Motley Fool Hidden Gems Investing - Motley Fool Money: 12.11.2009

Episode Date: December 11, 2009

What do better-than-expected retail numbers mean for investors? Why is Yahoo! bullish on Tiger Woods? Has Goldman Sachs seen the light on executive compensation? And what will AOL do with its newfound independence? In this installment of Motley Fool Money, we tackle those stores 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 Ellen. I'm joined by Motley Fool Senior Analyst Seth Jason, James Early, and Shannon Zimmerman. Guys, happy Friday. Happy Friday to you. Happy Friday, Chris. On this week's show, AOL regains its independence, Goldman just says no, and Yahoo scores with Tiger Woods. Then again, at this point, who hasn't? But we begin with Friday's better-than-expected retail numbers. The Commerce Department reported Retail sales increased 1.3% in November, largest increase since August.

Shannon, what was your takeaway for investors? Takeaway is this. As with last week's unemployment tick down, this is, at least at a glance, good news. It certainly warrants a lot of scrutiny just in terms of the methodology that they use to collect this information. But at a glance, I think it's good news. I don't think the news is good enough, though. We had an event from one of the services that I run here, And one of our colleagues, David Meyer, did a fantastic presentation about the case for deflation and inflation.

And the scariest slide was the level of reserves that banks have on reserve at the Fed right now. They're not lending. And as the credit market goes, so goes consumer spending. The uptick is nice. I don't think it's sustainable. James? Yeah, I would say that my faith in humanity has been restored, but it hasn't. I'd prefer if we saved more and didn't spend, but we're really not spending as much as we think we are.

The gas was way up in terms of gain. So was cars. I think that the actual retail gain was only 0.6% if you take out gas in cars. No, you can't take out gas. Clothing was actually down. What happens if you take out bacon? That's a good question. Clothing was actually down.

I did work with a guy once. His name is not Shannon. This guy would say, oh, my gosh, oh, my gosh, I'm so stressed out. I just got to get to the mall. And that guy is not spending yet, which is actually a good sign, and I like that. Well, you might like that, but our companies, our stocks don't like that. There's a lot of interesting news here. I think one thing to note is that ex-gasoline and motor vehicles, as James said,

not nearly as robust as you'd expect. There was some also good news, and you can't see it by making the finger quotes, about consumer sentiment. However, when you look at the absolute level, it's still well into recession territory. And if you draw a line backwards in time on the graph, You see that it's at heights where we had in, you know, the 82 recession, 90 recession. So it's still not all that great. The final point I want to make about this retail sales report is that there has been some stories lately out there among financial bloggers and other analysts that I respect.

And they've basically said this, hey, sales tax receipts don't seem to be matching what we're seeing in these retail sales reports. What's the deal? What is the deal? Well, it's hard to say because the methodology of the retail sales report is to survey about 5,000 businesses and then extrapolate from that survey and say, here's what happened. But that doesn't take into account everybody. And so it could be that maybe smaller businesses, the very smallest businesses, are going bankrupt. They're disappearing. And those sales are moving to surviving businesses.

Maybe that survivorship bias is not properly reflected in the survey. Entirely possible. It's hard to say, but I think it's worth scratching your chin and saying, hmm, whenever there's that big a disconnect between sales tax receipts and supposed gains in retail sales. This sounds a bit like an X-Files episode. No, no, no, no, no. In terms of holiday sales as we come into the homestretch for the holidays, are there retailers that you think are in a really good position right now based on their sales? I'm looking at Amazon pretty closely right now. I have always thought this was, well, not always, but for the most part, an absurdly expensive stock.

It certainly looks that way to me now in terms of a valuation that prices it at 50 times current earnings. And it looked that way to us all like six months ago when it was cheap. And you have to discount for a cheapskate bias among those of us here on the podcast. But to me, it's a story stock. Not exactly like Google is a story stock or Apple is. That company, Google, gets into people's brains. They feel smarter for owning it. Apple gets into their libido.

