Motley Fool Hidden Gems Investing - Why Did You Buy That Stock?

Episode Date: April 13, 2023

We asked the audience about recent stock purchases and they did not disappoint! (00:21) Asit Sharma discusses: - Delta Air Lines' 1st-quarter results - Why Delta CEO Ed Bastian is not worried about consumer spending - Highlights from Amazon CEO Andy Jassy's annual letter to shareholders (12:29) What's a stock you've bought recently and why did you buy it? Ricky Mulvey and Jason Moser dig through some of what our listeners have been buying and discover companies with moats and one short of a teddy bear business. Got a question about stocks? Want to tell us about a stock you bought recently? Email [e-mail] Companies discussed: DAL, AMZN, SCHW, OM, NKE, ASMLF, BOC, BBW Host: Chris Hill Guests: Asit Sharma, Jason Moser Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Chris Hill. We're taking a closer look at the stocks some of you have been buying. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Asit Sharma. Good to see you, my friend. Asit Sharma. Good to see you, Chris. I'm excited to be here as always. Let's start with Delta Airlines, shall we? Delta posted a bigger loss in the first quarter than was expected. CEO Ed Bastian, next month is his seven-year anniversary in the corner office at Delta Airlines. I'm going to take him at his word when he says he is not worried about the potential for lower consumer spending.

He said in an interview that air travel is something that the consumer is prioritizing. They may be pulling back on other areas, but I don't see it in our credit card data and I don't see it in our bookings. I believe him, but I can't help but notice the tense he's using there. It's a present tense. I don't see it. I wonder if six months from now he's going to be seeing it. Because, I don't know, Asit, it really seems like in the background, over the last six to eight months, one of the narratives for the overall economy has been consumer spending data, credit card data going up, stuff that we're seeing in the housing market, in auto loans, that sort of thing. Go in any direction you want,

Do you want to start with Delta's actual numbers or how the CEO is feeling at this moment? It's interesting, Chris. In some ways, he's right. Near-term, Delta is seeing great advance bookings for the summer. Business travel is coming back. They're seeing more demand for their premium products. First class, they're doing well on their Affinity revenue, revenue that comes in from credit cards and such. Loyalty as well. But I would be talking up nice demand that I see as well, because the problem that Delta has, which all airlines face, are stubbornly high costs. On the fuel side, fuel is up double digits over last year. On the labor side, Delta and

its peers in the legacy airline industry have been negotiating with pilots and other union workers. I think Delta is going to spend some $7 billion in cumulative costs over the next four to five years to adequately compensate their pilots per agreement. If you're looking at those kinds of cost hurdles, you probably want to be mired in the present where you see some lift on the revenue side. If that lift doesn't materialize, if the caution that I hear in your voice materializes, then they've got some further losses on their books in the quarters ahead. I will point out here that Delta is still sticking to fairly nice projections, both on the top and bottom line,

projecting great top-line growth and better operating margin as the year progresses. I think that's why we're seeing the stock basically flat, maybe down, at one point it was down 0.5% or something like that. The first quarter numbers weren't great. And yet, to your point, the optimism for the near-term. I think that's part of what is keeping the stock afloat at the moment. Sure. When you think about this quarter in terms of airline metrics, total revenue per available seat mile, this metric was up 16% against the prior quarter. They are seeing that capacity is getting used up. Very important metrics that you want to try to evaluate any kind of business that has such high fixed costs.

On that side, they look fairly healthy. This is the only thing that's keeping the stock from being down, I think, 7% to 10% today, given the fact that with all this revenue lift, they still couldn't produce a profit. Delta was still on a gap basis, negative for the quarter, although I will say their loss is much improved over the prior year quarter, as business conditions in the economy have picked up. If we go into a recession, though, we will see those same metrics start to move the other way. Capacity will move from being utilized to being underutilized if that all-important consumer element begins to soften.

