Motley Fool Hidden Gems Investing - The House’s Cut is Going Up

Episode Date: May 31, 2023

It’s tough facing the house, whether you’re playing it or trying to pay for one. (00:21) Asit Sharma and Dylan Lewis discuss: The latest housing data, showing high rates are affecting mortgage and refinance applications. The broader economic strength we’re continuing to see in spite of high rates How Las Vegas strip operators are tweaking their businesses to grow.  (12:22) Dana Corl and Keith Speights talk about big pharma’s focus on the weight-loss space.  Companies discussed: MGM, CZR, LLY, NVO, WW Host: Dylan Lewis Guests: Asit Sharma, Dana Corl, Keith Speights Producer: Ricky Mulvey Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Dylan Lewis Homebuyers and blackjack players are feeling the pinch. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me. Asit Sharma Dylan, thank you for having me. We're starting out today with the housing market. New data shows mortgage rates are at their highest since the fall of 2022, and applications to purchase and refinance homes were down 31% and 45%, respectively, year over year. The average 30-year conforming

mortgage is approaching 7%. But pairing this with other housing data, recently we've seen in March that home sales were up slightly year over year. Asit, it seems like homebuyers cannot get a break here. We're still chronically underbuilt in the U.S. housing market, we have ready and willing homebuyers, but prices have remained stubbornly high in a lot of markets, and there's no relief in sight on the financing front. For anyone that is not interested in buying a house right now, this is really a rate story. Rates remain high. We haven't seen them sustain around 7% in about 20 years. But as we back out from housing and we look at some of the other parts of the economy,

You would expect high rates to have these follow-on effects. Asit, it doesn't necessarily seem like we've seen them. Yeah, they're supposed to have those effects. The Fed, though, is trying to head off inflation. Recent numbers show some progress in this area. The roots of higher inflation, we can trace them back to the story of the last few years. There was Fed stimulus, there was global supply chain problems that we suffered during the pandemic and the like. Many of those pressures we see are abating, underneath, we still have a very strong economy. That's another reason the Fed may want to keep interest rates higher for a longer period. I've been following data that a company called

Refinitiv puts out on S&P 500 earnings. We see that they're actually flat with most of the companies in the index reporting, as of my last look, last week's data. This is sort of surprising to me, given that the kitchen sink has been thrown at U.S. corporations from these high interest rates we talk about, to inflation, to really wary consumers out there in the wild. This is something that's a net positive about the economy. The second thing that I was interested in is the Philadelphia Fed has this ongoing survey, and they survey about 28 leading economists. At last glance, these economists are still calling for 1%, or I think it's 1.3% year-over-year growth in the United States GDP this year.

The economy is still in better shape than many thought it would be. I want to unpack some of that, specifically the net positive on relatively flat earnings growth. Is the idea there, Asit, that this is relatively strong performance in the face of a lot of headwinds and that we're seeing things like pricing power come in and help offset declining demand? What exactly in there is positive? Because I'm sure some of our listeners are a little hung up on the idea that something being flat year-over-year maybe isn't the most rosy indicator. Well, the truth of it is, Dylan, you named a couple of factors underscoring why those profits aren't in the red when you

look at year-over-year comparisons. But tech layoffs, unfortunately, have something to do with that. Part of this resilience that I'm pointing to in American corporations is actually a bit of cost-cutting. But you're correct in that companies have been, beyond those layoffs, watching costs. They have been exercising pricing power in industries where you've got that. We see this in the consumer goods industry a lot. We've seen that over the past, I would say, four quarters. The real problem here is that when you look at the sequence of profits, they're pretty much on the decline. It's just corporations are stemming the amount of their bleed and they're trying to flatten out the curve. I think given

