Motley Fool Hidden Gems Investing - The Market Takes a Breather

Episode Date: December 19, 2024

The S&P 500 is still up about 25% this year, far outpacing historical averages. (00:14) Anthony Schiavone and Ricky Mulvey discuss: - Why traders are sour about the recent Fed meeting, and what long-term investors should focus on. - How American diners are responding to Darden Restaurant Group’s value offers. - Rising home sales at Redfin. Then (13:29) Motley Fool Senior Analyst Alicia Alfiere and Mary Long look at Upwork and Fiverr and the gig workplace economy. Companies discussed: DRI, TXRH, RDFN, FVRR, UPWK Host: Ricky Mulvey Guests: Anthony Schiavone, Mary Long, Alicia Alfiere Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

some of the steam is coming off your cup of coffee you're listening to motley fool money i'm ricky mulvey joined today by anthony chavone and what a day to get you on the a segment there's a lot going on in the market i could not think of a better time to come on the a segment uh happy to be here ricky yesterday the federal reserve wrapped up its open market meeting and here's what seemed to happen. Jerome Powell, the chair, announced that the Fed would take rates down by another quarter point, but that the rate of further cuts may slow. Yes, he prefaced it by saying, don't take this literally because that may change, and also that inflation needed to behave. This rate news triggered a sell-off in the market yesterday afternoon. S&P was down about 3%,

which is a lot for the broad index. So, Ant, I got my markets in turmoil lawn sign. We don't have the Chiron that they do on CNBC, so we go a little bit more old school. Should I put my markets in turmoil lawn sign out in my front yard? Well, Ricky, as somebody who owns a lot of REITs, I've had my markets in turmoil sign staked out in the lawn for about three years now. But seriously, though, I mean, the S&P 500 is off like 4% from a tie. And I mean, if anything, I think Wednesday's sell-off was healthy. I mean, last year, the S&P 500 was up nearly 30%. And this year, we're up about, I think, 25% now.

So it's been two great years for the market. And this year, we've really had no volatility in the market whatsoever. I mean, we had the yen carry trade in, I think, August. But I mean, other than that, that's about it. So I mean, who knows where this market sell-off might go from here. But just know that a potential larger sell-off is possible. well, I mean, the market tends to sell off, I think, I think it's 10% once out of every two years. So as a long-term investor, I don't think this Fed meeting or reactionary sell-off is really

anything to worry about. Chair Powell may have cost us a Santa Claus rally, but it's hard to be unhappy with the returns investors have seen over the past few years. Who amongst us could forget the yen carry trade madness of August? A lot of this comes down to the dot plot projections, which is when the central bankers guess where they think interest rates are going to go. Why is this something that the market cares about? And then when you're looking at businesses as a stock analyst, as a REIT analyst, is this something that you're paying a lot of attention to? So with the dot plot, the big news was that the Fed's dot plot is signaling two quarter point rate cuts in 2025. That is down from four quarter point rate cuts back in September when they had

their meeting. So I think that was a little bit unexpected by the market. And that's why you saw that the market sell off. And then, you know, adding to that, Powell's remarks at his press conference, you mentioned that, you know, cutting rates this time around was a close call and that the Fed would have to be cautious with further rate cuts. So I think that the market saw really kind of accelerated from there. As far as why the market cares about the dot plot, I think it gives them some type of like concrete data that they can hold on to, to give them a sense of what Fed officials are thinking. But I mean, to me, at the end of the day, that the bond market is really going to set the interest rates and kind of signal to the Fed about where to take the Fed funds rate.

So personally, I don't look at the dot plot at all. I don't think there's much signal in there for a long term investor. You know, like Peter Lynch said, if you spend 13 minutes a year on the economy, you've wasted 10 minutes or something along those lines. So it's not really something that I pay much attention to. Well, we're already three minutes into our macro talk. And I did think it was funny that there are economic headlines, financial headlines saying like Jerome Powell signals caution. He does that every single meeting. I've never seen a meeting where he's like, you know what? Now we're going to get wild with interest rate cuts. Let's see what happens. Then this morning, moving away from the Fed, traders started getting a little excited.

