Motley Fool Money - Motley Fool Money: 07.11.2014

Episode Date: July 11, 2014

The Fed's bond buying will end in October. Earnings season starts with a bang for Alcoa, but a thud for The Container Store and Lumber Liquidators.  We analyze an upcoming merger for Big Tobacco and an upcoming makeover for one restaurant chain.  Plus, portfolio manager Bill Mann discusses European banks, the best way for companies to use cash, and why he's heading to Japan. Learn more about your ad choices. Visit megaphone.fm/adchoices

Baseball is back and the first pitch is on Netflix. The New York Yankees, led by seven-time all-star Aaron Judge, head to the San Francisco Bay to take on Rafael Devers' San Francisco Giants. This season kicks off with one exclusive opening night game. Watch MLB Opening Night, the New York Yankees versus the San Francisco Giants live on Netflix. Wednesday, March 25th at 8 p.m. Eastern 5 p.m. Pacific. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money Radio Show. I'm Chris Hill, joining me in studio this week from Motleyful Supernova. Matt Argusinger from Motleyful income investor James Early and for a million dollar portfolio, Ron Gross. Good to see you, Jens. How you do, Chris?

The earning season kicked off this week. We will dig into some of the early results. The strong run of the housing industry is starting to show signs of fatigue. And as always, we'll give you an inside look at the stocks on our radar. But we begin this week with the big macro. This week, the Federal Reserve revealed that the bond buying program, which has been steadily tapered over the past year, will end in October. And Ron, we knew this is coming. I don't know about you.

I was still surprised that they put this out and confirmed this three months in advance. You know, it's interesting, if you find this kind of stuff interesting. Of course. And hopefully our listeners as well. There's a few conflicting pieces of data. One is you have the Fed and others lowering GDP forecasts. Partially because of the first quarter of winter weather, partially other reasons. But you also have unemployment coming down nicely.

So they have to balance all this. And they have to think about interest rates and inflation because that's the next thing we need to worry about. So I think on balance, they think, let's take away. the quantitative easing, focus on interest rates and inflation going forward. You support them, then? I think I support them. You think you think you support them. I think I support them.

Well, and James, to that point, the Fed also said, look, whenever interest rates rise, that's going to have no bearing. So no one should necessarily start a clock countdown at when the tapering program ends in October and say, okay, well, it's absolutely going to be three months, six months, whatever. Correct. Yeah, they were non-committal, which is kind of what they do by definition. And let's remember, too, these people are social scientists. They're economics. You know, they're not real.

Your economists is not real scientists. In other words, the only way we could actually know if anything the Fed does is correct is if we could have a parallel universe or several of them and have the Fed test different scenarios in each one. So it's totally impossible. So who knows? I mean, maybe it's the right move. Maybe it's not. As long as they're confident, I think that's what people want.

I think if you see unemployment dip into the fives, then you'll start to see people getting worried more about inflation, and you'll start to see interest rates accelerate that the rise in interest rates, they'll move it up a quarter. Certainly by 2015 and 2016, we're looking at higher rates, whether it's, you know, anything happens next couple of quarters. Presumably, though, if the higher rates come at the expense of or come alongside a robust economy, that's okay, right? What we wouldn't want is, you know, a lame economy and higher rates. That would be bad. Well, I'm just happy that we're one step closer. to getting out of the excuse business, which is

the sort of the negative pundits on the economy and the market keep coming out and saying, oh, well, the Fed's been pumping so much money in, well, thank God will be in a situation in four or five months where there just won't be this extraordinary stimulus. We'll actually be able to see if the economy and the market is standing on the radio.

What the Fed said they will do is, as these bonds that they've been buying so many of, as they mature, they're still going to reinvest those proceeds for the time being until it's time to start increasing interest rates. So we'll still have some sort of a stimulus. It won't be new money injected, though. Shares of specialty retailer at the container store down around 10% this week after first quarter results included a drop in same store sales for the first time in nearly four years.