They feel sexier for owning it. I think that Amazon is more of a finance geeky kind of play right now. And it's the rock-and-sock-and-robot game between Walmart and Amazon. And every time Amazon peels away a little bit of Walmart's market share, people like us get excited. But I can't get too excited because of the ridiculous valuation. Wow. It's hard to follow up on that. I think it is.

What I said about the sales tax discrepancy, this may be an example where stocks like this are going. And any stocks, actually, retail stocks, may stand to benefit because if you own a stock in a company, it's presumably a bigger company. And if they are taking market share, if they're taking more of the dollars that are out there, even if that total pool of dollars is less, that still might mean good things for the share price. That's right. Yahoo is getting a big boost in traffic thanks to Tiger Woods. CEO Carol Bartz said this week that when it comes to making money, the Tiger Woods saga is, quote, better than Michael Jackson dying. because in her words, quote, it's kind of hard to put an ad up next to a funeral. Guys, you know I continue to profess my love for Carol Bartz.

Your endless love. Has Yahoo found a business model here, Seth? I'm going to punt on that one. I'm just going to say that I love it. Any week where Carol Bartz opens her mouth is a great week in here because no matter what we say, it's going to pale in comparison. It's going to be less outrageous. The sad thing is I got nothing right now.

I got nothing naughty. Guys, take over. We should invite her on to the podcast every week until she comes. We should. She doesn't sound like she's in the PR business, but she has sort of a charm that way. A horrible truth about advertising kind of charm. What's interesting, Tiger Woods has lifetime earnings over a billion dollars, and over a billion dollars is about equal to the annual GDP of Bhutan or maybe Maldives.

So he's almost a small country on a yearly basis. And what I'm reading now from the Vancouver Sun, and I've heard similar reports from the Sun of England, and Tiger Woods might even quit golf. And this is obviously a bonanza, a bonanza for the news agencies because people like me with nothing better to do are reading about Tiger Woods. But what does this mean for Nike? What does this mean for Nike and some of these other sponsors if these alleged photos surface?

Don't you think that a lot of companies have to be doing disaster planning? Nike, which paid him $35 million last year, Gillette, Gatorade, Even the PGA and the television networks, Tiger Woods means a whole lot to these companies when it comes to ratings. And if he's not in golf, that means a whole lot less money in golf. Oh, he's not leaving golf. If he leaves golf, I will eat a golf ball on the show that week. Well, to bring it a little closer to home, too, we need to walk back. I think we had unanimous endorsement of Tiger Woods and his brand last week.

Oh, this sexes it up. This is great. It's a new trajectory for him. Not so much. I think we should reduce our exposure to Tiger Woods. I'm going back into Elliot Spitzer. I'm holding out for the nude photos, but I think I will reduce it. I wonder if I can have Tiger Woods video game on the cheap this winter season.

I'm buying more out-of-the-money calls. The dirtier this gets, the more famous Tiger gets. When it finally blows over, he's more famous. Goldman Sachs said this week its 30 top executives will not receive cash bonuses this year. The executives instead will receive stock that cannot be sold for five years. Goldman's been criticized for using $10 billion in government aid to boost its aggressive trading business. James, not every day that you hear about Wall Street not handing out bonuses,

this seems like a step in the right direction. That's pretty interesting, Chris. And, you know, this is sort of a southern playbook. And here in Washington, D.C., we're probably the southernmost portion of the Northeast. We're not really southerners, but southerners will know what I'm talking about. If you've ever heard the term, go get me a switch, which means you're in trouble and you have to get something that I can spank you with, basically. My heart just palpitated.

And there's psychology, because if you get too big of a switch, then you get whacked harder. If you get too little of a switch, you'll be sent back, or maybe your parent will get a switch of his own. And so it's kind of a tough situation. Goldman is motivated by greed and fear. Very little nobility, I will say, despite doing God's work. And if you notice the headlines today. That's a quote from your CEO, by the way. Which he rescinded, but he still made it.

The U.K. and now France, and now Germany is interested, too. UK and France are taxing executive bonuses in trading firms at 50%. That's crazy. Goldman, I think, is trying to get out ahead of the curve, saying, okay, okay, we already had a situation where our top 30 people were getting 30% of their bonuses in cash, just 30%, 70% in stock, which was delayed four years. We'll push it all to five years and make it all stock. So it's actually a very responsible thing to do for a corporation. is to stall executive pay until the actions that these people took are actually manifest to make sure it actually worked.

