Motley Fool Hidden Gems Investing - The CEO Draft

Episode Date: July 16, 2024

We’re picking CEOs for investors to watch. (1:01) Recorded live at FoolFest 2024, Bill Mann, Asit Sharma, and Ricky Mulvey discuss earnings from Charles Schwab and their takeaways from the conference. (7:50) Then, they draft their favorite CEOs in the following categories– capital allocation, growth stories, turnarounds, and wildcard picks. A correction: The CEO of Kinsale Capital is Michael Kehoe. Companies discussed: SCHW, OTC: CNSWF, ANET, WINA, KNSL, AMD, TTD, IBM, PEP, OTC: ADDYY, RKLB, ORCL, JPM Host: Ricky Mulvey Guests: Bill Mann, Asit Sharma, Erick DeVore Engineers: Desiree Jones, Michael Towers of Marx Productions Learn more about your ad choices. Visit megaphone.fm/adchoices

The Draft is live. You're listening to Motley Fool Money. I'm Ricky Mulvey. We are live at Fool Fest with the Act House. Thank you for being here, Motley Fool members. I'm also here with the mayor of FoolFest himself. It is Bill Mann. He is going to help us out with the CEO draft. And also here is

Asit Sharma. Asit, hello. I'm still waiting to be deputized as assistant mayor. The vice mayor of FoolFest. Assistant to the vice mayor. It's been a great event so far and Dylan

did not have one day to talk about coming into his live show, we're lucky enough that we have a day to talk about. I'll start with Bill. What's been a big takeaway from day one of Fool Fest? Well, I think it's such a delight for, and we were talking about this before we came on air, how great it is to be able to be face-to-face with the people that we actually communicate with every day. And I really do want to say that a lot of you have become friends of ours and my wife thinks it's really weird. You're wait you've never really met in person uh but it's true you know we we we know you all we really admire so many of you and it's it's wonderful for us all to be here in a very temperate washington

dc yeah and then austin how about you yeah same for me it's so exciting to meet with members i realize we spend so much time on zoom at home i become an introvert during the year because as we we were talking about earlier, I'm at my kitchen table trying to quap down some coffee before Ricky and I are talking, and other colleagues, meeting with them in Zoom, I meet with members and I realize, wait a minute, I used to be an extrovert. I used to be energized to see human beings within a few inches of me. Funny story, yesterday, many of you know Brian Feroldi is a great guy, super intelligent, has a nice learning class he gives for stocks, if you just Google him and a full contributor. So after a long time, I see Brian, he's

three feet from me. And I'm like, Brian, we should really catch up on Zoom sometime, buddy. But it's just so wonderful to be here. And I see colleagues, my colleague Vicky is here on Stock Advisor team. She's on the West Coast. I'm on the East Coast. So we got to chat together last night. So yeah, super happy and ready to do this. And then coming up, we got Brett Shulman here. We have Morgan Housel here. Anything you're particularly excited about that you're eager for for the rest of FoolFest? Now that we've gotten the emotional stuff out of the way. The hardcore stock talk, Bill. Yeah, I am really interested to hear what Brett has to say. And Morgan actually quoted me in his first book, so I like to call

myself an uncredited co-author of the best-selling novel. But he's a fantastic speaker. I don't know if you all know this, but yesterday Brian Haney was here, who is the president of Kinsale Capital, is a longtime Fool recommendation. And the night before, he, on his own accord, came to the bar here at the hotel with his wife just to meet Fools, just to spend some time. I didn't know he was coming. It was a really, really neat thing for them to do. And so I just want you to know how energized people are by, by your presence. Austin, anything before we go to Charles Schwab? I'm looking forward to your questions today in person on the app.

I want anonymous. I want to see who you are. Let me know. I'm that person. All right. It's Ricky, actually. Probably. We've got, I'll never tell.

We've got bank earnings this week. And this morning, Charles Schwab reported, Bill, you've been on the Charles Schwab story for a while. remember when everyone was panicked that everyone was gonna pull their deposits out of out of Charles Schwab yeah maybe that didn't happen and now Wall Street's a little upset because they wanted a million brokerage accounts but they only got nine hundred and fifty five thousand so close so so close how how mad are you I'm okay yeah I'm not that mad because Schwab was the company that forgot to

die and last year when when Silicon Valley Bank collapsed people said well obviously, there'll be another bank that collapses. And Schwab is actually, we think of it as brokerage, but it is actually organized as a thrift. And so, people looked at Schwab and said, well, Schwab has the same characteristics. It's obviously going to go away. And it hasn't happened at all. So, yeah, there are new accounts, which are people who have decided in the last year to trust Schwab. It's a little bit light, almost a million, but great earnings. And the company is is doing absolutely fine. Asit, this is a company with $9.4 trillion in assets under management.

