Motley Fool Hidden Gems Investing - The Meme Casino Reopens

Episode Date: May 14, 2024

One tweet is all it takes to add a few billion dollars in market cap. First, (00:21) Jim Gillies and Ricky Mulvey discuss the surge in short term speculation over meme stocks, and the long-term investment story at Home Depot. Then, (19:05) Alison Southwick and Robert Brokamp discuss how investors can evaluate exchange traded funds. Companies/Tickers discussed: GME, AMC, HD, SPY, VOO, IJR, VB, SPY, GRMAX Check out the Range Rover Sport at www.landroverusa.com Host: Ricky Mulvey Guests: Jim Gillies, Alison Southwick, Robert Brokamp Producer: Mary Long Engineers: Dan Boyd, Desiree Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the mania. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, meme stocks are back. How are you celebrating? um i'm not but thanks for the invite oh yeah happy to happy to have you on this show because if i say good to see you then you say good to be seen and occasionally i gotta i gotta throw in a little little bit of a curveball to to get us sure there is like one topic we have to talk about today and that is that is the meme stocks gym game stop it's up more than 200 over the fast past five days at the time of this writing it could be anywhere between negative 300 to plus 2000 the rally kicked off from a tweet from keith gill aka roaring kitty aka another

screen name i'm not going to say on the show of a man sitting forward in a chair uh to play a video game if you don't know roaring kitty he's the like the retail retail trader redditor sort of ring leader who kicked off the first rally with with videos and tweets and memes um had a book and movie made about him, gave a congressional testimony. And this meme that kicked off this rally came after a three-year hiatus and at one point added $4 billion to the market cap of GameStop. That's a lot of setup. Jim, what do you make of the comeback? If you had any doubts that we are living in the stupidest timeline, this should erase them. So I remember well the GameStop saga because I'm actually the fool who recommended GameStop about two months before the original

meme stock craze took hold. And it's funny because if you go back and look at the thesis that I had at the time, and I'll build it out in a minute, but then you go look at Roaring Kitty's stuff on Reddit and what he talked about in his congressional testimony, there's a lot of similarities to what I was talking about at the time. So in other words, I'm not saying he stole he doesn't know who i am i don't know who he was but that that there was enough investing things here there was an there was a legit investment case for gamestop in the fall of 2020 the autumn of 2020 that doesn't exist now but because it's a meme stock doesn't matter if there's an investing case doesn't matter if there this is a thesis this is bro culture going woo and you know bidding

like it it's utterly asinine and silly and look having a bit of silly fun occasionally is fine you got a couple hundred bucks you want to throw in a meme stock you know you know have a good time do not do not convince yourself what you're doing is investing do not convince yourself that you know this ends in anything other than ash for the long-term holder of a meme you're not sticking it to any man. I mean, look, I literally had lunch with an old friend this weekend whose son made us some very good money, like 50 bagged his own money in the original meme stock craze in AMC, oddly enough, but went from a thousand bucks to 50,000 bucks or whatever. And that money spends just fine. That money spends like money, right? Like that's okay. But he at least had the good

sense to get out. Again, this ends no way but ash. And I think it's interesting that Roaring Kitty, like, he posted a picture. Yeah. Posted a sketch. Why are we doing this? I mean, it is hilarious. It is hilarious to me. But coming at this from an investor standpoint, so I'm going to take you back to September 2020. Here's why I recommended GameStop in 15 seconds or less. It was the start of a console refresh cycle. New consoles, new PlayStation, new Xbox, always a good time for GameStop. These consoles used physical media, which means you still have a need for what GameStop sold. They had more cash than debt. They were cash flow positive, and they had no fewer than four high-profile activists circling the company, and they were

trading at four times free cashflow. That's an investing thesis. That's why it made sense at that time. And I said to my members, I said, I was expecting a double, maybe a triple in the next two years, and then we'll be out. What we got was an 8X in four months. And I said, see ya, because the meme stock idiot showed up and turned this into a casino. And casinos are fun. We all like casinos, but the house always wins in a casino. And that's probably what ultimately happens here. Well, there's a couple of things. One is that roaring kitty is funny. Like he's funny. Hilarious. Hilarious. Yes. He was doing a congressional testimony. I was rewatching it this morning. First of all, he's doing this bit to a group of people who are allowed to buy and

