Motley Fool Money - Hidden Gem Stocks We Love at the End of the Year

Starting point is 00:00:00 Do you still have some items to buy on your holiday shopping list? What about your holiday stock shopping list? Today is Thursday, December 18th. Welcome to Motley Fool Money. I'm your host today, Jason Hall. And I'm joined by Motley Fool analysts, Dan Kaplanar and John Quas, to discuss some of our favorite hidden gem stocks that look like great buys as 2025 comes to a close.

Starting point is 00:00:36 Get ready for a fun, foolish roundtable discussion. If I say hidden gems, you probably think I'm talking about small, esoteric companies that nobody's ever heard of, right? That's true, but it's not the only place that you can find hidden gyms. And on today's show, we have three giants in their respective industries. Airbnb is one of those dominant companies, and John, you brought it to the table. It's a name that people think of when describing the entire short-term stays industry now. It's become the verb, too. Since the first day of trading post-IPO, the stock's up almost double. but it peaked like a month later, and it's way down since then in early 2021.

Starting point is 00:01:20 John, why is this on your list as a hidden Jim Stockworth buying? Yeah, well, let me give you my elevator pitch here for Airbnb to start it off. So people aren't giving up this short-term rental model. Airbnb is the dominant player in the space, and I think it has a brand moat, and it's printing cash like few companies do. Eventually, these factors should make Airbnb stock a winner. I know it hasn't performed great in recent years, but I think that it will eventually catch up. Let's talk about one of the traits I like of a hidden gem, and that's reasonable growth in an

Starting point is 00:01:57 expanding market. So Airbnb is growing its revenue at a double-digit pace, 10% in the most recent quarter, expecting high single-digit in the upcoming quarter, but it's not red-hot, but that is reasonable growth. and there's market research pointing to ongoing growth in this space as a whole. And, you know, AirDNA is one of the third parties that puts out reports on this. And what's so interesting to me is that AirDNA has showed that there are rental property owners who are willing to put their listing on multiple platforms.

Starting point is 00:02:33 And that's kind of the majority. But if you're only listing exclusively, you're not listing with Airbnb's competitive. editors. You're listing on Airbnb exclusively. And so it's either Airbnb alone or Airbnb plus, but never without Airbnb. That to me shows the moat here. And one of the reasons I like it in this expanding market. There's more you like, too. Yeah, for sure. So I also like companies that exhibit this trait of having this relentless drive and curiosity to finding new business opportunities. Airbnb is definitely one of those. So it's invested $200 million. This year in experiences and services. And when you look at its bookings in the third quarter,

Starting point is 00:03:16 half weren't attached to a place to stay. I'm talking about it in its experiences and services. So people stay in a new place and maybe they'll book an experience on top of that, but half of the experiences now don't have a place attached to it. So they're doing it exclusively for the experience. And that's kind of an interesting trend. The company investing in that and seems to be paying off. And management's also talked about, hey, we're going to launch a couple new businesses, ideas every single year. This is throwing spaghetti at the wall for sure, but it has extra cash on hand, so it can't afford to invest in these new ideas. You look at the whole thing. It trades it 18 times as free cash flow. That's a valuation I can get behind. It's buying back

Starting point is 00:03:56 shares, and the share count is coming down. And it's investing in new opportunities. And here's the thing. Its competitive position does afford investors the luxury of pay If it was being out-competed, if it was burning cash, you wouldn't have the ability to be very patient here. But because it is so strong, you can be patient while it waits for some of these new ideas to work out. John, I'm a little less convinced that optionality is going to lead to that next leg of growth. But the core business is a wonderful business. And you mentioned the valuation. And that says that other investors don't necessarily think it's a wonderful business. So maybe some margin of safety there, plus or maybe interest rates falling a catalyst for

Starting point is 00:04:39 the business moving forward, too? We'll find out about that. But, Dan, you say there's something else that stands out to you. Yeah, there's a couple of things. One is that co-founder, CEO, Brian Chesky, has done a great strategy where he is actually living in a different Airbnb property. It's like on a weekly basis or every couple of weeks, something like that. As I get older, as I start to travel more, I'm finding that is more appealing. an idea for me as well. And I think that that may actually resonate with some older travelers as they get to a point where they're thinking about retirement, have more time to spend on the road. Suddenly, that hotel mindset, it's just different from what you get from an Airbnb. And so

Starting point is 00:05:19 I think there's a lot of potential there. The other thing that I have run into in my own travels in the past year is that Airbnb is actually starting to get some cross listings from traditional hotels. And what I was shocked at is the pricing on the hotel rooms on Airbnb is sometimes cheaper than what you get from aggregator sites. I even ran into one situation where it happened to me a Marriott property. I'm a Marriott Bonvoy loyalty member. It's a better price on Airbnb than I could get as a loyalty member, which kind of ticked me off as a loyalty member. But it does speak to the appeal that hotel owners have when they're like trying to get. get as much money as they possibly can, maxing it out, putting it on all platforms is the smart

Starting point is 00:06:06 thing to do. But I just never expected a traditional hotel to be so interested in Airbnb. I think that that's a potential growth driver as well. See, that's the kind of optionality that I think could be compelling. And it's a little bit of maybe Amazon's ad business on its own platform for inventory, where there's a lot of competition for consumer goods. And it's the same way for Airbnb. And it also says to me that Airbnb, you know what, we're not afraid of the hotel industry. Come, give us some money.

