Motley Fool Hidden Gems Investing - Strong Earnings Results, Mixed Reactions

Episode Date: April 19, 2024

Earnings are in full swing! We’ve got updates from the industry leaders in streaming, banking, chips and real estate – but strong numbers aren’t always turning into positive market reactions. (00:21) Ron Gross and Matt Argersinger discuss: - Whether investors should be buying Netflix’s “pay attention to this, not that.” - What Taiwan Semi’s results say about chips and why investors are up on United Health despite the company’s recent cybersecurity issues.. - The state of banking and brokerages, and why the current macro is confusing for everyone, even management at industrial REIT Prologis. (19:11) Malcolm Ethridge, CFP and author of Financial Independence Doesn't Happen by Accident, walks through money conversations you should be having during financial literacy month and why he’s watching cybersecurity. (35:42) Ron and Matt break down two stocks on their radar: Five Below and UPS. Stocks discussed: NFLX, TSMC, UNH, BAC, GS, MS, SCHW, PLD, BUG, CIBR, UPS, FIVE Host: Dylan Lewis Guests: Matt Argersinger, Ron Gross, Malcolm Ethridge Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. earning season is picking up we've got streamers big banks and cyber attacks the motley fool money radio show starts now

everybody needs money that's why they call it money From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me over the airwaves, Motley Fool's senior analysts, Matt Argersinger and Ron Gross. Fools, great to have you both here. How you doing, Dylan? Dylan. We've got a look at banking, real estate, an observance of Financial Literacy Month, and, of course, stocks on our radar. But we are going to start off with the earnings parade. And we're going to start off with one of the most highly followed Fool stocks out there.

Ron, Netflix reported this week shares down 7% following the report. The OG streamer posted what looked like a pretty good report. Revenue, earnings, subscribers all ahead of expectations. Ron, stock is down. What gives? Exactly. You nailed it. Big report from Netflix. We'll get into some of the metrics, but the stock sold off, I think, mostly because of some disappointing revenue guidance for the rest of this year, and also a bit of lack of transparency from the company going forward, which the analyst community for sure does not appreciate. But we can talk about that in a bit.

Let's look at some of the numbers. They added 9.3 million subscribers in the quarter, a particular strength in the U.S. and Canada. that's even more impressive when you consider that expectations were only for 4.8 so they did 9.3 expectations were 4.8 pretty good was a drop from last quarter's 13 million though i don't think anyone expected uh and to be anywhere near that but they they did a really nice job their total subscribers now almost 270 million again pretty impressive as we know streaming not the easiest business to get right. Revenue up 15%, helped by recent price increases for some plans,

a crackdown on password sharing that has annoyed my family to no end, and the new ad-supported tier, which now make up 40% of all signups in markets where they offer that plan. And those ad-supported memberships grew 65%. The company will stop reporting paid quarterly membership and revenue per subscriber data, starting with the first quarter of 2025. Investors not a fan of that. Analysts don't like that. It hurts them in creating their models. They want more transparency, not less. Kind of turned some people off. That could be because why the stock is a bit weak there. But margins are up. Operating margins approach 28%. That's up seven percentage points. EP ups up a whopping 83%. Guidance was weak, 16% for the quarter, 13% to 15% for the year on the

revenue side. That sounds good to me, but if you don't really knock the cover off the ball with the way this stock has been, you're going to get into some trouble. Trading at around 40 times free cash flow right now, not cheap, but this is a good report. Ron, it sounds like your family with the password crackdown might be helping juice those subscriber numbers that are going away. My question for you is, and I think Netflix's management acknowledges, they said, hey, we used to be a company that wasn't profitable, so we said focus on the subscriber numbers. Now we're profitable. Don't worry about the subscriber numbers.