And I do agree with Ed Bastian that the business consumer is important to this story. They see corporate travel coming back, but we need everything to be working at once. We need a strong consumer, we need strong business travel, we need fuel prices to decline, and we need those other costs that aren't wage-related to be managed pretty well for Delta to hit the kinds of numbers it's talking about for this year, and for the airline industry as a whole to have a positive year. Amazon CEO Andy Jassy released his second annual letter to shareholders. I haven't gone through it point by point, but what I've seen from the reporting on the letter doesn't surprise me in the sense that, Jesse, it sounds like

it's being very clear-eyed about how challenging the past year has been for this business. The past year was difficult for Amazon to absorb on so many fronts. They had a hangover from all their COVID business. In the space of two years, they doubled their entire logistics footprint. At the same time, once interest rates and inflation spiked, customers came to Amazon in their Amazon Web Services unit and said, we want to spend less on computing and storage because we have to manage our costs. Amazon, I think rightly so, has agreed with enterprise customers, yeah, we'll help you back off and dial those costs down. Now, that's not good for Amazon Web Services' growth trajectory,

and it's not good for the margins at Amazon Web Services. Thirdly, you had, in the other parts of the business, so many places that it just didn't make sense to have loss centers, burdens of high costs. Jassy started trimming. They've trimmed thousands of employees. We never like to talk about layoffs in any company that we tend to invest in or recommend for our members at The Motley Fool. But it's the reality of business. Massive layoffs and the shuttering of whole business lines and paring back on once-promising parts of the business. But I want to read one or two points from the letter that made sense to me. Jassy said, over the last several months, we took a deep look across the company,

business by business, invention by invention, and asked ourselves whether we had conviction about each initiative's long-term potential to drive enough revenue, operating income, free cash flow, and return on invested capital. In some cases, it led to us shuttering certain businesses. I like this because it crystallized what we've been seeing, what we've been reading in the tea leaves over the last three quarters. It was a very honest expression of wanting to operate in a more disciplined fashion. Now, I personally read the letter from the middle up. I jumped to the section where Jassy talks about Amazon Web Services. I think that's the true story here. I think what Jassy is really saying is, look, this part of our business

is going to be slow until at least 2024. We're not going to be able to rely on our cash cow. I've taken the knife to parts of our business that maybe we should have looked at several quarters ago, and we're not going to be as reliant on Amazon Web Services for our operating margin and our free cash flow. I read the letter backward. You don't have to read it that way. There's plenty in here that's fun to read. The advertising revenues are a bright spot. They haven't given up on the grocery business. But this is a complex business. Chris, it strikes me more and more that Jassy was a great person to put in this seat, just watching how he's What do you think? Two years in, I've summed up the letter. What were your thoughts on Jassy?

He was clearly the right person for the job. I talked to Brad Stone from Bloomberg recently on the show, and we talked about Jassy and Bezos. Brad Stone, as much as anyone in business media, has studied Amazon and Bezos as closely, if not more closely, than anyone out there. I take Brad at his word when he's like, no, Jassy's the guy. Bezos is not going to pull a Bob Iger. He's not going to pull a Howard Schultz and come back. But I think that one of the things that Jassy has picked up in his years of working at Amazon and working closely with Bezos, is, I think, a pretty deft ability to speak plainly about challenges. It's one of the things I appreciated about him as a CEO and this letter. At some point, if you're an investor,

you know when a CEO is trying to pull a fast one or just try to snow you with rhetoric. It's like, come on. It would have been very much out of character if this was him whistling past the graveyard. Everything's great, actually. It's like, no, come on, we all know there are challenges. But I also appreciate the fact that, and this is the thing Bezos was always good at, I thought, of speaking to questions that are lingering about the business that may not be at the forefront. An example of that in the letter from me is him talking about the investments that they will continue to make as a business. When he cites 2008 being a challenging time, not just for Amazon, but for the U.S. economy, and saying, I'm paraphrasing, but it's like, hey,

if we had stopped investing in AWS in 2008, as I'm sure some people were saying they should do, just as a way to pull an economic lever within the business, like, hey, let's dial this back a little bit. If we had stopped investing in AWS in 2008, we would not be where we are today. And so, I think it's also a way for him to essentially play a little bit of offense with this letter. Yeah, I felt so, too. Those are really great points. And the last thing that I wanted to point out, because I know not everyone who's listening is going to take the time to read it. Something along these lines that occurred to me, plain speaking and giving the investor perspective, was his brief conversation on their fulfillment network, the one I mentioned,

