Motley Fool Money - Boring Companies, Exciting Returns

Episode Date: April 22, 2023

 “A company that does boring things is almost as good as a company that has a boring name, and both together is terrific.” --- Peter Lynch  Sierra Baldwin and Motley Fool Senior Analyst Sanmeet Deo discuss: - Boring, but effective ways to invest - ETFs that can build a portfolio - 1 key metric for investors to watch - The businesses of potato processing, car auctions, and paint manufacturing Companies and ETFs discussed: SPY, VTI, VT, CPRT, LW, SHW, PTON Host: Sierra Baldwin Guest: Sanmeet Deo Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard. Daredevil Born Again official podcast Tuesdays and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. people think in the investing in stock market is you always have to be doing something. You always have to be trading.

You always have to be buying a new stock or selling a new stock or being very active in your portfolios. And really, a boring do-nothing strategy is probably one of the best. I'm Chris Hill and that's Motley Fool's senior analysts and meet Deo. If you don't find investing very fun, that might actually be a good thing. Sierra Baldwin caught up with Deo to discuss how to make investing less exciting, some basic ETFs to consider, and some boring companies with market beating returns. A lot of people associate investing with the excitement of buying and selling stocks based on market trends and buzzy technologies that promise big returns. We saw a lot of that during the

pandemic, but I'm wondering, should investing be fun and exciting? It was an interesting question because while the natural answer is yes, it should be fun and exciting, the real answer if you want to make true long-term wealth in the stock market is it shouldn't be that fun and exciting. It should actually be very boring. You should almost not think about it too much. You should buy good companies for the long-term that compound and not think about it too much. So fun and exciting comes when you go out into the out-ears, you made tons of money. So fun and exciting can work out thinking about companies like Netflix, Amazon, and Tesla. But when can that strategy really backfire? There are times when fun, exciting stocks or companies or story-type stocks are really exciting to kind of invest in. But it has backfired. One of the very popular names during the pandemic was Peloton. And truthfully, lots of other connected fitness stocks, companies that had fitness hardware combined with software that would be pushed out to their customers.

Those didn't really work as well. Now we're finding Peloton has struggled with their business. Some of the other themes, like 3D printing was something that became very popular. It was really fun and exciting back in the day. Don't think those stocks have really turned out very well. And then the jury's still out of Metaverse stocks. Those were very hot and popular for a long time. in the past couple years ago, haven't heard too much of them as AI has kind of taken over

the theme and the conversation there. So AI could be another one of those things that's fun and exciting, but is it a great strategy to invest in? We'll see. So we'll talk about some good investing strategies later on. But before we get to some individual names, it seems like a lot of wealthy people have built a fortune in a pretty niche or Dole Way. One of the companies that we'll discuss a bit later on is co-part. Their founder, Willis Johnson, literally has a book called From Junk to Gold because he became a billionaire, salvaging vehicles. Another example that comes to mind for me is a McDonald's franchise owner in the town where I grew up was one of the wealthiest people. Can you think of any examples?

Yeah, for sure. So when I was growing up in Houston, there was a family friend of ours that their family, owned a business that made pipe and pipe products, iron products, that they would sell to industrial companies. And that's it. Just fittings of small parts and their businesses thrive for 40 plus years. They're pretty wealthy and doing quite well just on piping products. What's one incredibly boring investing strategy that you use to build wealth long term? Yeah, you know, one of the things that's kind of people think in the investing in, you know, stock market is you always have to be doing something. You always have to be trading. You always have to be buying a new stock or selling a new stock or being very active in your portfolios.

And really, a boring, do-nothing strategy is probably one of the best. And one of the things that I found have been very helpful for me is an automated type of system. For example, I literally set aside, especially for my kids, since they have such a long time frame now of investing ahead of them, I literally set aside automatically from my banking out into their financial accounts or brokerage accounts that I've set up for them. Every month comes out some money, then goes into their portfolios. I don't necessarily do something right away with that money, but when I feel the time is right, lately I've bought some index funds in their portfolio. portfolios. And that's it. I hopefully want to put money into their accounts regularly on a monthly basis for a long period of time. And over time, that will compound and build a nice nest egg for them to do whatever they want with it in terms of college or whatever else.

