Motley Fool Hidden Gems Investing - Why We're Not Sweating the Fed's Next Move

Episode Date: February 7, 2022

Is someone going to buy Peloton? And if so, will it be Apple, Amazon, Nike, or a player to be named later? Jason Moser shares why Nike's track record of success make it the more logical candidate. Also on today's episode: - Spirit Airlines and Frontier agree to merge, creating the 5th-largest airline in the U.S., with a strong emphasis on leisure travel - What's the main driver of a toy business? Hasbro's TV production division gets the credit for stronger-than-expected 4th quarter - Deirdre Woollard and Matt Argersinger discuss real estate investing and why they're not worried about the Federal Reserve raising interest rates (17:00) Interested in more stock ideas? Our free Investing Starter Kit includes 15 stocks and 5 ETFs. For a copy just go to http://fool.com/StarterKit Stocks: AAPL, AMZN, NKE, PTON, SAVE, ULCC, HAS, MAT, PLD, STAG, EGP Host: Chris Hill Guests: Jason Moser, Deidre Woolard, Matt Argersinger Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Today on Motley Fool Money, what do Apple, Amazon, and Nike have in common? Apparently, they're all kicking the tires of the same company, but only one of them can buy it. That and more, coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Jason Moser. Thanks for being here. Jason Moser. Hey, thanks for having me. Later in the week, we're going to talk about what happens when one company buys another company, how they do it, what it means for shareholders of each. This is timely because of, I was going to say our first story, really our first two stories. Let's start with the reports

that we got over the weekend of two separate companies exploring bids for Peloton. The Wall Street Journal reported that Amazon is interested in Peloton, Financial Times reporting that Nike is interested, and of course, Apple's name gets thrown in there as well. A couple of things I want to get to, but let's start with this. Assuming the price was reasonable, which group of shareholders should be hoping that their company makes this acquisition, Amazon, Apple, or Nike? I feel like you could probably flip that question on its head and say, which group of shareholders does not want this acquisition to happen? Because it sure feels like Peloton has been through the ringer here recently. We've talked about this a lot, not just in regard

to Peloton, but with other businesses as well, in that you can see this is not a business that's going to zero. There is value there. It's also a business where while it feels like it may have a floor, it probably also has a ceiling too, unless you can figure out a way to to push that ceiling higher. I think that's where a deal like this could make sense for a business like Nike. If we just take into consideration, a lot of this is just hearsay. This is more or less speculation at this point. We don't know a whole heck of a lot, but hey, let's talk about it anyway. Apple, Nike, Amazon, all three businesses obviously could digest this acquisition without even really blinking an eye. To me, Amazon doesn't feel like it

makes sense. I get a little bit weary sometimes with Amazon and they're wanting to try all of these different things that seem to step outside of what they really do so well. For me, this would be ultimately for Amazon, I think it would just be a way for them to really lose focus on the core of the business in their retail operations and their cloud business. Apple could do something with it, but frankly, Apple doesn't seem to like going that route. Apple's already trying to build out their own fitness offering, and it seems like they're taking a little bit of a different approach in just offering the service, not really focusing as much on the equipment side, save something like an Apple Watch. You have an Apple Watch

and that can tie to your fitness life. But maybe Apple is trying baby steps to see what kind of opportunity there is and how consumers may react to what they can offer. But for me with Nike, I do see like it makes some sense. There's some complementary aspects to these two businesses. I think with Peloton, we've been very critical of the hardware side of the business, the cycles and the treadmills and whatnot. That is a bit of a trick there for them right now. But the ongoing community aspect, you've got a lot of people that are in that community, they're believers, they love it. Community can be a very powerful thing as long as you take care of it. I think that to this point, that's probably where Peloton has

executed best, is on their community. I think taking care of their community and giving people a reason to keep re-upping that subscription. With something like a Nike, I look at what Under Armour was thinking with its connected fitness pursuits back in the day, but Chris, actually successful. It's important to add that in there. I could see the parallels there between Nike and Under Arm here, but the difference is that Nike would actually get in here and execute and do this correctly. You can glean a lot of data from those users. Nike has a very strong brand to begin with. Even if there are concerns that Peloton's brand equity has suffered, that could be fixable, right? I mean, becoming a part of that Nike universe could add a little

shine and that could make a big difference. And then the ongoing, the relationship that you create with the community, with the users, you get a lot of data, you find out the kinds of gear that those users want. I mean, it could really help Nike break into some new product lines, but also just continue giving their customers what they ultimately want. And that really is the most important part of it all, right, is for a retailer to be able to continue to develop and give their customers ultimately what they really want. Yeah. When I was reading through this stuff this morning, I was thinking about Nike, and I don't own shares of Nike, and that is very much to my detriment. Not only such an