And, Maddie, Chairman and CEO, Kip Tyndall. Easy for you to say. Not so much. He said, look, this is more than just the weather. And I'm quoting here. He said, consistent with so many of our fellow retailers, we are experiencing a retail funk. That doesn't sound good. It doesn't sound good, but I still am trying to figure out what he exactly means by funk,

because, I mean, is he talking about upper middle class to wealthy females? Because that's generally who shops at the container store. Maybe they're in a funk. Who knows? But, you know, just, yeah, being down 10% for the week. This is also a company that's down 50% from its all-time high, 30% from its IPO. You know, and I look at the results. You mentioned the same store sales being down.

You know, net sales were actually up only 9%. It just, this is a company that came in, with a lot of momentum, trades for more than 40 times forward earnings, and these are really not numbers that support that kind of valuation. So I'm all concerned here about the container store. What worries me is some comments he made the CEO about, you know, we all thought this was winter weather related in the first quarter, and it appears that something else is perhaps going on here, and he used that phrase retail funk, which is a weird phrase, but we'll give, let him get away with it. That does concern me, because as we spoke about earlier, lowering GDP

forecast for this year. People are not too concerned about that because they're saying, well, it's kind of artificial because it was the weather in the first quarter. If there's other things going on here and consumers aren't spending, then maybe the economy really is weaker than we think, and it's going to take a while for those lower unemployment rates to catch up with consumers who will then hopefully go back into stores. I mean, I've gone to the container store from time to time when I feel like paying twice as much as I need to for a container. But is this, is the sale, are the sales there more correlated to GDP or employment? I mean, is it? It's housing thing.

It's housing. Okay, what I would think. I would think existing home sales probably drive it. We'll get to housing in a second, but broadening the lens of retail, we also saw this week, Costco, their same store sales in June were up 6%. We saw American Express getting an upgrade based on one analyst firm believing that we're going to see more consumer spending in the second half of 2014. So I think the jury is still out on sort of where we are in retail in general. Let's move on to housing. Lumber Liquidators does not report second quarter results until the end of the month, but shares down 20% on Thursday after the company lowered guidance, not just for the second quarter, but for the full fiscal year. Ron, this is a stock that you watch closely with your team at a million dollar portfolio.

How bad is this? Well, if you'll watch the stock's performance, it was brutal. I don't think long term it's that bad, but I think this year could continue to be sure. shaking and we get back to some of the things we were just discussing. The thought was that the week first quarter, the pent-up demand that occurred because of that bad winter would come back in the second quarter and sales would jump. Lumber liquidators didn't see that. They saw it early in the second quarter, but then it dropped off. So that's troubling. Where are these sales coming for when are they going to come? Hopefully they will. Is it later this year? Is it into 2015 at this

point, lumber liquidators also had some supply issues because they tightened up requirements from Chinese suppliers, and a lot of those Chinese suppliers could not meet those tougher requirements. So they've had to clean up some of those issues as well. So it was kind of a double whammy, but the biggest one is that customer demand. Yeah, Maddie, I was surprised by the ripple effect of this. I understand lumber liquidator stock being down 20% in a single day. But when you broaden it to the housing industry and you see tile shop, you know, a specialty sort of home. Improvement store shares down there. But even the big guys like Home Depot and Lowe is getting hit, too. Right. I don't know how much this is a harbinger for the rest of the housing industry. But there is an

underlying story out there about the fact that last year 2013 was such a strong year for housing. And a lot of that may have been built on the fact that there were a lot of investors out there, buying properties, renovating them, renting them, or even flipping them. And this year, those investors, there's not a strong current as there was last year. A lot of the real real estate this year is just back to, hey, you know, first-time homebuyers, which, by the way, still can't get a mortgage in a lot of places. And so it's, we might be seeing what the real state market actually looks like on a sustainable basis. And it might not be that pretty for most of the industry. I agree with a lot of that. I actually don't think it's that bad

into housing. It's just a little bit bad in comparison to last year. We're down about 5% from existing home sales from where we were at this time last year. Obviously, we'd like to see growth, not contraction. Overall, though, I don't think the housing market looks that shaky, just kind of relative to last year. Coming into this week, Wells Fargo had reported record profits for 15 consecutive quarters. That streak came to an end on Friday when second quarter profits came in at $5.7 billion, just slightly lower than the previous quarter. And James shares of Wells Fargo down a little bit on Friday.