That's why you're seeing some green in your portfolio is the US economy grew more than the Commerce Department thought 3.1% annualized pace. That was better than they had initially thought that the economy grew. And these numbers represent macro forces hitting stock prices. But I don't see it meaningfully impacting the businesses when the Commerce Department makes a small change in the revision. However, in some of the stories we are going to get to, I think it is interesting what individual companies have to say about the economy. Yeah, yeah, no, I don't think those macro revisions really impact the businesses that I follow. Like you mentioned, it might impact the stock price in a day, but at the end of the day,

it really doesn't impact the businesses. Personally, I like to learn much more about the economy by listening to the companies that we follow, like you said, listening to what they're saying about the consumer rather than looking for these small macro revisions. So the better than expected GDP growth really tells me nothing about the current state of the housing market. I mean, that's a sector that's been in a recession for like two years now. So as a bottoms up investor, I'm much more interested in what the companies themselves have to say about the economy and their businesses. Let's get to some company earnings. Let's get to the business. Darden Restaurant Group, the owner of Olive Garden, Longhorn, Yardhouse, and Ruth's Chris. That's

always a tough restaurant to say. Basically saying people are going back to the restaurants. The stock is up about 15% when I checked this morning. Here's a rundown of highlights for you, 6% sales growth and 2.4% comp restaurant growth. More people are going to the existing restaurants that are already opening and spending more. 14% never-ending pasta bowls are at Olive Garden. They let you know that early in both the conference call and the investor presentation. And also CEO Rick Cardenas focusing on how Darden's brand teams are filling menu gaps, including a healthier chicken dish at Longhorn Steakhouse,

something i'm personally opposed to but what stood out to you from the quarter yeah all those results were pretty impressive i think the stock what is it up like 15 as we're recording this um is that an all-time high so it's a really good quarter from them what kind of caught my eye was that longhorn steakhouse they increased same store restaurant stables by 7.5 so the american consumers eating a lot of steak they're eating a lot of pasta too at olive garden and you know that that's coming at a time when really the u.s consumer is pulled back a little bit on discretionary spending. So, you know, I think the strong results are kind of a testament to their brand concepts. And like you mentioned, the recent promotional activity, like the Possible's,

and then rolling out partnerships with Uber. I think I just rolled one out with Uber a couple months ago. So I think those value deals are really resonating with their consumer. And, you know, overall, it was a great quarter for them. So there's one restaurant that got me searching to see if it exists in the Denver, Colorado area. This chain, Cheddar's, will sell you a 16-ounce bone-in ribeye with two sides for $22. And when I'm looking at that, I know you follow another chain, Steakhouse. I keep thinking, are you seeing these restaurants getting competitive with even grocery stores now, especially when they're selling these value-conscious steaks to people?

Yeah, I think absolutely. I mean, I've never heard of Cheddar's before, being on the East Coast. And I've never been to a Longhorn Steakhouse. but I recently went to a Texas roadhouse, which I think was the company you were referring to that I follow. Very similar concept, right? My girlfriend and I, we went a couple months ago, ordered two meals, two drinks. We got free rolls, peanuts. And I think the bill came out to something about $35, which is incredible value, right? That's not really competitive to grocery store prices, but then you get the experience of dining out and you save time by not having to prepare that food

for yourself. So I think that's definitely competition for the grocery stores. Do you like Texas Roadhouse as a stock? So I went there too. And I can't get over this. They put their steak on a flat top. They're not putting it through a broiler. And it's also a restaurant trading at about 30 times earnings, which is a lot. I like the business. Absolutely. I mean, for $35 and you get all that food, I mean, that is just an incredible value. Every time I go, there's always a line out the door. Doesn't matter what day of the week, always a line out the door. So yeah, 30 times earnings, that sounds really, really expensive. I know they have some other store concepts as well that they're starting to expand a

little bit. I actually put Texas Roadhouse on my watch list about a year ago, and I thought it looked expensive at around 20 times earnings. So now the stock's, of course, up like 50% and turning out 30 times earnings. But to me, this is one where you do research now in preparation for a better valuation down the road. We'll tie this back to the macro economy talk. I want to see if you got a better gauge on the economy from one of two things. One,