It's really hard to make that go away, Bill. Asit, any big takeaways from you from Schwab or the bank earnings before we get to the CEO draft? Yeah, I mean, I literally was introduced to this company today by Bill. I don't spend a lot of time in the banking industry. I mean, on first look, this looks like a stinker, if I give my honest opinion here. Oh, crap. Pin drop silence. This is a joke.

17% growth in net assets is pretty good. When you get to that skill, it's really difficult to drive net asset growth. So put assets on your balance sheet, pass the high single digits. So for a company to really be able to extrapolate out its base and defy the law of large numbers, not the mathematical law of large numbers, which is something different, but you know how we talk about investing. Microsoft can't get bigger, can it? Schwab can't add another few trillion dollars

to its balance sheet, can it? I think it's sort of impressive. The other thing I like just taking a look at the company is you don't have to worry as much about the fluctuation in net interest margin with these companies. They have a diversified base of revenue, they've got the wealth management piece, so many other nice parts of the business,

acquisition of the other brokerages. So I feel that if I had to choose sort of a quasi-brokerage type banking company, would be such an interesting one to look at and uh yeah i've watched bill for many years i've seen him zero in on tiny tiny banks out of nowhere but it's so interesting to see him continue to be positive on a larger company and it's the earnings power it's the earnings growth i think that that's so attractive here i feel like we need to pour one out for the uh the great recession of 2023 do you all remember there were several economists who said there is a 100 chance that there will be

a recession and by the end of 2023 since the beginning of 2024 the big banks on aggregate are up about 33 percent so uh the the schwab experience to me should you know should suggest that for whatever reason however we've managed to do it recession is not coming and a soft landing is being achieved as we speak right by the way that investment bank congratulations bill i did Bill Mann has achieved the soft landing. You're welcome. That is the power of having a microphone behind a desk, Bill. A powerful feeling.

The investment bank that made that prediction, by the way, they've upped their prediction. So 101% chance for 2024. That's what I read. All right. The meat of this show is a CEO draft. We have four categories. CEOs that are good capital allocators, a growth story, a turnaround story, and then a wild card pick. Before we got recording,

our friend Shashi was kind enough to shuffle and deal the cards. Bill got the ace. Asit got the king. I got the seven, so that means I go last. Bill goes first. I believe we should do a snake draft, though.

Snake draft? So I go twice? Yeah. I think that... Does that make sense? Yeah. Applause for snake draft. Anything Bill says gets applause.

This is pretty spectacular. You're welcome. Asit, you get to stay in the middle for each one. I love it. Let's do it. let's start with a capital allocator. Bill, first pick of the draft, which CEO, which company are you picking for capital allocator? So there's a Canadian company called Constellation Software, and the CEO has been there for a long time. If you've ever pulled up a picture of him,

he looks like Santa Incognito. His name is Mark Leonard. And you would never see a Constellation software product but they do things like they buy they buy software companies they've bought hundreds of them and so and they look for verticals where there's no competition so they run water treatment plants and bowling alleys and you know and and hair salons and places where there are plenty of return there are a ton of customers uh and they have returned about 23 per year over the last 20 years and so they're very disciplined buyers of companies which is really really hard thing to do usually when companies acquire other companies it is a net wealth destroyer for investors but Mark Leonard has done it

exactly right for a long period of time first pick Constellation Software up next Asa Charma all right so I want to go in the opposite direction from acquiring companies on scale and talk about Arista Networks gotta be Jay Shree Ulal. What a fantastic CEO when you think about capital allocation. We look at Arista Networks and see this great networking company that competed with Cisco and Juniper Networks and really outshone those companies, but we rarely talk about how lean and mean this company is. I mean, man, you look at this income statement, there's hardly any operating leases to be found. You would think with such a company of scale, they would have

glamorous office space around the world lots of R&D facilities but they do so much with so little and it's impressive the balance sheets is bulking up over time six billion bucks rough numbers of retained earnings and super cash flow no long-term debt working capital six seven billion dollars and they don't have a need for it they're so interested in what they're doing that they've got firepower should they ever go the other way and say look we've reached the limits of our innovation, and we need to now start acquiring companies. I hate to see that as a tech investor. Ricky hooked me up with the head of product over there, so I interviewed him a few weeks ago, and they're so serious about the future, competing with NVIDIA, coming

up in one part of their business, but I really like the way they look at a dollar and try to get the most efficiency out of it. It's not a company that skimps on its employees, on compensation but they don't really have a desire to do frivolous things extraneous things and that shows up in the books so i gotta go with jay shree for that one how mad are you going to be if i take apple bill is that is that lame it's lame okay we should ask the the audience is that is apple lame like are you disappointed you've shown up in person mary's giving mary's giving a thumbs let's do right she gave a thumbs down i think thumbs down okay we're gonna do uh i'll take brett heffis at winmart it's like picking mcdonald's is your favorite scottish restaurant

