically, once the deal is announced, we're going to see stocks, any particular financial stocks, pop? I would say almost definitely. I mean, even if we kick the can down the road, I think we see a pop. But if we solve it in any kind of reasonable bipartisan way, perhaps like Simpson-Bowles, I think, has a bipartisan plan, I think we see a really strong market, at least for that day, certainly i agree with ron on that i think the despite all the political now i agree yeah despite

all the political advertising the actual effect that single president of either party can have the economy is less than than they would have you think uh joe maker one of the other big winners on tuesday night was math because uh our man nate silver who was just always losing in america math is always the underdog nate silver uh who works for the new york times and his 538 blog He was a guest on the Motley Fool Money Radio Show a couple of weeks back. Once again, he absolutely nailed it, calling all 50 states correctly, calling the overall vote correctly. And we also saw pundits lose, which, you know, if math is the winner, then pundits are definitely the loser. Well, there's nothing worse than a bunch of blowhards getting on the radio and just talking about –

Present company excluded. Yeah, but kidding aside, you know, one thing that we do here at The Fool, and I'm not promoting us, but – Sounds like you are. Go ahead. Yeah, let me ramp up, is that we do keep track records of everyone here at The Fool, and we have public-facing scorecards in a way that people are accountable for their actions in a very public-facing way where members can see that. And I think that it's great to see what Needsilver's done bring in some accountability to the process, and I think that it's awesome just how correct he's been. But it's also really highlighted that a lot of these guys get out on television and kind of make a living making these big predictions, and no one tracks it. No one keeps up with it.

Well, and predictions that are based sort of on gut feelings and that sort of thing. And he's a math guy, and he's American. And America ranks, like, what, like number 700 out of 300 countries in math proficiency, right? So it's kind of good to see this. Not to call them out, but I am going to call them out. Over at CNBC, Larry Kudlow and Jim Cramer, two people that I enjoy watching on television, but they felt compelled to make their own predictions. Larry Kudlow said Mitt Romney was going to win with 330 votes, not even close.

I was blown away by this. Jim Cramer said that President Obama would win with 440 electoral votes. That includes Quebec. Almost mathematically impossible. Puerto Rico and Quebec, yeah. All right, moving on to individual companies. An eventful week for Netflix. On Monday, the company announced it is adopting a shareholder rights plan to defend against a potential takeover by activist investor Carl Icahn.

On Tuesday, Amazon announced it is rolling out its Prime service on a monthly basis. Boom. So instead of paying $79 a year, you can pay $7.99 a month. You get two-day shipping and instant streaming of 25,000 movies and television shows. Joe Mager, what do you think is going on over at Netflix HQ these days? I would so much rather watch a live cam of Reed Hastings' office than anything that is on Netflix right now because it's just so fascinating. You know they have to be stressing out about the Amazon thing and the Icon thing. You know, with Icon, I don't really see much change happening here.

He suggested they sell the company. It's not as if Reed Hastings hasn't considered the possibility of selling to an Amazon or a Microsoft before. He dubbed it the poison pill, didn't he, recently? Yes. Which is not a good sign. That was the shareholder rights plan that basically said no one outside of the company can acquire 10% or more. It doesn't sound like it's a petty gesture or anything either. Since Icahn wasn't going to actually be the guy that did the acquisition, I think the pill is okay from his perspective.

He can take his position to 9%, 9-9, whatever it be. He can still advocate for change. He can try to take over the board. He can use the fact that they put a pill in place as an anti-shareholder-friendly action, and he can still make his argument even with the pill in place. Yeah, I mean, I think that in terms of the Prime thing, this is a bigger deal for Amazon than it is for Netflix, because it gives a good chance to really showcase the pricing of the two. You look at these, they're both $7.99 a month, but you get the inclusion of free shipping with Prime and Amazon.

It really shows the value prop there. And I think part of the problem with Prime previously, a lot of peas in that sentence, is that the price point was too high up front. It was $79 a year, and that's kind of a high bar for a lot of consumers. But when you just start out at $7.99, it's a great way for them to try it, see if they like it, and get kind of roped in. You've got to watch it on your computer, though. It's a big difference, computer versus TV. But to Joe's point about the two-day shipping, that's really good timing on Amazon's part as we lead into the holidays. And it may be the sort of thing where if people try it just for a couple of months, they like it so much and save enough money that, as we've talked about in the past, Ron, like with Costco, where, yes, there's a membership fee.

