Motley Fool Hidden Gems Investing - Stock Splits Matter

Episode Date: June 6, 2022

Amazon splits its stock 20-for-1 and while the pizza didn't get any bigger, there are short-term benefits to the split. (0:25) Jason Moser discusses: - Research from Bank of America showing the 12-month outperformance of companies splitting their stocks - Alphabet splitting their stock in July - Under Armour getting booted from the S&P 500 while Keurig Dr. Pepper (among others) replaces it - Howard Schultz declaring Starbucks' next CEO will be hired from outside the company (15:55) Matt Frankel joins Jason to discuss how you can find out what's inside and ETF and provide ideas for any investor who wants to keep it simple. Stocks discussed: AMZN, GOOG, GOOGL, UA, UAA, KDP, VICI, SBUX, CMG, VOO, VYM, VNQ Host: Chris Hill Guests: Jason Moser, Matt Frankel Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

head back to the streets and FX is the drop a snowfall saga watch Wanda Bell and Leon Simmons fight to reinvent themselves in 90s Los Angeles where the fallout from the crack epidemic fuels the rise of west coast rap ambition loyalty and survival collide as everyone risks everything to build something lasting and FX is the drop a snowfall saga streaming now on hulu on disney Plus, click or tap the banner to sign up now. Amazon splits, Under Armour gets the boot, and we go inside an ETF. Motley Fool Money starts now. I'm Chris Hill, and I'm joined by Motley Fool Senior Analyst Jason Moser.

happy Amazon split day. I was wondering, man, I feel like I went back to my original cost basis and I thought, wait a minute, what? But no, yeah, it's one of a few splits coming up. I think we've got Alphabet coming up soon as well. We do. And let's stick with this. For those who missed it, Amazon, today is the day before the market opened. Amazon shares split 20 for one. So, for every one share shareholders own, they now have 20 at $1.20 at the previous price, which, of course, led to some funny postings on social media of the stock chart down 95%, that sort of thing. But I want to get to what's happening with the S&P 500, because there's some rebalancing going on. We'll get to that in a second. But in terms

the stock splits. This is something that comes up now and again, and we always say the same thing, which is like, hey, the pizza is the same size, whether you cut it into four slices or in eight slices. And that's true. And I'm not going to say it's not true. But what I will say is that this seems like one of those situations where more than one thing can be true at the same time. Because, yes, the size of the pizza hasn't changed, and yet, human nature says there are plenty of people out there who have no interest in buying shares of a stock that is four digits. They are much more comfortable, they are much more likely to consider owning shares of Amazon at one-twentieth its previous price, even though the market cap is the same

and the business is the same. Yeah. I mean, you're talking about all this pizza. I had pizza for dinner last night, and now I'm ready for more pizza. To your point there, I agree. It's something we say often, it's the same size pizza, it's the same fundamental business, it's just sliced into more pieces, and that's ultimately what we got here with Amazon. And that is true. At the end of the day, as an Amazon shareholder, I don't really care about the stock split. I've got 20 shares as opposed to one, but it ultimately results in the same economic value. Now, with that said, I did a little digging, and there is some interesting research out there. I tweeted this out earlier. The Bank

America Research does have some facts to back this up, that share splits do have an impact. They are ultimately a good thing. They can be a positive catalyst. Now, I will say it is a near-term catalyst. I don't know that it's something that you really would apply to five or 10 years. I think then you get into the question of the businesses doing its thing. But it is interesting data nonetheless. It says that companies have outperformed the S&P 500 by 16.3% after split announcements. Now, this data goes back to 1980. They talk about these companies splitting their shares and it looks at windows from three months after, six months after, and 12 months after. If you look at three months after, the S&P returned 2.1% versus the stock

split 7.8%, go to six months and those numbers become 4.4% and 13.9%. If you look a year out, these companies that split their shares outperform the S&P rather significantly, 25.4% to 9.1%. Again, 12 months, is that much in the context of a business that you want to hang on to indefinitely? No. I've owned shares of Amazon for better than a decade. But the fact remains that it does have an impact and gains are gains. Anytime you can get a little bit of a head start there, I mean, am I going to turn down that delta? Am I going to turn down that little extra return? No, I'm not. It makes a lot of sense. You mentioned it earlier. It is a much bigger hurdle to clear convincing someone that $3,000 for a share

isn't expensive, even though, relatively speaking, it may not be very expensive, whereas $125 per share is far less expensive. The optics are there. I think that just really goes to show that it becomes a little bit easier for more people to buy that share at $125 versus $3,000. Even in the day of fractional share purchasing, I think a lot of people, myself included. We like to buy whole shares when we can. But nevertheless, it's very interesting data. I think it's something to keep in mind there as we discuss this stock split phenomenon. Andy Jassy, the CEO, had talked previously about a big catalyst for this move for Amazon is their employee base, which has grown dramatically over the past two years, and their ability