all the pressures that we see these corporations dealing with, it is actually better than many expected and that becomes a net positive. Bring it back around to the housing element of this story. My macro 101 from freshman year of college would say, we're seeing rates stay high, and maybe we're not seeing too many indications that they're going to come down quickly anytime soon. That points to me, in the face of all of these things, still relatively solid economic footing, even though we've been hearing this idea that there will be a recession coming for quite some time. Yeah, it's very counterintuitive, isn't it? You'd think people can't buy homes because of high interest rates. That's a really

bad sign for the economy. But so much of this game is expectations-based. The mortgage rates reflect expectation that the economy is going to remain strong, forcing the Fed to keep rates high to keep it from heating up more, and thus driving inflation higher. It's bad for homeowners in the near term, but it's also a data point, one of several that are starting to indicate that this often predicted recession might be milder than it will be harsh. There are some scenarios in which we don't see a recession at all in 2023. Again, what's temporarily bad for that budding homeowner actually reflects a healthy overall posture in the U.S. economy. Asit, one of the other stories that

I wanted to hit with you today is an update on the stakes at the Las Vegas Strip. According to The Wall Street Journal, visitors that sit down at the blackjack table should expect lower payouts than they've seen in the past. Payouts used to be 3-2 at Blackjack, according to those that follow the industry. Many tables are now paying 6-5. Asit, put another way, the house's cut on the strip is going up. Asit Sharma Why are they doing this, Dylan? I probably sound like an inveterate gambler. I'm not, but I wonder about what this means for overall business. The house always has an edge. We go to the house knowing that it has an edge, statistically honest. But gamblers want a

decent payout when they win to compensate for the hands that they're going to lose as they play more and more hands in that edge. So, what happens when the house lowers its expected payout? I'm not sure this is the most farsighted strategy. Yeah, it's interesting. It's a fun story, but it certainly has some money tied to it as well. We have seen broader efforts from the Vegas operators to find growth. They've done things like raising their table minimums. They've looked more to lodging and entertainment and use that as a way to bring some more money in. When you put it all together, it has led to record-setting gambling revenue for Vegas casinos in spite of traffic being below pre-pandemic

levels. I do wonder if this is a type of business squeezing the customers that they can already get in the door and maybe prioritizing short-term growth over long-term growth here, Asit? It could be, Dylan. I've got a couple of perspectives on this. You've got that record-setting gambling revenue, but also the hospitality side of the business is going very strong in Vegas. When we see this travel and leisure spend rise, casinos want to lean in on their resort profitability. In a bad economy, they do the opposite, they put out more tables, they spruce up those payouts. The second thing is, look, the major casinos, they probably should be focusing on getting a yield out of their capital expenditure.

This is billions that's been spent communally to continually upgrade Las Vegas as this resort destination. It makes sense that while gambling is still this huge draw, functional profit is coming from those hospitality operations. The Wall Street Journal article that you mentioned has a quote from Caesars CEO, Tom Rieck. He says, you're bringing in higher-value customers and we're already full, so you're kicking out the lowest end. I see no reason that needs to stop or would stop. This seems like a problem that they are solving by basically seeing where the price point is where people start to turn away. They have the problem, if you want to call it that, of enough customers in the door

that they can raise prices and find that sensitivity. And I think this is where your point becomes pertinent when you stretch out beyond this time period in which there's still some residual pent-up travel and leisure demand. Because when you optimize too much on a pricing function, that's where you can really shoot yourself in the foot in terms of long-term profit and revenue realization. It's the same equations that manufacturers play around with when they price the same equations. PepsiCo plays around when it tries to adjust the size of a bag of chips in an inflationary environment. At what point does the consumer say, I'll take a pass this time. Maybe we can revisit this

when and if we see that dip that we were referring to earlier, if we do hit a slight recession or maybe even something a little bit harsher than a mild recession, let's see then the posture that the resorts are taking. I'd say, for one, that they will probably try to entice those inveterate gamblers, the core of their business, back in and maybe ease up a little bit on those payouts. You mentioned before the focus on lodging and entertainment. I think that's interesting and it makes quite a bit of sense to me because you look at the casinos before and after the pandemic, it's a natural comp for any physical business where you have people onsite. But as you do that, you have to remind yourself that over the last three to four years,