But if you go to Costco on a regular basis, you end up saving all of that and more. Absolutely. Yeah. Joe, I was curious of your thoughts. The further inroads Amazon makes into streaming, does it make it less likely that they would want to acquire Netflix? Yeah, I think so. They've put a lot of muscle and money behind acquiring content at this point, and I'd be surprised if they bought them. Shares of McDonald's hit a 52-week low on Thursday after monthly sales for October fell.

And, James, this is the first time in nearly a decade that monthly sales have fallen. Is this a big deal? Is it a small deal? Or is it no deal? Well, it's interesting, Chris. I mean, they were at a 52-week high not too long ago. So from one standpoint, it's like they can't catch a break. I mean, 10 years, and this is the first slip-up.

It's sort of like, well, why can't people remember all the times I didn't break one in public or something? I mean, it's one of those situations. I mean, from the other standpoint, though, it's like, I want to know why. I mean, why did this happen? Doritos taco. I don't partake of that. It's a hypothetical run. McDonald's has been kicking butt for the past several years, and they're really not doing anything different this, you know, right now.

But why are people pulling away? And their competitors are doing pretty well. So that's, I mean, maybe it's the McRib. I just don't know. But that's the unanswered question. Well, when you look at how Burger King and Wendy's, which are obviously not in the same league as McDonald's in terms of executing their business, but they're out there trying to refresh their brands and that sort of thing, It does – maybe this is unfair, but it does seem to shine a spotlight on McDonald's where they do have this now once-in-a-decade miss, and all of a sudden it's, well, wait a minute, what have you done for me lately?

Yeah, and they've been doing so well up until now, doing the same thing they're doing now. So are consumer preferences changing? It's just kind of weird. One month is not a trend, certainly. And they've done a really excellent job in revamping menus and price points and adding things in the McCafe. So let's give them a pass, I think, on this month. If we continue to see it, then maybe they're falling from grace a little bit and losing market share, but not yet. So you see this more as a blip and possibly a buying opportunity to buy shares cheaper than a long-term problem.

I think that's fair to say. Shares of Zillow down around 20% on Tuesday. The real estate website's third quarter earnings were, what word should we use, Ron? underwhelming? Is that an accurate word? You know, it's interesting to me. Results actually were not so bad. And I'll even go ahead and say they were actually pretty good, especially in their core business. It actually strengthened. They added 4,000 new subscribers in the second quarter. The guidance was weak, and the problem really existed in their traditional advertising business. You can advertise on the Zillow.com site. And they lost one major customer

there. Quite frankly, it was Foreclosure.com, and they lost it because Zillow is bringing foreclosure listings in-house. And so, Foreclosure.com said, well, we're not going to advertise here anymore. Forget you. Yeah. Right. So, that's explainable. There's some seasonality to that business as well, somewhat explainable. But the core business was strong. I still don't think the valuation makes sense here. And I'm certainly not surprised to see a stock with that kind of a lofty valuation get crushed at the slightest hint of a miss. And it's still at like 60 times EBITDA. But

the business is actually okay. Later in the week, we saw Trulio, which is another online real estate site, same thing, missed on earnings, shares were down. If you believe that this is the future of real estate and it's only going to grow in terms of online, and we've talked before about part of the thesis with Zillow is the system gets smarter and more accurate as it goes along, is this a buying opportunity, or would you rather see it knocked down a bit more? It is a recommendation here at The Fool. For me, as a value guy, it's still too pricey. It's too hard for me to predict the future. To make that stock look interesting to me,

it's got to grow at exceptional growth rates in the future. Too hard for me to say whether it will. All these companies have to figure out mobile, just like everyone does, and it's too difficult to predict. Coming up, you just can't wait to face the mobs of holiday shoppers on Black Friday. We've got great news. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in studio with Joe Mager, James Early, and Ron Gross. Shares of Whole Foods down around 5% on Thursday after fourth quarter earnings came in right in line with analysts' expectations. And James Early, they increased the dividend by 43%. They did, Chris, but this is like giving the kid a 200% raise in the allowance by giving him three pennies instead of one penny.

I mean, it's still a sub-1% yield. So I shouldn't get too excited. Yeah, I'm not doing a backflip yet. But, you know, on the earnings, I mean, fortunately, Whole Foods charges so much that even a Superstorm couldn't really ding its earnings that much, which was great. I mean, the lines were insane before. I don't stock up before storms. I just figure I'll forage if I have to. But, you know, the lines were actually huge.