the logistics network, which took so long to build. Two points there. He said, one, it's going to be easier to manage this as more of a regional operation versus this big national operation. We can drive some more efficiencies. And two, now's the time to optimize. We moved so fast that we really didn't rank all the efficiencies that we could have out of the system. We're out of building phase. Now comes that profit optimization phase. I think that could be a powerful contributor to their profits. Again, I appreciated the clarity and directness that was there throughout this letter. Alistair Sharma, always great talking to you! Thanks for being here!

Same here! Thanks so much, Chris! We recently posed two questions on Facebook and Twitter. What's a stock you've bought recently, and why did you buy it? Jason Moser and Ricky Mulvey dug through some of the responses to discover companies with moats, Peter Lynch-style investing, and one person who decided to short a teddy bear company. We asked you on Twitter and The Motley Fool podcast Facebook group, what's a stock you recently bought and why? Joining us now to break some of them down is Jason Moser. Credit where credit is due, this is not our idea, this is a segment that you and Matt

Frankel did on Industry Focus. Yeah, thanks. This is something that we did on the Industry Focus Financial show for several episodes through the years. It started out as just a one-off, maybe we'd get a couple of responses. Then we saw very quickly that people were very excited to tell us about their ideas. Honestly, it makes sense. I get excited to tell people about my ideas, so it seems like it works both ways. As time went on, we kept on getting so many great responses, more than we can handle. I'm thrilled that we're able to do this today. Thanks. Let's get started with it. I think there's a few buckets that the responses fell into. We're not going to get to all of them.

But in the financials bucket, there was a lot of love for Charles Schwab at Cunning project on Twitter, quote, solid business across the board with a small percentage of risky exposure, needlessly punished for the sins of others in the sector. Vince on Facebook also wrote us, Charles Schwab, beaten down with all the banks, even though, number one, they're not a bank per se. Number two, they have actually served as a safe haven for depositors fleeing regional banks. And three, they're not exposed to a high percentage of uninsured deposits. Give them a grade. What do you think of that reasoning? Yeah, I like this one. For me, the first thing that came to mind, this is kind of like a baby being thrown out with a bathwater.

And we see this often when we see some sort of crisis in the market in whatever sector it may be. And in this case, sometimes investors will shoot first and aim second. And that's kind of what happened here, I believe. When you look at something like a Schwab, it's a $100 billion company. I think it was down 35% year-to-date or something like that, maybe a week or so ago. I agree, honestly, with everything that was said there. In many cases, Schwab has tremendous exposure to personal banking. We have retirement accounts that run through Schwab. Schwab acquired TD Ameritrade, so bringing in all of those account holders under the Schwab umbrella. I mean, there's just a lot of reasons to like Schwab. And I think our listeners have listed

those off. And I'll encourage folks to, on March 30th, our episode of Motley Fool Money on March 30th, Matt Frankel and I actually spoke to this, right? Matt spoke a little bit about Schwab, why he was excited about that opportunity as well. So, for folks who maybe missed that episode, I would encourage you to check that episode out from March 30th. And you can listen a little bit more to our conversation there. But in a nutshell, when you're looking at something like a Schwab. I was asking Matt, beyond just Schwab, investing in this sector, what were some of the things, if folks are interested in banks, what should they be looking out for? The obvious answer, look for diversification, don't put all of

your eggs in one basket. For folks who are interested in banks, maybe regional banks particularly, maybe an ETF would be a good way to get some exposure there. But some of things to look for in regard to banks, if you're interested in investing in banks, looking for opportunities. Matt was talking about looking for a discount to book value. Take that with a grain of salt, of course. But understanding a bank's loan growth, looking at inflows versus outflows. What are depositors doing? I think that was one of the things we saw writ large with so many depositors fleeing those smaller regional banks in favor of their larger brethren because they felt more protected in that regard. Sometimes,

that is not necessarily something you have to worry about because of that insurance dynamic that does exist. Then finally, he mentioned, and I thought this was a good one, look for their exposure to personal banking versus business banking. The reason why, the idea here is that people, we are less likely as people to switch banks. It's a hassle. We've got everything automatically coming out nowadays. If you want to switch banks, that's a real process. Businesses are going to be more inclined to do that if it's something that will ultimately help their bottom line. I thought that was another thing he said to look at. I thought that was a good tip there. Know their exposure between business banking and personal banking. That

