Motley Fool Hidden Gems Investing - The Trade Desk Joins the S&P 500

Starting point is 00:00:00 John Quast. What does it mean for investors now that the trade desk is set to be the newest member of the S&P 500? This is Motley Fool Money. Welcome to Motley Fool Money. I'm your host today, John Quast, and joining me today is long-term Motley Fool contributor, Matt Frankel, as well as Motley Fool co-founder, Tom Gardner. Both of you guys, thank you so much for being here today. We've got a lot of things to look at today, whether it is Bitcoin, investing trends, but let's start with our first story here. So, semiconductor company Synopsys just received all the approvals it needs to buy out S&P 500 constituents Ansys in a $35 billion deal. That leaves a spot open in the index, and it's getting

Starting point is 00:00:53 filled by advertising technology company The Trade Desk. Matt, Tom, The Trade Desk was down by 68% earlier in 2025, after the company missed its own guidance for the first time as a publicly traded company. Now, just a little while after the scare, joining the S&P 500 officially tomorrow, July 18th. Matt, let's start with you. What does this mean for The Trade Desk shareholders? Yeah, I mean, if anything, it's time to take a victory lap. The biggest impact in the immediate sense is just that the S&P 500 index funds are all going to be required to buy shares, which is why you saw the stock pop. The average S&P 500 component is something like 25% to 30% owned by just three or four big S&P

Starting point is 00:01:36 index funds. So that is a lot of upward pressure on the stock. Now, having said that, being in the S&P doesn't affect the business itself, but it is very impressive how far the trade desk has come. and it really is just an example of the hidden gems process at work. And it does get the stock on the radar of some institutional investors, but it's not a big victory business-wise, but it kind of is, right? Yeah. I mean, when you look at what happened to the trade desk, really just a blow to the confidence there when it missed its own guidance, but that was just one quarter. It's not the long-term trend. And speaking of the long-term trend, Tom, I know this is a stock that you've followed for many years, up 2,600%

Starting point is 00:02:16 since going public in 2016. What did you initially like about the Trade Desk, and do things still look bright to you for its future? Well, first thing I'll say is just to affirm what Matt said, which is, I think the move into the S&P 500 is exciting in the moment, but relatively short-lived, because it ultimately comes down to how well the businesses perform. But it does raise the profile for the Trade Desk, which is now a market cap of about $40 billion. We began recommending the Trade Desk across a number of services, Rule Breakers, Hidden Gems, and others at The Motley Fool back in 2017 in that area, a year or so after they came public. We did an interview with Jeff Green. That's always a validating thing. I would say anyone

Starting point is 00:02:53 who's investing in stocks, if you can find an interview with the CEO out on YouTube, wherever you can find it. Obviously, earnings call transcripts can give you some of their personality as well. But I took away from that interview in 2017 that we did with Jeff Green very, very positive things about the business and the leadership. I would say in terms of looking at companies, what would we look for to find that pattern that we found in the trade desk early on? Because as you said, it's now a 25-bagger and less than a decade since coming public. So, that's just an outstanding return. In the case of the trade desk, I would say you have a company with its focus on programmatic advertising. So, first in programmatic advertising,

Starting point is 00:03:28 that is a higher margin portion of digital advertising. Historically, the digital advertising was you'd call on the phone. I remember our first deal with a discount broker that we had way back in the 1990s of The Motley Fool. We actually called it The Handshake. We wrote a written contract. We said, hey, we don't know what's going to happen here. Let's see it. But it's become so much more sophisticated over the last couple of decades. And now what you have is essentially AI-powered programmatic advertising. So you put your dollar amount in and it just spreads across the internet to find the best locations for that ad. That is so much more sophisticated than traditional media. So the money was coming from traditional media into digital,

Starting point is 00:04:03 but then from digital towards programmatic, and then programmatic toward connected TV. that's that's the business pattern but let's just talk about two or three things you see in a company's financial performance that can help you find them number one they're taking market share in the higher margin developing area in a business their gross margins are rising okay and their returns on invested capital are rising those were all happening with the trade desk and you ask john you know what do we think of it now i would say again around a 40 billion dollar market cap the stocks around 84 today i would say trade desk is is looking more fully valued now more fully appreciated in the marketplace. I still think it can beat the market from here, but you're not