sell stocks for companies in which they legislate. And in that irony is not lost on the viewer. And he's just, you know, why did you buy it? I like the stock. Also, I am not a kitten, but you bring up, you bring up something interesting, which is that, you know, what are the lessons that maybe retail traders are coming into this, this meme stock craze with, because a lot of them got, you know, you have your friend's kid who made a lot of money on AMC, but a lot of them got burned for, for holding on for too long. And I wonder if you'll see more trading in and out this time. And if, you know, that means this cycle is going to, going to be a little bit quicker than the first one. Probably can't believe I'm about to do this, but my advice to meme stock traders,

do it. This is how I get fired, fools. Ricky's going to egg me on. I would not own any of these things past an end of day. In other words, if I was going to play in this area, and thankfully, I cannot because the Motley Fool, our training rules require us to own all stocks that we purchase a minimum of two weeks, so I'm immediately disqualified. Good. Very happy to be so. But if you don't have that type of restriction, I would not enter a position until after I saw the stock was actually going up in the day and I wouldn't own the position past four o'clock in the afternoon. I would not let myself, because the fact it can be up 30, 40, 50% in the pre-market and out of the gate. And tomorrow you might be down 30, 40, 50% in the pre-market and out of the gate,

you know, easy come, easy go. So I would not, I would only be playing with this during open market hours myself. The other thing is never lose sight. Like have this tattooed on your forearm if you need to. This ends in ash. My favorite non-GameStop example, and I've got a few more, but is the aforementioned AMC. Yes, my friend's son made some very nice money, but he was risking $1,000. He was risking a grand. He made good money because he got out. I have another friend who made a bit of money on AMC as well. Neither one of them thought they were investing. But the long-term shareholder in AMC, if you actually bought it on some sort of perception to kind of stick it to big hedge funds, just know this. Over the past three years, the market is up

33%. That's roughly the timeline of the AMC meme stock craze. The market's up 33%. AMC is down 95%. And that's after a couple of big days. The insiders at AMC have gotten rich selling more shares to Rubes and keeping this turkey afloat. The retail crowd who didn't time their exits have been ground into pace and that's going to happen again. So if, you know, if you want to play speculative games, we all like a good lottery ticket. We all like a visit to the casino or at least most of us do, but this is not investing. Play speculative games, win speculative prizes. AMC might be doing something kind of smart, which is that they're, they're doing an at the market offering of shares. As the stock was going up, they raised, I think it was $250 million.

Like I said, selling more shares to Rubes. Again, if you don't know who the patsy at the table is, it's you. And look, again, have fun with it. If that's your jam, it's not my jam, but it's fine. But again, realize that you're not making any kind of societal statement. If you get the money out, that's great. But again, long-term this, this is death. I think one key difference about this and I'm going back to a GameStop. Then the first craze is to your point, the first one was really sticking it to, to big hedge funds that had very much overshorted the company. And I think at the time the well, I guess it was the pandemic, but previously it had been profitable on an operating basis. Now the company is not making an operating profit. And also the mechanics are

going to be different because a quarter of the GameStop shares outstanding or short compared to 140% at the time of the craze, in which case is the stock price rose. People had to cover their shorts. That's from a Bloomberg columnist, John authors. I think that changes the dynamics of this, this rally. But then again, I could be very wrong, Jim, because, uh, the internet does crazy things and I don't know. The internet does crazy things. I will say a whistle, two things, and we'll move on to the next more palatable story. Shorting, not wrong, not evil, not illegal. I have a soft spot in my heart for shorts who get the thesis right, who get the thesis right. I got no problem with, Ricky, if you come to me and you're going to short my stock,

a stock that I own, God bless, I have no problem. Shorts are a price discovery and they're quite often, you know, they teach you things that you didn't already know about a company. So I think that they're an excellent and a vital part of a functioning market. I will say, though, I laid out my thesis at the time for GameStop, which I hope sounds like a reasonably intelligent way to think about a stock as an actual business. I will say that none of what I put into my thesis at the time, with the exception of more cash than debt, I suppose, none of those six things that I talked about in my thesis at the time, besides the more cash than debt, are actual true today. Companies burning money, the activists are gone. Well, one took over. That'd be Ryan Cohen. There

is no console refresh cycle. They're burning money hand over fist. And the next console refresh cycle, which probably happens in about four or five years from now, that one probably doesn't have um physical media so the so the the folks who were erroneously calling uh GameStop the next blockbuster three four and five years ago might actually be right three four and five years from now all right that's the end of this segment that I like to call let's bait Jim Gillies into going on a rant let's move on let's move on to a significantly more boring story which is that Home Depot reported this morning tough transition comp sales are down about three percent net earnings down 7%, but the company reaffirmed guidance CEO or the CFO, excuse me, Richard

