Motley Fool Money - The Trump Investor

Episode Date: November 11, 2016

What does a Trump victory mean for investors? Is Shake Shack's success sustainable? Will Priceline fly even higher? And will Disney spin off ESPN? Our analysts tackle those questions and share three stocks on their radar.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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From Motley Fool Hidden Gems, Chief Investment Officer Andy Cross, and from Motley Fool One, Ron Gross. Good to see you, as always, gentlemen. Hey, now. How you doing? We have got the latest results from Wall Street. We will talk emerging markets with David Quo, and as always, we'll give you an inside look at the stocks on our radar. But we begin this week with the full mailbag from Ben in Columbus, Ohio. What are the best wall building stocks that you recommend?

Yes, gentlemen, Donald Trump will be the next president of the United States, and investors are asking which industries will benefit a logical question to ask? Andy Cross, I'll start with you. So we already have seen this week hospital stocks taking a hit. When you think about investing over the next four years, are there any industries that you think might do a little bit better? Yeah, Chris, there's been a lot. I mean, we saw the reaction, the dramatic reaction, the stock market, and we saw a bunch of industries react positively. And some negatively, like you mentioned, so like the infrastructure stocks and some of the defense stocks. What I'm really interested

in, though, is I think this is the first time when we will actually see some corporate tax reform, there's a very good chance the Republican Party and Donald Trump, President Trump, go after the corporate tax reform. I think that actually is going to be good for small cap stocks. Now, I'm a small cap sleuth, and that's what I've spent a lot in my time. They've rallied, but here's why. So I took a look at some numbers. And of, there are 750 stocks traded on the U.S. markets that have tax rates, effective tax rates that are higher than 35%. And 55% of those are small cap stocks. So when I think about the stocks that are going to benefit, you hear a lot about, oh, this helps with the repatriation, the dollars of Apple and all those big multi-caps.

But I think it will really help the small cap stocks do well. I would be looking at industries that will benefit from less regulation because that's what he's been pounding the table on. And so whether it's banks with the dismantling of Dodd-Frank, perhaps, or energy, which could benefit from less regulation. You could have some strength there. The one thing I do want to caution is campaign promises do not always translate to actually things getting done. So to see people making big, big bats in these industries just because of campaign promises, I'd be careful. He wants a $1 trillion infrastructure plan. That's not probably going to happen. It's probably not realistic. There may be some infrastructure spending, which actually

the Democrats, the Republicans don't seem to like. The Democrats do. But it's not going to be that size. So just be a little bit cautious and don't plow all your money in at once. Yeah, I think there are a lot of headlines talking about all of this all at once. And traditionally, we espouse the, regardless who is the president and what they want to do. I mean, this is all not going to happen in one day. I mean, we look at these types of situations through the lens of years and not daily headlines. With that said, I think I said tongue in cheek before the election actually took place that if he won, we would probably see a little bit of a boost in alcohol stocks like Boston Beer and Anheiser Pushingbeth

perhaps. But in line with what Andy was talking about, I do think there is something there, particularly on the tax reform side, with all of these companies that have so much cash overseas. I mean, you look at Microsoft, Cisco, IBM, Apple, tremendous resources that they are not really doing anything with at this point. You see Apple taking out more debt just to be able to return value to shareholders that way. So if there's a tax holiday that allows a lot of these large-cap companies allows them to sort of bring that money back here. I mean, we're looking at more buybacks, possibly boosted dividends, reinvesting in the businesses here domestically. So I think that's a big opportunity that I hope to see

materialize. I was going to say this puts a stake. I think we can finally say this puts a stake in the bond market. I mean, when you think about bonds, I mean, we sold a 10-year jump above 2%. We're going to see some inflation start to show up. So if I was a bond investor, I think I'd be very careful about holding long-term bonds right now. Last thing on the election, at the state level, there were eight states, including California, Florida, Nevada, Massachusetts, and Maine that passed new laws permitting the use of marijuana. And we're getting a lot of questions from people saying, hey, wait a minute. This is clearly a trend.