Really, just because the streak came to an end? Well, a few other things. I mean, any bank obviously has a lot going on in any release. It's very complicated, but maybe the simple analogy of Wells Farger were taking its investors on a date. It probably took them somewhere between a Baja Fresh and an Olive Garden this quarter. I mean, like a okay place, but it's not really sending the message they want. I mean, this is the largest U.S. bank now by deposits, I believe, the largest U.S. mortgage lender. And speaking of housing, I think they did $112 billion in home lending last year on the quarter.

this is $47 billion this year. So it's quite a drop. Net interest margin drop. Their loan loss reserve got cut because of better credit quality, cut to a third of what it was last year, which is really great in one sense, but you can only do that so much. I mean, that's not a permanent win for this kind of a company. So there's some power. Car lending was up 11%.

There was definitely some positives, but it's more of a neutral quarter on average. It seemed like short-term thinking in terms of the stock selling off. I don't know. It just reminded me the old phrase, do a little bit more than everyone expects, and soon everyone will expect more. And it's like, well, wait a minute, 15 quarters of record profits. Yeah, yeah. I mean, and Wells Fargo looked great because they made it through their financial crisis a lot better than most of their places. They're one of the few just regular banks, and most of the banks became non-regular banks, I guess, to make a lot of money doing other things. And Wells didn't do it as much, but it's also kind of a testament to regular banking is just not as great of a business, too.

You take your first dates to Baja Fresh, so the second date, you really wow them and you get to overperform them. Coming up, one restaurant chain is getting a makeover, and the number one analyst of that restaurant chain just happens to be right here. Stay with us. This is 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 yourself stocks based solely on what you hear. Welcome back to Motley Full Money. Chris Hill here with Matt Argusinger, James Early, and Ron Gross.

Alcoa marks the unofficial start of earning season, and shares hit a two-year high this week after second quarter profits came in higher than expected. Al-Qaeda, not the sexiest business in the world, Matt, but man, the stock's looking good. Alcoa is getting it done. Awfully good lately. You know, getting kicked out of the Dow about a year ago was the best thing that ever had Alco. I mean, the stocks almost doubled since then. No, the results were really good. The net profit was $216 million for the quarter, $0.18 per share.

That was versus expectations of $0.12 a share. So aluminum pricing, 13-month high, definitely hot. Global demand for aluminum is supposed to be up 7%. And when you think about the operating leverage that a company like Alcoa has in the business, those are all very good things. There's also the – they've also seen a lot of strength in the automotive space. So, for example, the F-150, which is, you know, best-selling vehicle – one of the best-selling vehicles in the country, best-selling truck for sure. They're moving to a more aluminum body, and that is huge news for a company like Alcoa. So if that's the trend in automotive where they're going for lighter, more efficient vehicles using aluminum versus steel, again, good things for Alcoa. So I'm not surprised it's at a two-year high.

Big tobacco in the news on Friday, Reynolds American and Laurelard confirmed they are in talks for a potential merger. These are two of the biggest cigarette makers in America, James. And combined, that's a pretty significant new rival to alter your group, the parent company of Philip Morris. The backstory here, Chris, is over the past, actually many decades, cigarette sales have been declining every year in the U.S. And I guess that's what happens when you have a product that kills your customers. So for rentals, allegedly, right? For rentals, which makes Camel and Paul Mall, you know, they've had major declines also in market share. And that's not good for them.