McPhail said that customers are basically in a waiting game to, uh, because of higher interest rates, they have the money to do these big renovations. They're just holding off. Cause they want to see how the interest rate, uh, decreases or stays the same, how that shakes out. What's your headline takeaway from the quarter for home Depot? I'm not sure I buy that to be honest with you. I mean, well, look, if you, if you have the money, then you do it anyway because you don't need to borrow but if you're going to borrow like you know like when i've done large um renovations at my my house or large projects at my house we use our heloc we got a heloc tied to the house we've used that from time to time

if interest rate cuts indeed show up three four five months from now guess what my heloc rate goes down like you know so like it's a floating rate debt so i i'm not i'm i'm kind of i'm hearing what the CFO is saying. I'm going like, eh, I don't know about that, dude. I have the money. I have the money. I just, I just have some questions first. Yeah. Like, like, I mean, he's got to talk, he's got to talk his game, but it was a perfectly fine quarter. HomeD was actually one of my, one of my favorite case studies to kind of give to folks about the power of long-term investing and the power of, uh, uh, changing strategic choices. And I suspect I might surprise you with some of what I think about this one, but so if you go back to the

early 2000s and right up to about, I think it was January 2007, you know, for the first five or six years, they had a terrible CEO named Bob Nardelli who, you know, came over from GE, was going to bring the GE way. And all he just kind of, all he largely did was kind of, you know, tried to basically reform a company, perfectly good company in his own image that, you know, was the GE way. And we have enough examples of the GE way failing post Jack Welch that I think, you know, it ended the way I think we suspected it would, but don't worry about Bob. He got, you know, a quarter billion dollars to go away. But following the Bob Nardelli fiasco, Home Depot did a really smart thing in my book. Home Depot said, you know what, like, I'm going to make up the numbers here,

but they're roughly right. 90 plus percent of the population of, you know, North America lives 15 minutes or less from a Home Depot. We are saturated, you know, continental U.S., Mexico, Canada, like, we got stores. We should probably stop growing. We should embrace ourselves as a cash cow. And so, they did. They, at the time, so I'm looking here at the end of fiscal 07. So, it's February 2008 for those of you playing along at home. In a fiscal 07, they had 2,234 stores. Today, 16 years later, they have 2,337 stores. That is less than 5% growth total in about 16 years. Their CapEx, they slashed it. Their CapEx in fiscal 06, I think fiscal 06, maybe fiscal 07, was $3.6 billion. Their CapEx today is still below that.

They cut their CapEx by nearly three quarters in the next two years, and they just embraced the cash cow story. No more stores, but we make a lot of cash because everybody goes to Home Depot, everybody knows Home Depot, where doers get more done, right? Or whatever the slogan is. They cut their CapEx by 73%. They turned into cash cow. This was a very, very, very good decision for Home Depot and its shareholders. They made a cumulative between fiscal 08 and fiscal 23, 16 years total. They made a cumulative $144 billion with a B in free cash flow. They used $64 billion of that roughly, $64 billion to pay a dividend. Actually, we'll put that over there for a minute. They did about $96 billion to buy back shares. They reduced their

share count by over 40% during that time period. And again, you pay dividends on the shares that are outstanding. So even as you can raise your per share dividend because the total went down, because the total shares went down, the payout didn't rise as fast. So that $64 billion cumulative paid out over the past 16 years in dividends meant that the per share dividend went from $0.90 a year in fiscal 2009 to $9 this year. It's tenfold, that's 15.5% annual growth. This cash cow shift clobbered the market. Without dividends, ignore dividends, since the shift, the transition in the year post-Nardelli, Home Depot is more than 10-bagged. It's up 1,070% or about 16.5% annually versus a market that's up 8.6% annually. If you factor in the dividends,

which you should because, again, the dividend is tenfold over the past 15 years, the dividend-adjusted total return is close to 1,700%. That's a 19.4% annualized return versus a total return on the S&P 500 by 10.7%. They're beating the market by like eight and a half, almost nine percentage points a year. And it's still Home Depot. You're still going to go to Home Depot. You're not going to abandon them en masse and go to Lowe's or Canadian Tire or whatever. Why would you give up cash cow status, which has done such sweet things for your investors and your executives as well, because stock price go up. Why would you abandon that to return to empire building doesn't make sense to me it wants to get that pro market that's why