impressive track record of success in the athletic space, if you just think about it as an aspirational brand, the marketing that Nike does. It's pretty hard to watch one of their television commercials and not be inspired when you're sitting there on the sofa, like, I need to lace up my shoes and get out there. Can I just knock down one bit of speculation that happened that I came across this morning and I thought, no, that's absolutely wrong. This is an analyst's note that came out about this deal. I'm going to quote directly from this note, Apple may be forced into this deal if Amazon, Nike, or potentially Disney aggressively goes after Peloton in a defensive blocking move. Okay, look. You seem skeptical.

Apple has $200 billion in cash on hand. They're not going to be forced into anything with that amount of cash. They can do it if they want, although if history is any guide, they're probably not going to do it. But the idea that Tim Cook is going to be like, well, we don't want to do this deal, but from a defensive standpoint, we just have to, Jason. No, I'm sorry, that's 100% wrong. I'm right there with you. I think it is very fair to say that any company that you mentioned, it feels like Peloton needs that acquirer more than the other way around, no matter who the acquirer is. Again, this is all somewhat speculation. I do feel like there is a world where Peloton just continues to go about it on their own

too. Peloton could recover from this. It would take a lot of work, of course. You make, I think, a very good point there in regard to Nike. They just have such a long history of just spinning gold. They push a message that just resonates with so many people. They just always do so well maintaining and nurturing that brand. It just makes you feel like they could bring anything into that universe and continue to spend gold with it. There is a lot to be said for that. But yeah, to your point there, Apple, I don't think any company really would look at this and going in and saying, you know what, we have to have this. Let's go ahead and really, I don't think you see a bidding war coming from any of this, right? I think at the end of the day,

they would be looking at Peloton and saying, you know what, we could see the merits of your business and we could see doing some stuff with it. We'll buy it for pennies on the dollar, so to speak, right? I mean, I think garnering any kind of a premium at this point would be not in the cards for Peloton, right? They would have to really, they'd need some time to come back from this and demonstrate that they can actually continue growing before they could ever kind of garner any sort of a premium, I would imagine. Merger Monday appears to be living up to its nickname because Frontier Airlines and Spirit Airlines have agreed to merge. To do so would create the fifth largest airline in the U.S. I will point out that since this merger was announced,

it turned out to be a bad day for Frontier Airlines and the people attempting to fly, because all of Frontier's flights were grounded midday. They were apparently dealing with some sort of tech issue. It was prompting flight delays and cancellations. So, we're just going to, for the sake of this conversation, assume Frontier, this is just a hiccup for them. Let's go to what this combined entity would be. You look at Frontier and Spirit, they are both heavily focused on leisure travel. They're not levered to business travel in the way that a lot of other airlines are. Given that fact, does that make this combined entity a little bit more of an attractive investment opportunity than ones that are focused on business travel, which

is coming back slowly. Well, let's just leave it at that. It's coming back slowly. Yeah. To an extent, I think. I think it's going to come back in drips and drabs, whether it's business travel or leisure travel. People are coming to their own comfort level as we move forward. Business travel will continue to come back slowly. I think leisure travel, it's a bit easier to justify. People are a little bit more ready to go do something. You've got an airline here that ultimately the combined entity would ultimately still be a very small discount airline. What kind of opportunity does that really offer investors? that remains to be seen. I mean, at a time like this, inflationary times where the cost of

everything seems to be going through the roof, you could certainly see where travelers would be far more willing to maybe step down to a discount airline experience versus where they might normally just fly with one of the bigs. Airlines, it's just such a difficult business. There's so many moving parts, so many variables that come into play. It is one of those industries where size really, really can make a big difference. From that perspective, I think this makes a lot of sense. It does seem like it's combining two airlines that are gaining more share. There was a data point that I saw on CNBC earlier this morning that looked back to 2013. Spirit and Frontier together had 2.8 percent of the revenue passenger miles flown by U.S. airlines. That was

according to the Department of Transportation. Fast forward to 2019, their combined market share had basically doubled, 5.4 percent versus 2.8 percent. You're absolutely seeing some kind of of a trend there. I feel like in this day and age, when the value of a dollar is becoming more crucial to more people, I think that that would put something like a Spirit and Frontier more squarely on the traveler's radar than before. But it's also worth remembering, the bigs have done a very good job over the years of developing loyalty, whether that's through their own individual programs or through credit card programs. Travelers have built up some loyalty in that regard. But all in all, it feels like this opens the world up for more travelers,

and that ultimately would be a good thing. Although it doesn't exactly boost confidence that part of this announcement, they haven't decided on a name, where the headquarters is going to be, or who the CEO is going to be. Presumably, they'll figure all that out, but we'll move on. You and I have talked in the past about the toy industry. What is the main driver in your mind of a toy business? I'm asking because Hasbro's fourth quarter profits and revenue came in higher than expected, and their TV production division is getting the credit, which I don't really understand all that much. Back to my original question. When you think about a toy business, what is the main driver of that business?