to reward staff members who are making under, let's just call it $50,000 a year and being able to reward them with a few shares as opposed to if someone's making $30,000 a year, one share of stock is a 10% bonus. Hopefully, this will have a positive impact on retention and hiring at Amazon. You mentioned Alphabet. That's coming July 15th. It's not going to surprise me if we see a similar move, and we're seeing a little bit of it today. But to your point, we always have our long-term hats on at The Motley Fool. But if you want to take a short-term hat for the one or two day traders out there listening, it's like, well, congratulations. This seems like a nice opportunity if you're like, I'm going to buy

buy shares of Alphabet today, and then I'm just going to ride out the bump that's probably coming in mid-July and then sell. Sure, I'll take that short-term capital gains tax, but damn it, I'm going to make my 9%. Well, Chris, no one ever went broke making a small profit. I've heard that before. In terms of the S&P 500, one of the headlines I saw this morning is that Under Armour is being kicked out of the S&P 500. As a longtime shareholder, I was surprised to learn that it was still in the S&P 500. But this is the calendar-based rebalancing that goes on. Keurig Dr. Pepper is being added, along with a couple of other companies, Vici Properties being one of them.

In the same way that I framed the question of, do stock splits matter? When you look at the S&P 500, the NASDAQ, the Dow Jones Industrial Average, when you look at a company being added or subtracted, do you look at that as something that is material? Does that matter to you? Personally, it does not for me. I mean, I don't buy or sell a stock based on the index in which it resides. Now, with that said, it's not to say that this is something that just doesn't matter at all, though it does seem like it is dwindling in importance. Now, we talk about this, and it's known as the index effect. There's a paper written fairly recently by S&P Global which talks about this

index effect. It talks about how it used to be more important than it is today. It's an interesting paper, it's probably a little dry for a lot of people, but there's a lot of data that supports this. But ultimately, it documents that over the past three decades that stocks added to a popular index tended to outperform the index between the announcement date and the effective date, and then this was typically followed by a small post-effective date correction. Now, this plays into that same thing we were talking about with stock splits. This is more short-term in nature. But what we have seen over the last 25 years, this paper, is ultimately this index effect is declining, it's waning. Ultimately,

they attribute this to the structural changes that have been taking place in the financial industry and capital markets. There's the rise in EFTs, markets becoming more efficient, more liquid, passive investing is evolving and index rebalancing that plays into that. It's something that used to matter a little bit more. There were some short-term impacts that came from this years ago, but it does look like that index effect is waning just due to the evolution of markets themselves. But again, I don't buy or sell stocks based on the index. I think that's something to keep in mind. It is something that is always happening. When companies are pulled out of an index like the S&P 500, for example. That requires ETFs and other funds that mimic

those benchmarks to basically rebalance as well. There will be buying and selling in accordance with rebalancing. You have to ask yourself the question of why is the company being removed from a given index? You could make the argument that Under Armour is being removed from the S&P because it's not worthy. It's been having significant trouble. It's not to say that they can't turn this ship around, but they've got plenty of work to do. You see this happen more often than we probably talk about it on these shows. But it was interesting to dig into that index effect and learn the history of it. Earlier when you were speaking, I think you misspoke, you said EFTs when you meant ETFs. I just didn't want anyone to think that you had

created a new version of non-fungible tokens of EFTs to go with NFTs. We'll actually talk more about ETFs later in the show. Last thing before we move on, it is about the underlying business. You and I have been talking about things that are short-term in nature. The long-term rewards come from long-term great businesses. If belonging to the S&P 500 had a long-term material positive effect on a company, Under Armour would be doing better. I would just say that. You'd like to believe. I would like to believe that. Let's get to some comments from Howard Schultz. This was in an interview with The Wall Street Journal. Schultz basically giving an update on his time at the company since he has returned

as interim CEO. The headline coming out of that conversation is Schultz saying, we're going to be hiring from outside the company, which was something that I had assumed. I know there were people out there that when Schultz returned, they thought, of course, Schultz returned, he's staying for the long-term. Schultz pretty clearly saying, no, I'm just here to oversee a smooth transition. We have some good candidates. He didn't name any of them, which is smart. But as a shareholder of the company, I view all of that as a positive, both that Schultz is committed to overseeing the transition, that he sees the need for someone outside the company for a fresh set of eyes, because the company that he built around the concept of the third place, you've got

