Motley Fool Hidden Gems Investing - These Investments Fight Inflation

Episode Date: April 23, 2024

A primary reason to invest now? Have money to buy stuff decades later. The stock market can help you with that goal, but so can government bonds. At (00:21), we look at earnings from General Motors and Spotify. At (15:44), we cover the reasons that inflation is sticky, and what investors can do about it. Companies discussed: GM, SPOT, DAL, SGOV, Dividend report link: www.fool.com/2024dividends Host: Ricky Mulvey Guests: Bill Barker, Robert Brokamp, Alison Southwick Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. we've got an electric vehicle maker with some stumbles and self-driving on today's show and then tesla reports tomorrow you're listening to motley fool money

i'm ricky mulvey joined today by bill barker bill thanks for being here thanks for having me All right. First up, let's talk about General Motors. I found it an interesting company to observe. It reported today and its investors are pleased with the carmaker beating top and bottom line guidance. I'll give you the menu of things that are going on and maybe you can pick out what's interesting to you. The sales of pickups for GM made up for a loss in China. They're keeping car prices steady. The CFO, Paul Jacobson, implied that they are moving toward profitability in selling EVs. The CFO's speak for this is, quote, year-over-year improvements in variable profit and EBIT margins, end quote. And then another big story is that Cruise,

their autonomous vehicle ambitions are coming back, expected to relaunch after a bad accident in October. And that project is expected to cost $1.7 billion this year. Bill, there's your menu. What do you want to select off the menu of topics for our friends at General Motors? I guess that there's a fair fight between pickups and the loss of business in China. It's worth remembering that it was not that long ago, a couple of years, when GM was making $2 billion a year in profits from China, and now it's mild losses and there's an open question about what they're going to be able to do in China, whether they should still make a run of it there. But back in 2014-2018, they were booking $2 billion a year, and that looked

like the future of the company. Now, they're certainly hoping that I think it's the electric vehicles, which they're making margin improvements on, and the AV cruise ambitions. Mary Barra said that she's now looking at outside investments for cruise. It costs a ton of money. The company is trying to transition into this cash flow engine. If you're an advisor, would you just suggest, you know what, just spin the thing off and stay as keep some equity, but don't keep this thing as a part of your, your ongoing reports. Uh, I feel like that's a question above my pay grade because it's, uh, I mean, there's, there's a lot of prognostication, right. About the self-driving vehicle realm and GM is on the

record, not even that long ago, as saying they saw Cruise doing $50 billion a year in revenue by 2030. That's a lot. If they actually believe that today, based on the progress that they're seeing and an accident such as they had in the fall, which puts them a little behind schedule and makes everybody remember what the regulatory risks are going to be here. But if they actually think that there's $50 billion in revenue that's available off of a $1.7 billion investment now, obviously more in the upcoming years, then they're a big enough company to take on that risk for what would be a gigantic reward, not that the $50 billion in revenue would all be profits by any measure. But that's just a big, fat, round number. It's a big, fat, round number

that people, when they hear it, should take with a lot of grains of salt. When things are divisible by 10, twice, $50 billion, 2030, why that year? $47 billion in the third quarter of 2029, it'd be a little bit more believable. It just seems too elegant that just $50 billion arrives in a year that ends in zero. So, discount all that. We don't know whether there will be any money coming from Cruise, but somebody has a better idea than I do. So, 2029, $48.6 billion in revenue, you would have been happier with that? I would say, oh, somebody's got a model that's detailed, right? Rather than, ah, 50. What about 40? 50 is bigger than 40. I feel like that's where those numbers came from.

To GM's credit, they did put autonomous vehicles on the road, I think, before their competitors. So, the other part of this story is that GM wants to be a cash flow story. Barr in the CEO letter saying, we are very focused on capital efficiency. Last year, GM committed $10 billion to share buybacks. That's a lot for any company. It's a lot for a $52 billion company. So, why is GM spending so much money on this when they have their large growth ambitions? What's it signal to you?