But the Laurelard makes Newport, which has the menthol cigarette. I've never smoked a cigarette in my life, so I'm just reading about this. But the menthol cigarette apparently has a loyal. following that has been declining a lot less. This declines have been much smaller. So they think, hey, we want to have this loyal business. This lower Lard has, you know, they're both small compared to Altria, which has just over half the market, but, you know, you combine a 27% market share and a 15% market share for Reynolds and Laurelard, and you get something that's a strong, very strong number two competitor. Any interest? Because you're a dividend guy, but you're also, as long-time listeners know,

you're someone who is able to separate his personal habits with his investing habits. You know, I can recommend an alcohol company because I feel like alcohol can be consumed. I don't drink either, but I feel like that can be consumed responsibly. Fun guy at parties. I don't think tobacco can, so I just can't get near it. Before our final story, I want to say thanks to a couple of members who stopped by full headquarters while they were here in the D.C. area on vacation. Chris Davidson on vacation came in with his family from Wilmington, Delaware. and Mike Ginsburg and his family were visiting from Chile.

So, Chile. Chile, yes. So thank you to those folks for stopping by. This week, Olive Garden rolled out the first phase of a rebranding campaign that includes a redesigned website for takeout ordering, and most importantly, a remodeled restaurant featuring new decor, a more modern lobby and bar area, and fewer walls to create a more open atmosphere. and as I said before the break, America's foremost analyst on the Olive Garden is with us on the other side of the glass. I'm referring, of course, to Steve Broido.

Steve, they're going to be rolling this out to about 10% of their restaurants this year. First, are you excited about the possibility that the Olive Garden you frequent in Northern Virginia could be one of them? Not really. I love the nichey kind of closed off, heavily carpeted, very cozy environment that exists. You're not looking to mingle. with other people at the Olive Garden. Definitely not. Steve, we've never asked,

what is your preferred entree at Olive Garden? Well, I always taught my wife that I'm going to do the tour of Italy, but I don't usually. I usually do chicken parm. Do you have any advice in terms of remodeling for the business because you clearly have your own ideas

about what you think will and should work for them? I love restaurants that are quiet and that are cozy feeling. Big open spaces for dining don't always work as noise. loud and Olive Garden is a fairly quiet restaurant, at least that's what my experience. At least it used to be. The only one in there?

Is that why it's quiet? No, sir, E. There's often a wait. Get there early. All right, let's get to the stocks that are on our radar this week. And Steve, Royd, I will hit you with a question. Ron Gross, you're up first. What do you got?

Steve, I got Titan International TWI. They're a small cap manufacturer of wheels and tires for industrial and agricultural applications and vehicles. Q1 was weak. Q2 might even be weak. The cycle will turn. Agriculture and industrial companies will need wheels once again at some point, and the stock was undervalued by about 60%.

Steve, question about Titan? Is making wheels challenging? It seems like the easiest thing in the world to do. I mean, there's a lot of technical things that happen. There's technical. There's specifications that need to be met. There's certainly safety involved. The rounder, the better we find.

And yet, as we hear over and over, No one's looking to reinvent the wheel. There you go. You just got to be really good at. James? I'm going with China Mobile. This has a 4.3% yield. It's the world's largest mobile phone company.

It competes against China Mobile. There's China Telecom, China Unicom. They save money on naming consultants, apparently. These are all state-owned companies, but China Mobile was handicapped for a long time. It could not use the normal 3G standard. It had to use its own self-developed one to promote Chinese industry. And even its competitors could use the higher standard. But now, with 4G coming out,

It's an open playing field again. So that handicap is removed. They can use the normal 4G standard, and they have a ton of cash. They're building out all these towers. They'll have probably the world's largest 4G network and sometimes soon. Steve, question about China Mobile? Is there a landline infrastructure that's strong in China? Yeah, there is.

There is. I mean, it's, you know, other companies do it. And China Mobile has a weakness, actually. They don't have a lot of broadband and, you know, internet accessibility like some of the other companies do. But there is landline there. Matt Argusinger, what's on your radar this week? Sure. Well, we talked about Alcoa earlier. The one I'm looking at right now is Arsler-Metal, ticker M-T.