In other words, they can't do something really quick, then get out and pocket the money. It's a step in the right direction. A step in the right direction. Second thing is shareholders get a non-binding vote on pay. And, you know, non-binding, yeah, probably submitted via Star Trek communicator, so they don't actually get the vote in the first place. But same idea here, though. Congress is postulating some sort of say on pay legislation,

And Goldman says, well, wait a minute, let's get out ahead with our own plan that's very sort of softball and hope that people buy it because of first mover advantage. Yeah, you have to hand Goldman the small golf clap, but this is also a lot of PR and posturing. You still got hundreds and hundreds and hundreds of people making obscene amounts of money. And you can't really blame them for doing what they're doing. But the fact does remain that a lot of the money they're making is enabled by the taxpayers. All of you listening out there, all of us in the room, who lend them this money at ultra-low rates. I mean, if you and I could go around borrowing money at about 0%, we'd have no trouble turning it into profits. But is it the fault of Goldman, though?

Whose fault is it? No, well, I don't know. These guys are doing what they do. They just have an easier way of doing it. Because of the government. Yeah, and they are connected. And they're very well connected in government. What's this Timmy Geithner guy?

Who was that guy? Hank, Hank, Dr. Evil. Hank Goldman. Yeah, there are four or five Goldman guys in the White House. And if they can't get bonuses, they can get jobs with the Obama administration. I'm not sure if Goldman or Citi is better represented, but they could basically open a branch office. What if you're one of these other major firms? Do you follow suit?

So, yes, it's a step in the right direction, but it's a very small one. No, they don't because they're not getting enough heat. Really? Goldman is doing this because they are taking a lot more heat than most firms, and it's because they've been more successful than a lot of the other firms. Yeah, it's much better to delay a bonus than to have it taxed, and I think that's what they're trying to do. Apple is starting to think different about iTunes.

After buying music streaming service Lala, Apple is considering allowing iTunes users to buy music straight from the web. Currently, users have to download iTunes software. Shannon, is this a good move for Apple? They make a lot of money off of iTunes sales. I think this is the first chapter in what seems like a small story but could be a huge one. I think that Apple knows that the subscription models that Rhapsody and Napster have tried, that's the better user experience. And Zune.

And Zune, yes, of course, the mighty Zune. But the metaphor has been wrong all along. People don't like to feel that they're renting their music and it's going to evaporate if their account goes dry. But now that the sort of cloud computing is becoming the metaphor of choice, Apple knows that that's the better user experience. If it can get out in front of that and own it in a way that Rhapsody and Napster to this point have not been able to, they can reinvent the way people consume music again. This could be ultimately on a par with iPod. You mean recopy because there are people already doing this. Oh, no, absolutely, absolutely, but bringing it to the masses in a way that the – I love Rhapsody, but they've not been able to grow their audience in a while.

Indulge my ignorance for a second. The benefit here is the user does not have to download the iTunes program, so if you're traveling someplace or whatever and just don't have the capacity to download, you can still listen? That's right. I think ultimately this is an acknowledgment, and I think we would all agree, physical storage is becoming irrelevant. Apple knows that, and they must be laughing at how much money they have made getting people to pay a buck a song downloading it so they can have it on their hard drives. AOL is back to being just AOL. The divorce from Time Warner is final, and AOL now trades under its own ticker again. The company is worth $2.5 billion today, a very far cry from January of 2000, when AOL put together a $182 billion stock and debt deal to buy Time Warner and create a company with a combined market cap of $350 billion. Guys, as we close out the decade and we close out this business deal, what do you make of it all? Let's go back to more numbers quick. According to