Intelligence is what it signals to me. I love it. A company that can buy back its own stock at four or five times earnings should be doing so, because there are very few other returns that are available in the high teens on your investment. That's what you're getting. If the E in the PE is sustainable, and we're looking at maybe up to $10 of earnings per share. It's $45 or so, $50 a share price. That's just a great investment of money, which has a return that goes on forever. Eliminating those shares is still something that you benefit from 2, 3, 10, 20 years from now. Now, GM not have available the same opportunities to just relentlessly buy back shares. They're

too much in the public eye, they're too much attached to the word bailout, which happened less than 20 years ago. When contracts come up and the UAW is negotiating and they're enlisting elected officials to back up their side. The fact that GM may have spent billions of dollars on buying back its own shares is going to be compared to what they should have done in the eyes of UAW and some elected representatives, which is, you should just either pay workers more money or hire more workers, or optimally both, rather than just buy back shares for which there is no gain to employees. So, just taking $10 billion in a year and just buying back as many shares as they can, which would eliminate 200 million shares this year, and

between around 15% of the company in terms of equity and all that, it's not available. They can be big repurchasers of shares, but they're asking for the wrong kind of headlines in the next negotiation session with their employees by going all-in on it. Yeah, there was more talk about these buybacks later in the year from 2023 than in the summer and early fall. I want to hit Spotify earnings. But first, I got to do a disclaimer for the company that has a little bit, they have better microphones for their earnings calls than our card makers. But The Motley Fool has a content relationship with Spotify, active recommendations in the company. I'm a shareholder and a customer. So how's that for bias? But Bill, I'm feeling

pretty good today. Stock jumped about 16% this morning. Investors are happy about the growth in premium subscribers and net income profitability. You know what the bear said a few years ago? They said this company would have so much trouble becoming profitable because licensing costs don't scale. What happened? What's going on with Spotify? Well, they cut costs. They found, as many other tech companies, which had been enjoying the free ride for their stocks, going straight up based solely upon growth, whether it was subscribers or top line, and the bottom line not keeping up with that. That came to a head in 2022, and for some companies, 2021. they had to find profits in the size that they had grown into. Spotify came under the

crosshairs of activist investors and, in fact, let a lot of people go, around 14% or so of their employees, and scaled back on some of their more questionable podcast investments. It turns out that you can do both those things and still continue to grow your active users. Yeah, the offer seems to have shifted a little bit, whereas music and exclusive podcasts, hoping that big names, big name podcasts like Caller Daddy and the Joe Rogan Experience would bring people onto the platform. They've essentially let those shows out of the walled garden and say, we'll take more of the ad revenue from that. And now we're going to offer audiobook listening. Users of Spotify get 15 hours of audiobook listening per month. Podcasts are not exclusive.

What do you think about this strategic shift? Well, I think it's working. I think that the appetite for limited series podcasts is limited. It's hard to get the word out. It's a crowded field, and it's easier to get people to find. I don't know what the average number of podcasts that even an active user is listening to on a daily or weekly basis, but it is not as many as Spotify was betting on. Whereas some of the most prestigious things in the podcast world have come in the form of limited series, it's still hard to get the word out, hard to get the advertising revenue to back up the investment that those things need. And, you know, they're finding through trial and error, better models. And they've got lots and lots of hundreds of

millions of satisfied customers. And they seem to be growing that at a reasonable rate right now, but they don't need to grow at the rate that, you know, they grew once upon a time. Yeah. For the limited series, you need advertisers to come in before the show has downloads and say, fund the show in a lot of cases or buy based off projected downloads. But if you're buying for a talk show, you're able to say, you'll get about this many downloads a week at this cost. And it's a little bit clearer for those buyers who are, as Spotify mentioned, seem to be paying less for those ads. I'm a big fan of the products. I think it's got a lot of pricing power. I think it's got a lot of user stickiness. It's not something like a streaming service like Netflix

or HBO max, where it's painless. I think if you cut it for a month to go check out other offerings, but I'm also struggling with the valuation. Uh, this was a sub $20 billion company to start 2023. Now it's above 60 billion, Daniel Eck in the call pointing this out in a way saying a quote, 2023 was a truly standout year and should not be a base on expectation for every subsequent year, end quote. Do you think the profitability improvements, the strategic shifts we've discussed, do they warrant this kind of jump in market cap? The jump of a quadrupling of the stock price in a year and a half, probably not. It was a $70-some share of stock at the end of 2022. It's a $300 stock today, $318 as I look at the chart at this moment. It's gotten a lot of

rewards. Of course, it had lost three-quarters of its value. It's still not up to its 2021 highs as a stock, but the business is in much better shape. It's not riding off quite the same helium of multiples. There's more there today. But I would agree that you're not finding a justification for today's stock price in the earnings, yeah, in terms of any kind of PE multiple. It's got an outstanding position, but it's a little bit hard to see whether it truly deserves today's $60 billion-plus valuation. I think that that is something that will not stick around indefinitely. The analysts may not be listening to the words coming out of Daniel X mouth in the call. One thing I want to throw in here too, is if you are a, maybe you're a

student learning about investing, you want to sort of get familiar with earnings results in conference calls. I think Spotify does an excellent job for newer investors. They make their information very easy to digest in sort of that, if you're familiar with their Spotify wrapped font, they have a good user experience. And also the earnings calls are fairly clear and Eck does a good job breaking down the concepts he wants investors to follow him on for those listening. So if you're a newer investor, it's a good one to check out on that basis. Bill Barker, I think that's a good place to end it. As always, appreciate your time and your insight and thanks for coming on. Thanks for having me.