Having followed Hasbro for most of my time here at The Fool, so more than a decade, a toy company really is about the toys. The main driver is toys. For Hasbro today, it clearly is still the consumer product side of the business that's responsible for better than 60% of the company's overall revenue. When you talk consumer products, you're talking about that stuff that kids buying stores, toys, all sorts of different characters and licensing deals that they get with the IP companies out there to really build out that consumer products offering. But I think that the future for Hasbro more and more is becoming gaming and entertainment. The consumer product side of the business will still be a very key part of the business. I think that ultimately,

what you look at is, you see, they're bringing more gaming and entertainment into the fold here, and it ultimately plays into this brand blueprint strategy that they have, which is ultimately just trying to leverage all the brands and its family across all of these different opportunities. And so, you take it to the farthest degree back when we were growing up, right? I mean, there was no app on your phone for the Mr. Potato Head that you bought at the store and you got for Christmas. You got Mr. Potato Head and that was it. You didn't have an app to go with it. But now, like tech, has become an integral part of virtually every experience, whether it's physical toys or virtual entertainment. We're seeing Hasbro making a lot of investments across a lot of these

different entertainment platforms in order to capture that opportunity. I think the interesting thing, when you look at Hasbro, if you go back to 2019 and they made that acquisition of Entertainment One for around $4 billion. That was a very clear sign on the entertainment side. You think of Hasbro, you think of kids' toys, but then you actually look at the catalog of entertainment that they're a part of. There are shows that aren't necessarily what you would be recommending to the seven, eight, nine-year-olds. They got Cruel Summer and Yellow Jackets as a couple of examples that they called out in the release of successful shows that they are a part of now by virtue of that Entertainment One acquisition. Then again, you look to their

Wizards and entertainment segments, the Wizards gaming segment. We've seen the gaming market itself between hardware and software, but gaming altogether. We've seen companies talking about a $300 billion market opportunity. Obviously, Hasbro isn't going to tap that whole thing, but it's a big universe, and that's where they see the puck headed. It is a business that has changed materially here over the last decade, and it is not sacrificing the physical for the sake of the virtual, it's really coming up with a strategy to be able to marry the two together, and it feels like they're doing a good job of that. I'm just glad that Clifford the Big Red Dog live action movie was not a financial success. I'm not wishing ill for Hasbro and its shareholders,

But I found that film to be so terrifying that I thought, boy, if that thing's a hit, they'll make another one. And based on the numbers I'm seeing, I don't think they are. I feel like Clifford the Big Red Dog, it's a better cartoon. Yes. Live action, I'm not feeling it either. And listen, I'm a dog lover, you know it. But yeah, to me, I saw the commercials for that one.

I'm like, oh, yeah, I don't want to go see that. No, not even at home. I don't want to watch it at all. Jason Moser, great talking to you. Thanks for being here. Thank you. We didn't talk about interest rates, but few topics have gotten as much attention lately. When is the Federal Reserve going to raise rates? What will it mean for stocks? What

will it mean for real estate? For all the speculation of rate hikes coming in 2022, you can count our real estate experts among those who are not sweating the Fed's next With more, here's Deidre Woollard. Thanks, Chris. I'm Deidre Woollard, and I'm here with lead real estate analyst, Matt Argersinger. Matt, last time we chatted, it was a little bit about how REITs had an extraordinary 2021. Some of our REITs have been dragged down a little bit in the overall market volatility. What's happening there? Well, hi, Deidre. I think it's a symptom of two years here. If you go back to 2021, when REITs really did well, the real estate sector really outperformed historically,

it was really about a rotation, I think, away from some of the high-flying technology, COVID momentum names that we really were familiar with. Thinking those were too highly valued, so money rolled into real estate. But here in 2022, I think the overall market's reacting to the idea that it's no longer a hypothetical that the Fed is going to raise rates. It's really a fact, and it could happen as early as March. And higher interest rates, when that's on the horizon, it's a knee-jerk reaction from investors to say, well, let me sell off some riskier assets like stocks and go into other assets, fixed income, etc. I think that's just affecting all asset classes. I'm not surprised that the market's been volatile,