He made that up. It doesn't really exist. It just happens to be the biggest steel company in the world. But no, if I'm thinking about companies like basic materials, utilities, energies, industries that have really lagged the bull market rally that we've seen in recent years. And Arsler-Metal is just trading less than book value. In peak economies, Arsler-Metal can trade up to three-time's book. I just think it's cheap and very well-run.

And like Alcoa, they've done lots of streamline their operations as well lately. Steve? Something that you think should never be made out of metal. Oh, my gosh. Shoes. No, what about steel-tile boots? What about steel-told boots? I mean, that's a safety item on construction sites.

That's right. I was going to go pillows. Do you have an idea of what shouldn't be made out of steel, Steve? Anything at the Aller Garden. Nice and soft and quiet. A pretty broad range of stocks there, Steve. Mobile, steel, wheel. and tires. Anything of interest you as an investor?

China mobile sounds interesting. I think, given a huge population, that's probably going to be moving mobile, as our population has. It seems very interesting. All right, drop us an email, Radio at Fool.com. Send in your stock ideas and send us your questions. Ron Gross, James Early, Matt Argusinger. Guys, thanks for being here. Thank you. Thank you. Coming up from Europe to Japan and back here to the states, we are going to go around the world of investing with portfolio manager Bill Mann. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Health. Bill Mann is the portfolio manager at Motley Fool Funds.

And unlike the last time he was on the show back in January, where he joined me from Motley Fool offices in London, he actually joins me here at Fool headquarters. I finally made it back. It took you that long to get back. It's good to see you as always. There are a bunch of things I want to talk about, including the recent shareholder event. that you had with Motley Fool funds. We had a huge turnout, and it was actually an historic event because it was the first time that Chipotle's concept shophouse catered. We talked to them, and they agreed to come out and do it, and they did a fabulous job. I mean, people were, I don't know if they liked me at all.

They loved lunch. Well, you know what? Let's talk about this for a second. Let's talk about you. No, not about you. But let's talk about this, because you bring something up with Chipotle that I've wondered for a while, and I've only been a shareholder for about a year or so. But it seems to me that for all the things they do right, and they do many things right

as a business, I'm curious why they are so conservative with expansion, not just of the Chipotle stores, but the shophouse concept's been around for a few years. I think you only need, you know, 10 fingers to count the number of locations they have around the country. And you might have too many. Yeah, and so I'm curious, you've studied this company, you've actually met with executives. Yeah. Am I, first, do you agree that they are being overly conservative? Not at all. Not at all, because the Chipotle model only works if they've got a great product, and they get people through the experience of ordering very quickly.

And so that's shophouse has actually rejiggered the entire, you know, the entire board and the entire way that they do things from when they started. So you go into a Chipotle and you say, I'll have beans. and it happens to be and it happens to work because it all happens to be Tex-Mex, you know, Mexac. I mean, it's, you know, close enough to Mexican. But the shophouse concept, as it started out, had a little Thai, had a little Vietnamese, had a little Chinese. So it was much harder to get your head around how you should actually pick things.

So they've really worked on the concept. And it's, I don't know say it's radically different from what it is. I imagine in the back of the store, it's radically different than what it was. In the front of the store, it's just a, you know, it's an easy. your experience. But Chipotle has always said that they would expand as quickly as they had managers to run their stores. And the way that they get managers to run their stores is to have them working in an existing branches. So they're just not going to go that fast. They can't, they can't end to their mind, and I agree with them, they shouldn't just go out and try and

create managers and force people into that funnel. It, you know, it does take time. The nice thing is, the more stores they have, the more opportunities they have for people to be actually getting that managerial experience. But they really won't open any faster than they've got top men and top women to run them. All right. Let's go back to what was going to be my first question. And I should mention that we're taping this on Thursday. And the big story in the market today is overseas in Europe, where across the board, European markets were down. It turns out things aren't all better. It turns out they're not.

