Motley Fool Money - Motley Fool Money: 10.05.2012

Episode Date: October 5, 2012

The unemployment rate falls to 7.8%.   Facebook crosses a new milestone.   Zynga hits a new low.   And a hedge fund manager tells investors to short Chipotle.  Our analysts discuss those stories and share some stocks on their radar.   Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Motley Full Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week from Motley Fool Inside Value, Joe Maker, from Motley Full Asset Management, Tim Hansen, and for a million-dollar portfolio, Charlie Travers. Good to see you, guys. Hello. We've got a lot going on. We've got retailers hiring.

We've got one beverage stock hitting an all-time high, and we've got email piling up in the full mailbag. We will get to all of that as well as the stocks on our radar. But we begin with the big macro. On Friday, the Labor Department said the U.S. economy added 114,000 jobs in September. The unemployment rate fell to 7.8%. That's the lowest it's been since January 2009. Tim, I'll start with you. We also saw the numbers for July and August being revised upwards.

What did you think of the numbers? Well, I think, first of all, it's unequivocally good that more people are working now than were a few months ago. I think that goes without saying in terms of the economic health of the country. I thought this was an interesting job report, though, for two reasons. The first is that everybody's really excited about 7.8% unemployment. If I told you in 2000 that, you know, in 10 years, 12 years, we'd be amped about 7.8% unemployment. So, you know, expectations have been reset for a time being. 7.8% is still not great. And the other thing is that it looked like the biggest gain in jobs

came from part-time work. And these are economic part-timers, which means that either the job they found couldn't afford or didn't want to take them on full-time, or they got downsized from a full-time job to a part-time job for lack of work. I think that's interesting just because obviously it's not ideal for people who want to be working full-time to be working part-time. Obviously, part-time is better than nothing. But what will be interesting to watch going forward is what category to those part-timers that are now go into? Do they be able to be? become full-time jobs. If they do, I think that's a great sign becomes a great sign. If they continue to be part-time workers or they fall back out of work, that obviously means the economy

is not getting the traction that people would like. Charlie, what do you think? Yeah, I'd like to look at the big picture here, and I agree with Tim. It is quite positive. If you look back to where we bottomed out in employment in 2009, it has been a slow, steady march upward in the number of people employed in this country. The 2011-2012 data is very consistent. you know, 100,000 plus jobs are added every month. No, that's not robust gangbuster job growth. That's going to get us back down to 5% unemployment rate. But it's surely a lot better than the naysayers are, you know, griping about. Joe? I am four jobs and glad to see the numbers going up. Just that simple. Sure. Also, your man, Warren Buffett, who it was July of 2011, made a bet with Peter Orszag from the Obama administration. Buffett said he thought, employment would be below 8% before election day. He won that one dollar bet, but he won it. He's a rich man now.

He's a rich. Don't spend it all in one place, Warren. But his thesis at the time was largely based on housing. He thought, this is going to be tied to housing making a return. Are we seeing that? Are we seeing housing making the kind of return that's really helping to drive the employment numbers? It didn't look like in terms of industry breakdown of jobs in the report today. There wasn't a clear trend in housing or anywhere, really, I think healthcare probably had the best performance. You know, that said, it's important to remember that this is a survey. It's basically an estimate. As you pointed out, they revised these things in a couple months for the most part. But, you know, in terms of what Buffett was saying and the housing industry, you know,

I said on our asset management conference call recently that the things that we can count, you know, not the things we estimate, not the things we sample and survey, but the things we count, the number of building permits being granted, you know, the number of, you know, sales growth at Home Depot, for example, these things have been clearly increasing month over month, year over year. And so, you know, eventually that strength is going to show up in GDP. It'll show up in jobs. And it's not always perfect because those are often estimates, their samples, their surveys are extrapolated.

You know, but the things we can count have been getting gradually better, you know, I think that, and I think that's going in the right direction. Can we talk about just how these numbers are reported for one second? Because, as I mentioned, we had revisions upward in July and August. We've had six straight months of revisions because earlier this month the Labor Department came out and said, oh, yeah, by the way, here are the numbers, the real numbers for March through June. At some point, does it make sense for the Labor Department just to say, you know what, we're not going to be doing it looking one month back. We're going to do it two months out because it seems like they're just constantly revising these numbers. If you're thinking that we should wait until we'll get perfectly reliable numbers from the government, we could be waiting for a long time.

