Motley Fool Money - The CEO Draft

Episode Date: July 16, 2024

We’re picking CEOs for investors to watch. (1:01) Recorded live at FoolFest 2024, Bill Mann, Asit Sharma, and Ricky Mulvey discuss earnings from Charles Schwab and their takeaways from the conference. (7:50) Then, they draft their favorite CEOs in the following categories– capital allocation, growth stories, turnarounds, and wildcard picks. A correction: The CEO of Kinsale Capital is Michael Kehoe. Companies discussed: SCHW, OTC: CNSWF, ANET, WINA, KNSL, AMD, TTD, IBM, PEP, OTC: ADDYY, RKLB, ORCL, JPM Host: Ricky Mulvey Guests: Bill Mann, Asit Sharma, Erick DeVore Engineers: Desiree Jones, Michael Towers of Marx Productions Learn more about your ad choices. Visit megaphone.fm/adchoices

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The draft is live. You're listening to my... Motley Fool Money. I'm Ricky Mulvey. We are live at Fool Fest with a act house. Thank you for being here at Motley Fool members. I'm also here with the mayor of Fullfest himself. It is Bill Mann. He is going to help us out with the CEO draft. And also here's Asset Charma. Osit. Hello. I'm still waiting to be deputized as assistant. The vice mayor. Vice mayor of Fool Fest. It is been assistant to the vice mayor. It's been a great event so far, and Dylan did not have one day to talk about coming into his live show. We're lucky enough that we have a day to talk about. I'll start with Bill. What's been a big takeaway from day one of Fool Fest?

Well, I think it's such a delight for, and we were talking about this before we came on air, how great it is to be able to be face-to-face with the people that we actually communicate with every day. And I really do want to say that a lot of you have become friends of ours and my wife thinks it's really weird. You're like, wait, you've never really met in person. But it's true. You know, we know you all. We really admire so many of you. And it's wonderful for us all to be here in a very temperate Washington, D.C.

And then Austin, how about you? Yeah, same for me. It's so exciting to meet with members. I realize we spend so much time on Zoom at home. I become an introvert during the year. Because as we were talking about earlier, I'm at my kitchen table trying to quaff down some coffee before Ricky and I are talking. And other colleagues meeting with them in Zoom, I meet with members and I realize, wait a minute, I used to be an extrovert. I used to be energized to see human beings within a few inches of me.

Funny story yesterday, many of you know Brian Faraldi is a great guy, super intelligent, has a nice learning class he gives for stocks. or just Google him and a full contributor. So after a long time, I see Brian, he's three feet from me. And I'm like, Brian, we should really catch up on Zoom sometime, buddy. But it's just so wonderful to be here. And I see colleagues, my colleague, Vicki, is here on Stock Advisor team. She's on the West Coast. I'm on the East Coast.

So we got to chat together last night. So, yeah, super happy and ready to do this. And then coming up, we got Brett Shulman here. We have Morgan Housel here. Anything you're particularly excited about that you're eager for for the rest of Foolfest. Now that we've gotten the emotional stuff out of the way. The hardcore stock talk, Bill.

The hard, yeah, I am really interested to hear what Brett has to say. And Morgan actually quoted me in his first book, so I like to call myself, you know, an uncredited co-author of the best-selling novel. But he's just, he's a fantastic speaker. I don't know if you all know this, but yesterday Brian Haney was here, who is the president of Kinseyel Capital, is a long. time full recommendation and the night before he on his own accord came to the bar here at the hotel with his wife just to meet fools just to just to spend some

time I didn't know he was coming it was a really really neat thing for for them to do and so I just want you to know how energized people are by by your presence I said anything before we go to Charles Schwab I'm looking forward to your questions today in person on the the app I I want anonymous, I want to see who you are. Let me know. I'm that person. All right.

It's Ricky, actually. Probably. We've got, I'll never tell. We've got bank earnings this week. And this morning, Charles Schwab reported, Bill, you've been on the Charles Schwab story for a while. Remember when everyone was panicked that everyone was going to pull their deposits out of Charles Schwab? Yeah.

