Motley Fool Money - What's On Your Watchlist?

Episode Date: September 13, 2022

If you're a long-term investor, today was a good day to go shopping. (0:21) Asit Sharma discusses: - Stocks, across the board, falling in response to the Consumer Price Index data for August - Jay Powell, and the increasing likelihood of a third consecutive rate hike of 0.75% - The importance of having a watchlist of stocks - Buying great businesses at lower prices (11:10) Tim Beyers joins Alison Southwick and Robert Brokamp to discuss the various businesses "tech stocks" actually consist of. Stocks mentioned: SPY, QQQ, AMZN, DIS, GOOG, GOOGL, JNJ, NVDA Host: Chris Hill Guests: Asit Sharma, Alison Southwick, Tim Beyers, Robert Brokamp Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill joining me today, Motley Fool Senior Analyst, Aza Charma. Thanks for being here. Chris, thanks as always for having me. So, this is one of those days, isn't it? This is one of those days with the market. Consumer price index rose 0.1% in August, month over month, increase compared to July. And that 0.1% increase, Asa, has sent stocks as a group straight down. As you and I are speaking, the Dow Jones Industrial average is down nearly 3%.

The S&P 500 is down 3%. And the NASDAQ is down just more than 4%. Where do you want to start? Because this is all because the Fed is meeting next week, September 2,000. 20th and 21st, and the powers that be on Wall Street are expecting, not incorrectly, they're expecting a third consecutive rate hike of 75 basis points. Yes. I mean, Chris, first of all, look, it's the power of small fractions, as you note, right?

If you look at the big picture, nothing much has changed since the hot readings of the summer. Just a marginal, sequential bump, I mean, really small. but this reminds me of an old dire straits lyric from the song espresso love. At the end of this song, the narrator is talking to, in those days, I know what they called them, but this would be a breista today. And he's asking about his espresso, and he says, is this another one just like the other one? And today, investors are sort of waking up thinking, look, we all see this three-quarters of a basis point hike that's in the car.

September, but we might be getting another one of a similar magnitude in October. Previous forecast, we're saying, okay, we would have three quarters of a basis point raise, and then maybe for the rest of the year, we'll step down. Maybe it'll be like 1% total. This throws it off. You know about this increase? What's worrying investors is that when you pull apart two parts of the CPI, which are a little bit volatile, so that's energy, of course, and

food. The stuff underlying that looks hot. I mean, rents are rising. The cost of medical care is rising. We saw that used car prices are finally starting to fall, but now on the flip side, new car prices are rising. So there's all this underlying pressure on everything from food away from home to commodities that's under the surface bubbling. And even though gas prices, tank prices fell, say five bucks on average in the US to about three bucks 70. Over the past several months, it's been offset by all these other pressures. I'm glad you mentioned the gas prices, because I think that that is one of those data points that gets pushed out so often, not just in the financial media, but mainstream media as well. And so I can understand some people being thrown

by the increase in inflation month over month, just because the thing that we've all had right in front of us for the past, let's just call it, 10 weeks, it may even be more than that, but the price of gas has just been falling steadily day after day, week after week, for more than a couple of months now. That being said, am I wrong to think that what's happening in the market today is a buying opportunity. I mean, even if you're just looking at index ETFs, like the QQQ or the S&P 500 ETF, you can get it for a few percentage points cheaper than you could yesterday. Yeah, Chris, I saw you at Fool Fest, our Motley Fool celebration a few weeks ago. And before that

summit, I was looking over my own portfolio, what I'd bought a lot of this year. And it's just that. I think the thing I've most bought is the QQQ alongside a lot of individual stocks. Because this environment is starting to play in the favor of the patient investor, who can buy the index when it gets beaten down on days like this? The only issue is that we've had so many days like this, and the read on inflation, the fact that this will only exacerbate interest rate pressure, means that we don't know when this period's starts to come to a close. So, you know, it looks like we'll be for another, in for another quarter or two of this type of pressure at the least. Federal Reserve Chairman Jerome Powell

is determined. He's adamant that he wants to see several months of cooling inflation before he starts easing off that pedal, that stern pedal of driving up the prevalent barring rates. So what this means is, prices are. are very elastic. We could see inflation start to cool pretty quickly, but the Fed will take its time to be sure that that's not a transitory effect and that inflation is indeed going down. So investors might be in for another couple of quarters of some rough weather, but I'm with you. I mean, look, why not keep buying things like the QQQQ, other ETFs and sectors that an investor finds attractive and just slowly build up positions?