Starting point is 00:06:35 Put your properties on our platform. We'll take a little money from you. We're still going to win. Up next, Dan makes the case for Lulu Lemon in the midst of growing competition and a change in the C-suite. Stay with us. These days, I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly why I love quince.

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Starting point is 00:07:56 Motley. Welcome back to Motley Fool Money. Over the long term, Lulu Lemon has been a huge winner. It's up more than 15x since going public, but in recent years, it has not been a great investment. Investors have lost money from the peak back in 2023. We can go all the way back to 2020. Beginning of 2020, the stock is still down. The business has lost some of its luster. Dan, what's going on with Lulu Lemon today that makes it compelling to you as a buy? I've been following Lulu Lemon for a long time, and it's interesting to me how stocks that arguably start out more looking like rule breakers can end up emulating Hidden Gem style stocks later on. We all know Lulu Lemon's yoga apparel business, it changed the retail industry. It opened up an entire new

Starting point is 00:08:43 category of these so-called Athleisure products. It kind of brought a new meaning to casual Fridays at the office. It's been instrumental. It spawned a whole bunch of other specialties. retail concepts as well. Business did done really well, but after briefly topping $500 a share late in 2023, early in 2024, we've seen the stock plunge 70%. Well, what happened? Growth trends slowed. They even reversed in the core North American market. And even now, the company is guarded about its immediate outlook. Seems like it's trying to bottom. But even most recent quarter, we saw same store sales in the North American segment drop. So, there's a lot of questions about Lululemon right now, but the thing I focus on is we have seen

Starting point is 00:09:31 Lululemon be resilient before. Turn back the clock, what, 10, 11 years or so? From around 2012 to 2014, the stock was down about 50%. What happened? Yoga pants were suddenly see-through. We had all these quality control issues. That was exacerbated by some comments from the then CEO, now former CEO and founder, which I won't bother to repeat here, but it took a while for the company to write the ship after that big boondoggle. But the payoff was the stock was a 10-bagger by 2021. So come back to today. Now we're facing a similarly interesting moment. Lou Lemon just announced its quarterly results earlier this month, but it also said CEO Calvin McDonald is stepping down. Shareholders were happy with that move. More recently, we've seen activist investors come in.

Starting point is 00:10:27 Elliott Management has apparently taken a billion dollar stake in Lulmin stock, has suggested a former Ralph Lurin executive named Jane Nielsen for the job. So very much the stock in play it right now, a lot of investors trying to see, is this the thing that breaks Lululemon out of its slump? Yeah, it's so interesting, Dan, that we're going to experience a a change here at CEO, and I'm a little bit worried about a new management team coming in here and overcorrecting because I really don't think things are as bad as it appears. I think you have good apparel businesses and bad ones, and bad ones have piling up inventory, and that leads to markdowns, and it leads to a complete disintegration of its profit margins.

Starting point is 00:11:12 You look at Lulu Lemon, that's not what's happening. It's a good business. Inventory is fine. Margins are fine. It's just having a slowdown. And so I'm worried that a new manager could come in here and overcorrect when in reality, it's kind of stay the course and do what you need to do to keep appealing to your customers. I agree with a lot of what you said, John, and I will admit, I'm less than convinced that this

Starting point is 00:11:36 recent trend of trying to pick up superstar CEOs for consumer goods companies that are going through some temporary problems. I just don't think that's as important as just going back to basics. Let's make some good products. Let's build up a core base of loyal customers, make them feel valued. But here's the thing. Investors have bid down Lula Lemon stock so far that they're essentially assuming no real chance of successfully reigniting the growth fires here. I'm not that pessimistic. I think somebody new in the corner office might be able to reverse that negative sentiment and get the stock moving in the right direction again. You know, I think competition is a real threat, but it's also an important reminder that it's a really compelling business. Competitors are not jumping in this to lose money.