you got Jerome Powell's commentary on inflation, which excludes volatile energy and food prices, which is what people spend money on. Or you have Darden CEO Rick Cardenas saying, quote, it looks like the consumer is starting to feel a little bit better than they were in prior quarters. Which one are you taking for a macro thumb in the wind? That's a tough one. But I I would probably say Darden, but with the caveat that other companies are seeing the same thing as well. So a company that I follow fairly closely, Simon Property Group, which owns some of the nicest malls around the world and in the US. And they released a press release a few weeks ago saying that Black Friday traffic was up more than 6% this year. So that tells me that the

consumer, which it's definitely still feeling the impact of inflation, but they're starting to feel a little bit better. So I think taking that bottoms up view with Simon Property Group, Darden and other large companies as well, that can be just as useful as to listening to what Jerome Powell has to say. Anything else you want to hit with Darden before we go to Redfin? Just quickly, I wanted to note that they acquired a company called Chewy's in October. I'm not familiar with Chewy's, but it's a Tex-Mex concept. Not to be confused with Chewy, the pet retailer, but Tex-Mex concepts like Taco Bell and Chipotle, they've performed well in recent years. I think this would be interesting to see how they fold that new concept into their third portfolio brands.

Let's take a look at Redfin, which also had some economic data that it was happy to report this morning, saying that its overall home sales were up 7% from one year ago. This is the largest annual increase since June of 2021, where it had a little bit of a different baseline going on back in June of 2020. The median sales price is up about 5.5% from a year ago. And the median price for a home right now in the United States on Redfin is $430,000. When you're looking at that number soup, what's it mean for Redfin? Yeah, to be honest, I'm not really sure what to make with those numbers because the numbers look pretty good right now. But I mean, with mortgage rates now above 7% again. What are the numbers going to look like over the next few quarters, next few

years? Existing home sales for the full year, they're still in line with last year. The week is since 1995, according to Redfin. I just think it's a really interesting dynamic that we have in the housing market right now. We have historically low inventory on the market right now because something like 75% of homeowners have a mortgage rate below 5%. That's essentially an asset to them when current mortgage rates are above 7%. So homeowners don't want to give that up and list their homes on the market. And then sales are down because homebuyers can't really afford a 7% mortgage rate combined with the price appreciation that you just mentioned. So I mean, there's a lot of demand for new housing, but the numbers just really aren't

penciling out from both the buyer and the seller's perspective. And I think that's why we're seeing such a frozen transaction market that's impacting Redfin as well as some of the other real estate related companies out there. Seems like home builders are going to have plenty of demand based on all the forces you just talked about. So with home builders, something I've been thinking about recently is, you know, what happens if interest rates, mortgage rates do fall? You know, they do go back to kind of 4%, 5% range. Demand will probably increase, right? Because it's more affordable for new buyers to come to the market. But what I'm thinking about is like, will supply actually increase faster than demand? And could that actually lower prices and hurt home builders?

I don't know anybody who would have expected homebuilders to perform so well when interest rates were increasing in 2022, but they were great performers. So, you know, could we see the opposite scenario unfold if interest rates come down and homebuilders have to compete with more existing home inventory? And, you know, since homeowners have so much equity built up in their homes, you know, might they be willing to sell their homes at lower prices in order to move? So that's just something I'm kind of thinking through now. Something to noodle on over the holidays. Anthony Chavone, good to get you on an A segment.

Appreciate your time and your insight. Thanks for being here. Thanks, Ricky. Investors have soured on gig workplace platforms since their pandemic highs. But maybe it's time for a second peek. Motley Fool senior analyst Alicia Alfieri caught up with my colleague Mary Long

for a look at Fiverr and Upwork. peak pandemic we heard a lot about the gig economy and alicia that economy obviously very much still exists but it hasn't really boomed in the way that we were once told it likely would bloomberg published an article about this a couple weeks ago they were citing data from the bureau of labor statistics and stated that the percentage of the u.s workforce in the gig economy has barely budged in the past six years. In 2017, that share was 10.1%. In 2023, 10.2. Very minimal movement. Do you got a take on this? Why hasn't the gig economy taken off in the way that many predicted it once would? Well, first I would say the gig economy can be really difficult

to measure. And back in 2017, which is I think the last time the BLS did this survey, they only really reported main jobs. So people whose main job was a freelancer. And it looks like Bloomberg is doing the same thing in this article that you're talking about. The government did recently tweak its methodology. And in the latest report, it also counts freelancers with more than one job, which I think helps us get a better handle on what's happening in the freelancer gig economy. The problem is back in 2017, they didn't have that number. So it's hard to gauge what the growth has been. If you look at another data source, so Statista, for example, there has been roughly a 13% increase in freelance workers since the pandemic, though perhaps not at the same rate