your work, you've got your home, and we want to be your third place, he realizes, no, that's not going to work, and we need fresh eyes on this. Yeah, I'm with you. I'm a shareholder myself, and I was refreshed to hear his conviction here. I mean, I expected it, frankly, and I don't think he wants this job anymore. I think he feels respected and valued in that they are looking to him to help solve this problem. But to your point, yeah, this is a much different company. I mean, it's hard to imagine that you think, well, Starbucks is just a coffee company. And I mean, yeah, at its core, this is true, but it's very interesting to note. This is a company that now makes more of its money selling cold beverages on the go than hot beverages where

people want to go sit down and have a conversation. That third place is even evolving. You hear them talking about building this digital third place even now. You hear talk of the metaverse in Starbucks earnings calls. I'm not sure exactly where to take that, Chris. I like my coffee in real life. But listen, the metaverse is real and it's happening. I think that companies looking to establish a presence in that space makes a lot of sense. Starbucks looks like it's going to be doing that. But he said it, for the future of the company, we need a domain experience and expertise in a number of disciplines that we don't have now. This is just a company that is a different company today than it was 20 years ago. We know that the world is headed in a

different direction as technology continues to evolve and change the way we do things. To me, going outside looking for an external hire, looking for external talent makes a lot of sense. I think it's not an automatic, but I think it can work out very well. You look at how Chipotle benefited from bringing in Brian Niccol. It's not to say that that's easily replicated, it's not to say they can just go out and find their own Niccol, but it does show you the potential impact it could have if they make a wise hire. I believe that they're taking this very seriously. One of the reasons why I think that is, if you look at what's been going on over just the past several weeks that Mr. Schultz has been back there. He's letting talent go. He's asking talent that has

been there for a while to actually step down and leave. That to me is a sign that he sees the writing on the wall and realizes they need to refresh this entire leadership team to build a Starbucks that's going to be able to take on the challenges of this new technologically driven economy that we're really morphing into. I don't know that it's a problem that's easily solved. I will be fascinated to see the shortlist of talent they're looking to bring in there. But I tell you, I'm a big fan of Howard Schultz and what he's done with the business, and I'm a big fan of his judgment when it comes to finding the right leaders and putting them in the right places here for Starbucks. I think he's taking this very seriously, and I like the chances that he will

help fill that role with someone who's worthy. Appreciate the time, Jason. Thanks. Thank you. Some speculative assets have been imploding, leaving some investors to wonder, what backs up my investments? Matt Frankel joins Jason Moser to discuss how you can find out what's inside an ETF, and they share some ideas for how to keep it simple. I wanted to talk with you a little bit today in regard to something that I think has become a little bit more of a question here, something at least to pay attention to for investors here over the past couple of years. We've seen new asset classes develop. Asset classes,

you think of things like cryptocurrencies, like non-fungible tokens, NFTs. We're seeing new wave of asset classes coming along, and with that new wave comes new ways to invest in them. We look at the market in particular this year, it had a rough start to the year. The Nasdaq in full-on bear territory. The S&P has recovered slightly recently, but it's still down around 14% for the year. Folks like us who enjoy picking stocks, and we're dealing with some volatility, and I'd imagine some folks out there are even dealing with some sleepless nights. One way to avoid those sleepless nights though, it's something we always recommend investors consider, particularly investors who are just getting started, and

that's having exposure to funds. One of the things we like to tout about funds, they're instant diversification. You're making one purchase, but really getting a lot of exposure in that one purchase. We're talking about things like ETFs, exchange-traded funds, things like index funds and even mutual funds. I think we'd probably argue that mutual funds are on their way out. Let's start the conversation real quick here. Let's remind listeners exactly, let's talk about ETFs first and foremost here. Talk about what ETFs are. How do ETFs differ from other funds like mutual funds or index funds? I agree that the mutual fund is on its way out, and that's generally because

of the rise of ETFs. So, an ETF, exchange-traded fund, it pulls investors' money into a big pot with a common objective. Generally, with ETFs, it's to track a certain stock index or bond index or certain commodity. It's not an active investment, meaning you don't have investment managers actively making decisions. If it's an S&P 500 ETF, for example, they're just buying 500 stocks that are in that index. The big difference between those and mutual funds, which have index funds as well, is that ETFs trade on the stock market in individual shares. You can buy them anytime you want when the market is open, just as easily as you could buy, say, a share of Disney. You type in your order, you click the buy button, and you just bought a few

shares of this fund. It makes it a lot easier than a mutual fund, which generally prices once a day. you have higher minimum investments. Most mutual funds are in the thousands for your initial investment. I have some of my favorite mutual funds, but in general, they are less convenient than ETFs, is the big, big difference, as the ETFs are designed for today's retail investor. Now, when we talk about ETFs, two questions come to mind, and I think one question piggybacks on the other. Let's start with this first question here, because there are a lot of different ETFs. There are a lot of different ETFs. They can focus on broad market strategies, they can focus on particular industries within markets. But when we're looking at ETFs,