Once you take that and telescope out, five years from today, 10 years from today, I think most investors will be in a good shape who employ that strategy because the underlying fundamentals of the U.S. economy are actually still pretty strong. And if anything, the long-term trends of productivity in this economy, the fact that we are trying to change to a more climate-friendly economy, etc. I think all that plays into the hands of the long-term investor. What we're seeing in the market today reminds me of something that our colleague Matt Argusinger tweeted out early in the summer. I believe it was early June. And he wrote on Twitter, I'm not sure when or how this all ends, but I would view the following as can't miss generational buying opportunities.

And he went on to list several stocks, basically saying like, you know, I'll just pick a couple of examples. And again, this is Maddie's opinion. This is not guidance. Insert all the requisite disclaimers. But Maddie looks at if Amazon falls below $90, if Disney falls below 80, if Alphabet falls below 95, I would just point out, because I looked at his list, and I was like, wait, where are these stocks? is within about 10% of being below $95 a share. It's down today. And, you know, he didn't list

companies like Nvidia and Johnson and Johnson, but Alphabet, NVIDIA, Johnson, all three of those, huge companies, stable companies, profitable companies, they're all within a couple of percentage points of their 52-week low. So it's not just the broad-induced. index, ETFs that look like buying opportunities. There are some really great companies with bright futures ahead of them that are on sale right now, Ascett. Yeah, Chris. I mean, there are so many things we can unpack from that great tweet.

The first being that industry leaders with big balance sheets and a lot of inbuilt demand are the first to lead companies back out of a period like this. So buying them makes so much sense. The second point that Maddie's trying to communicate is, you don't get these opportunities every day. Remember, after the Great Recession for what, 10, 11 years straight, you had very few opportunities to buy great stocks at all time lows because they were headed up. Also in this, I think what he's pointing out, I'll quote from his exact tweet that you sent me, what are you watching at the end? But I'll tell you, Chris, I actually misread that.

I was in a little bit of a hurry, and I thought it said it first, what are you waiting for? But the point is well taken. What are you watching? Which plan are you making in advance? Because we know, you and I know, as investors, that when there's so much red ink on our screens, there is something psychological that starts to pull us away from that buy button, which is, wow, can this go down further? How bad can this get? And that sometimes is a mistake to get caught in that trap. It's a great reminder. Not only just, this is why you have a watch list, but to the point you just made, which is so important, I said, don't move the goalpost. If you have a watch list and you go so far as to say, all right, this is the price I'm going to

put. If this stock starts trading below this price I'm going to buy, don't make the mistake that I have made in the past and hopefully we'll never make again. But I have, I've absolutely made the mistake of having a watch list, putting a price in a stock, and then when it falls below, I move my price target even though. I'm like, well, wait, I want to try and time the bottom, which is impossible to do and is just a dumb mistake that, again, hopefully I'll never do that. Yeah, same. I've lost out so many times on trying to be a perfectionist.

You don't have to be a perfectionist in this environment. I've got this great retweet I'm waiting for now that you've sent me what Maddie tweeted out on the 10th of June 2022. Once these prices hit this level, I'm going to tweet back out. Maddie, yo, did you buy? Oh, I'm knowing Maddie, he's on top of it. As a Charmer, always great talking to you. Thanks so much for being here.

Same here. Thanks so much, Chris. Speaking of technology stocks, Tim Byers joined Allison Southwick and Robert Brokamp for an over overview of the industry while recognizing that the term tech stocks is kind of misleading. Last week, Motleyful analyst, Nick Seiple, gave us the Cliff's notes on the energy sector. And this week, we're joined by Tim Byers to share his essay, What Tech did over the summer break. Tim, thanks for joining us. Thanks for having me.

So, since we have a back-to-school theme going here, it only makes sense that I crammed for today's taping and decided to Google top U.S. tech companies by Market Cap. And no list is the same. As some said, it's Apple, Microsoft, Alphabet, Amazon, Tesla. Others had Nvidia, Broadcom, and Cisco in there. So it feels like a tech company is just whatever we collectively decide as a people is a tech company. That is factually correct.

