Motley Fool Money - Motley Fool Money: 02.03.2012

Episode Date: February 3, 2012

The Government reports better than expected unemployment numbers. Facebook files to go public.  And Clorox cleans up with its quarterly earnings.   Our analysts discuss those stories and share three stocks on their radar.  Plus,  we talk money mistakes with Carl Richards, author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week from Motley Full Inside Value, Joe Mager, from Motley Full Income investor, James Early, and from a million-dollar portfolio, Ron Gross. Gentlemen, good to see you as always. How you do, as always. We have got earnings from the gap. Abercrombie and Amazon. You may have heard something this week about Facebook going public.

We will dig into that as well. And as always, we've got a few stocks on our radar. But we will begin with the big macro. On Friday, the Labor Department released the latest unemployment numbers. 243,000 new jobs. The unemployment rate drops to 8.3%. James Early, I'll start with you. What do you think? Well, Chris, there's a minor drill down. These are, of course, non-farm jobs. I kind of feel bad for the farm jobs because they're always deliberately excluded from every survey. Workers of the jobs? The farm worker or the jobs. Either one, I guess. They just count them in order to exclude them.

But this is obviously good news. The unemployment rate ticked down from 8.5 to 8.3%. The big question, though, and I will also add, the December is traditionally a volatile month. So these results are going to matter because they're going to tell us whether the trend is real or not. It looks good so far. We are sort of at an economic crossroads. So the big question is, what are the policy implications going to be from this?

Ron, fifth straight month that the unemployment rate has dropped. What do you think? I'm getting more cautiously optimistic each week. I like it. It looks good to me. That number I always talk about that under-employment rate or the real employment rate. Tick down only slightly to 15.1 percent from 15.2. I'd like to see that number come down more aggressively. I think it will. I hasten to add, though, stimulus after stimulus after stimulus has come our way. QE3 is being talked about. The Fed is keeping it to Trace low until 24 through 2014 now. I don't know where the economy goes without all of that. Can I just add, Ron?

I kind of thought Ron was full of a little bit of baloney on that point about the closet, you know, real unemployment for a long time because I assume that whenever there had been a high unemployment, we also had high sort of closet unemployment. But then I think it was on the Barry Riddle's blogger or something. I saw a chart that shows it actually is much, much higher now than it has ever been. So you were 100% right. So you thought I was baloney this whole time, but you just kept your mouth shut? No, I'm being polite.

I guess that's nice of you. Well, I'll bring in the baloney. So it sounds like you're basically saying you're not going to get back into anything until unemployment is low. In terms of stocks? Yeah. I'm fully invested from a million-dollar portfolio perspective, so I can't go in any more than that, but it doesn't mean I'm not nervous. What's low enough for your liking? Low enough interest rates, you mean?

No, unemployed. I think we're on the right track. The track to me is what's important. Okay. As long as things trend positive. Are you running for office? Joe, what do you think? Yeah, I thought they were good numbers and definitely a sign of, you know, what's to come.

I think the general trend is the more important thing than the individual month that comes up. I think James made a great point about December numbers being volatile. So overall, I'm optimistic, and it's another just rolling sign of good things. The most anticipated IPO of 2012 is one step closer to happening. This week, Facebook filed the required paperwork with the SEC. Shares are expected to begin trading in May. Ron Gross, I'll start with you.

Anything jump out at you in Facebook's filing? What do you think? I mean, you've got to give it to them. It's really, it's quite impressive. A billion dollars of net income, a billion and a half dollars of cash flow from operations, 850 million active monthly users. It's an incredible success story. They don't necessarily need to go public.

They don't need the cash. I don't like when companies go public unless they need to access the capital markets for cash. Zuckerberg explicitly said, we're going public for our employees and our investors. I don't like that statement. It is what it is, though. I'm not naive. That does occur. Suffice to say, you're not going to be rushing out to buy shares when they begin trading?

It's quite possible this stock is going up and going up quite a bit. At 100 times earnings right off the bet, that's actually similar to where Apple went out. Interestingly enough, and Apple continued to skyrocket. Probably not for me. I'll keep an eye on it, but it's very well could go up. Joe, what do you think? I think it's grossly overvalued. I mean, when you dig into the numbers, you basically see that compared to Google, they get about a quarter of the dollars in revenue that Google pulls down per user. So they're not nearly as efficient at monetizing their base of active users.