That could give you some ideas as far as opportunities in the space. Might add commercial real estate in there, something to keep an eye on. Yeah, absolutely. I think with Charles Schwab, yeah, the bear case was that they weren't going to be able to pay much of a return on cash deposits. Therefore, people would pull their money out and move it to somewhere where they could get a higher return. That's a very different reasoning for an alleged bank run. And to your point, yeah, moving your money is a pain in the butt and people don't act as rational economic actors. Let's move on to stocks for the long-term.

I liked this from at always underscore invest on Twitter about Boston Omaha writing added to existing holding. I feel very ignored by the market due to size and nature of the businesses within it, but with large long-term upside for a long-term investor. A couple of key things I liked in there. First of which was that it was a stock that this person had already owned. Yeah. Well, oftentimes, I think, what is it? Peter Lynch said, oftentimes, the best stock to buy is one that you already own. I've certainly seen that play out in my investing life as I've built up my portfolio. In this case, I agree. I think Boston Omaha flies under the radar for a lot of investors because it's such a small company. We're talking

about sub-$1 billion market cap. These great businesses all start out as small businesses, and they grow over time. I think with Boston Omaha, it's such an interesting collection of businesses. You've got an outdoor billboard advertising business, you've got a surety insurance side of the business, you've got a broadband side of the business, you've got an investment side of the business. I think one of the qualities of this company that a lot of folks really, really enjoy is there are some similarities to something like a Berkshire Hathaway or even a Markel Insurance to a degree. Both companies we're big fans of here at The Fool. There is also a tie. I think it's Warren Buffett's nephew, I believe,

is one of the leaders of this company. It's one that a lot of folks here like, and I think it's a fascinating business as well. I tend to agree. It's nice to be able to add to some of your higher conviction positions. This one seems like it is ignored probably due to its size and just interesting collection of business lines. Also, I think that the leadership of Boston Omaha tries to fly under the radar. They don't do a ton of media. They don't do earnings calls. So, it's perhaps not only market-inflicted. Also, how much credit do you get for being the nephew? What about cousin, second cousin, third cousin twice removed? Brand is a very powerful thing. Whenever

you see that name, sometimes that's all it takes for some people. As long as we can use the stock photo. Speaking of Peter Lynch that you mentioned earlier, there are a couple Peter Lynch-ish types of investments. At BrandonWest38 wrote us that he bought Nike, a leader in athletic apparel that is 20% off its recent high. For a dad who recently started team sports with my boys, I see Nike products everywhere and feel very comfortable holding this company for the long-term. Not looking for those big endorsements, looking for the youth sports. Yeah. Well, I mean, the endorsements are essentially advertising. You see more and more athletes sporting that Nike brand.

It is just a very resilient business with a very strong brand. Brands ebb and flow. They witness their challenges and they capitalize on their opportunities. Nike is no exception there either. But my kids own Nike shares, they've owned them for a long, long time. of the reasons is because it's one of those stocks that they can own indefinitely in our minds. It's through the years, they've just done a tremendous job of growing that presence. It is a global business, tremendous distribution. Again, like you said, with the athletes that are sporting that brand, that is very powerful advertising that resonates with the consumers. The next one I found meaningful, it came from us from at volfan79 about Outset Medical,

us, saw my mother-in-law suffer from kidney failure for two years before passing last year. Here, remote home made three trips to the dialysis center a major issue. Home dialysis would have been a huge help and even possibly allowed her to travel, which was a passion of hers. Yeah. I mean, that's powerful, right? I mean, so sorry for your loss, of course. And by the same token, I mean, you're sort of employing that Peter Lynch mentality of invest in what you know. you're basing this on something that you've experienced. And in this case, it was obviously a very powerful experience. And I'm a fan of Outset Medical, Ricky. I mean, I've pitched it on the show before. I own the shares myself. I've recommended it at my services. And for a lot of