Starting point is 00:12:25 And we've seen other retailer, other apparel businesses that have struggled because they kind of lost control of distribution. Lulu Lemon's different because it still has so much control over its distribution footprint. And I do think that I agree with both of you that this is less a turnaround and more of a recalibration. But the stock is still priced maybe for more trouble ahead. Yeah. Okay, up next, we've got one more. I've got a Mag 7 stock that I think is more hidden gym than you might think. Stick with us. If you're early in your career and looking for insight, inspiration, and honest advice, listen to the Capital Ideas podcast, hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last,

Starting point is 00:13:05 and what it means to lead with purpose. The Capital Ideas podcast from Capital Group, available wherever you listen, published by Capital Client Group, Inc. Welcome back to Motley, full money to wrap up today's show. I want to talk about Alphabet, guys. But what are we talking about here? I thought you said this was a hidden gem, right? Alphabet, more like hiding in plain sight. Hidden, if this was April, maybe, but now? Yeah, I think that's fair. From the beginning of the year, the stock's up 55%. But that big sell-off during the lows in April, the stock's basically doubled since then. And it's clearly gone from being perceived as a feared loser from AI eroding that ad-driven search business to now one of the expected winners from artificial intelligence.

Starting point is 00:13:54 Now, I think it's true. We're seeing it's getting really serious traction with Gemini. It's cloud services business is booming. And we've also figured out that the ad business is, it's actually kind of holding up pretty well, even as we do see search be affected by AI. But I think the reason it makes the cut for me and of the stocks that we've discussed today. It's the one that I have actually most recently bought. It's because of those things and all of the other things that Alphabet is positioned to win from. Yes, that includes search. That includes AI in the cloud, but it's basically got a Netflix bolted onto it with YouTube. And it's a cool little thing with YouTube is it's a much lower risk content development engine because it shares in the profits

Starting point is 00:14:38 it's with content creators. By the way, it's emerged as one of the largest cable TV companies in the U.S. too with YouTube TV. And we also, we continue to kind of creep closer to autonomous vehicles becoming a real thing. Waymo is approaching a half a million rides a week, and they're aiming to hit a million rides a week really soon. Eventually, that's going to be a big business. It's going to feel like an overnight success, but it will have actually taken 15 to 20 years to build out. Well, I think that's exactly why Alphabet is a hidden gem. It's not because it's undiscovered, but rather because investors tend to think about it one-dimensionally, when in reality, as you

Starting point is 00:15:19 point out, Jason, this business can win every way from Thursday in so many different ways. As an analyst, I can barely keep up with everything that it is doing and succeeding in. So, optionality is a business trait that we can't measure by any valuation metric. There isn't a stock screener that's going to pull this out. But it's so important from an investing perspective. And just looking at the plethora of past stock market winners, they had that trait. And Alphabet certainly has it. And there are underappreciated optionality aspects of the business. Jason, kudos to you for making this purchase recently. I think it's always hard when you've seen a stock really take off before you've had a chance to really add to your position. I was fortunate enough.

Starting point is 00:16:03 If I saw Alphabet as sort of this mispriced, underappreciated stock years ago, and I've been adding, even as many commentators dismiss the company for missing out on AI, missing out on cloud computing. Well, Alphabet proved that wrong. And now the stock is much more fairly valued than it used to be. There's still potential, though, for future gains. Good on you, Jason. All right, guys, I got one last question to wrap this up. We've talked about three stocks today. which do you think is the biggest winner in five years? John, you go first. Yeah, I hate to say it. Y'all know how much I love Airbnb, but I believe that Lululemon has the clearest path to doubling in value over the next five years. I think all three of

Starting point is 00:16:48 these stocks are really safe. I really do. But Lul Leman, to me, it has a really good balance between its growth rate and its valuation, maybe the most favorable balance between those two factors. And so for me, it has the nod of the best stock today. Jason, I've got to say, I agree with John 100%, and not just because it was my pick. But I have to say this, too, I wish that it would be alphabet. I wish that Alphabet would be able to outperform Lula Lemon over the next five years because I own a lot more alphabet stock. I think Alphabet's going to do just fine. And I'm really optimistic and hopeful. Airbnb might finally catch a break here, start executing well enough, get some appreciation from shareholders, get the stock moving back in the right direction.

Starting point is 00:17:34 Yeah, Airbnb just keeps landing on my too hard pile. The valuation is really compelling. I'm waiting to see more evidence that these other things are going to really help it deliver, and we're going to be rewarded with a higher multiple. Alphabet, this is just about the most expensive multiple on a sales basis it's ever traded for. So it's not cheap. So there's still, all the other things I laid out, we're counting on. The market is expensive. expecting big things from the company. So I agree. I come back to thinking of this group, the highest probability. I agree. I think the best margin of safety, the business that's proven, the business that's a lot stronger than the stock is treating it like, I think that's a little lemon too.

Starting point is 00:18:13 I agree. How about that? All three of us. It's a first, Jason. I'm not sure that's ever happened before. Yeah. It's either a really good thing or really bad thing, right, John? This is a shocking development for sure. Okay, guys, this has been a lot of fun. Dan, John. Thank you both so much for joining me today. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For John Kwas, Dan Kaplanger, and the entire Motley Fool Money team, I'm Jason Hall. We'll see you tomorrow.

Motley Fool Money - Hidden Gem Stocks We Love at the End of the Year

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