All right, two quick things before our next segment. First is a heads up. We are not running a B-segment on Wednesday or Thursday's show to create some space for earnings coverage. And the second thing is that I'm going to do a quick ad. Growth stocks steal the spotlight in financial media, but something way more boring is behind a whole lot of wealth creation. Dividends, the regular payments that companies send shareholders. Dividends can make companies a little more disciplined on capital allocation and provide investors long-term streams of income. Some of the Motley Fool analysts behind Stock Advisor, our flagship investing service, put together a list of three dividend stocks to buy this year. We're sending this report to Motley

Fool Money listeners for free, just as a thank you for checking out the show with no purchase necessary. Just go to fool.com slash 2024 dividends, and we'll email it directly to your inbox. We'll also include a link in the show notes. All right, next up, inflation. It's stickier than the experts thought, so what can investors do? Allison Southwick and Robert Brokamp discuss one option that you might want to consider. So far, 2024 has mostly been a good year for the stock market. However, the last couple of weeks, not so much. Since April 10, the S&P 500 has dropped almost 5%, and the Nasdaq more than 6%. So, what happened on April 10? Well, the Department of Labor announced that the Consumer Price Index rose by 0.4% in March,

higher than expected. And it nudged the year-over-year inflation figure to 3.5%, up from 3.2% in February. So, the CPI sneezed, and the market caught a cold. Bro, what's going on? Well, Alison, at the end of last year, the Fed was signaling that due to the declining rate of inflation, we could expect three interest rate cuts in 2024, and some economists were predicting that the number could be as high as six. Per usual, the market tried to get ahead of the Fed, and stocks began a very strong rally toward the end of October. Unfortunately, so far this year, the rate of disinflation has stalled, and currently the futures market is predicting just maybe one or two cuts this year.

some firms, like Vanguard, think there won't be any. So now the market is sort of dialing back some of its perhaps premature excitement about lower rates. And when inflation began rising in 2021 and reaching as high as 9.1% in 2022, we kept hearing about supply chain issues caused by the pandemic. That was an easy storyline to follow. But what's keeping prices up now? Well, inflation in general is caused by a lack of supply or too much demand, usually a combination of both. But a couple of years ago, the biggest issue was much more of the former. Today's inflation is a much more complicated mix with demand probably playing a bigger role. Really, if you look at the prices of various types of items, they kind of have their

own story, so we're not going to get into all of them. But here are some of the reasons why inflation has been sticky so far this year. So first of all, we all know there are plenty of conflicts around the globe, Ukraine, Middle East, Africa, and this is driving up the prices of various commodities, particularly oil. Secondly, many companies are charging higher prices beyond the rate of inflation and their costs. Their input costs might be up 13%, but they've budged up their prices 15%. Some people call this greedflation from corporations, but really, as investors, this is what we want. A report from the think tank Groundwork Collaborative concluded that half of inflation is due to higher profits. There's no question

that corporate profits as a share of GDP are near all-time highs. What was the high point? The second quarter of 2021, pretty close to when inflation began taking off. Then there's just the low unemployment rate, currently at 3.8%. In fact, we're in the midst of the longest streak of months with unemployment below 4% since the 1970s. When unemployment is low, businesses often have to increase the wages to attract workers. In fact, this is one of the silver linings in the past few years, that incomes really have been rising faster than inflation for many workers, particularly lower-income workers, which is the opposite of what was happening before the pandemic. I personally am happy to see that. When we were planning for this episode,

Bro, you said inflation is partially our own fault. It made me think about how last week, our Taco Bell order came to $50. And I did that old person thing where I immediately turned to my husband and complained that in my day, the Taco Bell menu was broken up into $59.79 and $0.99 unless your parents were buying, in which case you splurged on the Mexican pizza for $1.29. Somehow I am still anchoring to prices from my childhood and complaining about inflation like everyone else. But I'm also still going to continue to live Moss. And it seems like everyone else is as well. Yeah, we've all done this, right? We've all said, like, I used to pay $10 for this thing. And then I bought it two months ago, and it's $13. And then I bought it today, and it's