Starting point is 00:04:40 going to get anything like what we've gotten over the last decade. But again, it's positioned well in a growing trend. It's just that there's more competitive threats now in its marketplace than when it really emerged as the true leader in programmatic and connected TV advertising. I couldn't agree more. Going back to CEO Jeff Green, definitely not afraid of the competition that's ahead. Definitely facing those big tech giants head-on. Not short of ambition. I think it definitely has the opportunity to continue to grow in its market. Well, coming up next, we are talking Bitcoin. This is Motley Fool Money. every day now until December 31st. Let's move on to our next topic here. As of this taping,

Starting point is 00:05:50 the world's largest cryptocurrency is Bitcoin, and it's sitting near an all-time high price. There has just been a wave of institutional buyers this year in 2025. This is coming from companies, from corporations. And just this morning, Semler Scientific announcing that it bought 210 more Bitcoins and now owns over 4,800. That's a lot at its current price of $118,000 per Bitcoin, but it still pales in comparison to a company like Strategy that owns more than $600,000. Even news coming out this week that BlackRock, because of its Bitcoin ETFs, actually holds even more than that. It's the largest holder. Tom, if all of these companies and all of these other investors are buying Bitcoin. Is this something

Starting point is 00:06:32 that every investor should incorporate into their investing strategy? Well, I first have to call it similar scientific, because I find it's such an enjoyable, I would say funny story, because it's a company with a market cap below $600 million. This is a very small company in the public markets. Their core business is blood flow measurement technology. They are a healthcare technology company that has decided to just aggressively buy Bitcoin. And right now, it's certainly looking like a good move. So, we're moving beyond that. Let's say the first 15 years of Bitcoin were largely about early adopters, techies, and very technically-minded people, as well as individuals that just said,

Starting point is 00:07:12 I'll take a little bit of a risk on this. Now, we're moving to the stage after the first 15 years where we're starting to see corporations and financial institutions buying. So, the movement of this now $2.4 trillion asset is largely going to depend on how much institutions back and buy and validate Bitcoin. So, this is no longer a speculative, hey, a bunch of people on the internet are playing around in their home, building their own mining systems in their basement. This is a very for real thing with ETFs, with substantial asset bases for ETFs out of the gate, these Bitcoin ETFs. So, this has been legitimized, but Bitcoin is valued at about $2.4 trillion, I mentioned earlier. And gold is about $17.5 trillion. It's about seven times

Starting point is 00:07:55 larger allocation for gold. One quick note on this. Gold, over the last 25 years, has outperformed the S&P 500, which is pretty remarkable over a quarter century. It's hard to fathom, but it is actually true. You just blew my mind on the podcast. I do think the relationship between Bitcoin and gold is a good one to watch. And I think that gap will narrow. For me, until you start seeing governments taking more fiscal responsibility and really trying to balance budgets by getting the tax policies right and getting the spending policies right and getting them aligned, getting both sides on the same team so we're not yelling less filling tastes great at each other. Until that happens, you're going to see the debasing of currency, which does favor

Starting point is 00:08:38 these alternative assets like Bitcoin as a store of value. So I will go on the record saying I think Bitcoin is going to outperform the market substantially over the next five to 10 years. but it'll be volatile. And if anyone's not bought any Bitcoin and wonders, when do I jump into the skipping rope here? And what's the time to get going? Just wait for it to decline 20%. It's going to happen. It's happened a lot before. Matt, what about you? Do you think that there's anything here to like about Bitcoin? Well, I was one of those weird guys back in 2013 with a little mining rig set up in my house, like Tom just mentioned. I wish I had kept the three Bitcoin or so that I had mined till now. I was trading at about $300. And to me, it was free

Starting point is 00:09:14 money. This breaks my heart. I know. And I wanted to really just understand how the technology worked. That's really the only reason I did it. It wasn't anything to do with investing. But right now, there is a lot to like about Bitcoin, especially in the current regulatory environment. Just to name one example, SoFi is a stock that I follow very closely. And their management just announced that they are bringing back crypto trading to the platform because we finally got regulatory clarity that banks can be crypto custodians. That's why they dropped it in the first place. They could be the first of many to bring cryptocurrency trading to their platform. And imagine if some of the big banks end up doing it now that we actually have

Starting point is 00:09:52 regulatory clarity. So that's just one example. I don't necessarily think everybody needs to own Bitcoin, but there's a whole lot to like about it right now. And I think that the trends are going to encourage higher trading volumes, which should put long-term upward momentum in Bitcoin. As we talk about Bitcoin, and there's just fundamental differences between cryptocurrencies and stocks, I think it's really important to note that. And on a similar note here, I think it's important to distinguish between investing in stocks and trading in stock options. And gentlemen, there's an undeniable surge in popularity when it comes to stock options. And just in the first quarter of 2025, the Robinhood app saw options trading at an all-time high.