Now, you could say that that's an opportunity that if they improve the way they deliver ads, then I think they will, that they'll be able to bring in a lot more dollars. But at the same time, you know, it's going to IPO between 24 or 28 times sales. Google's selling for about five times sales. The NASDAQ 100s at two-time sales. So there are great expectations priced into this, and it will pop in a huge way on the first day, and it'll probably have a big run, but that doesn't mean that it's a great long-term hold. James?

A possibly underappreciated difference is that Google, or even like going back to Yahoo, a long time ago, they had their business models sort of the main thrust of it a little bit more fleshed out. Facebook does largely, but on a scale it wouldn't be quite as far along. So it's not as proven. And another thing is how many people use Facebook? It's almost like a billion. I don't know how many people. Well, what did you say, right?

800 million. Yeah, yeah. There's, you know, there's a hundred billion friendships. How are, that's a lot of friendship? That's a lot of friendships. It's more than I've got real friendship. How much more can they go before they really max out in terms of diminishing returns? It's going to happen.

It's going to happen. Well, I think you have to think outside of the box, maybe like a railroad service would be. What other areas of revenue can they go? They have 10 different potential futures out there, and we can only see two or three of them. But we don't see that now. I don't see that would be my gripe, too. Well, and as I said, the shares don't begin trading until sometime in May, but it did have a material effect on some other stocks this week. Shares of Zingha and Groupon and LinkedIn all popped the day after Facebook made this filing with the SEC.

Obviously, Zinga is tied in very closely to Facebook because of Farmville and Mafia Wars and all that sort of thing. But I don't know. I mean, is this going to, you know, Joe, you're talking about how Facebook is probably going to pop on the opening day. It's a low-float IPO. Right. It's rigged. Only 5% of the company is going to be offered to the public. So it's essentially rigged to pop that opening day. But is this also going to have a nice ripple effect for other companies. It is. Part of it is just building general excitement about social media. Another part of it

is some people are getting excited about the idea of Facebook with all its cash and its wildly overvalued stock. using that wildly overvalued stock as currency to make acquisitions. So Zinga, for example, represents about 12% of Facebook's revenue. A lot of people think not unreasonably that they might step in and be like, hey, we'll swap you some shares selling for 30 times sales, which is crazy to buy out your business at a much lower price. I don't know that that will happen.

I think they would end up scaring away a lot of other third-party developers, and they won't make that move. But I can see why people would get excited about the potential for that. Maybe Zinga could be an acquisition candidate, but I would argue that the other ones, I mean, I'd say the main economic reason for these other companies going up. There is no economic reason. People are just excited about this, which sort of is really the whole story here. It's just an excitement IPO, just back to the old day. So we'll see if economics matched up. Well, and it is one of those things. I mean, obviously joking at the beginning of the show about how you may have heard something about this. This story was everywhere this week, and it seemed like people were coming out of the woodwork. Ron.

Ron was coming out of the woodwork? No, not Ron, but... I'm out of the woodwork. Your personal trainer, you know, just out of the blue is like... A nice gentleman that I happen to work out with is inquiring from me, how do I get rich? How do I make money on this Facebook IPO? So yes, it is pervasive among everyone. That is a little scary that this is the thing that is getting people interested in the stock

market. But on a more material level, let's talk about Mark Zuckerberg for a minute because the CEO, the founder and CEO, he's got about 20. of the company that he owns, but he's going to have 50% or just over 50% of the voting shares. Is that right? I mean, is that? He controls the company, and what he says goes. So you have to buy into his stewardship and believe that he will do what's in the best interest of shareholders.

We have no reason necessarily to doubt that he won't. He's very old and alive. But, you know, he's got one percent of the company about every year he's been alive. He's only 27 years old. When I was 27, I couldn't have been the CEO of anything. But I think there are reasons to doubt that, right? I mean, you've seen the social network and everything in movies is true. But, depending aside, I mean, there have been a lot of questions about how this guy's treated as business partners in the past.