it's built by in a distribution company for 18 billion dollars and delivering uh delivering things like insulation straight to job sites there's a lot of that pro market they can go out and take jim as an incremental business that's fine as long as they don't decide you know what we need what we need are you know every every american say if you're within a 15 minute drive of a Home Depot. We don't need a new growth, uh, stratagem where, you know, we want that to be every, every American within seven minute drive. We don't want the, you know, small mini stores like Best Buy did or little vending machines again, like Best Buy did like. That'd be tough with lumber. Well, it would be tough with lumber, but you know, maybe not a few other products,

you know, you know, they're your light bulb, your light bulb source. But like, again, this has been one of the great, you could have bought, you could have bought Home Depot in the teeth of the credit crisis for $19. It's $340 today or whatever it is. Again, with the dividends, imagine you'd bought, Ricky, imagine you bought at $19 or $20. Now you're getting $9 a share in dividend per year. There's nothing I love doing more than imagining how much money I could have made by buying stocks 20 years ago. Today, where Home Depot is at, I mean, you talked about Berkshire Hathaway as a bedrock stock for a portfolio. Do you think Home Depot deserves a similar stock for an investor's portfolio? Yes. All right. Very good. Jim Gillies. Very simple.

That's the shortest answer we've gotten. It's the last one. Jim Gillies, thanks for your time and your insight. No problem. Take care. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region. In seconds, you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted.

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Alison Southwick, and Robert Brokamp discuss how you can evaluate them in one major thing to look for. All right, so here are the steps to follow to evaluate a fund, whether it's one you're considering or one you already own. First up, start with performance. Yep, we're going to start with the bottom line on this. I'm going to talk through how you evaluate performance and other criteria by using Morningstar, the fund research company that, coincidentally celebrates its 40-year birthday this Thursday. Morningstar was founded by Joe Mansueto out of his one-bedroom apartment in Chicago. And today, the company employs more than 100,000 people and is worth $12.7 billion, which is kind of like a fun little American

success story. So I'll be talking about how to use Morningstar's website a lot in this episode, but just know that most of the information is also available on the fund company's website. Also, many brokers and 401k providers have partnerships with Morningstar, so you may be able to find the same info on their websites. Okay, so here's how to evaluate a fund's performance. You go to Morningstar.com, enter the fund's ticker, and click on the performance tab. And when you scroll down, you'll see the year-by-year returns. And further down, you'll see the trailing returns table. There, you're going to see the returns over various time periods, like 5, 10, 15 years if the fund has been around that long. Most importantly,

you'll see the fund's percentile rank, which compares its performance to other funds with similar objectives. So, for example, if you're checking up on your U.S. large-cap value fund, the percentile rank measures how it fared relative to all other U.S. large-cap value funds. And this is crucial because it ensures you're making an apples-to-apples comparison. Now, the lower the number, the better. So, for example, if a fund's percentile rank is 25, then it has performed in the top 25% and outperformed 75% of those types of funds for that time period. I would say you should look beyond one year or even three. Every great investor hits a rough patch every once in a while. But after five years, certainly 10, you can expect a fund to be showing its true colors.

All right. Your next step is to compare it with another index fund. Yeah. You can have an actively managed fund that outperforms most of its peers, but still underperforms an index fund. In that case, it might be time to just ditch the actively managed fund for the index variety. If you already own an index fund, compare it to others in its category to see if it's a leader or a laggard. And you do this by finding comparable index funds or an ETF to measure your fund against. You could look at the options offered at Vetify's ETF database, found at etfdb.com. And Morningstar has a page that lists index funds, and it has a whole page devoted to ETFs.