Okay. All right. If you ask to be shamed by Bill, you will be shamed by Bill. I'll take Brett Heffes at Winmark in part because he doesn't think about capital allocation that much. He has a model for it. Winmark is a resale franchisor of companies like Played Against Sports, Plato's Closet. You may have heard of it if you've ever listened to Jim Gillies speak. When Heffes was doing an interview with uh Jim he explained he's like we have a process this is kind of what it looks like and this is the amount of time I'm going to spend thinking about it and I I like that you have a process you have high inside ownership and uh that's good enough for me let's let's move on to growth story we've got a growth story and since I get to go first in the

snake draft uh Eric Eric DeVore yeah I'm calling up someone because I you know I'm going against analysts right now so I need all the help I can get I'm giving Eric DeVore my pick for growth story. Did you just make the call to bring in a new pitcher? Correct. Yes. Impressive. Eric, can you come up for a CEO with a good growth story? Look at those pants. Somebody's got to do it. That's pants for radio. Yeah, absolutely. What a treat. All right. Well, my pick via Ricky would be uh dr lisa sue from amd um her yeah that's right bill one of your favorites boom um i think her time at ibm then free scale her her upbringing at mit the amount of the amount of well-rounded like left brain plus right brain in order to support the creative

stuff that AI is going to bring, that creatives bring with GPUs. I think that the backbone of this market is not just a winner-take-all with NVIDIA, and I think there's going to be more than one winner. And yeah, I think that she's going to be great. Eric DeBoer, thank you. What a great pitch. by the way we were fighting for lisa sue in another category a few minutes ago i mean if you want to think about amd it was a company that was basically kept around by intel so intel wouldn't be declared a monopoly so that's the level you know that she has brought to the table

not only have they survived but they're winning and it's really amazing all right next up in the snake draft, it would be Asit. Asit, what's your growth story? My growth story is Jeff Green at the Trade Desk. I mean, this guy I've been watching a long time. And when Trade Desk was a very small company, he was talking smack about the walled gardens over Google all the time, every conference call. I mean, half an hour just talking about the monopoly power of advertising that they were going up against. And I didn't take it very seriously. I watched this company grow. I started looking into their tech and i said man these guys are serious i mean against that wall garden first they brought their little helmeted heads and they ran up and bopped up against that garden fell back

then they they brought in a few crossbow archers started trying to shoot over what are you even saying keep going the trebuchets i'll sit you're on fire right now keep going brought the trebuchets they threw the dead horses over okay and then they said let's get a battering ram and that That was unified ID 2.0 when the cookie started to crumble. So I really like this combination of fierce competitiveness, talking smack, but working on the tech and telling his team, let's just have a better tech. Let's play with other folks. They're very good at partnering up with other companies in that ecosystem.

So for me, that's what growth is about. having that goal going after it aggressively having ambition vision he's got it all he's a little long-winded but other than that i like this guy this is this is a company that sells ads and you've made it sound like game of thrones awesome i need to hear more about the dead horse trebuchet dead dead horse trebuchet do you need to buy an ad on netflix like that's where we've gone to i'm all right i'm glad you're following that one up is uh for the listeners bill has his hand against his forehead and he's trying to get well I do I do want to leave it to the to the live audience here because I did call Apple a little bit lame and you all agreed with me if I were to

say Elon Musk as a gross story would you describe that as similarly lame and too obvious yes okay good I'm glad that I I'm glad that I structured it so that I was going to lose um I am going to continue to be uh uh lame and semi-obvious and talk about the ceo the the president ceo uh brian keogh and brian brian haney who we met yesterday here from kinsale capital uh it is an insurance company they do hard to place insurance and if you were in the room yesterday that you learned about how they had a boat run into one of the hotels that they were insuring uh pretty impressive story but this is a company that has turned uh a very small business into a very big one and it is a commodity business you can get insurance from anybody i could write