those reasons that were just stated, I mean, dialysis historically has been a hurdle, a challenge. It's something that's needed, right? It's not optional. And it's something that a lot of folks here in the United States alone require. The barriers to deal with that, they've just been so difficult. Then along comes something like Outset Medical, which is utilizing technology in order to make it easier, in order to help scale healthcare. That's one of the things I like about a lot of these healthcare companies that are building on technology is they're really solving a problem in scaling healthcare, making effective healthcare more available to more people. I'm very hopeful that Outset works out. I'm optimistic that it will, and

it sounds like probably an opportunistic purchase in this case. Also love to see some moats in the thesis. At Neil in Rockville wrote us, finally made a move on ASMLF. Be careful, got to buy the ASMLF. Been hearing and watching its growth and has a true moat to boot with new chip plants being built in the U.S. You got to believe it will be needed more than ever. Yes. Well, I mean, look, there's lithography, which is what ASML does, a very specialized and expensive process. The machines that they sell are $300 million plus. This EUV, the extreme ultraviolet lithography machines that they specialize in, we know the tailwinds in the chip space. They do have a bit of a monopoly

on much of this equipment, big barriers to entry, and not only the tech capability here, but the capital requirements as well. And again, understanding that the tailwinds and semiconductors this seems like a pretty sensible one yeah asml builds the machines that builds the machines to build the chips yeah and it takes some some incredible engineering that even if you just even if you just copied and pasted what they were doing you couldn't replicate what they're doing because it's such a highly specialized knowledge i think that's spot on and when we uh as we're wrapping up you know uh jason when you ask people on twitter what they're thinking you don't always get the answers you expect. We did get some folks who did not share stock purchases with

us. In fact, they shared with us stocks they sold. At Ryan tweets, a shorted Build-A-Bear and lost. How is that company doing so well these last few years? First of all, I'm going to lead in with one statistic, Jason. Build-A-Bear is trading at like eight times earnings. Yeah. Well, I mean, that's not surprising to me. I can just tell you as a parent, having gone through the Build-A-Bear experience many, many years ago, it's got its puts and its I mean, it's a wonderful, quick solution when you want to throw your kid a birthday party. But you very quickly realize you only need so many teddy bears in your house. It's a really great experience for little kids' birthday parties, and it's a great way

to keep your kid entertained for a while. I think its market opportunity is capped. It is one of those things that requires a physical presence, so to speak, when you're going to a mall, in most cases, to do it. I'm not sure what the price was when you shorted this company. But as of today, it's a $350 million market cap, and shares are up almost 1,400% over the last three years. It's coming off a very low base. The financials of this business are still not terribly encouraging. I understand why you shorted it, but I think this is just a good lesson. I don't short stocks, Ricky, it's just not my style. If I don't like it, I just take a pass and don't buy it. With your short thesis, you can be

100% right and the market can still stick it to you. Hopefully, lesson learned. It's also tough shorting small caps where you get the volatility and the upside can be more upside-y based on what a few buyers are doing. But I don't want to end there. What were your broad-scale takeaways from the responses you saw? I was pretty impressed. Most of them I read, I was like, yeah, that makes sense. Yeah, absolutely. I love this exercise because it forces you to think, why am I buying right? There are a lot of reasons to buy something. In most cases, it's personal. I think that is one of the bigger takeaways. It's just investing is a very personal exercise. Some ideas

resonate more with some folks than others. I think it just goes to show there are a lot of ways to get it done. That's always worth remembering. There is a ton of information out there. There are a ton of opportunities out there. You're going to probably take a pass on most ideas, but it's always worth remembering. I think investing is a very personal exercise, and it's always worth remembering that you just learn as you go along and you incorporate what matters most to you as you build your investing philosophy. Jason Moser, appreciate your time, as always. Thank you. Got a stock that you've purchased recently? Tell us about them.

drop an e-mail to podcasts at fool.com. 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.