What should we be watching here if we're losing this key metric? Well, we definitely need to understand the subscriber base, for sure. Now, because they pay different prices now, some ad-supported, some higher-priced, it's not as easy. It's not one-for-one anymore. So that's kind of their reason for saying we're going to stop being as transparent. More transparency would actually help solve that problem if they gave us a breakdown of all of their memberships, but they seem to not want to do that.

So we can treat this mostly as a regular company. How is revenue doing? How are margins doing? How is profitability? But then we for sure need to know the direction of the subscriber base as a whole. Matt, are you buying that narrative? Focus on this, not that? Hey, I'm going to buy whatever Reed Hastings is showing me because, hey, I mean, this is as we called it, you called it the OG streaming network.

It's remarkable, actually, to me to see whatever Netflix is reporting, the fact that subscriber numbers are still growing the way they are, especially in the U.S. I know that password crackdown is having an effect. And just to see the other streaming players, especially the ones who seem like they had the playbook, right? Netflix wrote this playbook over a decade. they came in great content grabbed a lot of subscribers but they're flailing around now and paramount's in the process of probably going private and i'm just i'm just continually impressed by by the core netflix audience and it feels like and i don't know if this is true but the the portfolio of streaming apps that everyone has nowadays it feels like netflix is the one that

no one's letting go of maybe netflix and disney plus everything else is sort of like i'll subscribe to it if i see something interesting but i'm probably not sticking with it um and that that's an incredible position of strength for them. And the others, including Behemoth Disney, are finding out it turns out that streaming is a tough business. It's a member acquisition business. It's a content business. And it's an expense cost structure business. And you can be unprofitable for a long time until you get all three of those things correct. All right. This week, we also got an earnings update from arguably the most important company in the world. Matt, Taiwan Semiconductors Management called AI-related demand insatiable in their commentary with

earnings. Did that show up in the results? Oh, it certainly did. And I'm glad it's right for them to point that out, because it is the area of the business that is growing really fast. In fact, the supercomputing business, the high-performance computing technology part of the business, the five nanometer and three nanometer wafers, seems really small. I don't know how small, but I guess that's microscopic. But these are the chips that power essentially all the big artificial intelligence language models applications. That makes up now almost 50% of TSM's revenue, and it's expected to double in 2024. So that's really impressive. It plays right into the results. You're seeing revenue up 16.5% in a quarter. Revenue in the

current quarter, the second quarter, is expected to increase 28%. So that's kind of an acceleration and well ahead of expectations. I would say the reason, though, that TSM is really focusing on the AI part, the high-performance part of their business, is because the other side of the business, the smartphone side of the business, which is still the lion's share of revenue and earnings, that's in a bit of a slump right now. It's interesting that, to me, it points to maybe a larger concern with Apple in particular. If the next iteration of iPhones don't really capture of the imagination as they've had in the past. People aren't replacing their phones fast enough. I know my phone is going on three years old. I don't see a need to replace it as fast as I used

to. I wonder if TSM's earnings actually tell a bigger story about Apple and the smartphone market and where that's heading. As great as the AI growth is, at least in the near term, it can't really offset the slump in that business. And so that's got me a little concerned about TSM. One of the other things that popped up with TSM was, you know, in April, the company's home, Taiwan, was hit by a 7.5 magnitude earthquake. We got some commentary from management around the impact of that. And Matt, so far, it seems like it won't be that disruptive. I know that was a big concern, just with the global chip trade being so reliant on Taiwan. That's right. And so, they spent some time touting, well, we're opening assets,

we're developing assets all around the world, so we're diversifying our manufacturing. But the reality is, that's going to be a really long, expensive process to get there. The lion's share, of course, for the development is still going to remain in Taiwan. So any disruption there, and we're not just talking about things like earthquakes, but of course, any increased tension with China just puts a little more risk on that. I have to say, though, I haven't really ever taken a close look at Taiwan Semiconductor stock, but now trading for about 20 times forward earnings, earnings that are expected to grow by about 15% a year over the next few years, you know, it's not exactly a rich valuation