And in this case, it's Portugal's largest publicly traded bank. Yeah. Which was already troubled. Already troubled. And trading was suspended. The parent company of the bank was apparently having some trouble paying back some of their debts. Which seems bad for a bank. It seems very bad for a bank.

We were talking about this earlier. your colleague, Tim Hansen and Motley Full Funds, and you guys seem relatively unsurprised that this is happening. Sure. I mean, the issue with the European banking system, the issue with the European economy in general is that it's, although it's better, it's not healed. I mean, the European economy, particularly in the peripheral countries, Portugal, Spain, Italy, Greece is still quite impaired. And even if you believe that things are getting better, and I happen to believe that things are getting better, but at a much slower rate than the stock market performance for Europe and the European banks would have suggested, you know you're going to have bumps in the road. And so this was a very large troubled lender. And the different thing about Europe and in the U.S. is that almost every bank in Europe is actually too big to fail.

They don't have community banks. They have a few massive banks in each market and then some that go across markets. They have their own version of Bank of America just cloned. Everywhere. Yeah, everywhere. So anytime that you have stress from a European bank, it is in some way systemic. And that's bad. Well, so is that why we see this across the board red ink on the European markets?

Because on the flip side of that, you can look at Portugal. and say, this is not a very big company? And the stat I saw was that the GDP for Portugal is equal to one half of that of your home state of North Carolina. Yeah. So I'm sure there are at least some investors saying, well, wait a minute. I get that it's the biggest publicly traded bank in Portugal, but that's not a very big place. Not a very big place, but the way that finances have been structured in the European Union

means that if things go bad for Portugal, that other countries, have to come in and back them up. They are truly not allowed to fail. So you can't ring fence it in the way that you could hear. You know, even a medium-sized bank that gets into a tremendous amount of trouble here, and we've seen this, you just put a circle around it and the bank eventually goes away, and it's not as contagious. You're listening to Motley Fool Money talking with Bill Mann,

the portfolio manager at Motley Fool Funds. We are just at the start of earning sales. season. And one of the results season, I think, was the joke we've made. We've made before. Results season. Yeah. And one of the narratives coming into this earning season, there are several, but one of them has to do with cash because companies have more cash at their disposal than almost at any point in history. That's, by the way, part of why we've seen so much merger activity in the first half of 20. 2014. That's why we're expecting to see even more merger activity in the second half. But I am curious, and I don't think I've ever asked you this before on the radio show, as someone who studies public companies for a living, how do you think about cash? Do you have a default way? You know, if James Early were here, I'm sure he would say that his default way that he likes to see companies use cash is just keep cranking up that dividend. And that's fine. Give it back to him. That's right. But I'm curious how you look at cash. So let's take the example of Chipotle once again. So Chipotle has, its largest market is California, and its most saturated market is Colorado. And Colorado is where it's based. It's where it's based, exactly. So it makes sense. So Colorado has about five times as many stores per person, or what's the reverse, you know, than it does in California. So if you tell me that Chipotle is going to keep investing, stores just focusing on California until California has as many stores per capita as Colorado.

I'm going to say that sounds like a great decision because they're making money hand over fist in Colorado as well. So for a company that has actual growth prospects and you look at the on ramp and you say that Chipotle can continue to grow for a long, long time, I want them to retain everything. But on the flip side, you have companies that have grown for a long time. and they get to the point where they've got 90% of the market. Let's take, for example, the big airlines. What you don't really want to see from the big airlines is for them to jam any free cash flow that they have, if any,

back into trying to make their market share bigger because they're in a fixed market. It's a lord of the flies situation where everything just comes at the cost of someone else. What you would really like from a company in that situation is for them to, return cash to you. And so it really kind of depends, but what we don't want to see is companies that just retain huge amounts of cash and have no plans for them. A great investor that we know named David Nirenberg calls that the green blanket. I mean, it's cozy. It feels great for them. They feel secure. But money is capital. And your returns on capital are really negatively impacted by the amount of cash that you have that doesn't really get, you know, that doesn't really

get used in the business. And do you think we are collectively at that point now, where, where cash that's just being hoarded is cash that is being wasted, because in late 2009, maybe even all through 2010, you can make a good case for companies saying, no, no, no. Given what we just went through, we want a green blanket. Yeah, I would say that cash being wasted isn't the right term for it. But I do, you know, as a citizen, I do think it is kind of bad for America that there's all this money sitting in places where it's not being used. I mean, to me, the economy goes, the economy grows and operates best when most of its assets are being used more efficiently.