I wasn't thinking so much perfectly reliable. It just seems like, let me put it this way. I can't remember the last time a jobs report came out that did not include some sort of revision of the previous month or two. I mean, it's a huge undertaking, right, to figure out not only how many people are working, but whether they're working full time, whether they're part time. If they're not working, whether they're doing so voluntarily, whether they've dropped out of the labor. I mean, there's so many categories of things. You're saying I'm being too hard on the labor department. You're being a little bit hard on them.

You know, but it's also, I think it's partly the media's fault, too. You know, everybody's focusing today on 7.8 percent unemployment. You know, and people who, you know, want to argue around this number, you know, obviously there are discrepancies about how many people are working. Their discrepancy about how many people may have dropped out of the workforce. You know, that 7.8 percent could be lower. It could be higher. But I think the important thing to look at with a report like this, that's really a sample

or a survey, is the directionality because the methodology is consistent. And directionally, it is going in the right direction. But we're never going to get, you know, to a concrete number. that won't be revised. But I think just, you know, take it in context, look at the directionality of it, and that's your indicator as an investor and let the politicians argue about what the exact number might be. Sticking with jobs, earlier in the week, Macy's announced it is hiring 80,000 seasonal workers to help during the holiday rush. That is up about 2.5% from last year for Macy's. And Charlie, we also saw Walmart, Nordstrom, Toys R Us, Amazon. They are all also increasing their seasonal hiring over long.

last year. What do you think about that? What does that say to you? Yeah, you're right, Chris. This is a trend I'm seeing across a bunch of retailers as high as 10% more employees over last year. And these aren't just sales associates on the floor. They are working in call centers for customer service and the distribution centers to fulfill the orders. And to me, it says retail is expecting a stronger holiday season than what they saw last year. I think that's a good sign for the economy. It follows up with what we were just talking about from the jobs report. And you have to understand how important these Q4 numbers are for a retailer. If you look at companies like Coals, this is almost half of their profits for the entire year coming out of the Christmas season.

Macy's is up to two-thirds of their profits come from the holidays. You don't see that type of extreme swing with companies like Walmart that serve customers year-round and aren't as dependent on holiday spending. But I view this as a very bullish sign for retail as we go into the Christmas season. So if you're thinking from the standpoint of the stocks of these companies, And we'll pull out Walmart from that group for the reason that you just said. But is now the time to sort of add these types of companies to your watch list when you're looking at a Macy's and a Coles expecting that they may have a very profitable next few months? What I would recommend for investors is to gauge the share price around what the market is expecting for the stocks. I think you have to be looking for positive comp store sales in the next quarter and make it on that valuation.

Or to have done it a year ago, if these stocks were all cheap. expectations were very low. More trouble in Farmville, guys. On Friday, shares of Zinga fell to an all-time low after the online game maker lowered guidance for both the third quarter and the entire fiscal year. How bad is this, Joe? Pretty bad. It's been a terrible year.

The valuation for Zingo was ridiculous and operationally. They're not doing well either competitively. There are a lot of other people moving in on the Facebook turf and just squeezing for dollars there and it's hurting them. They're losing eyeballs and they're shooting themselves in the foot too. The ONG pop acquisition was a total disaster. They acquired this company earlier this year and wrote off half the value of it. I've never seen that big a markdown on a company or write down in such short order. It just really speaks to the lack of control here.

But I will say for all those question marks, I don't like management. I don't like the business. I don't like the competitive position. And yet. And yet, 70% of the market cap is in cash right now. And that doesn't mean I think I'm going to run out and buy it, but there are really, really low expectations for the stock at this point. Yeah, I would run so far away from this thing. It's not even funny. You know, not only because, I mean, Joe makes a case for their cash balance, but he also made the case with noting the write down at OMG Pop that they're perfectly willing to light money on fire. And they're grasping at straws to do so. So who knows what they're going to do next year?