Our investor is going to be able to benefit. When you look at marijuana stocks as a group right now, they are almost to an individual business. They are penny stocks. Yeah. I mean, I think the big challenge with that whole thing. that whole market, and certainly I wouldn't go chasing the penny stocks, that's really a dangerous game. But I would say that the marijuana, the companies that are dealing with the marijuana

market, they're going to have financing problems because it's not a federal law that marijuana is legal. And a lot of banks don't want to touch those businesses. So they have a lot of trouble in just managing their day-to-day cash flows. And while I think there's a lot of small companies out there that look interesting, I think once the big boys really start to get into this, the altruies of the world, you're going to see them. really take over this industry because they know how to get it done. All right, let's move on to earnings. The Walt Disney company wrapped up its fiscal year with a fourth quarter report featuring

lower revenue out of the TV division. They're still losing ESPN subscribers. Not really a shock there. CEO Bob Eager, though, appears to have turned things around on the conference call. He's got that magical Disney touch, right? I think ESPN's challenges, first and foremost, do not mean that Disney's best days are behind it. I think they are dealing with a bit of a challenging environment. And it makes a lot of sense.

I mean, traditionally, working on this cable model, ESPN was a no-brainer tethered to the cable subscription because we didn't really know how much Disney was making from that relationship, but we had some pretty good assumptions, and they were making a killing from it. At this point now, it's all a matter of distribution. And that's really the nut that they need to crack. It's just distribution is a far different model than it was just 10 and 20 years ago. So they're taking advantage of over the top. They're taking advantage of skinny bundles.

They are going to launch a on-demand personalized style ESPN branded offering in 2017. They have that big investment in Bamtech. So they are looking at this and trying to figure out the best ways to solve it. And honestly, I think ultimately it opens up a bigger market opportunity. Perhaps they're not making as much an operating profit that they were before with being tethered to cable. But it opens up such a large market opportunity. I think there still is plenty of room to go there.

And it was interesting to read over the week, or I saw John Malone had published a piece saying he could actually foresee a time where ESPN considers spinning off from Disney. Disney considers spinning off ESPN. And I mean, that makes sense if the economics aren't there, I mean, maybe it is worth it. And it really allows Disney to focus on what it does so well as an IP company, because 20, 30 years from now, they're going to still have all of that IP and a lot of sequels to go with them. And we know we've seen to date. They've proven to be very astute and able to do that. And then one final thing, Disney Shanghai, obviously, a lot of talk going into the opening.

They brought in about 4 million people in the first four months to put that in context. Disney World down in Orlando brings in about 20 million people per year. So Shanghai, Disney, off to a great start, and they anticipate breaking even on that far sooner than was anticipated. And, you know, the stock has not done very well over the past year, but I think you're looking at a company, still fairly, I mean, in the big media landscape, they are still small enough that they hopefully can still be nimble. And maybe it is John Malone. He's his recommendation of spinning off ESPN, I'm not quite sure if that's actually the way it's going to go. But Bob Iger certainly, I mean, he came back to the, you never really left. He really is leading that company.

So hopefully he will do something that gets this company kind of moving in the right direction. Shares of Macy's up 10% this week after a third quarter report that frankly Ron was anything but impressive. Their profits and revenue came in lower than expected. Same store sale, where is the optimism coming for this company? So seventh consecutive quarterly decline in same store sales. The company is not doing well. The optimism comes from the potential monetization of the company's very valuable real estate holdings. Starboard Value, activist investor, guys I know well, have been pushing to unlock value in the real estate for quite some time now. They think the real estate a loan could be worth $21 billion. The stock is only a $13 billion market cap. So significant

upside potential there if Starbird is correct. Announcement concurrent with the earnings release that Macy's has cut a deal with Brookfield asset management to develop 50 of the locations to unlock value there. We also have information that the Union Square store in San Francisco is going to be sold and value unlocked there, the downtown Portland, Oregon. store, the Brooklyn store on Fulton Street, the $270 million deal there. So the company isn't as going as far as Starboard would like with a spin-off kind of the real estate assets, but they're taking it step by step and unlocking value in specific stores and specific groupings of stores, and that's where you see the optimism in the stock.