Starting point is 00:10:37 They were up 46% from the previous year, up 84% from two years ago. Matt, why do you think that investors are so interested in trading stock options right now? The short answer is that they're doing it for the wrong reasons in a lot of cases. Options are exciting, and there's lots of money to be made if speculative options bets go correctly, which I would be willing to bet is most of what's happening on Robinhood. A longer answer is that over the past few months, we've seen really this investor appetite for speculation that we haven't seen since the 2021 era really start to make an appearance again. We've seen SPACs start to make a comeback, for example.

Starting point is 00:11:15 We've seen the meme stock trade and the Wall Street bets group. The same can be said in recent days on the iBuyers, Opendoor and Offerpad. Opendoor has tripled over the past month. Traders see options, and they see this as a way to amplify moves like this even further. And if you remember the GameStop rally, that was primarily options-driven. So, it's not a big surprise, given that all of those other kinds of speculation have come back, to see options volume really soar. It's worth noting, too, that within the options trading trend, this actually really surprised me.

Starting point is 00:11:49 According to CBOE, 61% of option activity in May was zero-day options. So, these are options that you buy today and they expire today. it's essentially a short-term prediction of the stock price. Tom, is thinking short-term a good idea? Oh, I see the largest softball coming over the plate at a Chicago softball field right now, and I'm just waving my bat waiting for it. Let's remember our college days in spring fling, you know, spring week. The market rolls from party to hangover to party, and back again and again. So, we're moving back deep into the party now. We're going to feel bad at some point. Because you don't stack up some of these factors together and not pay the penalty.

Starting point is 00:12:34 At some point, the market's trading at about 25 times earnings. We're 30% to 35% above the 200-week moving average of the S&P 500. The U.S. stock market is representing about 70% of equity value worldwide. I start hearing a song like Trouble by Ray LaMontagne when this happens. If you haven't heard that song before, play it. It sends a little bit of a message about what happens when zero-day options start becoming very active. Executive insider selling is picking up and now above average.

Starting point is 00:13:04 You have above average levels of margin debt. And we have the leveraged ETFs out there. I don't know why the SEC stopped at 3x leveraged ETFs. Let's make them 9x leveraged ETFs. Let's just allow people to, you know, so there's more and more speculation. As people are having more and more fun, they're going back, you know, to get another drink at 1 a.m. And I'm not saying this is not a good reason to invest. I am saying that there's a very good

Starting point is 00:13:29 reason to look at the type of investments you're making right now. And this would not be the time to climb out on the edge of the branch, right? This would be the time to stabilize with some more cautious and moderate classified investments. We classify every stock of the Motley Fool as cautious, moderate, or aggressive, and I'd be in the cautious or moderate zone. But let's remember, we've been rewarded for staying invested. I love an investor like Jeremy Grantham, but he still has a call out there that the S&P is going to $3,200. I never heard him correct that one. So, it's dangerous to turn bearish and start pulling your money out of the equity markets. It's much better, I think, to gradually change the style of investments

Starting point is 00:14:03 in your portfolio. So, if you're very growth and tech-oriented now, recognize there's so much enthusiasm and there's leverage behind it, and that can end up causing more volatility than normal in those types of investments. Well, I can personally attest that all of my worst investing decisions were when I was thinking short-term instead of long-term. so definitely appreciate that perspective. Coming up later in the show, we're talking hidden gems that we think will beat the market from here. This is Motley Fool Money. now until December 31st. And finally, Fools, as our earnings season here is starting to heat up a little bit, starting to kick off, we've got some hidden gems we think are hidden gems that

Starting point is 00:15:10 are on our radar. Matt, what do you have for us? Yeah, I am watching Rocket Companies very closely. ticker symbol is RKT. Not to be confused with Rocket Lab USA, which is also an excellent business. But Rocket Companies is the parent company of Rocket Mortgage, Quicken Loans, and a few other financial businesses. And there are a couple of reasons I like it. One, their acquisition strategy lately is really interesting. They recently closed on the acquisition of Redfin, which eliminated the two worst things about Redfin, its balance sheet and the fact that it's not profitable, because it got absorbed by a profitable business. And they're acquiring Mr. Cooper, which is one of the biggest mortgage servicers in the world.