how do we know what that ETF actually owns? An ETF that says it's going to mirror the broader S&P 500 index, well, we have a general idea. They're saying that they own the businesses in the S&P, and there's a way to find that. But for ETFs that focus on all sorts of different strategies, how do we actually get to understand, how do we find what those ETFs actually own? Yeah. There's an easy answer and a hard answer to that. The easy answer is, you mentioned the S&P 500 index fund. The obvious answer is that they own the 500 stocks that make up that index. To find any ETFs top holdings, you could usually find them directly on the website. One of my favorites is the Vanguard S&P 500 ETF. The ticker symbol is VOO. If you go to Vanguard's

website and find their S&P 500 index fund homepage, you could find a list of the biggest holdings. The S&P 500 is what's called a weighted index, meaning that bigger companies count more. So you're going to see the big companies make up the top few holdings like Apple, Amazon. The big tech companies are the big ones in that. But if you want to really dig in to how much stock these companies actually own, the best way to go is to find the fund's annual report, which is also available on their website, but it's a bigger document. I'm looking at the one for the Vanguard's S&P 500 ETF, and it's a 40-page document. But hidden inside that document is what's called the schedule of investments. And that's where they report to the SEC and to investors

every share of stock that the fund owns. And this is, I don't know the exact number, but about $100 billion ETF. I'm looking through it. For example, Walt Disney Company, they own a little over 38 million shares of the stock worth about $6 billion. Netflix, they own 9.25 million shares of Netflix. I can go on and on. I'm not going to read all 500 on this show, obviously. But the point is, you can see to the single share how much stock these ETFs own. It's not just that they're telling you this. I could write on a piece of paper that I own 9 million shares of Disney. It doesn't make it true. This is what the SEC is there for to regulate and make them report the actual numbers. You could be very, very confident

that these are accurate numbers as of the date listed on the annual report. That does lead me to my next question, ultimately, is they say that this is what they own, but then how do you know that they actually really do own it? I guess part of reason that question comes up is because it feels like we're in this transitionary period where the market, we're seeing these new asset classes coming about and it feels like regulators are still trying to ultimately figure out how to regulate things like crypto, things like NFTs. is it something just that simple? If we want to confirm a fund actually owns this, is there a designation we should be looking for that fund? Or is the fact that the fund

trades on the open market, that explicitly tells us that this is a fund that is subject to regulations by the SEC and that regulatory environment is what we use to confirm that but these funds actually do own those assets. Yeah. If the fund trades on the NASDAQ or the New York Stock Exchange, you can pretty much be sure that the financials have been audited and confirmed. That's a big contrast to things that trade on the over-the-counter market. I know there are some, for example, Bitcoin vehicles that trade on the over-the-counter market that have less verification markets. Not that any of them are lying, I'm not saying that, but it's just less verification markets. There are some ETFs that trade on the over-the-counter

a market that have fewer verification requirements, and it's just the way that regulations are set up. If you see this in their annual report, you could pretty much be sure that these numbers have been confirmed, they actually own these shares of stocks. By the way, with a company like Vanguard, this is another reason I love Vanguard's funds, you can look at the individual companies' filings, their proxy filings, for example, and see that Vanguard owns, say, 10% of Alphabet stock because of these index funds. You can confirm it backwards and forwards because the companies have to confirm it with these big investors. That's a really good point that you make there, graduating up from the over-the-counter, those pink sheets as we refer

to it sometimes. There is a reason why you'd prefer to be on the New York Stock Exchange or the NASDAQ as opposed to being something over-the-counter. There is a credibility that comes along with that, that certainly leads you to a little bit of a different investor base, so that's good to know. Real quickly, before we take off, I know you referred to the Vanguard S&P index fund earlier, the VOO. You're a real estate guy, Matt. You certainly have to have at least one real estate related ETF that floats your boat, right? Yeah. I got to go with Vanguard again. Vanguard has some of the lowest-cost ETFs. You're going to pay less in investment fees than you would in most places. Vanguard is not paying

me to say all this. I really am a big fan of Vanguard ETFs. There are other great brands. Schwab has excellent ETFs as well. But the Vanguard Real Estate ETF, ticker symbol VNQ, That's one that I like. It's a market cap weighted index, just like the S&P 500. What about folks out there looking to protect their wealth, maybe looking for a little income stream there? You got anything for us? Yeah. I'm surprised it's going to be a Vanguard fund. The Vanguard high-yield VYM is the ticker for that one. It is a collection of a few hundred stocks that pay above average dividends. On the aggregate, it pays a lot more than, say, an S&P 500 index fund.

great choice for retirees and re-retirees. Well, we will leave it there. Matt, thanks so much for making the time for us today. Of course, always good to be here. 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. Thanks for listening. We'll see you tomorrow.