So speaking of index funds, you get a huge basket of stocks and you don't have to do any of the picking. Who should focus more on index funds than individual stocks? So if you're not inclined to invest in stocks and spend a little bit of time investing in stocks and businesses, learning a little bit about the businesses, it could vary on how much you want to do in terms of studying and due diligence on the businesses. But if you're going to own individual names, you should have a minimum level of knowledge of what you're owning and what you're buying. If you don't want to do that, there's nothing wrong with that. A better bet is to just buy index funds. And honestly, I think index funds,

funds are a good staple of any portfolio to buy and anchor your portfolio. And then if you want to add more names to your portfolio that are individual stocks, that kind of add some spice to your portfolio, add some more flavor to your portfolio, that's definitely great. Some great index funds is the Spider-S-M-P-500 ETF, SPY, is the ticker. That's great for tracking the S&P 500, the 500 large companies in the United States. Vanguard Total Stock Market ETF, ticker VTI, covers the entire gamut of stocks, regardless of what index it is, in the United States. And then if you want to get a little global exposure,

you can go with the Vanguard Total World Stock ETF, which is ticker VT. That'll give you that total world global perspective on investing. I want to transition to some individual stock names, but before I do, we're going to be focusing on one metric, return on invested capital. Can you talk a little bit about what return on invest still capital is and how you think it fits into the broader conversation about investing? Returning investor capital is one of the single most important financial metrics for investors. So when a company has a high RIC, it needs less capital grow earnings and therefore generates more free cash flow. A higher free cash flow leads to a higher intrinsic value of the business that ultimately is reflected in the share price of the company. So higher RIC can lead to a higher stock price, which could lead to a higher stock price, which could lead to,

better returns for investors. Are there any times when investors should ignore the return on invested capital metric? So there's certain times when a return on investing capital metric will not be as useful. A young company launching a new product or making an acquisition, it can get very wonky. You want to take an average or understand whether the company is actually making profits to see if that return on invested capital metric will be useful. And for steady, stable businesses, generating healthy amounts of earnings and cash flow, it's definitely a great metric to use.

And when it comes to picking stocks, another consideration is David Gardner's snap test. What would happen if you snapped your fingers and the company just completely disappeared? It seems like a lot of boring companies pass this test, even if you don't think about them very often. Yeah, you know, for sure. I mean, the snap test is a great thing. way, especially for boring companies. While these companies wouldn't be top of mind, they're companies that are needed. For example, waste management services, you know, if we snapped our

fingers and had no more waste collection, we'd be in a lot of garbage piled up on our streets and be awful. If we had, you know, no funeral services companies to kind of help us with those services that we need, regardless of economy or recession or anything happening, that would be very difficult for us. So there are plenty of companies that we don't think about that are actually very useful for our daily lives, that if we were to snap and they were to go away, we would struggle through our daily lives. So getting into some examples of boring stocks and why you think they're worth considering,

The first one is Lamb Weston. This company doesn't seem to be disrupting the future of anything, but it definitely has a product that I'm grateful for, and it certainly doesn't pass my snap test. Can you talk a little bit more about what it does and how it makes money? Yeah, so, you know, one quote that I wanted to kind of mention, too, is from Peter Lynch, where he said, you know, a company does boring things is almost as good as a company that has a boring name, and both together is terrific. So, Lamb Weston, very boring. It doesn't even imply what it actually does. You have no idea what it does just from hearing the name. But Lamb Weston is the largest potato product manufacturer in the world, supplying

giants like McDonald's with fries, yes, French fries, while also selling its own consumer products. Over 60 million of their potato fries are sold daily. They even have an interesting tagline and says seeing possibilities and potatoes. So, you know, they basically make their money, from taking potatoes, creating all kinds of products, whether it be fries, chips, any kind of potato product you can imagine, and selling those to restaurants, food companies, and usually they have long-term contracts with those companies to sell their products. And they do quite well, given that simple, basic premise. And over the past seven years, the company has compounded revenue is at 6%, EPS at 12%, and has an average an ROIC of 23%.

So it's pretty impressive what they've done by just chopping up potatoes. It's definitely a company that I hope does not go away. Next one, we talked a little bit earlier about Copart and how their founder, Willis Johnson, became a billionaire, literally turning junk into gold. What is the business and how is it doing today? Yeah, you know, Copart is actually one of those names that was first recommended in Stock Advisor way back in August of 2007 and then Rule Breakers in April of 2009. Since the Rule Breaker wreck, it's returned over 1,952%. Again, Copart, hear their name. Kind of boring. Don't

know what they do. You know, Copart is the largest marketplace and auctioneer of salvage and clean title vehicles. You know, they serve insurance companies, banks, dealers. individuals, et cetera. It serves a different niche than typical used car sales, for example. So think of an insurance company selling off a total of car or charities flipping car donations for cash. It sells about 3 million cars a year across 190 different countries. And over the past 10 years, the company has compounded revenues 13%, free cash flow at 50%, and has averaged an RIC of 32%. And also, one thing I want to mention about Copart is they kind of have two parts of their business. The biggest part of their business is actually making money from selling cars and charging various service fees.