Maybe that didn't happen. And now Wall Street's a little upset because they wanted a million brokerage accounts, but they only got 955,000. So close. So, so close. How mad are you? I'm not that mad. Okay. Yeah, I'm not that mad because Schwab was the company that forgot to die.

And last year when Silicon Valley Bank collapsed, people said, well, obviously there'll be another bank that collapses. And Schwab is actually, we think of it as a brokerage, but it is actually organized as a thrift. And so people looked at Schwab and said, well, Schwab has the same characteristics. It's obviously going to go away. And it hasn't happened at all. So, yeah, there are new accounts, which are people who have decided in the last year to trust Schwab. It's a little bit light, almost a million, but great earnings. And the company is doing absolutely fine.

This is a company with $9.4 trillion in assets under management. It's really hard to make that go away, Bill. I said, any big takeaways from you from Schwab or the bank earnings before we get to the CEO draft? Yeah, I mean, I literally was introduced to this company today by Bill. I don't spend a lot of time in the banking industry. I mean, on first look, this looks like a stinker. I give my honest opinion here. Oh crap.

Pin drop silence. This is a joke. Yeah, yeah. What? 17% growth in net assets is pretty good. When you get to that scale, it's really difficult. to drive net asset growth, so put assets on your balance sheet, pass the high single digits. So for a company to really be able to extrapolate out its base and defy the law of large

numbers, not the mathematical law of large numbers, which is something different, but you know how we talk about investing. Microsoft can't get bigger, can it? Schwab can't add another few trillion dollars to its balance sheet. Can it? I think it's sort of impressive. The other thing I like just taking a look at the company is you don't have to worry as much about the fluctuation and net interest margin with these companies. They have a diversified

base of revenue. They've got the wealth management piece. So many other nice parts of the business, acquisition of the other brokerages. So I feel that if I had to choose sort of a quasi brokerage type banking company, this would be such an interesting one to look at. And I've watched Phil for many years. I've seen him zero in on tiny, tiny banks out of nowhere. But it's It's so interesting to see him continue to be positive on a larger company. And it's the earnings power. It's the earnings growth. I think that's so attractive here.

I feel like we need to pour one out for the great recession of 2023. Do you all remember? There were several economists who said there is a 100% chance that there will be a recession by the end of 2023. Since the beginning of 2024, the big banks on aggregate are up about 33%. So the Schwab experience to me should suggest that for whatever reason, however we've managed to do it, recession is not coming and a soft landing is being achieved as we speak. By the way, that investment bank? Congratulations, Bill.

I did it. Bill Mann has achieved the soft landing. You're welcome. That is the power of having a microphone behind a desk, Bill. A powerful feeling. The investment bank that made that prediction, by the way, they've up their prediction. So 101% chance for 2024. That's what I read.

All right. The meat of this show is a CEO draft. We have four categories. CEOs that are good capital allocators, a growth story, a turnaround story, and then a wild card pick. Before we got recording, a friend Shashi was kind enough to shuffle and deal the cards. Bill got the ace. Asset got the king. I got the seven.

So that means I go last. Bill goes first. I believe we should do a snake draft, though. Snake draft? So I go twice. Yeah. I think that. Apples for snake draft.

Anything Bill says gets applause. This is pretty spectacular. You're welcome. Awesome. You get to stay in the middle for each one. Okay. I love it. Let's do it.

Let's start with a capital allocator. Bill, first pick of the draft, which CEO, which company are you picking for capital allocator? So there's a Canadian company called Constable. installation software and the CEO has been there for a long time. If you've ever pulled up a picture of him, he looks like Santa Incognito. His name is Mark Leonard. And you would never see a Constellation Software product, but they do things like they buy software companies. They've bought hundreds of them.