the gambling landscape has changed considerably. Sports betting and gambling is far more accessible now than it was for a lot of users via mobile. Do you feel like that can put a ceiling here on what casinos are able to flex or might be something that guides a lot of these casino operators, Asit, to focus on the draws that get people in the door more so than just what's going on at the table? I think that digital element can bring some net margin to the big gambling houses. I think in there, they can shift around where they entice and where they squeeze customers, Dylan. If you look at Caesars, we mentioned them, their digital revenue is really starting to come around. Net revenues were $238 million in this past quarter. Now, they ran that at

a slight loss, but over time, as more digital gambling becomes widespread, and of course, this is also a state-by-state story, I think you'll see some of that nice margin come in allow the big houses to make choices on where the lodging profit is, where that hospitality profit is, and again, what the incentive really is to cater to gamblers who maybe are loyal customers, but really don't bring the profits to the table anymore. In fact, our producer, Ricky Mulvey, pointed out to us that slot machine revenue is more than double the combined take from table games, sportsbooks, and horse racing in Nevada. You've got a lot of flexibility in this P&L equation, and the digital certainly plays into it as these operators are looking

to spruce up their bottom lines in any kind of environment. Asit Sharma, thanks so much for joining me today. Thanks a lot, Dylan. This was a lot of fun. Weight-loss drugs are hitting the market, and big pharma is ready to cash in. Dana Corll caught up with Motley Fool contributor Keith Spites to find out how these treatments work, the side effects you may want to know, and which company is leading the race. Ozempic. It seems to be everywhere.

It's in the news. It's in my social circle, whether it's actually Ozempic or another GLP-1 medication like Novinordis' Wegovi or Eli Lilly's Manjaro, it seems to be the medication of the moment. Keith, can you explain to those who may not be familiar what it is? So, Ozempic is the brand name for a drug called semaglutide. It's what's called a glucagon-like peptide 1 or GLP-1 agonist. So, what that does is GLP-1 is a hormone that is involved in the process of insulin regulation and insulin production. And so what Ozempic does is it binds to this GLP-1, what's called GLP-1

receptors. And then that causes the production of insulin in the pancreas for one thing. And so Ozempic is a type two diabetes drug. So that's really important there. It reduces the amount of sugar leaving the liver, but it also slows down food leaving the stomach. And so the combination of all this reduces appetite and can lead to weight loss. This is relatively new to market as a weight management tool. Do you think it's a fad? I don't think it's a fad. And technically, Dana, Ozempic has not been approved by the FDA for weight loss. There is another version of semaglutide that is marketed by Novo Nordisk, and that drug's name is Wagovi, but it's the same active ingredient. It just has a higher dosage. It has been approved for weight loss.

I don't think this is a fad. I think this is a huge market, and we're going to see more drugs enter this market, I don't think you're going to see Ozempic go away. We're learning more about the capabilities every day of this drug. And just last week, there was a story about how this medication can help address addiction of many kinds. If I understand correctly, it tempers the amount of dopamine your body releases when you ingest something you like, whether that be food or alcohol. What does this mean about the dopamine we get every day from things that we enjoy? Are we looking at the long-term effects of changing brain chemistry? Well, I think the important thing to note on this, Dana, is that these are just initial reports.

They're anecdotal reports. There haven't been clinical studies that conclusively demonstrate that Ozempic can reduce the addictive behaviors that you've read reports about. There have been reports that Ozempic can help people who are alcoholics not crave alcohol anymore. It can help people not want to smoke cigarettes. It can help people not bite their nails anymore. And so we haven't seen conclusive clinical evidence that the drug actually does all of that. That's not saying that it's not possible that it could be effective in those types of things. So we'll just have to wait and see.