But you can live for 30 days without food, too. Maybe you can. But overall, yeah, the earnings weren't dinged too much. EPS was up, I think, 43 percent, revenue up 24 percent. The dividend rate is great, but we're going to need a lot more before I get interested for income purposes. When you look at the valuation of the stock relative to other grocery stocks, Kroger, Safeway, that sort of thing, yes, they're all grocers, but it also seems like Whole Foods is playing a somewhat different game there. Do any of them interest you, or you're just not interested because of the overall business model?

I wish I knew more about the future of the industry. I think everybody does. What we're seeing is the middle market guys are coming under pressure, like the Safeways and the Kroger's, because the super values and the discounters are taking the low end, the Whole Foods and kind of the frou-frou retailers taking the high end. So what's going to happen to the Safeways? Should note that we eat lunch there every day. So we are frou-frou. Activision Blizzard's third quarter profits came in higher than expected. The video game maker also raised guidance.

But Ron, shares of Activision Blizzard seem stuck in this range of about $10 to about $13 And they've been there for about two and a half years Deja vu all over again Why does Wall Street hate this stock? Well, first of all, the numbers do look great And they've got great franchises Call of Duty, the next installment's coming out next week World of Warcraft is still doing well

Diablo 3 is doing well The numbers look really good So why is the stock not doing anything? A, there's a little bit of an overhang because 61% of the stock is owned by Vivendi. And what is going to happen with that stock is questionable. They wanted to sell it. They couldn't find a buyer. It creates a bit of an uncertainty within the stock.

And two, even though the gaming industry, the software gaming industry, is changing and becoming more of a recurring revenue model, it's got a long way to go until it really is that. And there's more of the kind of movie model here where they have to continually come up with the next big thing. And people don't necessarily like to hang their hat on that. There are obviously other electronic game makers out there, EA and Take-Two Interactive, etc. When you look at the franchises that they all have, does Activision Blizzard have sort of the deepest bench, for lack of a better term?

Do they have the most hits? Because it is a hit-driven business. I mean, to your point about it, it's like the movies. Yes, I understand the resistance for some investors to say, well, look, if they can't produce hits. But it seems like Activision Blizzard is at least producing more and bigger hits than the others. We own it in Million Dollar Portfolio because of these great franchises they have, because World of Warcraft produces this recurring revenue model along with some of their other games, and because the valuation is reasonable.

Now, as you said at the top, the valuation always seems to be reasonable, but we're patient, and one day the market will catch up. Are you a player yourself? I am not a gamer now. Yeah, I mean, I think the biggest problem with the stock, for all the things Ron mentioned, but we're all walking around with smartphones in our pockets now, And you can buy games for $0.99 that are fun, easy ways to pass the time. And I think that's just cutting into mindshare.

Yeah, but you can't really rip out someone's throat like you can in Call of Duty. It's not the same. It's clearly not the same. We did not get to this on last week's show. This news broke after we taped. But Berkshire Hathaway's third quarter profits were up 72%, $3.9 billion, Joe. Obviously, it's a business that generates a ton of cash. But the thing that seems to get played up in the media is just how much cash they have on the balance sheet.

And Warren Buffett continuing to say how he's got his elephant gun loaded. He's looking to make a big acquisition. What do you think of that? I mean, we were joking last week about the Oriental Trading acquisition that they made for … Game changer. Not really a game changer. But what do you think when you see that? Does that get you excited as an investor to see what is the next big acquisition Buffett's going to make?

Well, it does because I'm a nerd. But I think Berkshire's problem is very unique in the sense that they almost make too much cash. They have a hard time redeploying it in ways that they're going to earn high rates for a long time. And so I like that Buffett is taking his time, as always, before putting it to work. And he's looking for something that he can buy in one big swing. I think odds are good it'll be either a big stake in a large public company or a big private company that's off the radar of most investors. What do you think, Ron? Yeah, I think we should point out that the 72% increase in earnings, it really wasn't because the operating businesses were so strong. It was largely a result of the investment

and derivatives portfolio that did well. But the operating businesses are fine. But I think two times during the course of the last 12 years, Buffett passed on a $20 billion deal because they couldn't come to terms right at the end with the value. So he's going to get there. It's going to happen. And there's a wide range of industries he could go. He likes all different kinds of businesses, whether it's consumer businesses or manufacturing, domestic or international, almost impossible to predict. It's coming, though. His media comments seem to indicate more of a swashbuckling vibe lately. Do you have concerns that the elephant gun may be deployed in an imperfect manner?