a lot of technology names have been hit, but real estate has also been hit because it's all being lumped together in this inflationary interest rate rising fear environment that we have beginning here in 2022. The two I words, inflation and interest rate, seems to have been on everybody's minds, certainly for the last month or so. We're real estate people. How does that affect our world? Right. We've talked about this. It's fascinating. I think in the short run, higher interest rates, fears of inflation, they're going to cause stocks to underperform, they're going to cause real estate to underperform. But if you look historically, National Association

of REITs has done some great data on this, CBRE has done some analysis on this. If you go back around 50 years, the real estate sector of the economy has done pretty well in periods of high inflation and higher interest rates. And, Deidre, I'd be remiss if I didn't point out some of our own research here at The Motley Fool that shows real estate being a pretty good inflation hedge. There was a study done by Jack Capril back in January that showed REITs have beaten inflation 26 out of the last 41 years. So, as a real estate investor myself with a substantial amount of my portfolio in real estate stocks, equities, and private real estate, I'm OK with higher interest rates. Generally, that means, A, the economy is doing

well and companies with pricing power. Real estate as an asset in good locations with good uses is an asset with a lot of pricing power. I think overall, real estate's going to do just fine. We just might have short-term challenges with outperformance. Then later on, as the economy digests these higher rates, I think real estate will do just fine. We've seen so many tech companies are still investing in big purchases, partly I think because they see real estate as that store of value, too. That's absolutely right. Let's pivot and talk about one of our favorite trends, which is industrial real estate. My goodness, this has been just a crazy sector.

We all know about supply chain issues. One of the biggest REITs in the space, Prologis, I looked at their earnings recently, and their CEO had said that the demand is just showing no signs of slowing. What's going on there? Well, industrial has been so strong for years now, and even well before COVID hit, which is this long-term transition to e-commerce across the U.S. economy. And by the way, I saw a stat the other day that almost blew my mind, that retail sales as a whole, only 16% of retail sales in the U.S. are happening online. You compare that to, say, China or other countries where it's 30%, 40% of sales are online.

So, think about that. E-commerce seems like it dominates our life these days, but yet it's still a fraction of how we shop, generally, as consumers in this country. That's been a trend that's been going on for years, this transition to e-commerce. And what you need with e-commerce is, of course, warehouse space, logistics space, fulfillment centers, transportation hubs, all these spaces that we, as real estate investors, took for granted for years and decades, as we loved office, retail, and other things. But we actually need spaces like this, and we need spaces like this close to big cities, or at least close to major transportation hubs or airports or things like that.

We just don't have enough of it. We haven't had enough of it for years. We're trying to catch up to it, but in reality, I think we're hundreds of millions of square feet short of where we need to be in industrial space. That's really exciting if you're a pro-logist or another industrial REIT, because the demand for your facilities has never been higher. Vacancy rates have never been lower. You almost see growth as far as the eye can see. Yeah, absolutely. One of the things that you and I have talked about, too, is the acquisition that's happening in this space. Individual REITs are trying to grab up as much space as possible. Larger companies are

gobbling up smaller REITs. It really seems like there's so much capital flowing to this area right now. Yeah, that's right. A lot of companies are going to take advantage of it. I was worried about some of the valuations I'm seeing across the space. A lot of companies that we follow, like a Stagg Industrial or a Prologis, they're out there making acquisitions all the time, but the real estate is getting pricier by the day. It's really about identifying those markets where you can still find value, still find opportunity. That's why I like a Stagg Industrial, ticker STAG, or an East Group Properties, ticker EGP. They're in the more secondary markets, some of the hotspots where they can

go in and buy single assets at good valuations. I was surprised, Deidre. We opened this segment talking about the market volatility, the decline in a lot of real estate stocks. I was surprised to see that industrial REITs have been hit pretty hard as well, down 10% to 15%, depending on which one you're looking at. To me, that's a tremendous opportunity given the macro setup we just talked about, which is just this massive tailwind with many years of growth. Yet, these stocks have come down quite a bit, just like all other real estate stocks. I think there's definitely some opportunity in this space. If you're looking to add some more real estate exposure to your portfolio, I would certainly look at the industrial space.

Yeah, absolutely. Well, thank you so much, Matt! Thank you, Deidre! That's all for today, but coming up tomorrow, Alison Southwick and Robert Brokamp for getting ready for Valentine's Day by answering the financial questions that can help improve your relationships. 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.