And the majority of the revenue actually comes from these service fees. So, service fees are so when someone sells a car through a car part, they'll charge a seller fee for their services, like organizing the auction, storing the vehicle, handling the paperwork. They also charge buyers' fees, things like registering to bid, buying the car, and handling a truck. transfer of ownership. So all these different fees that they charge buyers and sellers kind of stack up into a significant source of income for them. And that's the majority part of their revenue. Another part of the revenue is where they just sell cars. So, you know, they'll have salvaged or clean title cars that they get, and they'll auction them off and sell them. And then they take a percentage of the sell price for themselves and give the rest to the seller. So that's a

little bit of a smaller part of their business. Most of their business comes from the service fees, and those really rack up, given how their business is performed, something very boring that probably no one you want to take on the task of doing. Yeah, you know, when I think of a totaled car, I really just think of an unsalvageable pile of steel and junk, getting crushed in a junk lot, and disappearing forever. So that's pretty impressive. How does their return on investment? invested capital compared to the industry average and buzzier auto stocks like Tesla. Yeah, so there's a couple of companies that are publicly traded that do something similar to what they do. And those companies, you know, Copart's returns have average,

like I said, about 32% over the past 10 years. Some of these other companies, you know, one is car auction services and another's insurance auto auctions. It took a quick, look, and they've definitely stacked up very well against those companies. Something like a Tesla, while Tesla in the short term does have a higher ROIC, the thing about Copart is they've done 32% over the past 10 years, and if you look back even further, it's probably been similar or close, and they've been around for a long time and done it consistently. And that's the other thing is companies that have a high ROC, steadily rising, and very consistent, are definitely much more attractive.

If I were to an investor investing Copart versus Tesla, I know that that Copart RIC is probably going to stick around and be very similar to what it is now and what it's done historically versus a Tesla. I'm not really so sure how that RIC is going to kind of hold up, even though it is higher at the time. The last one that I want to talk about today is Sherwin Williams. If you thought watching paint drying was fun, how about listening to it? I will say that I just use Sherwin-Williams product to paint the exterior of my house, and I am a happy customer so far. But is this a company for investors to watch?

Absolutely. You know, Sherwin-Will-Liams also was another one first recommended stock advisor way back in March of 2008, ironically, in the same year as the first housing crisis. And since then, it's returned 1,463%. For those that may not know, Sherwin-Williams is kind of engaged in manufacturing, distributing, and selling of paint, coatings, and related products to not just retail customers, but professionals and industrial and commercial customers in North and South America. Over the past 10 years, they've compounded revenues at 9%.

EBIT or operating income at 11%. They've grown their dividends 17% and have averaged an RIC of 28%. You know, this is a company that is boring, sells paint. You think of, you know, paint drying, like you said. That's probably the best way to own a stock like this is let the paint dry and just watch it. You know, and they serve so many different people, so many different end markets that they've done very well. And if you think about it, it's also a brand name that's very, you know, this kind of takes away is different from the other companies we've mentioned. And it's not, Sherrin Williams won't give you the idea of what they do.

And it's kind of a boring name. But because they built a brand name, a lot of people will know what Sherman Williams is. You know, they've seen the symbol or they've heard, seen commercials, things like that. So this is definitely one that I would feel very comfortable knowing will always be needed, will stay tried and true, and will benefit from, you know, more houses, growth and remodeling. You know, with increased interest rates and a bit of a troubled housing market and some of the impact of that, you know, slowing spend on remodeling, are those things that investors should be concerned about with Gerwin Williams? I mean, definitely. It's definitely a risk for a company like this when there's macroeconomic uncertainty, housing slowdowns and slowdown in construction activity or slow down in remodel spending. definitely one of those things that will impact their company. It's not like as if it won't.

But let's take, for example, in the 2008 financial crisis, you know, in their net sales in 2009 dropped to $7.1 billion from $8 billion in 2008. We're representing a decrease of about 11.2%. Now, given the magnitude of that crisis, that's not too bad. And they've recovered ever since there. So while their business will surely take a hit, I'm fairly confident that they can recover through any sort of crisis. And they've been around for a very long time. So even during the 1980s recession, when there's high interest rates, inflation, unemployment, they weathered that storm and are still going. So they were founded in 1866. And so they've seen plenty of different marketing conditions.

No marketing condition in the future will resemble the same market conditions that we've had, but they know how to handle those situations. Given that they have such strong returns on their investor capital, strong balance sheet, they'll be able to do fine. Well, thanks so much for joining me today, Send Meet. I hope we didn't put our listeners to sleep. Thank you so much, Sarah. 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 ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.