You just scroll down to the bottom of that page for links to lists of all the ETFs in various categories. Next step, it's time to look under the hood. Now, you likely bought a fund to get exposure to a certain type of investment. However, you may be surprised at how much your fund holds other types of investment. For example, it's not uncommon for U.S. stock funds to be allowed to invest 10% to 20% of their assets in international stocks. Another example is index funds that are supposedly dedicated to a certain type of company or investment, but actually have a good bit of exposure to others. For example, maybe you've heard that small caps are particularly cheap

these days. They're like, okay, I want to look for a good small-cap index fund. You find that among the top ones in terms of size is the iShares S&P small-cap ETF, ticker IJR. It's actually the biggest small-cap ETF. It has 99% of its assets in small caps. That's great. But then you look at the third biggest small-cap ETF, that is a Vanguard small-cap ETF, ticker VB. You find that actually a third of its assets are in mid-cap stocks. It's a mixture of small and mid-caps, what they often call SMID. If you're looking more for a pure play small cap, you might choose to go with the iShares ETF. You'll find all this info about your fund by looking up on a Morningstar and clicking on the portfolio tab. For a stock fund, you'll see how its holdings break down by

size, sector evaluation, other metrics, including how much of the fund is invested domestically versus internationally. You can also review its top holdings. For a bond fund, the Morningstar portfolio tab will delineate the holdings by type of security, corporate versus treasuries versus asset-backed bonds, credit rating, and duration, which is related to maturity and indicates the fund's sensitivity changes in interest rates. The higher the duration, the more the fund will go up and down according to changes in interest rates. As you review what's in the fund, ask yourself whether it's investing according to your expectations and whether the fund's holdings are significantly different from what you own elsewhere in your portfolio. Because if it's not

that different from everything else you own, you're not really getting any additional diversification, so why bother owning it? And a final note about checking your fund's innards. These days, well more than half of 401k participants invest in target date funds. And I love the idea of target date funds, but they're intended for investors with a moderate risk tolerance, so they may be playing it too safe for the typical Motley Fool podcast listener. If you're invested in a target date fund, check out the stock bond split and see if that's where you want to be. If it's too conservative for you, choose a target date fund which has a date that is five to 10 years later than when you actually plan to retire. All right, your next step is to

count the costs. Several years ago, Morningstar studied how well its STARS rating system as well as cost-predicted future fund performance. The verdict, according to the report, and I'm just going to read a quote from it, quote, if there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds, end of quote. The fees charged by a mutual fund are mostly captured in the expense ratio, which is the percentage of your investment taken by the fund each year to pay for operating costs. Now, some types of funds have higher expense ratios than others because it costs more to invest in those markets. According

to the Investment Company Institute, here are the asset-weighted average expense ratios for different categories. So, for U.S. stock funds, the average expense ratio is 0.44%. International stock funds, 0.58%. And sector stock funds, 0.63%. Stocks are going to be more than bonds because the average expense ratio for a bond fund is 0.37%, money market fund 0.13%, and for target date funds, 0.32%. So, if you have a fund with an expense ratio that is higher than those averages, make sure you're getting above-average performance as well. And finally, keep an eye on the cost of your index funds. Some are cheaper than others. As an example, the oldest and perhaps most well-known ETF is the SPDR S&P 500, ticker SPY. It has an expense ratio of 0.09%, which is pretty dang low.

But Vanguard's S&P 500 ETF, ticker VOO, is even lower at 0.03%, and that ever so slightly lower cost has contributed to slightly better returns. And both of those ETFs are significantly better than the nationwide S&P 500 mutual fund, ticker GRMAX, which has an expense ratio of 0.58% and charges a 5.75% upfront commission just to get into the fund. And there's just no reason to invest in this fund when significantly cheaper options are available. All right. Your next step is to limit Uncle Sam's take. And this is for the funds you own or are considering owning in a taxable brokerage account and not in a 401k or IRA. Because for funds you own in a brokerage account, you'll have to pay taxes on the interest dividends and capital gains distributed by the

fund each year. And remember, even if you don't sell a single share of the fund, you may still owe taxes on the capital gains realized within the fund when the manager sells an investment for profit. Now, to get an idea of how much you might pay, look up the fund on Morningstar and click on the price tab. Scroll down to where you can see what is called the tax cost ratio. And that is the amount of return each year that would have been lost to taxes by someone in the highest tax bracket. You'll see many funds that will lose 1% to 2% of return each year to taxes. Most people aren't in the highest tax bracket, so the actual tax costs will be lower for most people, but it's still an important consideration. What you'll find is, very generally speaking, index funds have

lower tax cost ratios than actively traded funds, and ETFs have lower ratios than traditional open and mutual funds. But it's not always the case, so do your research. All right, so there we have it. Steps for evaluating your funds. It's a fair amount of research. How often do you do this exercise, bro? Once a year. I think it's one of the benefits of owning a fund. I don't think you have to stay on top of them as much as maybe your individual stocks, but certainly once a year is important. 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 Ricky Mulvey. Thanks for listening. We'll be back tomorrow.