We've seen some of the swashbuckling, easy for me to say, with little acquisitions like their Oriental Trading acquisition, which is odd to me. For the big boys, I think he's going to be very methodic, and he's going to know what he's getting into before he pulls the trigger. And finally, guys, Walmart has announced it has moved up the start of its annual Black Friday sales to 8 p.m. on Thursday night. Sears is reportedly doing the same thing. Thanksgiving Day, Joe Mager? Really? I support this. Tell me why. Let's just have a real moment, okay by 8 p.m on thanksgiving we're all ready for a little personal time i'm ready for a nap

just having to break away from the family for a little while and i think what better way to spend it than mad rushing into a Walmart with a thousand other people you don't know yeah thanksgiving is my cheap television thanksgiving is my single favorite day of the year so so the idea of going to stand in line so i can get a 32 inch flat screen at a cheaper price that that does but You can beat everybody else. That doesn't appeal to you, the competitiveness of it? Well, as we've said before, I've never actually been in a Walmart before, so the odds of me doing it on that day is very, very slim.

We will end there. Ron Gross, James Early, Joe Mager, guys, we'll see you a little bit later in the show. Coming up, a conversation with columnist Morgan Housel on what the 2012 election means for your investments. Stay right here. This is Motley Fool Money. I get money from you to tickle your whim or blow up your mind. Then I give money to you and you pay me back in kind.

Welcome back to Motley Fool Money. I'm Chris Hill. Now that the presidential election is over, what does it all mean for your investments? Here to talk about that and more is Motley Fool columnist Morgan Housel. Good to see you, my friend. Thanks for having me, Chris. You wrote a column this week. You wrote it, I think, on election night entitled Obama Wins What You Need to Know. We've talked before about the whole notion of making investment decisions based on political outcomes and, in general, not a great idea. Yeah, not really a great idea. I would challenge readers to think about a couple things here.

One, something I think is really true about all elections is that the economy is probably going to do what it's going to do regardless of who was president. If we don't have dictators in the United States, there's a process for our politics and our process for making laws. So I would challenge people prior to making changes to your portfolio based on the election, go back to 2008 and read news stories from after President Obama was elected in 2008 about what people said this is what's going to happen to the economy now that obama's president you'll find three big things one people said bank stocks are going to do very poorly now that obama is president because he's going to regulate the bank stocks they said big oil stocks will do very poorly

because he's going to regulate big oil they said green energy will do very well because green energy is going to be subsidized what's happened since then bank stocks have tripled big oil stocks have doubled and green energy stocks have by and large crashed some more than 90 or 100 so basically the exact opposite of what really smart people said was going to happen back then. And when you look back at the history of post-elections, you see that over and over and over again. We just really don't know what's going to happen to the economy or specific industries based on who was president. And yet, you look back just the last few days, right after the election, Wednesday, the market down 2.5%. We saw people, and presumably these are professional people

on Wall Street saying, no, we've got to sell. Time to lock up whatever gains you have because taxes are going to go up and time to just get out of stocks altogether. So as far as the market reaction over the last couple of days, I'd say a few things. One, you always have pretty deep moves after presidential elections, either way down or way up, just sort of based on the emotions of the day that really aren't indicative of what markets are going to do one year or two years or three years later. So if you're in this for a short-term game and you're a day trader, that might be important to you. If you're a long-term investor, that should really have no impact on you. The other thing about the market movements in the last

couple of days is that there's a lot of news coming out of Europe right now. Greece is doing much, much worse than people thought, and some comments from central bankers in Europe that really spooked people. So I would caution against tying the moves the last couple of days directly to the presidential election. How is that possible, by the way, that Greece is doing worse than people thought? You look at Greece over the last couple of years, didn't we all think it was doing badly? I mean, how much worse can it get? No, they've really reached a point where the Greek citizens have completely lost faith in their government. And so when their political leaders try to put forth policies that probably

would be beneficial to their economy, they have absolutely no trust from the general population. And when that happens, when there's no trust between the population and the government, it's really hard to get anything done whatsoever. And you just get strife, people bonking heads back and forth, and it really spirals out into an ugly situation. There are very few scenarios, I think, right now that you could say Greece will be materially better within the next couple of years. It's a very, very dire situation. I want to ask you one more question about the election, and that is this conventional wisdom that has gone on really for decades, for as long as I can remember, that the stock market does better under Republicans, just as a blanket rule that