It doesn't make the feel any more warm and fuzzy. But just removing Zuckerberg from the equation, that situation where one person has a greater control over the company than they have in terms of ownership, is that, on balance something you like to see, or does that give you pause? No, I like to see management team, CEOs with a nice amount of skin in the game, so there are interests that are aligned with shareholders, but not too much to where if he would like to, he could run it as a private company, and we would be powerless to do anything about it. All right. Exit question on Facebook. We're talking about a valuation of $100 billion a year from now.

Are we going to look back and say that that was overvalued, undervalued, or fairly valued? What do you think? Ron? I'm going to answer about where I think the stock is going to be, not about overvalued or undervalued. I think the stock will be higher than it is today a year from now. I think it'll be higher also, but in three years it'll decline. Joe? What James said.

Shares of Amazon fell 10% on Wednesday. Fourth quarter earnings. The revenue was up 35%, but profit was down 57%. Joe, by Friday, the shares had recovered some of that loss. What did you make of the big sell-off? Well, I thought it was a complete overreaction. I mean, Amazon has said so many times, look, we are focused on long-term profits and we're willing to take short-term hits to make that happen.

Everyone knew that they were selling a bunch of Kindles this quarter at low margins because they're trying to basically sell a razor blade or a razor so that you'll come back and buy the blades later. Negative margins. Right. Well, the blades, exactly. And the blades are really valuable, which are the books. And you'll come back and buy those later, maybe over a period of years.

and you'll get hooked into using the Kindle store as your home for buying books for a lifetime. So despite this, everyone freaked out when the numbers came in below expectations. But if you're a long-term investor, I think that was a perfect quarter in terms of your long-term thesis. Ron? I'd love to see everyone continue to freak out, quite frankly, from a selfish perspective. The stock's off 26% from its 52-week high. Still too rich for me to get in. I would love to be an owner, though. Lower it goes, the more interested I get. What if this model just isn't working?

I mean, you're not concerned about that? The Razors and Blaze model with the Kindle. I mean, maybe that's actually true. Maybe the market's right. No, I do believe that they're a preeminent discount retailer, but they have so many other areas to pursue, like we were talking about Facebook, that I think growth will be tremendous in the future.

It's hard for me to actually see the growth or project the growth. That's why I need to see the valuation. I need to have a cheaper valuation to make that bet. Coming up, the price of cotton is rising, but only one retail clothing company is choosing to whine about it. We'll tell you which one. Stay right here. Now I just wait for them to write on my wall. Take a look.

On Facebook. Take a look. You're listening to Motley Fool Money. 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. Welcome back to Motley Full Money. Chris Hill here in the studio with Joe Mager, James Early, and Ron Gross.

Let's get to some more earnings, guys. shares of Clorox up this week on some strong second quarter earnings. The company also raised guidance for the rest of the fiscal year. James Erle, what do you think? Well, Clorox has been really beaten down for Blue Chip. It's sort of like the dorky kid who finally gets in the dance floor and everybody cheers when it finally delivers some good results. They were coming off sort of an easier comp last year if you factor into Bert's B's right down, you know, that like chep-chep-stick type stuff they bought. But bottom line, you know, they raise prices on their bleach, which they were able to do. It's just a cheap product. It has pricing power, whereas Procter & Gamble, Unilever, Kimberly Clark, and some of the other

consumer products companies are really struggling with that same issue. But Clorox has been able to do it, ironically enough. How important is that ability, the ability to really wield pricing power? How much does that factor into your investment thesis when you're looking at any stock? It's pretty important for me. In the case right now, we have a lot of generic competition. The worry with all these firms is, are people going to permanently switch to generics? The emerging markets are really where the brand is stronger, or the power of the brand, I guess, is a little bit stronger. So, yeah, pricing power is really what matters in the more developed markets as well, I would say. We have a tale of two retailers, shares of gap up more than 15 percent this week on its latest earnings,

shares of Abercrombie, down more than 10 percent after the company lowered guidance for fourth quarter earnings. Ron, what do you make of the retailers? Well, nobody had a stellar quarter. It was a very promotional quarter, discounting, cleaning out old inventory, really across the board. It's also now, it's an expectations game. What were people looking for and how did the company come in relative to that? Gap outperformed expectations. Abercrown became in light. Stock sells off as a result. It's a near-term reaction. I prefer to just look at how is the business doing. How does the inventory look now? How will things look a year, two, three from now? Not

in one or two days. You know, I think Abercrombie's problem, too, is I went in a store recently. You can't even see any merchandise. It's so dark. You know, I just have to buy it. I'm not sure you're at the target. They had a hot guy out front, Ron, and his boxer shorts. It's pretty interesting, too.