for a company that is growing like this. And as you mentioned, it's probably one of the most important technology companies in the world. All right, before we head to break, I want to check in on healthcare. We got an update this week from UnitedHealth. Ron, heading into earnings, story was not looking particularly great for United. Company had to pay $2 billion to providers tied to the Change Healthcare cyber attack. Stock was down 15% after news of the attack broke over the last month or so. But oh, how an earnings report can change the story. Shares up 12% following earnings. What got investors excited? But oh, yes. This is a strong report, for sure, and the shares did react appropriately, but you nailed it. It's against the backdrop of that

significant hack to the Change Healthcare unit. It disrupted much of the healthcare financial system, had a major impact on UnitedHealth's own operations. The company has restored most of the functionality. It's working to retain and win back customers. It's an uphill battle. They expect a full year hit to earnings of at least $1.6 billion. So a big deal, not to be swept under the rug. But for the quarter, revenue up 9%. Healthcare unit was strong. The Optum unit was strong. The insurance unit had a bit of a higher medical care ratio, which is the share of premiums spent on medical care. And that's due to some government effects, Medicare funding reductions that came from the government. The cyber attack hurt that, business mix hurt that. So some negative there.

But overall, if you strip out all these one-time items, including cyber attack, to get an understanding of how the business is operating, you get earnings per share up about 10%, which is pretty good. And the whole sector has really been dealing with the Medicare issue coming from the government. But management said things are on track, their expenses are running on track, and things look fine. Only 17 times forward earnings pays a 1.6% dividend yield. Not too bad. May take a look. All right, listeners, if the United story has you interested in cybersecurity opportunities, stick around. We have some ETFs to watch in cybersecurity coming up later on the show. We're going to head to break, but after, we've got a rundown on big

bank earnings and a look at the industrial real estate market. Stay right here. This is Motley Full Money. Welcome back to Motley Full Money. I'm Dylan Lewis, joined over the airwaves by Matt Argersinger and Ron Gross. We're going to keep the earnings parade going with a look at Schwab. Matt, this is a fun one for us to check in on because it's not only a business in and of itself, but a look at investor activity overall. You dug into the earnings results. What did you see this week? Right, Dylan. The results weren't that relevant to me looking at the report. If you look at this quarter, for example, these results year over year compared to last year's first quarter right after the collapse of Silicon Valley Bank and all the issues that came out of that with

regional banks. It's an apples to oranges comparison. Schwab owns a regional bank, so they kind of got treated pretty harshly beginning then. But to me, the real and compelling story is just look at the assets for Schwab. Just in the first quarter, $96 billion in core net new assets, 1 million new brokerage account openings, trading volume was up 15% quarter over quarter, net inflows in their managed asset business, which is a growing part of the business, that was up 60% year over year. They're finally down to the last 10% of TD Ameritrade accounts that have yet to be moved over to Schwab. So, within a month or so, they think they're going to be finally done integrating the merger. And you put it all

together, total client assets at the end of the quarter. Now, part of it was driven by, it was a healthy return for the stock market, but still reached a record $9.1 trillion. It's up there with BlackRock, of course, and Fidelity as one of the largest asset holders in the world. It's incredible. But I think this might have been the most important quote, most impactful quote from the conference call. This is from CFO Peter Crawford. Quote, we've seen meaningful progress back towards our historic pace of organic growth, a continued moderation of client cash realignment activity with the pace slowing, in fact, even faster than our expectations. End quote. If you remember, Schwab and the regional banks,

beginning really a year ago, saw this new realization among a lot of their depositors that, hey, I'm not getting anything from my checking and savings accounts. They started moving those assets in large amounts to treasuries, money market accounts, CDs. That had an outsized impact on Schwab, which pays low rates on its bank accounts and brokerage deposits. If that's moderating, assets are picking up, people are keeping more of their money at Schwab, They're trading more actively as they were in the first quarter. This is a very positive momentum shift for Schwab, and I think it's going to be a good year for them.