I suspect that cash pile will diminish faster than the stock price will fall. You know, and the other thing is that the CEO Mark Pink is, that huge sale he did in May, I think it was in May or at least... What? What? This is a sale of his own stock. Yes, which already looked suspicious. Now it looks really, really, really suspicious. And tough to be... Tough to trust any management team with cash when they've shown such a complete...

lack of wanting to take care of share of shareholder interest or even their own balance sheet. Yeah, I was worried about or interested in going a little dumpster diving here just because of the size of their cash balance relative to the market cap. But as to mention, they are burning cash. And that's actually fairly typical for video game companies. The only company in the business that consistently makes money is Activision Blizzard. Everybody else will have one good year off a big product, and then they are horrible businesses the rest of the time, and I think Zinga's going to suffer that fake.

What if they paid you dividends in Facebook credits? No. Or Bitcoin? Can I get some Bitcoin? I think when I hear Tim talk about lighting money on fire, that could be the basis for a new video game. That could be like a business-centric video game. I like the visual. You get Zing on one side, Hewitt Packard on the other.

Just to stick for a moment. Burn to the bottom. On Facebook, because shares of Facebook were also down slightly on Friday as a result of this sort of tied in. Joe, when you look at Facebook now, what do you see? The big news for them this week was that they had crossed the $1 billion mark in terms of the number of users they have. Obviously, we'll know more when they report earnings later this quarter. But what do you see when you look at Facebook right now? Well, it sounds like they're making some good traction of monetizing the base.

They're trying some new things, including an ad exchange, which just from the buzz that I'm hearing from advertisers is off to a really good start, and that's promising. Another thing they're doing is promoted posts, where you can promote a post of yours for $7 so that other people, it. I think that sounds ridiculous in vain, but we all thought the same thing about blogs or Twitter five, ten years ago. You played Farmville, too. Before we start talking about ridiculous things to spend money on. Well, to that point. Joe just went through a phase. We think it's silly, but there are some people who might find reasons that they actually want to pay for it. And I think it's just a good example of a small bet and test for them that they can try and it might pay off. And if it doesn't, it didn't really cost them anything.

Coming up over the past five years, shares of Chipotle have outperformed the market by more than 125%. So is now the time to short Chipotle. Analysis and answers next. This is Motley Full Money. Welcome back to Motley Full Money. Chris Hill here in studio with Joe Mager, Tim Hansen, and Charlie Travers. This week in New York City, the Value Investing Congress was held. This is a big event for value investors.

And one of the featured speakers was David Einhorn. He's a hedge fund manager who last year at the Value Investing Congress laid out the case to short shares of Green Mountain Coffee Roasters. And I should point out that those shares are down more than 70% from a year ago. Joe, this year he made the case for shorting Chipotle. Among his reasons, he said there's a low barrier to entry. The costs are going to go higher in terms of their inputs for proteins, grains, but also health care. and he said that they have a risk of losing frequent customers. And among other things, he cited the positive reviews that Cantina Bell, the concept from Taco Bell, have been getting, you were there.

You were in attendance. What did you think of his case? Well, it was interesting and well researched, as they always are from David Einhorn. But I'm not really buying this one. When you're talking about shorts that involve valuation and competitive dynamics, it's always nice when there's an actual catalyst involved. So with Green Mountain, there is a patent roll off. which recently happened and definitely is going to hurt margins in sales. In the case of Cantina Bell versus Chipotle,

and there was not a clear discernible point at which they might start losing business. And operationally, Chipotle is still doing very well. And I agree the stock isn't cheap, but there's not something here that I'm excited about going short on when the company's performed so well for so long. Tim, what do you think? Well, you know, he laid out some survey results that he did that showed people appreciated the new Cantina Bell food at the lower price.

point more so than the Chipotle food, I don't know who he served it, because every other data point I've seen from Joe eating the food on video on fool.com to, that's what I was going to say, Joe did his own survey. And to every review, every food critic review, everything I've read, Chipotle wins hands down, generally speaking, and people are also willing to pay when you ask, like, well, what are you willing to pay for that? Chipotle generally gets what they charge, whereas, you know, Taco Bell, Cantina Bell, people are willing to pay less than what they're going to charge, even though it's, you know, lower price than Chipotle. So, I don't really get that case.