And so, and they look for verticals where there's no competition. So they run water treatment plants and bowling alleys and hair salons. and hair salons in places where there are plenty of return, there are a ton of customers, and they have returned about 23% per year over the last 20 years. And so they're very disciplined buyers of companies, which is a really, really hard thing to do. Usually when companies acquire other companies, it is a net wealth destroyer for investors. But Mark Leonard has done it exactly right for a long period of time. First pick, Constellation Software.

Up next, Asa Charma. All right, so I want to go in the opposite direction from acquiring companies on scale and talk about Arista Networks, got to be J. Shri Ullal. What a fantastic CEO when you think about capital allocation. We look at Arista Networks and see this great networking company that competed with Cisco and Juniper Networks and really outshone those companies. but we rarely talk about how lean and mean this company is. Man, you look at this income statement.

There's hardly any operating leases to be found. You would think with such a company of scale, they would have glamorous office space around the world, lots of R&D facilities, but they do so much with so little, and it's impressive. The balance sheets is bulking up over time, six billion bucks, rough numbers of retained earnings, and super cash flow, no long-term debt,

working capital, $6, $7 billion, and they don't have a need for it. They're so interested in what they're doing that they've got firepower, should they ever go the other way and say, look, we've reached the limits of our innovation and we need to now start acquiring companies. I hate to see that as a tech investor. Ricky hooked me up with the head of product over there, so interviewed him a few weeks ago, and they're so serious about the future competing with NVIDIA. coming up in one part of their business,

but I really like the way they look at a dollar and try to get the most efficiency out of it. It's not a company that skims on its employees, on compensation, but they don't really have a desire to do frivolous things, extraneous things, and that shows up in the books. So I got to go with Jay Shreve for that one. How mad are you going to be if I take Apple, Bill? Is that lame?

It's lame, but we should ask the audience. Is Apple lame? Like, are you disappointed? You've shown up in person? Mary's giving a thumbs down. Let's do, right? She gave a thumbs down, I think. Thumbs down, okay.

We're going to do, I'll take Brett Heffis at Winmark. It's like picking McDonald's is your favorite Scottish restaurant. Okay. All right, I've been, okay, okay. If you ask to be shamed by Bill, you will be shamed by Bill. I'll take Brett Heffes at Winmark in part

because he doesn't think about capital allocation that much. He has a model for it. It's also, and Winmark is a resale franchisor of companies like Played Against Sports, Plato's Closet. You may have heard of it if you've ever listened to Jim Gillies speak. But when he was doing an interview with Jim, he explained, he's like, we have a process. This is kind of what it looks like, and this is the amount of time I'm going to spend thinking about it. And I like that.

You have a process. You have high inside ownership, and that's good enough for me. Let's move on to growth story. We've got a growth story. And since I get to go first in the snake draft, Eric, Eric DeVore. I'm calling up someone because I, you know, I'm going against analysts right now, so I need all the help I can get. I'm giving Eric DeVore my pick for growth story. Did you just make the call for, to bring in a new pitcher?

Correct. Yes. Impressive. Eric, can you come up for a CEO with a good growth story? Nobody's got to do it. That's pants for radio. Yeah, absolutely. What a treat. All right, well, my pick via Ricky would be Dr. Lisa Sue from AMD.

Yeah, that's right, Bill. One of your favorites, boom! I think her time at IBM, then free-scale, her upbringing at MIT, the amount of well-rounded left-brain plus right brain in order to support the creative stuff that AI is going to bring, that creatives bring with GPUs, I think that the backbone of this market is not just a winner take all with NVIDIA and I think there's going to be more than one winner and yeah I think that she's going to be great Eric Tabor thank you what a great pitch by the way we were fighting for

Lisa Sue in another category a few minutes ago I mean if you want to think about AMD it was a company that was basically kept around by Intel so Intel wouldn't be declared a monopoly. So that's the level that she has brought to the table. Not only have they survived, but they're winning. And it's really amazing. All right. Next up in the snake draft, it would be Osset. Osset, what's your growth story? My growth story is Jeff Green at the Trade Desk. I mean, this guy I've been watching a long time. And when Trade Desk was a very small company, he was talking smack about the walled gardens over Google. All the time, every conference call. I mean, half an hour. Just.

talking about the monopoly power of advertising that they were going up against. And I didn't take it very seriously. I watched this company grow. I started looking into their tech. And I said, man, these guys are serious. I mean, against that wall garden. First, they brought their little helmeted heads, and they ran up and bopped up against that garden and fell back.