We're going to stick with financials. Ron, we saw most of the big banks reporting earnings that were actually pretty good, equal or better than expectations from Goldman, B of A, Morgan Stanley. But better than expected doesn't necessarily mean good in all cases, it seems. That is so true. Yeah, there were some common themes across the six big banks, but it was a mixed bag. For example, Bank of America reported an 18% drop in first quarter profit, but Goldman and Morgan Stanley reported higher earnings thanks to their investment banking units.

There were several positive factors that impacted kind of all the banks across the board. Consumer spending remained strong, pent-up demand for dealmaking, including stock and bond sales, helped results from the more Wall Street-focused banks, the Goldmans and the as we discussed. A strong stock market in the first quarter increased fees the banks collect on money they manage for clients. But investment banking, clearly the bright spot. Goldman Sachs and Citigroup's investment banking fees each increased 32% from a year ago. Bank of America's was up 38%. Pretty impressive. Now, these positive factors were offset by a significant pressure from higher interest rates, which hurt profit margins and will continue to hurt profit margins

into the foreseeable future. Banks are warning that the recovery in capital markets is fragile. We have to really keep an eye, as with most things nowadays, on those interest rates. Ron, I'm going to ask you a question on behalf of all B of A customers here, because I am one. We have seen the big banks continue to get away with offering low interest rates on savings accounts, pocketing some really nice interest rate spread there. Is this going to be able to continue? Are they going to be able to continue to get away with this? I will answer that anecdotally, Dylan. I was a Citibank customer for 30 years as a former New Yorker. And just in the last month and a half, I moved my account over to Capital One to capture that 4% plus interest rate that

they're offering on their savings accounts. So the other guys better step up or I will not be the only one moving away. Matt, are you moving money around as well? I'm always moving money around Dylan. But I have to say, it's the same issue with Schwab. Schwab faces the same challenges. But it looks like, for whatever reason, people are sticking with those low interest rate accounts. And there's no pressure to increase them, really. It's amazing. Never underestimate the friction of making change. It is one of those things that the stickiness is a powerful competitive advantage. All right. We are going to wrap our earnings takes with a look at real estate. Matt,

You dug into the results from Prologis. This is the world's largest leading industrial property company. And they have a thing or two to say about the state of warehousing. What did you see in the results? Yeah, I would put this up not quite at Taiwan semiconductors level as important to the global economy, but Prologis is pretty important to the global economy. The results were good. Same store net operating income, key metric, that was up 5.7% year over year. Average occupancy fell a bit, but I thought it was interesting that management noted that occupancy for the broader industrial real estate market, it's down about 310 basis points since peaking in 2022. Prologis' occupancy rate has fallen only 80 basis points over that

same time. So they're doing better on occupancy overall. Rent growth on new leases was up 40% in the quarter. And they saw this big spread between rents on current leases versus the market. It's a spread of almost $2.2 billion in incremental earnings that they're going to get in the next several years. What the market didn't like, though, and why the stock is down about 12% they are seeing slower leasing activity, lower net absorption of space. We had this post-pandemic boom in industrial real estate leasing. If you remember, companies were racing to increase their e-commerce space, increase their supply chain capabilities. There was a lot of excess buying in those years. That hangover is still with us. You have a lot of customers today

who are not utilizing a lot of their space. That's weighing on results a little bit. Pelagius thinks it's a short-term problem. And by the way, yes, they cut their full-year guidance, but they cut it from $5.58 at the midpoint to $5.50 on the core FFO per share. $0.08. And yet, the stock lost about $8 billion in market cap in the last two days. It just seems way overdone. And if I look at the stock right now, on that revised guidance, it's trading about 19 times forward FFO, 3.7% dividend yield. You just don't get that in Pelagius' stock very often. Matt, last week on the radio show, we were talking about the confounding macro picture and how it is a little hard to make sense of so many things moving in a very similar,