Okay, but the real estate aside, the holidays are coming up. Don't they need to have a really good holiday quarter? Well, it's interesting. So while this quarter, again, as you know, it's interesting, as we're as we said, continued a trend of poor results. They did say that the fourth quarter looks strong and they used the term improving retail trends in the fourth quarter, which allowed them to reaffirm their full year guidance. So perhaps some good news for the fourth quarter, but you know what, the proof is in the pudding. Let's see how it comes in. Yeah, and department stores in general, I mean, just that they are really struggling. You see

a lot of the folks that the cores of the world and the coach of the world just not really pushing through to the department stores. They'd rather go directly to the consumers. Graphics chipmaker, Nvidia, coming out with blowout earnings on Friday. Third quarter profits sending shares up 25%. They look good across the board. Andy, their gaming division really crushed it. Well, the gaming division is phenomenal. I mean, they are really broadened out their entire suite of portfolios and their processing units across just, not just gaming, but data centers. They have partnerships with Tesla and their driverless cars. Their AI push into artificial intelligence is really gaining stream.

So they are not going to out of the park across everything. This is a $36 billion company. It has $6 billion in cash, $3 billion in debt, generates $6 billion in sales, a billion in operating cash flow. Spends 25% of their sales in R&D. Stocks more than double. It's up 25% today. So really, things are moving in the direction, not just for them, but for that industry. So they are taking market share in a very fast-growing industry.

Coming up, earnings paloosa rolls on. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser, Andy Cross, and Ron Gross. Shake Shack hitting the trifecta this week. Third quarter profits came in higher than expected. So did their revenue.

And they raised guidance for the full year. I've got to tip the cap to them, Jason. Well, let's just go out and buy the stock, Chris. Well, clearly some shareholders were doing that because it's up more than 15% this week. Let's not. Let's not. I think this is a great example of an investment that could be good, but only at the right price. And up to this point, the price still hasn't really made any sense. But let's talk about the good, okay? I think you made a good point there in that they've turned in some very good numbers. Impressive top line growth there, 40%. Same shack sales.

Oh, please. That does exist. If you like Zillow using the word Zestimate, then you'll love Shake Shack calling their same store sales, same shack sales. Yep, that was up 2.9 percent, which is reasonable. It's more in line with something like a Panera, less in line with something like a Chipotle back in the days before the E. coli scare. But guidance for the coming year, I mean, they're seeing the same shack sales between

two and three percent next year. Most of that seems to be coming through price increases, though, less through traffic. That probably is a bit of a concern that you have to at least keep an eye on. Again, going back to the price, though, I mean, I think this is where this thing really doesn't make much sense yet. You look at what the market is valuing each same shack restaurant at. They're valuing those shake shacks at about $8.5 million per store, versus Chipotle that the market is valuing at around $5.5 million per store.

And then we get down to the market opportunity where shacks – They have milkshakes. Yeah, they do. You're right about that. Chipotle's getting ready to test desserts, right? Right, right. They haven't made anyone sick yet. I mean, I think you really have to kind of look at the market opportunity, really,

to ascertain whether this is a good opportunity as an investment goes. And Chipotle is going to open 200 stores this coming here. Shake Shack's going to open around 25 or so. So, I mean, this is just a bigger market opportunity with something like Chipotle than Shake Shack. So, again, it could be a good investment, but one where you really have to understand the value that you're getting there for the price that you're paying. And I just don't even like the stock. at these levels.

Well, in restaurant stocks, just in general, have been just really obliterated as people start to digest both the potentially fiduciary rules, which will see what happens with the Trump presidency. Those changes, but also just food costs and labor costs. Third quarter revenue for CVS health rose more than 15 percent from a year ago, but shares falling this week when CEO Larry Merlo cut guidance. And Ron, their prescription business is taking a bit of a hit. Ooh, yes. So the quarter was good, but the big problem here is that in their pharmacy benefit management business, their Caremark business, Walgreens just ate their lunch a bit.