Cash sitting in the bank generating, I mean, basically nothing now is not an efficient use. It's not going to go away that cash isn't going to get destroyed. It could, you know, could get inflated away. So there's a bit of a negative return there. But there's no real potential for destruction there. But there is a potential for the destruction of, you know, of, of, of, of, of, of, of, of, of, economic speed and an economic turnover that would be better for all of us if they weren't sitting on so much cash.

Big boss man, can't you hear me when I call? Coming up, more with Bill Mann. Stara here. This is Motley Fool Money. Welcome back to Motley Full Money. I'm Chris Hill, joined in studio this week by Bill Mann, the portfolio manager at Motley Fool Funds. Earlier this week, there was the annual shareholder event for shareholders of Motley Fool Funds.

It was a huge turnout. And we were really, really grateful that people came. It was just wonderful to see so many shareholders. And it's always just very uplifting for us to be able to spend that time. One of the people, part of the program, was an interview that Tim Hanson, your colleague, one of the analysts at Motleyful Funds conducted with the longtime and recently former CEO of Drew Industries. And I was just struck by how smart this guy is. is, what a wonderful business he's run, and how you could pick a hundred investors at random,

and I would bet almost none of them are familiar with this company. And it just sort of, I thought this is perfect. This in some way sort of crystallizes part of the approach you guys take, which is, you know, there are a lot of companies. Where on earth did you find it? Yeah. Yeah, not only, so Drew Industries makes a lot of components that go into RVs and mobile homes and things like that.

So I would go a little bit further. So people who buy RVs, they know they're buying a Monaco coach. They're buying a Winnebago. They have no idea that about a quarter of the money that they're spending, you know, that that input is actually from Drew Industries. They have no idea. The little, the little slighty thing that makes the door, you know, the window blow out when you park it, that's them. You can make money on that sort of thing, apparently. Apparently you can.

How do you find a company like that? that. So I think that we have a pretty simple model. You know, we're looking for companies that have returned, uh, we have, have generated large returns of capital over an extended period of time. That, you know, it's pretty simple. And you can, you can, you can, you can look at any screen, you know, any screening software and it will tell you what this, this is. So that for us, you know, that for us is a very simple start. What has made money over a long period of time? I think a lot of people tend to shorten their period of time. And so what they'll end up finding is companies that have done that but but have, you know, but have performed really well over, let's say, the last year. Let's hope the last year. Sometimes it's the last quarter. I love companies that have returned capital, you know, who've generated super normal returns on capital for a long period of time, but that also happened to be at their 52 week low list or, you know, or happened to have generated a negative return on capital over the last year because that tells me, that they're probably super smart people involved and something happened.

You know, something bad happened. And so if you start thinking about companies from that perspective, you're a little bit agnostic as to what they are. So you look at the list and it's all weirdo stuff. I mean, it's all things that just that, you know, that analysts aren't following. They don't necessarily, people don't necessarily have a handle on. You know, think about the RVs. Nobody thinks of the RV industry as being great in a land in a world. of $4 gas prices, but gas prices are kind of irrelevant to RVs.