I don't necessarily think of them as direct competitors just if you look at where their locations are. How often do you see a Chipotle next to a Taco Bell? You know, Chipotle's tend to be downtown. Taco Bell is by the highway, by the shopping mall. So, you know, nobody's going to walk to the Chipotle and say, oh, I'm going to go walk to the Taco Bell instead. Obviously, some points about rising proteins.

That's going to hit every restaurant. So, I mean, that's a fair point, but not unique to Chipotle. And then, you know, Chipotle, you know, obviously is a. is a more expensive stock in a lot of ways, but it's hard to even justify that it's wildly overvalued. I think working backwards, you need double their store count, which means to get to about 2,000,

and they need to sustain about 4% same store sales. Now, that's really good. It means they'd be one of the best restaurant operators out there in the market, but that's what they are right now. And, you know, they've also got a new concept, that shophouse Asian concept, so they don't necessarily need to have 2,000 Mexican restaurants,

They could have 2,000, you know, they could have 1,200 Chocolates and 800 shophouses, what have you. But there are a lot of ways to get from A to B there. And so, like, I agree with you. I don't think it's a, it's not the open and shut case that Green Mountain look like with the patent roll-off and the inventory mismanagement. Yeah, by the way, he talked about Green Mountains more on this presentation and mentioned that he estimates they make about $0.8.00 in profit, earnings before operating profit, for the individual K-cups they sell, and that they've had to cut prices by around 8 cents per K-cup. So you can do the math on that yourself, but it just gives you a sense of where this model's going. Shares of Constellation Brands hit an all-time high on Friday after earnings came in higher than expected

and the company raised guidance. Charlie, the world's largest winemaker appears to be selling a whole lot of wine. Yeah, it's kind of funny how when your business does well, your stock follows. Yeah, amazing. Yeah, so Constellation brands, they raised their guns. guidance. They're going to earn over $2 a share this year, which is quite good for them. And what they do, in addition to being the largest producer of wine, is they have the crown jewel in their portfolio is Corona. They have the rights through a joint venture, which they are buying out from Modello to import and market Corona beer, Negro Modello and their whole portfolio in the United

States. Corona is the best-selling imported beer in the United States, and it's doing very well. for them. But I think if you look across the rest of their portfolio, it is not that attractive, certainly not compared to industry giant Diageo. But what they're good at is selling, you know, the inexpensive wine and corona. You can always email us. Radio at Fool.com is the way to get in touch with us. Guys, email from Allison Rubin in New York City. She writes, as a 25-year-old investor, I feel like there's very little stock advice for buy and hold and hold and hold for 2030. 40 years. I'd love to get a little more insight from you on long-term investments. We've got about a minute and a half left, Joe. You mean other than the rest of the show? Other than the great

insight that she's getting from listening to Motley Full Money. Any thoughts? I mean, she's clearly thinking decades out. What advice do you have for her? Well, I suppose in terms of resources, I think Fool.com is a great place. We have a lot of great free content on the site that is readily available, easy to understand. I think 13 steps to investing foolishly is a great way to start. It's exactly what it sounds like, and it's very long-term oriented, and I recommend anyone who's new to investing to give those a try. Tim? Yeah, congratulations to her for getting started so early. Yeah, that's right. That's great. You know, in some ways, maybe she should stop listening to the show. She's got so much time. She doesn't need to worry about the news, you know? Just, you know,

internalize it and keep adding money on a regular basis, and you'll probably come out really, really happy on the other side. So in that vein, we don't want you to stop listening to the show. So I would make sure that instead of reading about what's happening in the market, you read about what's happening at companies. And just making that subtle differentiation, I think, will make sure get you on the right path to thinking about business-focused long-term investing. I'm going to make a shameless plug for our Stock Advisor service. I mean, this is a 10-year-old service that's crushing the market based on buying and holding great companies for the long run. I mean, I'm not a shameless plug kind of guy, but it's appropriate in this instance.

We'll wrap it up there. Guys, we'll see you a little bit later in the show. Up next, is there a dividend bubble in the investing world? Two of our top writers battle it out. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill.