They signed a big deal that would cut CVS out of about 40 million prescriptions next year. It caused them to lower their guidance for this year and next year. It's a competitive business by bringing that benefit management business in-house. That's good. But then it allows Walgreens to kind of remain agnostic and go after all the other benefit managers out there. that's what they've done, shutting CVS out. So that's a problem. Even with the lowered guidance, company still does well, but it's going to take a chunk out of their business. It's only 13 times,

maybe 14 times earnings based on the new guidance, certainly not an expensive stock. But with this uncertainty here, I'd take a wait-and-see attitude to see how actually the revenues and therefore the profits come in or down. Think they should start selling cigarettes again? I do not. Shares of price line hitting a new all-time high this week after third quarter profit and revenue came in higher than expected. Somebody had a good summer, Andy. Yeah, they did a great summer.

I mean, when you think about what they're doing with their room nights were up almost 30%, their gross bookings up 25% for the quarter. Revenue is 19%. One challenge they did have, Chris, is they bought open table back in 2014 for about $2.6 billion. And they wrote down 940 million of that. Ouch. During the quarter. So a very large chunk of that, which just kind of goes to show you when you think about companies buying other online companies for a lot of money with a lot of goodwill.

That was more than half their goodwill on price lines balance sheet. So they really had a tremendous quarter. They can really show their business model doing very well, especially international. But they made this acquisition maybe stretch a little bit on the price, and they're showing the consequences for that right now. What happened to TripAdvisor this week, Jason? The stock got hammered, Chris. What do you mean what happened?

No, I mean, it really did. As a shareholder here, it hurt a little bit. And bottom line, the numbers weren't all that bad, but really management laid out in the call that this moved to instant booking where TripAdvisor is becoming more like price line and an OTA. It's just going to take a little bit longer. And the problem is, if it's going to take a little bit longer and it doesn't monetize quite as nicely as desktop does, well, the market just isn't really known for its threshold for patience. And so I think a lot of money left TripAdvisor, realizing the 2017 is going to be a big investment year. It doesn't mean that the thesis is busted or the company is not pulling through on its promise.

I mean, all signs point towards success here. It just sounds like it's going to take a little bit longer. But at the end of the day, it's a lot to build out a network of users like that with that content. And TripAdvisor has built up such an amount of trust with its users that I think that is its true asset. And honestly, as an investor, I can sleep at night knowing that. Well, it's interesting. Priceline and TripAdvisor have a very tight partnership. And price lines of business that generates almost $4 billion in operating.

profits and spends $200 million on CAPX and they buy back a ton of stock. So they have a lot of wealth to put into defending their territory, and they will do that. Nordstrom's third quarter profits came in 60 percent higher than analysts were expecting. Shares up a little bit on Friday after the report. Help me out here, Rod. This wasn't a situation where they beat by a penny. They crushed the bottom line. They crushed the bottom line. It's partly the result of the fact that their big anniversary sale was in this quarter, the third quarter versus last year it was in the second quarter. If you start making some adjustments, it brings down how good it actually looked.

But still, this is the second quarter in a row of decent results. The Rack division and their hot look, if I'm pronouncing that correctly, continue to be the big growers there. Sales were up 10% in that division. That's nice to see. The full price stores aren't doing as well. But still, there is growth there. negative, they had a book $197 million write down of their trunk club, the men's business, which they had acquired for $350 million in 2014. Obviously, paid a bit too much for that puppy. But that business is actually growing. It's just that they paid too much, unfortunately. Company raised guidance. A company looks like it's doing well. Stock's not expensive here.

It could have been worse. They could have bought Open Table and have to write down something like that. All right. Ryan Gross, Jason Moser, Andy Cross. Guys, we'll see you a little bit later in the show. Up next Next, we are heading to Singapore to get a global perspective from David Kuo. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. David Koe is a regular financial commentator for the BBC.