Do you think the FDA is watching? And I ask because I think back to the 90s miracle drug, Fen-Phen. It was everywhere. Just like I feel like Ozempic is mentioned everywhere, and it was FDA approved, yet users were at risk of experiencing severe cardiac problems. Are there lessons we learned from this kind of popular weight loss drug that we should be looking at this time around? Yeah, I think so. I mean, there are no drugs out there that don't have some side effects, and Ozempic and Wagovi do have side effects. They can cause nausea, headaches, diarrhea, dehydration. And there actually are some really severe, very rare side effects, including kidney

failure or pancreatitis, even thyroid cancer. And so, yeah, I think the abuse of these drugs is something that you'll see regulators watch very closely. We know that Ozempic was originally designed for diabetes patients, and now it's being applied in other places. And from a supply and demand standpoint, is there enough to serve the people that really need it for their type 2 diabetes? There have been supply issues, and it's been solely a result of the just massive demand for Ozempic for weight loss, and so that has been an issue in the past. I think we're moving past that, and as more of these types of products enter the market, that'll be less and less of an issue, But yeah, it has been a real issue, especially in late 2022.

It seems that there are companies attempting to capitalize on medication like this, such as Weight Watchers, who in March announced that they're launching a more medical wing of their offerings, which will include potential prescriptions for Ozempic. What are your thoughts on kind of the scalability beyond pharma that companies are using to leverage for other markets? You know, that's a hard one because you can understand why organizations like Weight watchers would want to tie into this, for lack of a better term, a Zympic craze. You know, you can understand why they would want to jump on board. But at the same time, these drugs require prescriptions and, you know, patients need to have qualified healthcare providers who are making

those prescriptions. And again, I think this is something that you're going to see regulators really keep a close eye on because there's always that possibility of abuse when things kind of get in crazy mode like they are right now with Ozempic. And so, you know, I think regulators are really going to be watching this closely to make sure that things really don't go awry. Of the current medications on the market and their makers, either Novo Nordisk or Eli Lilly, would you pick a horse in this race? I can tell you the horse that Wall Street is betting on the most. And I would tend to agree with Wall Street on this front. So Eli Lilly has a drug called Manjaro, which is lycozempic. It's approved for type 2 diabetes, but also lycozempic. It is

effective at treating weight loss. Eli Lilly has reported some really encouraging late-stage clinical results for Manjaro in treating weight loss. The company is moving forward with obtaining regulatory approvals. They plan to file for those approvals. This drug could be on the market officially for treating weight loss in the not-too-distant future. And Manjaro actually does things a little bit differently than Ozempic or Wegovi. It's what's called a dual agonist. It targets both the GLP-1 hormone that Ozempic does, but also another one called GIP. It stands for glucose-dependent insulinotropic polypeptide. That's a mouthful, right but so it targets two different hormones and as a result there's some evidence that it

could be more effective than than azepic or wagovi also eli lilly has indicated that they could price it somewhat lower i think they're looking at in the ballpark of 980 dollars for the highest dose of it versus 1 350 for wagovi so um you know i think wall street is right to bet on eli lilly in this case. Manjaro could be the biggest winner. In fact, analysts are projecting, at least some analysts are projecting, this drug could reach peak sales annually of around $25 billion. That would make it one of the biggest selling drugs of all time. Now, these names and medications in general, and this doesn't have to do with Ozempic, how do they name these drugs? I love it. Yeah. Sometimes they really get creative.

So you'll notice some drugs, they try to tie into the active ingredient name, the chemical name. Sometimes they have nothing to do with it. So I'm not sure where exactly where Ozempic came from. I'm not sure where Manjaro came from. I'm sure they had some really creative people sitting in a room coming up with names that had not already been used. Well, Keith, thank you so much for joining me today. We hope to have you back again soon. Thanks, Dana. Great to be with you.

Dylan Lewis. As always, people on the program may own stocks mentioned 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, thanks for listening, we'll be back tomorrow.