Joining me in studio now, we've got two of our most prolific writers for Fool.com, Morgan Housel and Matt Koppenhever. Guys, good to see you. Thanks for being here. Good to be here. That you're having us, I should say. It's great to see you because, you know, I mean, Morgan, we talked about this last time. You've lived in Seattle for so long. You just moved across the country.

And Matt, after years in Las Vegas, you're moving here. I went broke. What can I say? I've ever heard of think that it's more like the godfather. It's like just when you thought you were out, we just pulled you back in. An offer I couldn't refuse. Let's talk about some of the stuff you guys have been writing about. And I want to start with an issue that you guys seem to be in pretty significant.

disagreement about, and this is the whole notion of the dividend bubble. And Morgan, we've talked about this before. But, you know, Matt, you just wrote something recently where you basically said, no, there's no dividend bubble. First, why do you think that? Well, part of the reason I think it, and Morgan will appreciate this, is if you actually look at the data, the way that dividend stocks have performed over the past few years versus the rest of the market, particularly within the S&P 500, the evidence just isn't there that there's this widespread bubble among dividend-paying stocks. Some of the stocks have gone up. Some have gone up a lot. And so you have individual stocks that are maybe overpriced now. But I don't see a widespread

bubble among dividends. And yet, Morgan, we see companies just amassing greater and greater amounts of cash on their balance sheet. Certainly there are companies that get rid of that cash by making bad acquisitions. But more and more, it seems like companies are just returned. turning that to shareholders in terms of dividends. Why do you take the opposite view from Matt? Well, I think in terms of dividend bubble, the word bubble is probably not appropriate here. I've used it in the past, and it probably wasn't the right word to use. I think more what it is. I think more of what it is, is that you have dividends stocks in general that are fairly high

high price, which is going to subtract from future returns. Not necessarily a bad thing. Most of the stocks I own are high dividend paying stocks. So I own myself. but when you look at it in terms of future returns, it's probably a lot lower than most people think. So right now, bonds yield next to nothing, cash yields next to nothing, and really dividend-paying stocks are some of the only areas that you can see that you can get yield.

On a widespread basis, like Matt said, it's hard. There's some overvaluation there, but it's not too bad, but there are specific stocks that have attracted a substantial amount of interest lately, and their prices have been pushed up to levels that will not be kind to investors in the future. A few names. Utility stocks, like Consolidated Edison and Southern Company, are pretty pricey.

The big telecom stocks, like AT&T and Verizon, are pretty pricey. The big tobacco stocks, like Altria and Philip Morris International, look pretty pricey. Not necessarily a bubble in the sense that these stocks are going to crash 80% in the terms that we usually think of a bubble, but in the sense that future returns over, say, the next 10 years will, I think, be lower than most many investors expect they will be. Matt, what do you think? I mean, I'll turn to you for rebuttal. I think there are two major points here. The first one is that Morgan just likes to disagree with me, no matter what I say. The second thing is that I agree. There are, of course, you can pick out some stocks that are high

that probably won't have particularly attractive returns going forward. I think it gets dangerous when we start using that word bubble. And that's the big thing that I'm railing against. and I actually wrote an article maybe last year at this point, that there's a bubble and bubble predictions. I think we love using the word bubble now. And when it comes to dividends in particular, I mean, if you think about the dividend, you go back decades, and this is what people wanted from stocks, was dividends. A company makes profits and what happens they give it back to you through dividends. And then we lost sight of that over the past 20 years or so.

So the idea that anybody would be talking about, oh, we have this bubble in dividends. No, it's more like people are getting back to this is what owning a stock is about, and I think that's a great thing. As a general rule of thumb, whether or not you think there's a bubble or whether or not you think that there are specific stocks that, to your point, Morgan, are just getting too pricey. As a general rule of thumb, is this one of the best moves that management can make? Because we've talked in this room before about things like share buybacks and how you look

at the data, and a lot of companies just get that wrong. A lot of management just mis-times that. It seems like paying a dividend is kind of hard to screw up. The evidence that back-sat-up is there's a lot of it, and it's pretty unmistakable. There are really three things that management can do with cash. They can pay out a dividend, they can buy back shares, or they can reinvest it back in their company. Or I guess four things they could also do, they can buy other companies with it. I was going to say, as someone who's a longtime shareholder of Microsoft and Cisco system, yeah. Companies can also make acquisitions that are akin to lighting money on fire.