He's also the director of Motley Fool Singapore, which is where he joined me from now. David, thank you for being here. Good morning, Chris. What was the reaction on the other side of the world to the election here in the States? Well, I think most people are listening in America and many people, over here were just glued to their television set. And then as each result came in, people were just in. What the results come in, what they were hearing, tiny little dots on the on English airs as well. People were then piling into gold. In that sense, did it remind you

of an event earlier this year with the vote in the UK for Brexit? As on the rest of the world. I mean, Brexit, I think most people were shocked also. But then they kind of knew that Britain was a fairly localized in the Donald Trump, the rebound industry, the market would rebound, but that quickly as it did in America, so busy that I didn't really get an opportunity to buy, because my first instinct to that case, because the repout came so quickly that you would never have even realized anything happened in the market. One of the big lessons probably too well, it just reacted to the sort of wondering. I was curious how you spent the day after the election, and the reason is because I watched an interview that you gave on CNBC on Monday, in which you were very clear about how

you were completely unconcerned as an investor as to the results of the election in the United States, because you looked at your portfolio and thought, I see a lot of stocks that don't really have any great bearing on who occupies the White House. And I still don't be affected in any way by portfolio. And I just never had an opportunity to be calling on that, rather than a selling opportunity. It should be reacting to the opposite way it's going to be affected. Let's move away from the election for a moment. When you look at emerging markets, they've done better in 2016.

It's been a while since emerging markets have had a good year. But they've done better in 2016, certainly than the U.S. market has done. I'm curious as we head towards the end of this year, if there are any markets or particular countries that are on your radar as an investor. East Asia. They knew they had to learn English. And then we had the 1980s when we got the Japanese land emerging markets here in Southeast Asia is that they'll look for new markets.

So emerging markets over here, Chris, is that we are survivors. All right. Last question. And then I'll let you go because I know that your business day is just beginning. before you were a highly respected financial commentator, you were a bookmaker back in the day. And your former colleagues in the UK have had to pay off some really big long-shot bets this year. Donald Trump, the Brexit vote, Leicester City winning the Premier League. I'm curious, when you saw those long shots having to be paid off, what was your reaction,

Were you just happy that you were no longer in that line of work? Or did you feel some sort of commiseration with your former bookmaking colleagues? If you want to get insights into what's happening in Singapore's stock market, you can get David Quo's free investing newsletter called Take Stock. You can sign up for it just by going to fool.sg. That's the Motley Fool's website in Singapore. Fool.S.G. And you can sign up for Take Stock.

David Quo, always good to talk to you, my friend. Thank you so much, Chris. You have a great day, and we're looking forward to another great time. Coming up next, we'll give you an inside look at the stocks on our radar. You're listening to Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So, no buy ourselves stocks based solely on what you hear. Welcome back to Motley Full Money, Chris Hill here in studio once again with Jason Moser, Andy Cross, and Ron Gross. Before we get to the stocks on our radar. A couple of things real quick, guys. A little bit more earnings from Wayfair, the online

home furnishings company. They didn't just lose money in the third quarter, Jason. They lost four times the amount of money that they lost a year ago. Shares fell nearly 20 percent Tuesday morning after the report, and by Friday they had finished up about 7 percent for the week. What in God's name is going on with this company? It is a very volatile holding, and that is something that I think investors need to accept with this company, at least in the near term. Because as you noted, still losing money, I think really the most important thing they can do right now is figure out a way to at least get profitable. The big question really is all down to just, when they pull back on their

spending to grow the business and acquire customers, are they going to have enough brand loyalty to keep that wheel spinning and grow this business? So for Wayfair, it all boils down to the percentage of orders that come from repeat customers, because as they continue to pay to acquire new customers, that's expensive. They eventually want to have these customers coming back for more. They don't have to pay for those acquisitions, and it makes the business more profitable down the road. These numbers are trending in the right direction, but it is a difficult business to set up. It requires constant spending to build out that infrastructure. It is a very Amazon-like business model in that regard. I'm really conflicted with this one. I like the company. I like

leadership. I like the opportunity there. But when we model out the numbers, there is a big question mark as to how big they can grow this consumer. base and how many orders are these consumers going to place in a given year, given that it's home furnishing. So, very competitive industry. Obviously, Amazon plays into it in some degree. Just no easy answer with this one. Our email address is Radio at Fool.com from Halstead Frost in Austin, Texas. Can you tell listeners what you think of Periscope versus Facebook Live? I'm just trying to determine which has a brighter future. I think, I mean, I'll just start. I think the future's