very positive direction. We actually saw some commentary from Pelagia's CEO on that, saying it is a perplexing environment. You have indicators that are moving in the right direction, GDP, retail sales, e-commerce sales, and yet it is not converting into leased space. It seems like everyone is a bit confused with what we're seeing here. Yeah. And then you got higher rates, you got geopolitical issues. So everyone's just a little hesitant and I think it's all, people are just cautious and that's what it's all adding up to right now. All right. Matt Argersinger, Ron Gross. Fellas, we're going to see you guys a little bit later in the show. Up next, we're going to celebrate Financial Literacy Month with a look

at how to talk about money with your loved ones. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Dylan Lewis. April's Financial Literacy Month, and in observance, I caught up with Malcolm Etheridge. He's the Executive VP at CIC Wealth Management, a certified financial planner, and he's got a new book out this April, Financial Independence Doesn't Happen by Accident. Malcolm walked me through why he's having a hard time getting some of his clients to de-risk their portfolios as they get older, how he's viewing the interest rate outlook, and two ETFs for

exposure to his favorite industry. So you're a CFP, and I'm guessing you have a lot of conversations with folks in different ages, in different phases of life, looking at money and thinking about what's in their portfolios. Do you notice anything generationally about how people are thinking about saving, retiring, and investing? We're both millennials, and I know everyone's kind of approaching this stuff differently. Well, you would think everyone's approaching it differently. But the thing that really jumps out to me is that the boomers who we technically advise them to go 60-40 at the point that you retire and then also work your way down to more of like a 50-50 stock to bond ratio and further and further down the chain. Getting our

boomer clients to be willing to take some risk off the table has been a serious challenge. And I mean, for the last, call it five years, where the getting has been really good in the stock market, it's very tough to get any person who is even retired and taking income from their portfolio to take any risk whatsoever out of the portfolio. Is that people just seeing the opportunity cost of de-risking and saying, you know what, I'm excited with the gains that I'm getting? 100%. And it's all fun and games while the market is going up and to the right. But what we are more concerned about is everything that goes up must come down. And so we're more concerned about what happens when the getting is no longer good and we're coming back down the other side of

that mountain. But it's really hard to think about that when every time you talk to your friends, you turn on the news, anything else, it looks like the party is so much fun. And so they're like, why would I leave the party now when everything is going so well? And it's like, this is the part where you grab your keys and get out of here. I think I had a conversation with my mom about two months ago that hit that exact note. She went from working to retiring last year and I think has had that moment of, oh yeah, I'm going to start pulling on some of this soon. And all of a sudden, it is a massive shift from going from accumulating to actually needing that money. It's a major mindset shift. I imagine it's something that you have to talk through with

your clients and adjust the way they're looking at things. Well, also making them aware that they've already won the game, right? If your mom is comfortable enough and in position to feel like she can step away from full-time work, she's already won the game. So now is when you're supposed to be living off of the fruits of your labor and sowing the seeds of those crops you planted for all those decades while you were delaying gratification and saving for this rainy day. You're here. Now is the time to sit back, relax, put your feet up and not be watching your portfolio and worrying. That's the part that's really hard to get across to people. It's not that the game is over, but you've already won. You've got a significant lead. Sit your starters

on the bench and let everybody else just run out the clock. That part is hard for them to wrap their minds around. Your book that's out this April focuses on financial independence. There's a distinction between investing for retirement and investing for financial independence. How do you break that down? 100%. Yeah. So, the thing to focus on when you're thinking about retirement in the traditional sense, right? I'm going to work for 35, 40, 45 years in a profession and I'm going to save and invest all along the way and I'm going to put a healthy portion of my savings into the stock market, which on average, somewhere between 9% and 10% is what I can expect. And over that time period, it's going to compound, my employer is going to give me a portion as a match and so