Right, exactly. So of those four things that they can do, paying dividends is unmistakably, if you look at history and there's so much academic data on this available, is easily the single best thing that management can do for shareholders for long-term returns, The top stocks to own over the last 50 years, when you look at the really long term, are invariably companies that pay high dividends. The single best stock to own over the past 50 years was not Microsoft or Cisco or Walmart. It was Philip Morris Altria. And one of the reasons that is because the company is entirely dividend focused.

That's all management focuses on. They pay out the majority of their earnings in dividends. One company that recently started paying a dividend is Apple, and yet for, you know, despite the dividend, despite the run that the stock has had, this amazing 15-year run. Matt, you recently wrote, doesn't interest you as a stock. Why is that? Because we've had plenty of people here at the Motley Fool say, forget the run-up of the stock.

When you look at the valuation, it is still not an expensive stock. The valuation actually looks really good right now. And I'll be honest, up until recently, I had an iPhone since the very first iPhone. I've been using iPods since the very first iPod came out. Apple's in a very tough business, though. Apple's not in the phone business. It's not really in the computer business. It's in the cool business.

They're selling wow. And they've done that really well. Unfortunately, that's a tough act to keep up. And I think about companies like Sony. When I was younger, you didn't buy electronics if it wasn't Sony. more recently you had you had research in motion and people laugh at that now

but I remember when I was using the first Blackberry people would grab it and say this is great wow this is amazing this sends email you know and Apple has a very tough act to keep up and I don't know if it can do it you know what's really tough in with industries like that Apple is in

is that they really have to reinvent themselves every two or three years and come out with new products that keep people excited. And the odds that one of those future reinventions will not live up to past expectations is very high. And that's why, like Matt said, you have so many companies like Sony and Research in Motion and Nokia that go from great heights to great lows very quickly. And really, I think when most people are thinking about investments in stocks, they should look for companies that will prosper for decades to come and not just quarters to come or years to come. So if you think about a company like Procter & Gamble or Colgate,

The odds that 20 years from now will still be using the same toothpaste and that Colgate-Palmore will still have a big share of the market are very high. The odds at 20 years from now Apple will still be the dominant consumer tech company. Maybe it'll happen. Maybe it won't. There's still a lot of uncertainty there. And I think that's one of the big reasons that Apple's valuation looks fairly low is because there's a big question mark over what happens in the future, whether they can still keep coming out with great products every year.

Does the amount of cash they have on the balance sheet give you guys pause at all? Because I hear everything you're saying, and their luck, or whether you believe people make their own luck or not, their luck will run out at some point. They will have a miss. We had the whole thing with the maps recently with the iPhone 5. That seems more like a speed bump than anything else in terms of its long-term effect on the company. But even when you factor in the possibility that they will have a miss of some kind, a big miss on a product, they've got all that cash. It seems like they can weather a couple of misses.

You know, that's certainly true. The other side of that is when you have that much cash, the pressure to do something big with it grows. And when you have pressure to do something big, you get some bad outcomes usually. So it was really the same situation with Microsoft last. decade. They had more cash than they knew what to do with. They gave a lot of it away in a one-time special dividend. They also used a lot of it on buybacks at prices that were not favorable compared to today's prices. They also used a lot of it for some sketchy acquisitions that don't look great anymore. So, you know, usually when the market is valuing companies

that have a lot of cash like Apple, they put a pretty discount on that cash. Reason being is because is the history of companies blowing cash on bad acquisitions and bad buybacks is pretty high. Transformative is the word to look out for there. When companies start to struggle and they have a lot of cash, you will hear that they're doing a transformative acquisition. And usually that means a large acquisition that they haven't really worried about valuation on. So if Apple starts talking transformative acquisitions, that is the time to cut and run. Okay. Good red flag to watch out for. Just in the couple of minutes we have left, we're coming up on earnings season.