pretty bright for both when you think about streaming video. The quality is certainly good on both platforms. Yeah, I tend to agree. I mean, I think Periscope was one that sort of came in there and knocked Mirkat out of the picture in the very beginning stages of live streaming. To see Facebook live come on and then not really knock out Periscope. Periscope has only gotten stronger. I think that's a testament to the strength of both networks. Facebook, obviously, having a very large network. Twitter having a big network. its own right. I foresee both of these concepts doing very well in the years to come. Is this like an ABC, CBS, NBC thing someday? We're talking three or four key networks

when it comes to streaming. I absolutely believe that, yes, more and more people will be viewing their content in this way. So, like, Twitter, for example, actually has an app on the Amazon and Apple TV now. You could go watch sports on TV. I think Twitter and Facebook and others, Amazon even, are really helping sort of reshape this media space in the 21st century. And they are going to be challenging those networks that we traditionally grew up with. All right. Let's get the stocks on our radar this week. And we'll bring in our man, Steve Broido, from the other side of the glass to hit you with a question. Ron Gross, you're up first. What are you looking at this week?

Well, I am sorry to sound like a broken record. But in the age of Trump, I have to go back to Titan International, TWI, maker of industrial tires and wheels. Stock is up 190 percent this year. But if you look at it over five years, it's still down 50%. So it's good to get some context there. So Trump has a $1 trillion infrastructure plan that he says he's going to do. We talked about it earlier. Even if it's not even anywhere near that, if it's half, it's a quarter of it. I like what that means for these types of stocks. Even before this, the mining agricultural industries were looking up. Some of the infrastructure was looking up. I think there's at least 40% upside left in this stock, potentially significantly more, depending on how these end markets

rebound. Steve, question about Titan International? Knowing its government and it's slow moving, how long, let's just say large infrastructure bill was passed, how long does it take to trickle down to Titan International? It would probably take a while. You'll start to see it show up in companies like Caterpillar, which would be a great way to play this as well. It'll take a while, but the stocks will reflect it in advance of that. So shouldn't Caterpillar? will really be your stock. If you want a small cap or a microcap, even, you go with Titan.

If you want a behemoth, go with chat. Andy Cross, what are you looking at? Transdime is a provider of aerospace parts, and we found it in Hidden Gems 2006, one of the sub-billion-dollar company around that. It's at $14 billion today. It's been a great winner for us. They report earnings next week. The aerospace products they provide to all different kinds of companies who make air

jet parts and equipment, 90% of their revenues are tied to products that are specific to TransDime and about 60% of their sales are aftermarket's parts. So when I look at the aerospace market, I look at more and more growth in aerotravel, the more demand that we're going to have for higher efficient products that fly through the air, I think Transdime's a good play to be. Steve? Can they make something to make planes quieter? Is there a part that they could put in that just, it's incredibly loud when you're in a plane? You know, yeah, there's a lot of those, a lot of the new carbon fiber parts that go into the new Dreamliner 707 are designed to help not just fuel efficient, but make the experience all that better. Trans-Ime could play there. And the ticker?

T-D-G. Jason, what are you looking at? Home Depot earnings are coming out next week. Ticker is HD. And this is really proven to be one of the more Amazon-proof businesses out there. They benefit from all weather, whether you rent or own your home. You talk about a large market opportunity. And this is the biggest footprint out there, really. These guys have actually grown earnings per share over the last five years and an annualized rate of 21%.

And when you think about that top line growth was only 5%. They were very good at bringing things down to the bottom line. I suspect that's going to continue. The stock is down year to date. But the longer you stretch that timeline out, it is just really phenomenal. How bigly shareholders have won with Home Depot. Steve? What's the last thing you personally bought at Home Depot?

Wow. Gee whiz. That's why the stock's down to your. to date. I'm going to have to think about the one. Probably some paint. I wonder in the age we saw interest rates tick up here. Mortgage rates are higher than they were. I wonder if that hits Home Depot a bit for at least the near term. I don't think in the near term. I think longer term that's perhaps something to keep an eye on, but I think it's going to take so long to get those up. What do you like, Steve? I'm going home depot. I just bought a plunger there.

Does that count, Steve? It sure does. That's going to do it for this week's show. Thanks for listening. We'll see you next week.