the Republican Party. When the Republican Party is in power, the stock market does better. When you look back over the last 50, 70 years or whatever, what do the numbers tell us about that conventional wisdom? So when you look at the numbers, it's pretty clear that in the past hundred years that the market has done considerably better under Democrat presidents. And in real terms, when you adjust for inflation, effectively all of the return of the stock market in the past hundred years has come under Democrats. That's nothing about politics. That's just you look at the numbers, you look at who was president, that's what you get. Something I would caution about that, too, is that for statistics to really make sense, you need a lot of numbers to look at.

So if you were to make a firm statement about what the market does under presidents, you would need to look back over several hundred or several thousand different administrations. And we don't have that. We have 15 or 20 different presidents over modern history that we can look at. And that leaves a lot to random chance. It's also very hard to tell what presidents do best for the economy because so many policies from one administration trickle into the next. So it's hard to tell who's really responsible for what. Now that the election is over, the big issue that is front and center in American politics is the fiscal cliff. And I'm just wondering when you see these stories, what do you think are the implications for investors? Well, I think it's

very clear that if we go over the fiscal cliff and do nothing about it, the economy will go back into recession. That's pretty clear as day. I think both parties in Congress and the president don't want that to happen at all. And I think hopefully post-election these last couple of days, we've seen a little bit of parties working together and some comments that there will be concessions and there will be deals. So I think the odds are pretty good that we will avoid the fiscal cliff. The question is how we do that. I think what is likely is that over the next couple of weeks, we'll have a short-term deal, a short-term budget deal that will last maybe six months and sort of kick this can down the road again. We seem to be good at that. We're very

good at that. And that's really what the fiscal cliff is, is a culmination of more than a decade of kicking the can down the road. You had the Bush tax cuts from 2001, 2003 that were temporary because you couldn't make them permanent because there are certain budget restrictions that you can't make something that's going to create long-term deficits forever. And then you had the debt ceiling deal last summer, which was, hey, we need to figure this out. And then their deal was, okay, let's push it towards January 1st, 2013, which we're coming up on. So this fiscal cliff in itself is just the culmination of cans being kicked and kicked and kicked and kicked. One day we're going to have to eventually get there. The problem that politicians run into

is that everyone says, we want to fix the deficit, but we can't do it today because if we did it today, it would harm the economy. So we're going to create a package that's going to start X months or X years down the road, which makes sense. And that's a smart way to do it when the economy is really weak. The problem with it is that tomorrow eventually becomes today and you eventually get to that point. There's only so much that you can keep kicking. And so someday we're going to have to face the realities and it's not going to be fun when you do, but that's reality. You're listening to Motley Fool Money, talking with columnist Morgan Housel. On Friday, we saw the Consumer Sentiment Survey come out.

It is encouraging, I thought anyway, most positive outlook for the economy in more than five years. When you look at the economy in general in the United States, do you see encouraging signs? And if so, what are they? One thing that's really interesting about consumer confidence right now is you have consumer confidence at the highest level in five years. You have, on the other hand, you have CEO confidence that is low and dropping quickly. So there's a sort of bifurcation between consumers think everything's going great, CEOs are really worried. I think the big difference there is that CEOs are very worried about the fiscal cliff. And I think the general population is sort of oblivious to what's going on there, just because it really hasn't been in the news until the last couple of days because everything has been dominated by the election before that.

uh for as far as consumer confidence that's really driven by three factors one stock market performance two job availability and three is gas prices and all three of those have been doing considerably better this year they're not great by any means but they are doing considerably better so i think that's why you're seeing uh the rise in consumer confidence as far as uh how the economy is doing in general uh i think there are really three things that are boosting the economy that are probably fairly underappreciated right now. One is that the odds that we have a big rebound in housing construction are pretty good. The rate of housing construction right now is considerably below the rate of household formation, which is the exact opposite position that we were in

five years ago during the housing bubble. And so just to get back to a level where housing construction meets population growth, we will probably have to double the level of new home construction. That creates a tremendous amount of jobs. Sort of the rule of thumb is that every new home built creates between two and three new jobs. And we're at a position now where just to keep up with population growth, we'll probably need to build about 1 million new homes per year than we currently are. So that could be a huge boom to the economy. Two is the rise in domestic energy production. For about 30 years straight from the early 1980s through about 2008, the amount of oil that we're producing in the United States

fell basically every single year. Since 2008, it's up about 30%. And that's the first time in 30 years we've seen anything like that. The rise in natural gas production is even more impressive. And it's just exploded. We found so much natural gas

in the last couple of years that prices have plunged. And now drillers, people like Chesapeake Energy are struggling because prices have fallen so much. That in itself too creates a tremendous amount of jobs.