Then they brought in a few crossbow archers, started trying to shoot over. What are you even saying? Then they brought the trebushes. Asset, you're on fire right now. They brought the trebueshays. They threw the dead horses over. And then they said, let's get a battering ram. And that was Unified ID 2.0 when the cookies started to crumble.

So I really like this combination of fierce competitiveness, talking smack, but working on the tech and telling his team, let's just have a better tech, let's play with other folks. They're very good at partnering up with other companies in that ecosystem. So for me, that's what growth is about. It's having that goal, going after it aggressively, having ambition, vision. He's got it all. He's a little long-winded, but other than that, I like this guy. This is a company that sells ads and you've made it sound like Game of Thrones, awesome.

I need to hear more about the dead horse treborship. Dead horse trebushet. Do you need to buy an ad on Netflix, Bill? That's where we've gone to. All right, I'm glad you're following that one up. is for the listeners, Bill has his hand against his forehead, and he's trying to get a good at Grown's comparison. Well, I do want to leave it to the live audience here,

because I did call Apple a little bit lame, and you all agreed with me. If I were to say Alon Mosque as a gross story, would you describe that as similarly lame and too obvious? Yes. Yes. Okay, good. I'm glad that I structured it so that I was going to lose. I am going to continue to be lame and semi-obvious

and talk about the CEO, the president and CEO, Brian Keough, and Brian Haney, who we met yesterday here from Kinsale Capital. It is an insurance company. They do hard-to-place insurance. And if you were in the room yesterday that you learned about how they had a boat run into one of the hotels that they were insuring. Pretty impressive story. But this is a company that has turned a very small business into a very big one. and it is a commodity business. You can get insurance from anybody.

I could write insurance from you for you. It would be a terrible mistake on your behalf to do so. But they have been fantastic at it. It's a 10-bagger over the last seven years, which is really, really hard to do in the financial space. All right, and then you're up next for turnaround as the snake draft continues. So can you all name, you can, top of your head, you can think of a number of AI companies,

one of the oldest ones is a company that you wouldn't really think of, and it is a tremendous turnaround, and it's happening right now. And so the CEO is Arvind Krishna, and the company is IBM. If you remember Watson, you remember Deep Blue, the whole chess thing, that was AI before it got branded better. And IBM has taken all of its hardware businesses, and it has gotten out of those businesses. It is a services business now. It is asset light. It is very sneakly one of the companies that has one of the biggest leads in artificial intelligence. And you don't know about it because it doesn't have some huge multiple attached to it.

It doesn't get talked about very much because I think people are almost embarrassed to say, oh, yeah, I'm really fond of IBM because IBM has done nothing but disappoint for 20 years. But I am here to say that Arvin Krishna has done a bang up job turning this company around. and people are going to start to notice. There was a murmur in the crowd, and then I heard pens clicking when you brought up IBM, Bill. Should I spell it?

I think that's the best... I think that's the best reaction you can get in an investing conference, though. I was like, huh? Okay, got you. Gotcha. All right, Austin, what's you got for a turnaround? So I don't think I'll hear any pens click because this CEO is actually out of the CEO's seat.

But Ricky said we can talk about past performance, but there was a time when Pepsi was really languishing against its rival. what kind of turnaround story could Pepsi be, right? But you're in a very tight band when you're a consumer goods multinational company. You've got to grow a little bit beyond the rate of inflation, but you can't grow too fast because at that scale, you know, what happens, your only method is pricing power and you'll price yourself out of the market.