forth and so on. That's the traditional way to invest for retirement. When we talk about financial independence, we talk about people who generally want to leave the game earlier than the government says that they should be allowed to, right? So I want to be gainfully unemployed is the way that I like to say it, in my 40s, maybe in my 50s. And the way that you invest for that is different because you have to be putting money into vehicles that are going to pay you back income at some point while you're still younger, right? So also the way that our system is set up, you're allowed to pull money out of your retirement savings after 59 and a half. You're allowed to apply for and start to receive social security benefits after 66. Now I'm saying I'm going to be pulling money

back out of my portfolio in my 40s and 50s. And that means that I'm going to have to use vehicles that aren't tax deferred or have the same treatment related to them that our retirement accounts do. So that's things like real estate. Obviously, most people who talk financial independence talk about real estate, but the really important part of that is that those rents you receive are income that pay you to stay in bed, basically. Or I'm investing these dollars into a business maybe that 10 years down the road is going to start to pay back dividends and I'm going to live off of those dividends. And so, it's very different. The mindset is different. The tactics that you're taking are different from the way that we invest for

traditional retirement. One of the other things I know you get into in the book is the idea of talking about money with family and talking about money with loved ones. I will be your straw man here. I am recently engaged. My fiance and I are past that euphoria period and are now kind of rationally looking at, okay, practically, how do we put our lives together? What advice do you have? Yeah, that's a tough one. And I don't say that to say it's not worth doing. I say that to say, if you feel like this is a very tough thing to approach, you're not alone, right? I'm a person who does this for a living. As you can probably tell, I get excited talking about money. I probably talk about it in my sleep. My wife is the opposite. And so even I have to find the right

time to approach these conversations. And so what I've done is said, we're going to actually set aside two times per year, an hour on a Saturday morning where we're going to sit down and have our financial planning meeting. And I'm going to prepare and present to you the exact same way that I would a client, our financial situation. I'm a business owner. And so I want to make sure that she understands all the different things that are going on with all the different business interests that I have and everything else. And we just have a conversation around, we have a one-page financial plan. It's literally one page with us on it and all the different assets that we own and what their income streams are and so forth and so on. I sit down with just that and try my

best not to overwhelm her. But what I would say directly to you is as the person who I assume is you is most interested in talking about the money and you have the other person who's at best neutral. It's making sure that you only give them the facts and the information they need to know, not trying to overwhelm them with all the things that you are excited about. You went and found and researched and you're passionate about making a pitch the same way you would to a boardroom at work. You have to make it so that it's digestible enough that it brings the other person in, gives them what they need to know to feel comfortable and confident when they walk away. and that's it. Just because you know all the things that the YNAB community wants to know,

and you got your spreadsheet down, you're a zero budgeter, and you got all the different buckets that those dollars are going to, that's great for you. But for the other person in this relationship, they could care less. And so you got to meet them where they are, and maybe eventually you drag them into the deeper end because they start to see how it comes together and get as excited. But you can't expect them to share your passion from day one. You've got me pegged. You need a budget, all the subreddits. Yep, that's exactly where I'm spending my time. And I will say thank you. And I'll say also on behalf of Jess, thank you. She'll appreciate that advice as well. In addition to your financial planning work, I know you're an investor and someone who's

paying attention to the market. I see you on CNBC. And so I want to get your take on a couple different things. You mentioned the 9% to 10% annualized folks can generally expect from the market, and also the difficulty in convincing people to de-risk. Are you surprised that that is an issue when we're in an environment where rates are higher and you can generally earn some pretty easy risk-free money? 100%. The stock market has not made sense to me in over a year. I know you're a follower of the yield curve and the implications of the two-year treasury being above the 10-year. So to keep from getting too wonky here, just the fact that it's been inverted for how long it has and nothing bad has happened befuddles me. Because