Starting point is 00:15:48 And second, Rockets bread and butter in the 2021-2022 era was refinancing as people were taking advantage of those low mortgage rates. Rockets loan volume in 2021 was about four times what it is now. Right now, Americans are sitting on about $35 trillion in home equity thanks to rising home prices and the fact that almost nobody is tapping into their equity at current interest rates. If the Fed starts lowering rates and mortgage rates seriously start taking a turn downward, we could see a refinancing boom that would make 2020 and 2021 look small. I think Rocket has a lot of opportunities, and they are the company that's really on track to be the all-in-one online real estate disruptor. I'm watching that one very, very closely.

Starting point is 00:16:33 I love that, Matt. I'll just throw in here to the mix, Progressive Corporation, ticker symbol PGR. We all know the company. If you watch sports, there are a lot of progressive insurance ads. Obviously, a very large insurer of automobiles, auto insurance, cars, motorcycles, boats, RVs, commercial vehicles. They do have other lines of insurance at their business, but this is the primary category for them. The company's capitalized about $145 billion. It pays a 2% dividend. The first reason I'm calling out Progressive today is because I do think, as we mentioned before and was mentioned on the show yesterday, that the market's becoming richly valued, particularly in certain segments. So I like to look to the other side when that

Starting point is 00:17:12 happens. And there isn't a lot of buzz about progressive insurance, but they just came out with some news this week about performance and guidance going forward, which is very pleasing. I'm just going to call out one number. They're expecting their combined ratio to fall down close to 87%. That's about five percentage points lower. That demonstrates extreme underwriting discipline. So they're essentially making a nice double-digit margin on all of the insurance contracts that they're writing. So Progressive gained a big advantage over Geico, its primary competitor, by committing to telematics and technology and really tracking how well drivers are doing out there on the road and aligning their insurance offers to how well you're driving.

Starting point is 00:17:52 And Progressive, it's been a great stock over the long term. It's been relatively flat in the last year, maybe about a 10% gain, but this is a well-positioned business, very stable. I think a great brand. You can easily add money to Progressive, in my opinion, and expect a below average volatility in the stock, market level performance, but I think maybe market outperformance with a richly priced S&P. And you're going contra to what's happening in the marketplace today. And that's why I talk up PGR, the Progressive Corporation. Wow. Rocket Mortgage, Progressive. I'm going somewhere completely else entirely. This is Xometry, symbol X-M-T-R. This is a very small-cap company, under $2 billion. It's an AI-powered manufacturing marketplace.

Starting point is 00:18:34 What I really like about this company right now, the use case for users provides instant pricing, instant lead time. This is really helpful if you need something manufactured. It provides injection molding services, CNC machining, die casting. These are all really important things. In the current political environment that it's incentivizing, this onshoring of manufacturing, I think that Xometry is in a really good place to be able to pick up some of that business. First quarter revenue up 23%. It just turned profitable. I think this is a company that not a lot of people know about, but that can play a really big part in this onshoring of U.S. manufacturing. It's one that I like here at

Starting point is 00:19:16 only three times sales. One thing I'll say about that, John, to close, is that Xometry and our AI-powered Moneyball database, if you're a Motley Fool member, take a look at our databases because We have a whole enterprise-license-driven AI-powered scoring system for public companies. Xometry is showing a lot of progress over the last couple of years in their product development, in their scoring of their products, and making significant investments, as you've mentioned, in technology and AI relative to its competitors. I haven't looked at Xometry closely, but I'm going to now. Well, that's it for our show today.

Starting point is 00:19:46 As always, people on the program may have interest 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 is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Tom Gardner, Matt Frankel, and the entire Motley Fool Money team, I'm John Quast, and Fool on! We'll be right back.

Motley Fool Hidden Gems Investing - The Trade Desk Joins the S&P 500

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