insurance from you for you it would be a terrible mistake on your behalf to do so uh but they have been fantastic at it it's a 10 bagger over the last seven years which is really really hard to do in the financial space all right and then you're up next for turnaround as the snake draft continues so um can you all name uh you can top of your head you can think of a a number of ai companies one of the oldest ones is a company that you wouldn't really think of and it is a tremendous turnaround and it's happening right now and so the ceo is arvind krishna and the company is ibm if you remember watson you remember deep blue the the whole chess thing that was that was AI before it got branded better. And IBM has taken all of its hardware businesses, and it has gotten

out of those businesses. It is a services business now. It is asset light. It is very sneakily one of the companies that has one of the biggest leads in artificial intelligence. And you don't know about it because it doesn't have some huge multiple attached to it. It doesn't get talked about very much because I think people are almost embarrassed to say, oh yeah, I'm really fond of IBM because IBM has done nothing but disappoint for 20 years. But I am here to say that Arvind Krishna has done a bang up job turning this company around and people are going to start to notice. There was a murmur in the crowd and then I heard pens clicking when you brought up IBM, Bill. Should I spell it? I think that's the best reaction you can get

in an investing conference. I was like, huh, gotcha. All right, Austin, what you got for a turnaround? So I don't think I'll hear any pens click because this CEO is actually out of the CEO seat. But Ricky said we can talk about past performance. But there was a time when Pepsi was really languishing against its rival. What kind of turnaround story could Pepsi be, right? But you're in a very tight band when you're a consumer goods multinational company. You've got to grow a little bit beyond the rate of inflation, but you can't grow too fast because at that scale, you know, what happens, your only method is pricing power and you'll price yourself out of the market.

So Indra Nooyi came to PepsiCo at sort of a vulnerable time and she really drew the strategic threads together. I noticed after she came on board, suddenly I walk into my C-store and finally I'd see stacks of Mountain Dew besides Frito-Lay products, why didn't they think of that before? just a very strategic thinker, a very kind, compassionate CEO. I have a theme running through my choices. Most of them are women. I think we need more women CEOs in the Fortune 500 because, thank you. Maybe I'll hear some pens clicking for that. Because they tend to be very analytical, but also great listeners. And sometimes you need the opposite of all the testosterone I

was describing before with Jeff Green. And you need leaders who can come in and figure out what needs to be done and get people to align that common goal. I thought she was great at that and also introduced some more sustainable practices at PepsiCo. They issued a green bond for a billion bucks. And yeah, some of that is probably greenwashing, to tell the truth, with these big corporations, but at least they're trying a little bit. So great leader. She came and talked to us at The Motley Fool during the pandemic, virtually via Zoom, and we got so much out of that conversation. Their stock would double if they renamed it Frito-Lay. I'm going to take Bjorn Golden, who is the CEO of Adidas, this CEO came into a really tough situation because

Adidas had tied up a lot of inventory, sales, and profits to the rapper formerly known as Kanye West. And it was because Adidas, for a long time, was trying to look for the next Michael Jordan, the next big figure that can just sell a lot of shoes. What ends up happening is Kanye West uh broke down said something he trebucheted himself he he trebucheted himself um not an easy person to work with and uh what bjorn golden did when he came back in is he said we're not going to look for the next big figure we're going to look across we're going to try to get very specific across a lot of markets and um distribute our bets a lot and i i think that's working out for adidas uh earnings getting back to hopefully positive territory is a shareholder i hope so

So, but I think he's doing a good job. So can we take a quick digression here and talk about the process of investing? Yes. So I really like this about Ricky. We actually, I chatted with you about Adidas. We had sort of a comical podcast recording because the story was so incredible.

It feels like a year and a half ago. And I remember, so Ricky tends out to bring the snark in me. I have a very little snark level, but sometimes when we get together, he can dial it up and it's fun. I remember that being a really snarky podcast episode I went back and looked at Adidas and I was like gosh who would buy this thing look at all that inventory and you know fast forward to a

couple of weeks ago and we're chatting about this Rick and I were just chatting he's like yeah I'm an Adidas investor now yeah if I'm not mistaken and I thought that was so foolish the ability to laugh at a company today and then return to it and let that smile fade a little bit into interest some curiosity and then take a position when you see the story turning around. So I thought that was great. I tried to emulate that behavior in my own investing, but it's rare. It seems easy, but it's hard. Yeah. It's something I changed my mind about because what I originally took, when you look through an Adidas earnings call, it is a complete scattershot. And I'm like, what is going on here? And then I realized, oh no, no, there's a plan. I see what Mr. Golden