So Indra Newy came to PepsiCoat, a sort of a vulnerable time, and she really drew the strategic threads together. I noticed after she came on board, suddenly I walk into my C store. And finally, I'd see stacks of it. mountain do besides Frida Lai products. Why didn't they think of that before? But just a very strategic thinker, a very kind, compassionate CEO. I have a theme running through my choices.

Most of them are women. I think we need more women CEOs than the Fortune 500 because... Thank you. Maybe I'll hear some pens clicking for that. Because they tend to be very analytical, but also great listeners. And sometimes you need the opposite of all the testosterone I was describing before, with Jeff Green, and you need leaders who can come in and figure out what needs to be done and get people to align that common goal. I thought she was great at that, and also introduced some more sustainable practices at PepsiCo.

They should have green bond for a billion bucks, and yeah, some of that is probably greenwashing to tell the truth with these big corporations, but at least they're trying a little bit. So great leader. She came and talked to us at the Motley Fool during the pandemic virtually via Zoom, and we got so much out of that conversation. Their stock would double if they renamed it Frito Lay. I'm going to take Bjorn Golden, who is the CEO of Adidas. This CEO came into a really tough situation because Adidas had tied up a lot of inventory, sales, and profits to the rapper formerly known as Kanye West. And it was because Adidas for a long time was trying to look for the next Michael Jordan, the next big figure that can just sell a lot of shoes.

What ends up happening is Kanye West broke down. He treboschied himself. He trebushed himself, not an easy person to work with. And what Bjorn Golden did when he came back in is he said, we're not going to look for the next big figure. We're going to look across, we're going to try to get very specific, across a lot of markets, and distribute our bets a lot. And I think that's working out for Adidas.

Earnings getting back to hopefully positive territory, is a shareholder, I hope so. But I think he's doing a good job. So can we take a quick digression here and talk about, the process of investing. Yes. So I really like this about Ricky. We actually, I chatted with you about Adidas. We had sort of a

comical podcast recording because the story was so incredible. It feels like a year and a half ago. And I remember, so Ricky tends out to bring the snark in me. I have a very little snark level, but sometimes when we get together, he can dial it up, and it's fun. I remember that being a really

snarky podcast episode. I went back and looked at Adidas, and I was like, gosh, who would buy this thing? Look at all But inventory. And fast forward to a couple of weeks ago, and we're chatting about this. Ricky and I were just chatting. He's like, yeah, I'm an Indyus investor now, if I'm not mistaken. And I thought that was so foolish. The ability to laugh at a company to date and then return to it and let that smile fade a little bit into interest and curiosity and then take a position when you see the story turning around. So I thought that was great. I tried to emulate that behavior in my own investing, but it's rare. It seems easy, but it's hard.

Yeah, it's something I changed my mind about because what I originally took, when you look through an Adidas earnings call, it is a complete scatter shot. And I'm like, what is going on here? And then I realized, oh, no, no, there's a plan. I see what, I see what Mr. Golden is doing. So I got wild card. I want to take a true wild card. I'm taking Peter Beck at Rocket Lab. I feel like dude's putting rockets into space. He is not Elon Musk. He's putting more rockets into space. If you're assembling a team of CEOs, I want a wild one. I want Peter Beck. He almost got deported. Yeah. Right? When he showed up and he started, he's from New Zealand and he was like this 19 year old. So he started hanging around sensitive facilities in the U.S. because he was fascinated about rockets.

And they're like, all right, person not from here. Why are you hanging out at the gates of Vandenberg Air Force Base? Osset, what's your wild card? All right. So I'm going to ask for a show of hands. If you're listening, post this recording, raise your hand, I'll feel you. But who in this room has heard of Saffircats?

Not a person. She is the CEO, one of the largest companies in the world by market capitalization. She is the CEO of Oracle. And she does an amazing job of managing that outsized personality. If I asked for a show of hands who's ever heard of Larry Ellison, I think you would, OK, raise your hands. Like half the room, right?