What are you guys watching, whether it's a company, an industry, a trend, what are you watching heading into this last earning season of 2012? I'll tell you what, I'm actually really interested to see the continued progress that Bank of America makes. This is a bank that, I mean, they've made so many mistakes, but a lot of those mistakes were driven by a past CEO, Ken Lewis. who's speaking of transformative acquisitions, Ken Lewis loved to make acquisitions. And during the meltdown, he made what are probably two of the worst acquisitions of all-time Merrill Lynch and Countrywide. The new CEO there, Brian Moynihan, he's been doing a lot of good things, and I like what I've been seeing there. So I'm interested to see what they come out with. I was going to say, aren't shares up something like 60% for Bank of America?

Shares have been doing pretty well, and yet the valuation, I mean, if you're looking at, at Bank of America on a historical basis in what it's traded at, it's still trading at a pretty low valuation. Morgan, what are you watching as we head into the last earnings season? So really two things. When I look at the S&P 500 as a whole, sort of the whole market, profit margins right now are at or near an all-time high. And that's one of the reasons the market has done so well over the last couple years. My earnings have done so well is that companies are squeezing more profit out of every dollar of sales than they ever have. there's ultimately going to be a limit to that how much they can do and profit margins will top out if not fall.

If profit margins do start falling, the only way that companies will be able to grow earnings is through increased revenue. And that's really hard to do when the global economy is as slow right now. So that's one thing I'm looking at. The other thing I'm looking at right now is earnings in the housing industry. There's a pretty clear bottoming and comeback that's going on in the housing industry. And a lot of home builder stocks, a lot of housing. stocks that have just been pitiful over the past five years are really starting to make a strong comeback. So that's the other thing I'm keeping an eye on. In terms of the home builders,

or any in particular that you're keeping your eye on or just the whole group? It's really hard to pick a good home builder. There are a few good names that are well-managed. I tend to look at it as a basket of home builders. All right. Coming up, we'll give you an inside look at the stocks on our radar. You're listening to Motley Full Money. As always, people on the program may have interest in the stocks they talk about and the multiple may have formal recommendations for or against, so don't buy ourselves stocks, basalium you hear. I'm Chris Hale, joining me in studio once again, Joe Mager, Tim Hanson, and Charlie Travers. Guys, before we get to the stocks on our radar, one more email from the Fool mailbag.

Again, email us, Radio at Fool.com. Email from Pete Staples, who writes several times you've mentioned that PayPal might end up being spun off from eBay. I get it that eBay may sell PayPal, but how would that work out for owners of eBay stock? Would we get a one-time dividend? Would we get stock in the new company? What usually happens as far as stockholders getting compensated when a spinoff happens? Joe? Well, what usually happens, and what I think will happen here, is that PayPal will be spun off into its own business.

And as an eBay shareholder, you'll have the same number of eBay shares plus some number of PayPal shares to go along with that. When you net it together, your investment the day it happens will be worth roughly the same it was the day before. So in that sense, it's kind of a non-event, but it'll be different because the two will be. be independent companies with independent strategies, which I think will be great. He goes on to write, with eBay getting much of its income from PayPal, wouldn't my eBay stock be worth less after a spinoff? That's a good question. So proportionately, the value of your eBay shares will fall by the amount of the PayPal shares. But as far as the eBay business itself goes, I think it's doing very well. They just

posted their best growth quarters since 2006, and it's something I'd be happy to hold on to. Is that something, because you watch eBay pretty closely, is that something you're rooting for? Are you rooting for that PayPal spin-off? I am, yeah. I think they'll unlock a lot of value, and I think it'll do better as an independent company. All right. We will get to the stocks on our radar, and we will bring in our man, Steve Broido, from the other side of the glass with a question for each one of you.

And you can fire one back at him, because you know what? Oh, I will. Wow. Charlie's good. I've been waiting for this day, Chris. By all means, fire away. My company is Next Stage Medical, tickers NXTM. It's a small medical device company.

They are a disruptive force in the large kidney dialysis market. There's been a 40-year paradigm in the United States of patients who need dialysis of having to go to a dialysis center three times a week for their treatment for four hours. It's very inconvenient. What next stage has built is a dialysis machine that can be used in the home. And a lot of the clinical data is showing that patients just have better results of doing it in their living room than actually having to travel to a center. and the stock's done very well.