that we were expecting at the height of the pandemic. Still growth, not gangbusters like a lot of people were expecting. The last year has been tricky too. Both Upwork and Fiverr have mentioned in their earnings calls that there have been layoffs and businesses also tend to cut back on spending during an uncertain economy, but even so, freelance or gig economy isn't going away anytime soon. And Upwork also has its own data that it kind of contributes to this pile of information that we can pull from. They tell a slightly different story than BLS. The company said in 2023 that nearly 40% of the U.S. labor force was involved in some kind of freelance work, which kind of gets at the same point that you just mentioned, like, you know, we can measure

this in different ways? And is the important measure how many people are using freelance work or gig economy work, temporary work as their full-time job, or how many are tapping into this as a side hustle? So not only are there different ways in which people use this work, whether it's like a more full-time position on a temporary basis or as a side hustle, there's also different kinds of gig economy work. You've got your Ubers and DoorDashes. But for those who are looking to offer digital services. So copywriting, marketing, software development on a freelance basis. There are many platforms, but two major ones that allow you to do so. And that's Upwork and Fiverr. Upwork is the larger of the two. They make about double Fiverr's revenue, despite charging a

smaller fee. They've charged 10% to Fiverr's closer to 20. Apart from those, any major differences between these two freelancing platforms? Yeah. So both have pretty similar customer bases of small to medium-sized businesses as well as individuals. But I would say Fiverr started off as a platform where services could start as low as $5, hence the name. Since then, it's grown beyond that price point and now has a variety of prices and services. But right now, I think the buyer spend is a little bit different on these platforms. So Fiverr, average buyer spend something like $278 in the last full year, so 2023. Upwork looks to have a higher spend on the platform. It's close to $5,000 in 2023. That is a big difference. The number of buyers on the

platform is different as well. Upwork had 855,000 as of its most recent quarter, and Fiverr had 3.8 billion buyers on the platform. Another difference is how buyers and sellers connect. So on Fiverr, buyers can search through a bunch of freelancer listings and hire for specific jobs. On Upwork, freelancers can apply to jobs. So it can involve a lot more sorting through applications on the buyer's side. Whereas the gig economy broadly has flatlined by some measures, the share prices for both of these platforms have been absolutely decimated in the past five years. Both are bad. Fiverr's downturn is especially steep.

stock is down nearly 90% since its late 2020, early 2021 highs. But for all that negativity in the share price, Fiverr's revenue, it's grown its revenue pretty steadily and impressively since 2019. It became profitable on a net income basis in fiscal 2023. Today, it trades at a PS ratio of a little over three. Is Fiverr's story one of a still promising company that had expectations that got out of hand and have now kind of come back down to earth? Or is this a stock that you wouldn't touch with the 10-foot pole? That's a good question. I think it's more of the former. I think expectations have come back to earth. And I think that, you know, as we talked about before, freelance work isn't going anywhere. On the surface, it's easy to note some

of the negative things about Fiverr, right? So one of the things is that the number of buyers is falling. But as you said, there is more to the story. Revenues have been growing in those years since the pandemic, though not at the same clip. And the company has been generating cash, which is great. And despite the number of buyers declining, average spend per buyer is going up. And that's pretty interesting. This can be a function of Fiverr getting bigger customers. Like we talked about, they started as more for individuals, $5 a pop for this freelance activity. And now they're continuing to move upstream, getting small and medium-sized businesses, which can help the company grow the platform into the future. Most people appreciate

customer growth, and it's easy to appreciate customer growth. But customer spending growth is also pretty impressive. And I think it can be a sign of future growth activities. It's not hard for me to imagine a world in which a buyer and seller find each other on Fiverr, they work together, and then they say, hey, we can make this cheaper for the both of us and avoid this 20% take rate, and then proceed to continue doing business off of the platform to avoid paying that fee. So you talk about growing average spend per customer. Retention, I would think, is a pretty important piece of that puzzle. How does Fiverr retain both buyers and sellers? Yeah, I think the power is, again, the network. And to your point,