He's the chairman, and together they're a wonderful team. He's a visionary. He's sort of a wild guy still in his late 70s, acts like a much younger person, and he's very creative, but he needs someone who can execute alongside. And about seven years ago, they realized that, again, Snark, all this hand-wringing and thumb-waving they did at the cloud wasn't helping Oracle's business.

So instead of jumping in and saying we were wrong, we were the company that should have built the cloud. We were the world's premier database company. They started from scratch. Let's pretend we were doing this today. How would we build this? And they came up with a really nice architecture. It's called RDMA. Fast forward seven years, the youngest companies on the planet, the Anthropics of the world, the mistrales.

So many small startups want to work with Oracle. Why? Because the architecture allows for faster. training, faster inference, it's lower cost. So if you've got to dole out the millions that some venture capitalists gave you, you want to be able to have more inference, more training, so you can figure this stuff out, get a leap on the competition. And she's really great at that. Actually, took over, unfortunately, Mark Hurd was the CEO of Oracle, passed away untimely, I think in his early 50s. And since then, that duo of Saffir-Kats, Larry Ellison,

has been so powerful in the markets is one reason why that stock has really taken off. off in the last couple of years. They've found their place in the cloud, and it's cloud plus. It's really an AI place. All right, Bill. I'm going to go with the CEO Whisperer. Okay. Jamie Diamond in the middle of the last decade took over a group that's called the CEO

Roundtable. And one of the things that the CEO roundtable does, every year is they survey all the CEOs, what do you think is going to happen with the economy, what do you think is going to happen with your industry? And so when he took over, he goes, we have all this data. Why don't we see the people. who know the most about their own businesses, how they did, and you're not going to believe this, but they did terribly. Their own day, you know, the CEOs of these companies are really, really

not very good at prognosticating, no better than really anybody else. Is anyone good at prognosticating? Well, I can tell you, I can tell you that on the list of people who aren't CEOs are on it. Jimmy Diamond is, he, I really would almost vote for him to be the CEO of America. He loves this country. His letters every year to J.P. Morgan shareholders go so far beyond what the bank is doing. And he is such an inspirational person. He is for other CEOs for sure. This is a banking guy.

Like he doesn't have to do that. There are bankers. They would sell their grandmothers if they could make a profit at it, right? They will make a market in anything. And Jamie Diamond is someone. who has said, no, these are the things that we ought to be doing, and these are the things that we ought not to be doing for the good of the country, for the good of society.

And I think that that is something that is worth our tipping our hats, too. That's a good place to wrap it up. All right. On Bill's team, we got, we're going to pick a winner. Raise your hand, because, yeah, raise your hand. If you think Bill 1, you'll raise your hand if you think Osset 1. Don't raise your hand for me. Remember, I'm the deputy mayor.

He always gets the glory. The mayor of Full Fest. I take out the trash. The mayor of Fool Fest, Bill Mann has picked Constellation Software, Can Sale Capital, IBM, and J.P. Morgan. Okay. Yeah, you're allowed to raise your hand for Bill. Okay. It's like, Steve.

Sorry, I didn't need a deep permission. Ricky, you didn't give them any instructions. I said raise your hand. Well, I was going to do applause, but I was like, I think hand raising is easier to measure. Everyone has their hand up for them. Okay. Austin Sharma, Arista Networks, Trade Desk, PepsiCo, and Ory Oh

Someone back there has been voting twice, but you put up two hands The gentleman in the American flag shirt We had such a great conversation You didn't want to have to choose between us You put up two hands for Osset so I'm counting your vote for Osset And then are you from Chicago by any chance? I've got I've got winmark AMD Adidas and Rocket Lab Thank you Eric that's why I think I think I think I want

voting for you no I think you Okay, I think Osset won. I think Osset wins the CEO draft. Thank you all so much for being here. This has been a lot of fun. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy yourself anything based solely on what you hear. I'm Ricky Mulvey.

Thanks for listening. We'll be back tomorrow. Thanks, ladies.