going back to, I think, 1950, going back to that period, 10 times out of 10, where the two-year treasury has gotten above the yield of the 10-year, a recession follows. The one thing that's unique and different about this particular scenario is that the unemployment rate has stayed historically low. And as long as the labor market is as strong as it is, that phenomenon can go on longer than anyone, including Jerome Powell, ever imagined. What that makes me fearful for, though, is that the moment that reckoning does happen, it's going to be significant. That's the one thing that I have to caution people about that we can't just declare mission accomplished and soft landing is here, there's still room for us

to hit pretty hard on this landing. But the labor market holds all the cards. It's shocking to me, yes, that rates could be above 5% for this long and nothing bad has happened. But I also am a student of history and a student of economics enough to know that higher interest rates usually take the longest to work their way through the labor market, usually about 18 to 24 months. Our first rate hike was in March of 2022, which then means that we're just at that two-year mark. And so we could be right around the corner from finally seeing the impact of raising rates and what that means for the labor market. But I hope not. As an investor, I hope the party keeps going. But as a pragmatist, it can't. Yeah. I mean, on last week's radio show,

we were talking about how wild it is for basically everything to be at or near highs. S&P 500, gold, your go-to crypto, Bitcoin, and interest rates all at the same time. It's kind of wild. It seemed like we were heading to a very clear interest rate picture. Then we saw inflation data come out recently that was a little hotter than people were expecting. If we wind up in a spot where rates do wind up being higher for longer, are there any types of businesses you're particularly worried about? I would be worried about anything that's not a major tech company. And I mean, literally, if you go back to the Feng labeling that we had once upon a time, anything that's not one of those big 15 to 20 tech companies that's got more than $40, $50 billion of cash

on their balance sheet, I'd be concerned about those companies. And the reason that I say that is because most corporations borrow to grow. They've been borrowing to grow at 0% almost interest rates for a decade. And so, everything was growing. And so, we're kind of seeing the fruits of those investments that a lot of those companies were able to make back then. We're still in this love affair with AI and ChatGPT and Gemini and everything else. And the companies that can continue to invest in those kinds of developments, Microsoft, Amazon, so forth and so on, they've got hundreds of billions of dollars on their balance sheet to fund their operations for however long it takes us to work our way through a bad market. And so

if and when we hit that skid, everyone has to slam on the brakes and can't really fund that next wave of growth. Maybe they even have to start laying folks off. You know who has the most cash on their balance sheet? Apple. You know who didn't lay anybody off in 2022 and all the other tech companies were kicking people to the curb? Apple. And that's the dynamic that I'm leaning on here. So there's about 10 to 20 companies that have the Fortress balance sheet to allow themselves to fund their operations that way. The rest of everyone else is in trouble, especially the small and mid-sized businesses that have already borrowed as much as they possibly could just to get through the last two years. And that's who I'm most concerned about.

Okay, your caveats on small and mid-cap companies noted, but outside of the bigger tech names, what are some companies that you're following right now and you're excited about? I'm really big on cybersecurity. To me, if this doomsday scenario that I just painted for you actually comes to fruition the exact same way I just drew it up, you know what's a non-discretionary budget item for any corporation or government entity out there? cyber defense so we just saw united health care got what a billion dollar bill basically for a breach that happened that that's how much it has and will cost them to clean up that mess and united health care has the money to to cover it right but if we just think about like

i'm in uh ohio as i record this the government of ohio does not have a billion dollars laying around for a breach uh if one was to occur at the state level so they have to spend however many tens of millions of dollars they do have available fighting that. And then extrapolate that not only across 50 states plus DC, but globally, right? So now everyone's spend on cyber defense gets better and better and bigger and bigger because you know what cyber criminals now have at their disposal? AI. And so now we've got to fight not only the human element, but we've got to fight the machine learning element of cybersecurity as well. And so short story long, that's a sector specifically to me, one I think is ripe for consolidation. There's about 10, maybe 12

mid-sized cybersecurity companies. And I think there's probably room for like five or six, because there's a lot of overlap. A lot of them either are on-premise or they're in the cloud. Some of them try and do both, like a Fortinet, for example, which I don't believe can do both. But if you think about a company that's already in the cloud, like CrowdStrike, for example, who needs the on-premise capability of a Fortinet, maybe there's a marriage that happens there. Or if you think about a much larger company who wants to nab that, Fortinet, I think, does something like $5 billion of revenue, last I checked. I think about an Amazon, for example, who's got an entire cloud business that they need to protect. And Amazon does something like $575,