is doing. So I got wild card. I want to take a true wild card. I'm taking Peter Beckett Rocket lab. I feel like dude's putting rockets into space. He is not Elon Musk. He's putting more rockets into space. If you're assembling a team of CEOs, I want a wild one. I want Peter Beck. He almost got deported. Yeah. Right. When he showed up and he started, he's from New Zealand and he was like this 19 year old. So he started hanging around sensitive facilities in the U.S. because he was fascinated about rockets. And they were like, all right, person not from here. why are you hanging out at the gates vandenberg air force base but yeah um osset what's your wild card all right so i'm gonna ask for a show of hands if you're listening post this recording

raise your hand i'll feel you but who in this room has heard of safra cats not a person she is the ceo of one of the largest companies in the world by market capitalization. She is the CEO of Oracle. And she does an amazing job of managing that outsized personality. If I asked for a show of hands who's ever heard of Larry Ellison, I think you would.

OK, raise your hands, like half the room, right? He's the chairman. And together, they're a wonderful team. He's a visionary. He's sort of a wild guy, still in his late 70s, acts like a much younger person. And he's very creative, but he needs someone who can execute alongside. And about seven years ago, they realized that, again, Snark, all this hand-wringing and thumb-waving they did at the cloud wasn't helping Oracle's business.

So instead of jumping in and saying we were wrong, we were the company that should have built the cloud. We were the world's premier database company. They started from scratch. Let's pretend we were doing this today. How would we build this? and they came up with a really nice architecture. It's called RDMA. Fast forward seven years, the youngest companies on the planet, the anthropics of the world, the mistrals, so many small startups want to work with Oracle. Why? Because the architecture allows for faster training,

faster inference, it's lower cost. So if you've got to dole out the millions that some venture capitalists gave you, you want to be able to have more inference, more training, so you can figure this stuff out, get a leap on the competition. And she's really great at that. Actually took over, unfortunately, Mark Hurd was the CEO of Oracle, passed away untimely, I think in his early 50s. And since then, that duo of Safra Katz, Larry Ellison has been so powerful in the markets is one reason why that stock has really taken off in the last couple of years. They found their place in the cloud and it's cloud plus. It's really an AI place. All right, Bill. I'm going go with the ceo whisperer okay jamie diamond uh in the middle of the last decade took over a group

that's called the ceo roundtable and one of the things that the ceo roundtable does every year is they survey all the ceos what do you think is going to happen with the economy what do you think is going to happen with your industry and so when he took over he goes we have all this data why don't we see the people who know the most about their own businesses how they did and you're not going to believe this but they did terribly their own day you know the ceos of these companies are really really not very good at prognosticating no better than really anybody else is anyone good at prognosticating well i can tell you i can tell you that on the list of people who aren't ceos are on it jimmy diamond is uh he he i really would almost uh vote for him to be the ceo of america

He loves this country. His letters every year to J.P. Morgan shareholders go so far beyond what the bank is doing, and he is such an inspirational person. He is for other CEOs for sure. This is a banking guy. He doesn't have to do that. There are bankers, they would sell their grandmothers if they could make a profit at it, right? They will make a market in anything, and Jamie Dimon is someone who has said, no, these are the things that we ought to be doing, and these are the things that we ought not to be doing for the good of the country, for the good of society, and I think that that is something that is worth our tipping our hats to. That's a good place to wrap it up. All right. On Bill's team, we're going to pick a winner. Raise your hand, because, yeah, raise your hand if you think Bill won. You'll raise your hand if you think Austin won. Don't raise your hand for me. remember I'm the deputy mayor he always gets the glory the mayor of full fest

I take out the trash the mayor of full fest Bill Mann has picked Constellation Software, Kinsale Capital, IBM and JP Morgan okay yeah you're allowed to raise your hand for Bill okay sorry I didn't need a D permission

Ricky you didn't give them any instructions well I was going to do applause but I was like I think hand-raising is easier to measure. Everyone has their hand up. Okay. Asit Sharma, Arista Networks, Trade Desk, PepsiCo, and Oracle. Ooh.

Someone back there has been voting twice, but you put up two hands. I see him. In the American flag shirt. In the American shirt, we had such a great conversation. He didn't want to have to choose between us. You put up two hands for Asit, so I'm counting your vote for Asit. Are you from Chicago by any chance? I've got

I've got Winmark AMD Adidas and Rocket Lab thank you Eric that's why I think I think Osset won

I'm voting for you no I think I'm voting for you buddy I think Osset won I think Osset wins the CEO draft thank you all so much for being here

this has been a lot of fun 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 yourself anything based solely on what you hear I'm Ricky Mulvey thanks for listening we'll be back tomorrow thank you guys