So between those two, I think there's a good potential that we could see a big pickup in jobs growth over the next couple of years. Anything can happen. That's not necessarily a prediction, just sort of an observation of what we're dealing with. And the third thing is that in the last couple of years, consumers have been really hampered down by excessive debt that was built up during the bubbles of the 2000s. That is by and large been whittled down to a level now where household debt as a percentage of their income is at the lowest level since 1993. So

households are in a much, much better position than they have been in years. And that's going to give them more flexibility to safely go out and buy a car, go out and buy a new house, send their kids to school without tacking on debt that they wouldn't be able to afford before. So I think you add those three things up. And I think the odds that the economy will be much stronger going forward than they have been in the last few years are very good. How do you invest your own money? Because we were talking earlier and you're basically an index fund guy. Yeah. So about 80% of the stocks that I own are in index funds, split out between S&P 500 index

funds, Vanguard total stock market index fund, some dividend funds that I have, mostly index funds. I also own about 15 individual stocks. It's a minority of my portfolio, but I still own them. Companies like Berkshire Hathaway, Altria, Philip Morris International, Johnson & Johnson, Exxon, big blue chip companies. I was going to say, those are the built-to-last companies. The built-to-last companies that I'm confident will be around 30 or 40 years from now. And I'm really just in it to own them and reinvest the dividends with the exception of Berkshire, obviously, and just own them for a long time. I'm really not concerned with quarterly earnings or what's happening here and there, short-term trends. These are companies that I really want

to own for the long term. And that's also why I own index funds. These are investments that I can own for 30 years and just sort of let compounding do its work without having to worry about what's going on quarter to quarter. About a year ago, you and I sat down. You had done a video series for fool.com, where you talked with just some amazing economic thinkers, people like Robert Schiller, Jeremy Siegel, and others, getting their thoughts on what the economy was going to be like in 2012. When you look back on those videos, what stands out to you? So there are really two things that I think about when I think back at that.

One, we interviewed Jeremy Siegel from Wharton, a famous finance professor. I know it was about a year ago. His view at the time was that he thought stocks would probably rise about 20% over the next year. When I wrote that last year, it was consistently mocked that people thought that was ridiculous, never going to happen. One year later, it's almost exactly what has happened. And the other thing I think about is when I interviewed all these famous economists one year ago, I asked them what worried them about the economy. Not a single person said the fiscal cliff, which one year later is what they would probably all say, what worries them now. And I think that's really telling that the biggest risk to the economy in the future are

really things that people don't know today. So right now, the biggest risk to the economy is the fiscal cliff. If we talk to these people one year from now, if we ask people today what their biggest fear about the economy would be one year from now, they would not say anything that will actually be the biggest fear one year from now. So there are a lot of unknowns in the economy. We really just don't know what's going to happen. We will wrap up there. You can read more from Morgan Housel on fool.com. Thanks for being here. Thanks for having me. Coming up, we'll give you an inside look at the stocks on our radar. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Joining me in studio once again, Joe Mager, James Early, and Ron Gross. Guys, before we get to the stocks that are on our radar, folks can always email us. Radioatfool.com is the way to get a hold of us. We got an email from Eric Wallace. He writes, I have to take issue with your comments that the show has dozens of listeners. I'm working hard to spread the word, so there must be dozens and dozens of listeners by now.

That's a good point. And thank you for spreading the word. We appreciate that. He goes on to write, my question is, you guys talk about free cash flow quite often. What are the ratios you like to use? Free cash flow to what? James Early? That's a great question, Eric.

Free cash flow is basically a substitute for net income. The original idea of net income is to capture cash flow, but it got so convoluted with accounting rules that we go back to the original cash. You don't need to use a ratio. You can just look at the raw growth in free cash flow just as an indicator of how well the company is doing. You could compare the ratio of free cash flow to dividends paid to get a more accurate version of the payout ratio. You can also compare free cash flow to incremental capital invested in a business to see how well the company is doing using the additional money they've put to work. Those are just some starting points. Ron?