$15. The fact is, we're still paying it. And the truth of the matter is, as long as we keep spending, companies are going to keep raising their prices. And I want to be very careful here, because there are many people who don't have a choice. Lower-income households, almost all of their spending is essential. So, if gas or grocery prices go up, they have no choice but to pay them. But discretionary spending overall is still very high. And pundits are trying to come up with terms to explain this, like revenge spending and doom spending. And as spending goes up, savings go down. The personal savings rate is currently below 4% among the lowest levels in more than 15 years. Let me give you one real-life example. Many people last year complained about the price

of travel, but that didn't stop people from traveling. The TSA screened almost 900 million passengers in 2023, an all-time high, and the Trade Group Airlines for America expects travel to be even higher this year. In April 10th, the same day that the inflation report came out, Delta announced that it expects the highest second quarter revenue in its history thanks to high demand for the upcoming summer. With demand this high, there's just no reason for companies to stop trying to raise their prices and see what they can get away with. Again, if you're an investor in these companies, that's what you would want, but as consumers, not so much. You mentioned that workers are making

more money, which sounds like a good thing. Are there any other upsides to the Fed holding off on cutting rates? Yeah. The Fed won't be cutting as much as they hinted at the end of the last year, which means that the 4% to 5% we're earning on our cash will continue, as long as, by the way, you take the time to find a higher yielding option. Nowadays, your cash can actually beat inflation, whereas over most of the past decade or two, your cash lost purchasing power. Also, while inflation stinks, we shouldn't wish for deflation. That can be really bad. First of all, it usually happens during a a recession, and no one wants a recession. It can cause a downward spiral because almost 70%

of the economy is driven by consumer spending. People may pause their spending in times of deflation. After all, why buy something today when it will be cheaper in a month or two? People stop spending, companies struggle, and then have to lay off employees, which further reduces spending, and so on. This is part of what made the Great Depression so bad and why the Fed likes to have a little bit of inflation from year to year. We began this segment talking about how the recent figure for the Consumer Price Index has put a dent in our investments. What should we be doing to help our portfolios fight inflation? It's definitely important for your portfolio to at least keep up with inflation, because in the end,

we invest today in order to buy something in the future, and those future prices will likely be higher. Historically, investing in the stock market has been the best way to maintain and grow your portfolio's purchasing power over the long term. However, as we've seen, inflation could be not so great for stocks in the short term, or at least stock prices. Dividends, on the other hand, are still continuing their inflation-beating ways. In 2023, the companies in the S&P 500 grew their dividend payouts by more than 5%, higher than the 3.4% inflation rate for the year. That's in line with the long-term trend of dividend growth outpacing inflation by one to two percentage points annually, so that's still going strong. For your non-stock money, definitely seek out

higher-yielding savings accounts, and you can find some options at The Ascent, a Motley Fool website. Treasury bills, which are treasuries that mature in a year or less, are paying well above 5%. And if you don't want to buy individual T-bills, find a low-cost fund that'll do it for you, such as the iShares zero-to-three-month treasury bond ETF, ticker SGOV. And I'll highlight a couple of other investments from Uncle Sam, the first being iBonds. Now, we don't hear so much about them nowadays since their rates have come down from 9.62% in 2022 to the current rate of 5.27%. But the thing to remember about iBonds is that the rate is made up of two components, one that is fixed at the time of purchase and one that changes every six

months according to the CPI. And the fixed portion of iBonds purchased today is 1.3%, the highest level in more than 16 years. So, you'll be guaranteed to beat inflation by that amount, which is actually pretty good for a super safe investment. But that rate will reset in May, as in a week from now. So, many experts recommend buying I-bonds within the next few days if you're going to do it this year. And the other investments to consider for the safe side of your portfolio are treasury inflation-protected securities. So, the real after-inflation yields on these are now over 2%, again, among the highest rates in well over a decade. So, I think I-bonds and tips make sense, especially for those near or in retirement. But they're very unique,

kind of quirky investments, so make sure you learn enough about them before investing. Start with treasurydirect.gov, which is where you can also buy both types of investments. But then visit tipswatch.com, a site run by journalist David Anna, who does just a fantastic job of explaining how these investments work and offers some thoughts about when to buy them. All right, Bro, bring us home. What are your final thoughts on inflation and our portfolios? I would say just don't overreact to one or two months worth of inflation data. Many experts expect inflation to eventually come down further, largely due to the way housing and shelters factored into the CPI. It takes up about a third of the index, and the data has a lag.

And some people believe that if current shelter prices were used, inflation would actually be below the Fed's 2% target. One such person is Jeremy Schwartz at WisdomTree, so visit his Twitter account to see the explanation, and we'll see how true this is over the next several months. But regardless, you should always have some inflation hedges in your portfolio, but don't go overboard. As always, you just want to set up your finances and your investments in such a way that you'll be mostly fine regardless of whatever's happening in the economy. 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. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.