It's also, too, like the ones that are classically determined as tech companies, like Apple, Microsoft, and so forth. They switch positions so much. It's a little bit like, you know, your old arcade video games, and you'd be one-upping each other, and someday Brod be at the top, then I'd be at the top, and Allison, you'd be at the top, and we'd be totally one-uping each other. That's kind of the way the market cap game goes and tech. But yes, it is absolutely true that tech is a terrible way to talk about investing in technology-powered companies because investing in semiconductors is really different than investing in consumer-facing software, which is really

different from investing in enterprise software, which is really different from investing in server hardware and so forth. So the dynamics of each of these businesses is really different. So that's the beautiful thing about it. One of the reasons you want to to be an investor in these tech-powered companies is because they all get lumped together, and they all have really different economics, which means the level of misunderstanding in the space is really high. And when the level of misunderstanding is really high, the level of mispricing is also high. So sometimes that is unfavorable. The stocks are really priced at a premium. Other times, it's really favorable to investors. Stocks are really underpriced because we just

don't give them enough credit for the amount of growth that they can achieve. But it's almost universally true that the term tech investing is so misleading that it makes the sector attractive to invest in, if that makes sense. Oh, yeah, no, because it seems like one of the reasons we got to this place where the tech sector is just a rattlebag of companies is because, oh, let's say you make a car, Tesla. And you'd rather be thought of as a tech company and not an auto manufacturer because the market is going to reward you if you sidle up next to Apple and other companies like that rather than Ford. So you market yourself as a computer on wheels, even though, I mean, let's be honest, you make cars. Right. Yes. And we see this a lot. We see this a lot. Probably the most ridiculous example of this I have ever seen.

And if you remember in 2019, when WeWork was a thing before it became the subject of documentaries, it put out an S-1, which is essentially a prospectus. It says, we're going to go public. We're going to sell stock. And in that prospectus, WeWork said, and I am not making this up, they said, we are a SaaS company. We sell space as a service. No, you don't. No, you don't.

I'm sorry that you don't. You don't sell space as a service. What you really do is you own chairs and desks and you serve coffee and people come in and they work and pay you a little bit of rent. That's what you do. You don't sell space as a service. Stop it. Yeah. So being a tech company was cool, right? And all these companies were trying to convince the dormant to let them into the club so they could party with, you know, Apple and Amazon, all these big growth companies. But then so here we are now. The party is kind of ended a little bit, or at least been put on pause. So what's been going on in tech lately? Well, I mean, I think the headline here is that tech has finally hit a bare market. And that is

really interesting because it has been the life of the investing party for such a long period of time that I think a lot of investors thought that could never happen. In fact, I mean, this is a little bit bold to say this. And I think, you know, Bro may want to correct me on this, but there are some investors that got so warped around this that they started to think of tech as a safe haven, meaning that it could just never go down. And that has obviously changed. The story now is that tech was overpriced. It was dramatically overpriced in 2020. The longest honeymoon ever is finally over. Investors are starting to divorce themselves from some of these stocks, and especially stocks where these tech power companies

have yet to produce a profit, those companies are dramatically out of favor right now. So you get companies that are reporting good results. They may report some real revenue growth, but if their guidance shows any hint of a slowdown or if expenses are higher than expected, the stocks get absolutely whacked. We saw this really recently with MongoDB, which is a database company. They had some really good results, but they reported that their earnings per share guidance was going to be their losses, are going to be bigger than expensive, bigger than expected, because they're going to spend more money on their operations, investing more in sales and marketing, investing more in R&D. The market didn't like that. It took the stock down by 20%

because there is a belief that only the tech companies that are right now navigating to profits are the ones that are going to survive the meltdown that's coming. That's not really true, but that's kind of where we're at, Allison. So if I'm understanding you correctly, it's this sense of like a reckoning is coming. Absolutely. And so that's why people are cooling off on tech and not giving them as much of a runway as they would have in the past. Absolutely, yes. And not just that the reckoning is coming, but that the reckoning is here. So we have to keep these tech stocks in our portfolios on a very tight leash. Whereas before, hey, the water's warm. Come on in. Everybody join the party. And that's not where we're at right now. So you have a lot of good companies that are getting tossed by the wayside along with companies that were dubious and questionable. We're not really differentiating between the two right now, which is an interesting place to be. If you're an investor, when that starts to happen,

you should pay attention because it means there's a better than average chance that some quality companies will start to go on sale. All right. So it sounds like you feel like there are some opportunities here that investors, I mean, here at the Motley Fool, we're long-term bottoms up investors. There's some opportunities here. So what are some of the guiding investing principles that you follow or you suggest for our listeners? Well, if you're going to search for quality. This is the hard part. So tech investing, even though I dislike that term, I use it because there's a lot of opportunity in the sector. The sectors are very different, and because they're very different, and because there's a lot of confusion, there is opportunity.