I would say the typical things you can compare to is price to free cash flow, not enterprise value, price or market cap, which would give you a multiple that you can then use to compare it to other companies or to itself historically. Or reverse it and do free cash flow to price, which would give you what's called a free cash flow yield. It would express it in terms of a percentage, and the higher the yield, the more interesting it may be. Just a minor tidbit on that. If you're using a free cash flow to price to a market cap figure, make sure your free cash flow is post-interest expense. Absolutely. Start with net income, take out capital expenditures. This Week in Financial Ratios rolls on.

Email us, radio at fool.com. Let's get to the stocks that are on our radar, and we'll bring in our man Steve Brodo from the other side of the glass just to hit you with one question, just for the heck of it. Ron Gross, what do you got? I'm entering an industry I actually don't know much about, and this is a starting point for me. I'm looking at Express Scripts, ESRX, which fell 10% this week on poor earnings.

They're a pharmacy benefit manager, like a third-party administrator for prescription drugs. And the sell-off has gotten me interested. It's a very strong business. It still looks pricey to me based on some of the multiples like we were just talking about. Net of interest in CapEx. Of course. But not only will I get to learn a little bit more about this industry, but maybe I'll find an interesting stock. Steve Brodo, question about this stock?

Sure. Where is the money to be made here? It seems like the pharmacies with the insurance and government getting involved in paying prescription benefits, where's the money here? So the primary way they earn money is that the UnitedHealthcares of the world, the insurers, kind of outsource this part of the business to these pharmacy benefit managers, and they handle all the prescriptions. They make a ton of money from the mail order generic route, and that's primarily the revenue model. Obamacare is going to be interesting to see. If one of the consequences of Obamacare is that costs are going to come down, does that perhaps make PBMs less important? And that's one of the things we'll have to look at. James Early, your stock? Chris, I recently talked about Buckle. This is a Nebraska-based jeans company that makes

$100 jeans or sells $100 jeans. They make some of them. This is a company that pays about a 2.7% regular dividend, but also a big special dividend. And just recently, this is a $46 stock that announced they're going to pay a $4.50 special dividend come November. So it's almost a 10% yield on your investment on top of a 2% regular dividend yield. So it's moving along according to plan. It's a good company. The states it sells to have a lot of money from ethanol and from fracking. And I like this company. Watch your mouth. BKE. BKE is the ticker. Is the ticker. Steve? Are there ways to find out about these special dividends before they are announced and and I'm no longer eligible to buy the stock and collect on them.

Remember, the common mistake is to forget that the special dividend, after the special dividend, the stock price usually does decline by that amount. It's still nice to have the cash. I'd rather take part of my return in cash than in capital gains, all that's equal. But just look for a company like Buckle, which does it regularly. Look at balance sheets, companies with excess cash that they just can't invest. They have nothing to do with it. That would perhaps be a candidate.

Or they'll buy Kayak. I was going to say, I would think that the way you find out about that ahead of time is illegal. So, yes, Steve, possibly, but it may involve jail time. So a tradeoff. Good to know. Joe, your stock? Yeah, Mondelez is one of the two companies that were spun off from the old Kraft Foods. Terrible name, but great brands.

Oreo, Cadbury, Ritz. A lot of people don't realize this in America, but Cadbury is the biggest chocolatier in Asia. It's a huge growth market. But incredibly profitable business, nice little dividend. And the ticker symbol? MDLZ. MDLZ. Steve?

What is the benefit of Kraft spinning off a company like Mondelez and creating its own subdivision? What is the benefit to Kraft for that? So, good question. They had too many brands under one house, and I think there was a lack of focus by doing that. And I think this just kind of unlocked some of the value of particularly Cadbury, which is just a great brand. Steve, Mondelez, Buckle, Express Scripts, any of those three interest you? I think Express Scripts. Ron got me.

Wow. I haven't read one of these in a while. It was like a waste. Ron basically said he didn't even know anything about it. Radar, baby, radar. So Ron prefacing everything by saying, I'm just learning about this industry. That doesn't scare you at all. He also used the acronym PBM, which I have no idea what that means.

Pharmacy Benefit Manager. Peanut butter and jelly. All right. Ron Gross, James Early, Joe Mager. Guys, thanks for being here. Thank you. That is it for this edition of Motley Fool Money. Our engineer is Steve Broido.

Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We will see you next week.