Interesting. Abercrombie, I have to mention this, they also, in giving their guidance, they also blamed higher cotton costs. Yeah, I mean. I mean, come on. I think everyone is experiencing that, obviously, the main raw material for many of these retailers. Right, but not everyone is choosing to whine about it. They did highlight it as a main. major effect had a major effect on their margins. But I think everyone is feeling that.

All right. In the time we have left, let's move on to the stocks on our radar. Let's bring in our man, Steve Brodow, from the other side of the glass with a question for each one of you. Ron Gross, you are up first. A company I mentioned maybe a year ago, I think it looks interesting now. Caterpillar, CAT, industrial equipment company. Their Q4 earnings were really strong, up 60 percent, beating estimates. They're seeing really strong demand in developing countries. And they're making really positive comments about both the domestic economy as well as Europe, which I find interesting.

Stock is not really cheap, but only 15 times earnings, 11 times cash flow. So it could be interesting, especially for some reason we got a little pullback. So I'm going to dig in. Steve? Sure. What sort of new product development do you like to see from a company like Caterpillar? It seems like if it's a backhoe or some large machine, are those changing that much? I think there is some technology that goes into these things.

Certainly, a backhoe isn't the same now as it was 20 years ago. I don't really think of it in those terms from a technology perspective. It's more, you know, can these machines get the job done and can they go into areas where they need to go, where the building has the most growth? And that's what I look for. James Early, your stock this week? Chris, I'm going with AstraZeneca. This is more of an on the radar than a recommendation per se, but it is an interesting company.

It's a pharmaceutical company. Just raises dividend 10%. It's known for having the second worst pipeline cliff in the industry. A patent cliff in the industry. In other words, got a lot of drugs going off patent. It has no idea what it's going to do to replace them. It might make a dumb decision and make a costly acquisition, or it might just shrink gracefully and just be a smaller yet profitable company.

So depending on what it does, it could end up being a pretty good company. Pharmaceuticals never shrink gracefully, though, right? I mean, look at Pfizer. Rather than shrink, they went out and paid top dollar for Wyeth. Steve, a question for James about AstraZeneca? Absolutely. Is it concerning that pretty much every ad you see on 60 minutes is for a pharmaceutical company? I feel like every single ad is for some kind of pharmaceutical company that is, I don't know what the products are doing.

It's just check with your doctor. You don't even know what the product is, but you know how you're supposed to feel about it, which is kind of strange. And I love all of them. Target marketing. Joe Maker, what's your stock this week? I'm looking at Google, which pulled back after having a great quarter, but analysts read the wrong signals out of it. So cost per click, which is how much Google gets paid for every time someone clicks on an ad for them, fell 8% year-over-year.

And sell-side analysts got really worked up on that on Wall Street because they viewed that as weakness in the business. But really what was happening was that Google was testing lower-price ads to generate more clicks, to generate more total revenue. And total clicks were up over 30% year-over-year, which drove more revenue. But instead of focusing on the real thing that matters, which is more total revenue, Wall Street got all worked up on this lower operating metric and dismissed forest for the trees. Steve?

Who's their primary competitor right now? Well, I guess it depends how you define them, but Bing would probably be the main one over at Microsoft in terms of search. And then you've also got Facebook, which is a big competitor on display ads and just general mind share for internet users. Gotcha. Yeah, it seems like that market has totally changed. Do people even use Yahoo for search much? I certainly don't. What's Yahoo? Microsoft actually powers Yahoo's search. It does. Yeah. So it's basically the same. You ever use Bing, Steve?

I have not. I know that there's very nice photos on it. I should check it out, but. All right. Joe Viger at Motley Fool Inside Value, James Early, Motley Fool income investor, and Ron Gross, million dollar portfolio. Guys, thanks for being here. Thank you, Chris.