You drive them 500,000 miles. You know, you're around 10,000 miles a year or whatever. So, yeah, so anyway, for, you know, for a company like Drew Industries, just focusing on companies that have extraordinary long-term returns on capital, and that will blow, you know, that will come to the top. This month marks the five-year anniversary of the Independence Fund, which is the first fund at Motley Fool Funds. first congratulations on making it we did it to the five year mark we made it because let's face it

not all not a lot of funds make it to the five year mark what do you know about investing now that you didn't know five years ago so i would say that the thing that i i will i will pay the industry a bit of a critique by complimenting us so it's a perfect way to do it what i what we have discovered is that people really really do send money to you after shares have gone up. They really do. So we, you know, we, we at Motley Fool Funds have had, uh, we've had positive subscriptions. That means more people have sent us money than have taken it out 60 months in a row since our inception. Every single month, we've gotten more money than has been taken from us. But we're weird in the industry. The industry really is cyclical and people really do,

they really do react on short term, you know, on short term moves in the market. And the Motley Fool has always been very critical of fund managers saying, well, you know, most of you can't beat the S&P 500. In some ways, the industry is set up in a way that makes that very hard. And what really makes that hard is that the fact, you know, that basic cash effect. I mean, the effect of cash coming into and out of funds at bad periods of time, amazing, you know, knock on effects come from that. And, you know, so that's something that we've, you know, that we figured was the case, but we've seen it really in action for a number of years now. In your most recent letter to shareholders, you wrote about a topic that I don't think I've ever seen touched on by a portfolio manager, and that's courage. Yeah.

Why? Why? Why courage? Well, I mean, I think that, you know, I... Let me be more specific. Why courage now? I get why an investor would say in the depths of the Great Recession, you must have courage. We're not there. We're at Dow 17,000. Yeah, we're certainly not there. I mean, the basis of the basis of this letter is that if you feel comfortable with your investing and the stocks that you hold, You might be, comfort comes at a high price. And that is, you know, and on an individual basis that may not turn out to be true, but on a general basis, it is definitely true.

That, you know, Warren Buffett said you buy when, you know, buy when others are fearful or be greedy when others are fearful and fearful when others are greedy. That really sounds easy. But you still have to do it. And it doesn't, you know, it's not the easiest thing in the world. old to say, wow, stocks have really gone up a lot. I'm going to go look for things that are actually really beaten down. Because everything that's beaten down, particularly in a market that's gone up a lot, I mean, it looks awful. I mean, there are some, you know, there's some companies that look like they are

going out of business in a big market, and they turn out to be the best winners over the future. And it really is easier to come up with examples when the market is down. But maybe the best example for us right now is emerging markets. You know, emerging markets underperformed developed markets by about 3,000 basis points this last year. They had, they were almost negatively correlated with, with, with the developed markets. And people are afraid of emerging markets. And, and the prices reflected. But if the price is reflected, that really ought to be where you go look. Speaking of going places to look, I've said before, you're the most traveled person I know. and that continues later this summer, not just for you, but for the entire team at Motley Fool Funds,

with something you've dubbed Go Somewhere Month. Share what that's all about. So we run funds that are both domestic and international, and we run them all out of Alexandria, Virginia. And we believe that being separate from the rest of the, from most of the financial industry, you know, focused, you know, based in London and New York. and Boston, that we have a little bit of an advantage. We have the ability to sit down and think. But we also believe very strongly in getting out and meeting the companies that we own, that we want to own,

you know, because we spend a lot of time thinking about managers and management. So we have come up with a program. The month of August happens to be a very slow month in the fund industry. So we try to make it as useful as possible. So each of us are going to go to someplace where there's a high- concentration of companies that we can go and visit during that period during that month and make the most out of it and really be able to make better decisions in the future by virtue of having spent some time in those markets we've got just a

few seconds left where are you going I'm gonna go to Tokyo yeah I was a Japanese major and you know I we Japan has been a very hard market to invest over the last 20 years last year was an incredible year for Japan it's come back you know a little bit but you know it is a market that is changing very, very quickly at last. And so that's where I'm going to go and spend some time. All right. Thanks for being here. Thanks for having me. You can read more from Bill Mann and his colleagues. Just go to foolfunds.com. Sign up for their free monthly newsletter declarations. That's at foolfunds.com.

That's going to do it for this week's edition of Motley Fool Money. The show is mixed by Gail Aniauevo. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. We'll see you next week.