Steve, question for Charlie? Is this the kind of company where a patent or two may make the difference between massive success and massive failure? That's fair to ask in the medical industry, and what they're doing is investing a lot of money in R&D to keep building new and better machines. Question for Steve? Steve, I'd like to know how you think about diversification for the average investor, how many stocks people should own. and, you know, like a small gross stock like Next Stage, should people own this alongside more secure companies? Well, personally, I'm very diversified, and I think that diversification can happen at many different levels. I think you can be diversified just holding an S&P index fund, which is what I do in my R401K here.

I just, you know, split it up into a couple different of the mutual funds there in my Roth IRA. I have some NASDAQ index funds and some S&P 500 shares the SPI. and I think I'm diversified in that way, and I also own some individual stocks. I bet you didn't see that coming. Great answer. Pretty good answer. Steve's just constantly rolling. Steve's the high roller in terms of stock investing.

Tim, what's your stock? I've been spending some quality time recently with FedEx, which is probably a company for. Yeah, I've been in FedEx. What have you in FedEx? I thought about going down to visit FedEx for Investor Day of Memphis. So FedEx has sold off recently on some news that they're not seeing packaging, shipping volumes as high as they were expecting. They've also got a couple question marks hanging over the company right now

including some lawsuits related to their non-unionization of their workforce and also there's a looming USPS contract that they have that comes up for renegotiation or renewal soon. So those are some questions but on the good side it looks

like their FedEx ground division is being really profitable and obviously is growing along with online commerce and the big question with FedEx is their express segment the freight and shipping that they do between Asia and the United States is down, and it looks like that's been transitioned into the sort of, we don't really care when it gets there market, which is obviously a lower margin. And the question, and companies are obviously doing that to save money.

So the question becomes, as the economy improves, do they go back to wanting to get it there really quickly or have they optimize their supply chain to be okay with? We're okay, what gets there when it gets there. I don't have the answer to that, but that's why I've just been spending some time with the company, but it's certainly on my radar. And the ticker? FDX. Steve?

My question is more around FedEx's logo. I've pulled it up here. Sure. Did you all realize there's an arrow in this FedEx logo? Am I the only idiot in the whole world that never saw the arrow?

Do you guys see the arrow? Yeah, between the E and the X. I never saw it. Right there. Bam. There's a great website. This is not great for radio, but if you look at the FedEx logo,

there's a little arrow between the E and the X, and for years, I never saw it. Someone pointed it out. It's like the Amazon smile from A to Z. A lot of people don't see that. Well, there's a fun. website demilked, which does all sorts of graphic advertising art, and they've got a fun, they've got a whole collection of, you know, like hidden messages and logos that are really neat.

Question for Steve? How you've been, Steve? I haven't seen you in a while. I'm doing great. How's your Bank of America stock? I think I may have sold off my BAC because it was trailing. But thankfully, part of a larger diversification strategy. That is true, but I'm doing great. Thank you. Good. Joe, we got about a minute left. What's your stock? Okay, MSCI. They are.

the owner of a number of indices that you probably recognize just from the name, but also portfolio analytics and risk management tools. The stock got drubbed by 30% on Tuesday when they lost Vanguard as a client. It's obviously a black eye and a loss of business, but I think it was a little dramatic and overdone. And the ticker? MSCI. Makes it nice and simple. Steve? What makes an MSCI go up? At this point, I think just realizing that the business isn't going to implode. Also, my question for you, who are you to judge? It's a very good question. You're always behind that glass judging.

It's true. It's quite true. Do you have an answer? I don't. I'm just me. We'll wrap it up there. Joe Mager, Tim Hanson, Charlie Travers, guys. Thanks for being here. Thank you, Chris. Thanks to our guest this week.

Morgan House and Matt Coppenheifer. You can read their stuff on Fool.com. That is it for this edition of Motley Fool Money. Our engineer is the judging Steve Broido. Our producer is the amiable Matt Greer. I'm Chris Hill. Thanks for listening. We will see you next week.