Coming up, want to stop doing dumb things with your money? Our guest this week has a few ideas you just might want to consider. Stay right here. This is Motley Full Money. Welcome back to Motley Fool Money. I'm Chris Hill. Can you ever do dumb things with your money? Carl Richards is a certified financial planner, and he's the author of the new book, The Behavior Gap.

Simple ways to stop doing dumb things with your money. Carl, welcome to the show. Chris is a pleasure. Thank you. I want to get to your book in a minute. There's a lot of great stuff in it. But first, I've got to start with what seems to be the topic of the week, and that is all the kerfuffle over the Facebook IPO. You're a certified financial planner. Client comes into your office next week and says, listen, whenever Facebook goes public, I want to get in on it.

What do you say to your client? I think investment and stick. All right. Let's jump into your book, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Money. I want to spot you up with a few chapter headings and have you expound on them. And the first chapter in your book, We Don't Beat the Market, The Market Beats Us. Wow, that's a little depressing. You also blog for the New York Times, and one of your recent blog entries, you wrote that everyone should use the overnight test.

For our listeners, if you could, please explain the overnight test. Hypothetical. I know, don't know. It's an exercise, people. Come on. You're listening to Motley Fool Money talking with Carl Richards, author of the new book, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Money. Probably my favorite heading of any of your chapters is Chapter 6, which is entitled, Plans Are Worthless. Carl, you're a certified financial planner. Tell me you're not using that as part of your marketing. You're listening to Motley Full Money talking with Carl Richards, certified financial planner,

and author of the new book, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Money. When you look at the universe of dumb moves when it comes to money, what do you think is the single dumbest mistake that investors make? The only thing is American and want to get rid of when they're on sale. Well, so that leads to a question that we frequently get here at the Motley Fool, and that is the question of, when do I sell a stock? So whether it's in your own life or working with a client, what are the questions, the processes that you go through when deciding whether to sell a stock?

So we've got to ask the question, don't care what stock. Should you be owning them or should you just use the default position of owning? Coming up more with Carl Richards, plus a round of buy-seller hold. Stay right here. This is Motley Full Money. If you've got the money, I got the time. We'll go honky-talking. Welcome back to Motley Full Money.

This Hill here in the studio talking with our guest Carl Richards about his new book, The Behavior Gap. For someone who is looking to work with a financial planner, what are a couple of questions that they should be asking? I think a lot of people are interested in working with a financial planner, but maybe aren't really, they feel like they're walking blind into the interview process. What are a couple of key things anyone should ask when it comes to working with someone with their money? You're listening to Motley Fool Money talking with Carl Richards, author of the new book, The Behavior Gap, Simple Ways to Stop Doing Dumb Things.

with money. Warren Buffett obviously has had an amazing track record of success. When you look at his career, what do you think is the secret ingredient? I hadn't heard that one before. Yeah, the idea was, look, we've... And I have to plug you for a little bit of free consulting on the financial planning. What are a couple of things that everyone can do in 2012 to get their finances in order? I touch it. And it's, I know it's boring. balance sheet. Let's wrap up with a round of buy-seller hold. Let's start with something that has certainly had a great run lately in terms of its investment value. Buy-seller-hold gold. Buy-seller-hold

time shares. We touched earlier on relationships and money. Buy-seller-hold separate checking accounts for spouses. Oh, buy all day long. That's a no-brainer. And finally, buy-seller-hold, reality TV show based on the Carl Richards book, The Behavior Gap. Wow. You're saying if someone comes to you and says, I love this book, I want to do a little reality TV, let me follow you around. You're not going for that? I've had, we've got that.

Oh, okay. I just didn't know if you were running away from it, and maybe there would have to be a stunt double where, you know, it's like the Bartles and James wine cooler guys. It's like, that's not really Bartles and James. It's like the behavior. The book is The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Money. It's a great, great book about finance, Carl. And I got to say, I was somewhat stunned by the fact that there are virtually no numbers.

This is a finance book with almost no numbers in it. Personal finance books. Carl Richards, thanks so much for being here. Thank you. My pleasure. That's all for this week. You can check out our daily podcast, Market Foolery. That's on iTunes and online at Marketfulery.com.

And for video highlights, go to FoolTV.com. That's it for this edition of Motley Full Money. Our engineer is Steve Broido. Our producer is Mack Greer. I'm Chris Hill. Thanks for listening. We will see you next week.