But if you want to find those opportunities, Allison, you're going to have to go under the hood. And there's really no getting around that. So you have to study things like the key metrics, that a lot of these companies report and get to know what they are. So examples of that would be remaining performance obligation, which is kind of, it is an official accounting term, but it just doesn't really get used outside of the sector, like large enterprise software companies. And essentially what it means, it's an accounting way to calculate what effectively is backlog. A company, let's say, has $2.5 billion in remaining performance obligation. You just think of that as backlog. It's basically revenue that can't be recognized yet, but it's contracted. So they have a bunch of customers who said,

yeah, we've signed a three-year deal with you, and we're committed for those three years. And so the value of the two years that they aren't yet in, that value gets computed into the remaining income performance obligation. It's an obligation that the company has to perform in order to get the money. And this kind of stuff, it tells you, particularly in the case of like a subscription business, how healthy it really is. Like, how big is the backlog? What is the dollar-based net retention rate? Are they growing their relationships with the existing customers? Because when the profits and the cash flow aren't there yet, you kind of have to go under the hood. and determine whether or not this business is showing signs of growth, healthy growth,

and growth such that you can see margins increasing over time and maybe a future where this is generating a whole bunch of free cash flow, because ultimately they do need to get there. So, yeah, you've got to pay attention to the metrics. The one bugaboo I'll give for investors, if you're going to follow those metrics, follow them historically because one of the things that sort of tips, it's a giveaway of a company that is telling a really good story, but the story may be a little bit weird, is if they

suddenly change the metrics, oh, you know what, pay a lot of attention to dollar-based net retention rate. Ah, you know what? We didn't really mean that. You should really look at the expansion rate. When those things start to change in the goalpost shift, that can be a bad sign. Yeah, I imagine there are a few traps for investors to avoid considering, you know, the kind of high-risk, high-reward nature of the sector. Are there any other ones you'd tell people for the work here for? Yeah, one of the big ones is particularly for the big companies. So I'm thinking specifically of Cisco, IBM, SAP, older companies that have a lot of cash. And what they do is roll up companies. But sometimes it's okay. If you acquire a fast growth company and tuck that in,

there's really nothing wrong with that. SAP's been doing a lot more of that lately. Cisco, though, tends to buy a lot of companies that are, sometimes they buy growth. Other times they buy companies that are not doing all that well. And they're like, well, it's really cheap and we can bring it in and we can roll it up. A bunch of rolled up bad companies is still just a larger bad company. So you really don't want to be paying a lot of attention to a large company that generates a lot of cash, but is doing so by vacuuming up businesses that weren't really doing that great anyway. So I don't love the roll-ups, Allison.

Those aren't great. I much prefer the companies, like say a data dog, which find ways to use their R&D dollars well, and they come up with new ways to serve their customers, and they grow their revenue that way. That's much better. That's organic growth, and I like that a whole lot more. Let's say you want just more broader exposure to the whole sector. Bro, I'm going to tap you in here. Do you have a favorite fund here? Well, I would say the first principle is just to look at what's in an ETF to make sure it's getting what you want. So, just for an example, two of the biggest technology ETFs.

One comes from Vanguard, Vanguard, VGT, the Spider ETF is XLK. When you look at the components of these ETFs, they're almost identical. And first of all, they're dominated by Microsoft and Apple. Makes up more than 40% of the assets in these ETFs. And then among the top five are Visa and MasterCard, which are not what you would normally consider to be traditional tech companies. So, I think a couple of other things to consider might be some other ETS. For example, the Vanguard growth ETF, VUG is probably more like what people would think of

as a technology ETF. It's got Apple, Microsoft, but also Amazon, Tesla, Alphabet, Meta. But even that has some quirky things. Like its 10th largest holding is Home Depot. But that's one that I own. And then, of course, you have to bring up the NASDAQ and the QQQ, which is the ETF that follows the NASDAQ 100. similar to the Vanguard growth ETF, but even that's a little quirky. Among its top-ton

holdings are Pepsi and Costco. Those are some ones to consider. I would just look at the holdings and the weightings of the companies and decide which ones you think are better fit into your portfolio. So let me add one more thing, Allison. One of the beautiful things about tech, particularly right now, is there are some big companies that generate boll loads of cash flow that pay really good dividends. And so tech is a place right now where you can get some decent growth and some really great sustainable growing dividends. And I think those dividends are safe, and I think they'll grow over time. Probably the best of them, Bro already mentioned, is Microsoft. Amazing company, growing pretty fast, has a great dividend, a long history of growing that

dividend, and it's not the only one. Taiwan Semiconductor pays a dividend. A very well-heeled company that's growing pretty well. So I think if you're going to invest in tech, don't forget that there are really durable, resilient growth companies that will pay you to invest in them. What is better than that? All right. Next week, we're going to be joined by Emily Flippin, and we're going to cover the state of the consumer goods sector. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.