what we, if we've got this right on our charts here, AOL itself was worth about $150, $160 billion at the time or something. So it's worth today an 80th of what the standalone AOL was worth back then. That should tell you something about the price people were paying for tech stocks back in the day. It's interesting because in a furtive way almost, AOL has gone back to its roots and is quite successful. They have the Weblogs network. And so folks who go to TMZ or Engadget or FanHouse, a very popular sports site, may not know these are AOL properties, but they're a part of that network and quite successful. TMZ, which has been in the forefront of the Tiger Woods thing, TMZ is owned by AOL? It's a part of the Weblog Inc., which is a unit

of AOL. And so to me, it is that they've gone back to their original days. When I first came to The Motley Fool in 1998, we were the most popular personal finance channel on AOL. My job then was to learn a scripting language called Rain Man that we used to populate the scripts. And I felt like a Latin scholar because everybody knew it was a dying language, but you still had to do it because AOL is how you played. And everyone's parents thought AOL was the web. And so AOL thrived in that confusion. And then enough kids convinced their parents to, oh, wait, there's a whole worldwide web out there, and they met their demise. I think the question is, what does AOL do now?

They keep talking about content, content. They're going to put all this great content out and get this ad money, but there are a lot of people out there putting out content. I just don't see where it's going to come from. I think they're cooked in the long term. It's sort of a smart, almost an app store mentality, because they're not doing this stuff in-house. They're going out to places that are fairly well-established

and getting the best of the best. True, and they do have TMZ. Not that I would know anything about that. There is potential. It could be a value play. As we head into the next week, guys, give me one stock that is on your radar, and Shannon, we'll start with you. So I am looking at a stock that is actually very widely held in the Duke Street service that I run, and it's KCI, Kinetic Concepts.

And it's an interesting sort of healthcare play, cutting-edge technology, but with some problems. About 70% of its revenue comes from a single product, and now there's competition that they thought they were going to be able to put off via litigation. Maybe they will. I think that that's probably unlikely. Nonetheless, dirt cheap, great forward-looking company, and the risk that it runs relative to the competition, probably at least two to three years out. So it's a good stock for looking at right now and then watching very closely over the next two to three years.

Get out of the door before everybody else? Exactly. Get those elbows ready. James Early. Chris, I'm going to recycle an idea that I used at the Duke Street Conference this week. As I just did. Exactly. Not because I'm lazy, but because it's good. Because he's an environmental guy.

Flowers Foods is a bakery. It makes all kinds of high-glycemic, high-carb sort of things. Nature's Own Bread is the number one soft bread in the country. They sell a lot to Walmart and a lot of other places. Over 12% insider ownership. I think there's a lot of the management team has 25 years or more tenure. And the thing that sticks out to me is return on capital, which is a fundamental profitability measure, has gone from a bit over 8% in 2005 to over 13% today. And for a company that's been around as long as Flowers has, this is a very, very impressive stat.

So I like how it's run. FLO is the ticker. You're saying that Wonder Bread is not the number one bread in the country? Apparently not. Not according to my sources. Not the number one soft bread, right? Wow. Ricky Bobby steered me wrong again.

It's the number one bread in Chris's house. Seth? I can't recycle from the Duke Street seminar panel discussion that I did with the guys because I had recycled a Motley Fool money idea there. So I'm going to go with the breaking news here. IMS Health, the ticker is RX, this was a Hidden Gems portfolio candidate. We later bought it. Then it got a buyout offer. The stock soared some 40%, 50% from where we got into it.

Today, opened up, dropped about 20%. What happened is in the Senate version of the health care bill, there was some language about prohibiting data mining, And this is sort of what IMS Health does, except that the devil is in the details here. And it's about personally identifiable data, which IMS Health will be able to cope with probably no matter what. So the stock dropped about 20%. People panicked before actually reading the language, before thinking about it. It's only down about 6% now, but there's still a buyout offer on the table, $22 a share, trading for about $20 right now.

I don't think the deal is going to be scuttled. If you are the kind of person who looks for arbitrage opportunities, you might want to look here. So at first it was down 20% and now just six? Yeah. It's amazing how the market, I mean, how bad the market is. How inefficient the market really is. How inefficient the market really is. Nobody read the language.

All right. That's it for this edition of Motley Fool Money. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. Good to be with you, Chris. Thank you, Chris. 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.