580 billion dollars of revenue so not even one percent like that's a company they could gobble up in a second and it probably gets through ftc uh scrutiny even because of how small it is i think there's room for like five six seven of those marriages to happen within this year and so cyber security to me is a place that i'm very excited about if you can't tell that i as an investor think that it makes a ton of sense probably to just buy one of the etfs right bug or CIBR or something like that, rather than trying to pick the perfect right one individual name within that space. But in there, there's going to be a lot of dealmaking that happens back half of this year, early next year. Listeners, you can get Malcolm's book,

Financial Independence Doesn't Happen by Accident, this April. And when you crack the spine, you might see a familiar name. Our friend Chris Hill wrote the foreword and connected us with Malcolm. We've got a break coming up, but you should stick around. Matt Argersinger and Ron Gross. We'll be back in a minute to discuss stocks on their radar. Stay right here. You're listening to Motley Fool Money. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis, joined again by Matt Argersinger and Ron Gross.

We're going to jump right into stocks on our radar this week. Our man behind the glass, Dan Boyd, is going to hit you with a question. Ron, you're up first. What are you looking at this week? I'm going with discount retailer Five Below, F-I-V-E. I love how my friends over at our Rule Breaker service describe this business. They say, imagine if Target and a dollar store had a baby. I think that kind of gets an image in your head. I don't know if you like it or not, but it's a good description. There are 1,505 below stores across the country focused on selling merchandise at $5 or less. They expect to grow that to 3,500 stores by 2030, so more than a doubling in seven years. Rapidly expanding the stocks 25 times, not the cheapest for me, so I'm

going to dig in a bit. The dollar store industry has been in a little bit of trouble right now, so there is an overhang and stocks have been weak, but I think it's interesting enough to take a look at. Dan, a question about Five Below. Ron, I'm an almost 40-year-old father. What's getting me into a Five Below? When your kids get a little older and they find out that they can walk in with a $5 bill and buy almost everything in the store, that'll get you there. Yeah, Dan, anything in this store could be yours. What a pitch for a kid. That's easy. Your father of year, right there. Matt, what's on your radar this week? Going with UPS, ticker UPS, we just add this to our dividend investor watch list. My partner in crime, Anthony Chavone, has done some

great work on this. The company reports results next week. They're going to be bad. Package volumes have been slumping. They're still integrating all the costs from the new Teamsters contract. They've got a glut of real estate that they're trying to work through. A lot of moving parts. But this is a company that's generated exceptional returns on capital, solid cash flows. there's a lot of brand equity here. What can Brown do for you? I love that the dividend is a central part of their capital allocation strategy. They've paid or maintained it for over 50 years. Stock just looks cheap, 4.5% dividend yield. I think once they get through this next quarter or so, things are going to be looking up for UPS. Dan, a question about UPS.

Has there ever been a more important brand with a worse tagline than what can Brown do for you? Or just Big Brown? I mean, you don't like that, Dad? I don't know. No, Matt. And you know why. You know what I think about when I think about those words. Okay.

Dan, I'm not really feeling a ringing endorsement on either side. I'm curious, which one is going on your watch list this week? I'm going to go with UPS simply because I'm going with what I know. I don't know anything about Five Below. He knows all about Big Brown. Nice. All right. Matt Argersinger, Ron Gross.

Appreciate you guys being here. Dan, appreciate you weighing in on our radar stocks. That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll see you next time.