sellers and buyers, if they create a relationship that's a positive one and they have a need for each other in the future, they can definitely work together offline in theory in the future. But again, the power of these platforms are in the network and in the platform itself. How else are you going to have access to a big pool of talented freelancers that you could easily sift through and see reviews, which are really important, or have a large group of buyers view your profile and the network helps you gain exposure in that way. Fiverr sellers can also advertise their services off of Fiverr's website. Fiverr even has a page for some ideas of how to do that. But on Fiverr's platform, sellers don't have to worry about advertising on their own or

figuring things out like SEO. You're on the platform and people can easily find your services. So I think it's beneficial to both sides. I think it's easy to think of AI as presenting an existential threat to these companies and the kind of freelance work that they support. But Upwork president and CEO Hayden Brown stated in her 2023 Letters to Shareholders that Upwork was making great strides and was only in the early innings of its AI journey. What do those strides look like? How is Upwork using AI to help buyers and sellers rather than handing work solely to machines rather than the human freelancers that want that work?

Well, they have a few different options that they offer. So they have an AI services hub that gives clients resources and tools and also helps them connect with freelancers specifically that have those AI skills. The AI services hub also helps freelancers use AI in their work. And the company has AI courses and content to help freelancers increase or build their AI skills, which I think is important as more and more people are interested in AI. Last year, the company had Upwork Chat Pro, which was designed to help freelancers with their work, and Job Post Generator to help talent buyers post jobs quickly and accurately. But there's more ahead. And so this year, Upwork released its Upwork's Mindful AI, or UMA. And on top of improving on those AI capabilities released last year, the company has hopes

of what the AI companion will be able to do. So for example, the company is hoping that UMA will be able to help companies assess freelancer proposals and compare freelancers' experience and skills side by side so they can help find the right freelancers for their needs. And they're also hoping that UMA can help freelancers build proposals that can help them win those job opportunities. So it could really be beneficial to both sides of this two-sided marketplace. The idea of building out this AI companion that can help evaluate proposals, help you write proposals, to me that kind of gets to like the long-term growth story of both of these companies. What do those growth stories look like?

Do you think there's any interest in growing these platforms into an all-you-can-eat hiring and HR management software? Is that within the lane here or is it better, hey, just focus on what you know best and focusing solely on the freelancer workforce? I like this idea. And we've kind of talked about this before. A company's optionality and increased capabilities can help them grow faster and longer than you expect. At the same time, if you grow into some of these areas, the company opens itself up to more competition as well. Perhaps people who have or companies that have been in the space longer who are innovating and that sort of thing. There are some things that they can potentially do that would feel like a natural extension of

a freelance platform, maybe adding a recruiter function, right? So if both parties create a positive relationship and they want that to continue on a full-time basis, I think that could be a nice natural outgrowth. They can grow into, you know, becoming temp worker companies as well. So that could be interesting. But honestly, I think the freelancer market in general is enough for Upwork and Fiverr to continue to grow into, to be able to perform as companies going forward. Both of these companies right now are trading at relatively low valuations, Upwork slightly below three times sales, while Fiverr slightly above. You like one of these companies better than the other?

Well, I think so. So I usually like to look at price to free cash flow. So it's a similar idea, right? We're using these as a thumbnail for valuation, right? So Fiverr is 15 times and Upwork is about 18.6 times. And those are helpful in terms of determining which one is cheaper, if that's what an investor makes their decision on. But it's more than that, right? It's what's happening at each of these companies. What's the story that allows us to make sense of the numbers? So Fiverr and Upwork,

as we pointed out earlier, both have seen share prices fall after the high-flying days of the pandemic. Both are seeing their revenues grow. Both are generating cash. Both are operating well despite a somewhat difficult market. And neither of these companies are really market darlings right now. If I'm in a contrarian investing mood, I think either can fit the bill. Fiverr is a little bit cheaper, which could mean my investment would have a lower hurdle to clear, but Upwork isn't that much more expensive. Plus, they have an activist investor who's looking to push for changes there, which could be interesting as well. So I think just like freelancers that can utilize either site. I could go with either. Alicia Alfieri, thanks so much for the time,

for the insight, and for the look at these two freelancing platforms. Always a pleasure to talk with you. So glad to be here. Thanks. 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 stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.