Which stocks have true potential for upside this year? What industries and trends should investors be watching? Which CEOs are on the hot seat? And which stocks should investors avoid?
Aaron Bush, Matt Argersinger, Jason Moser, and Ron Gross discuss 20 potential investing opportunities in the year ahead and make some reckless predictions. Plus, we discuss Apple’s latest stumble and upcoming IPOs we’re excited to see.
A full transcript follows the video.
This video was recorded on Jan. 4, 2019.
Chris Hill: It’s the Motley Fool Money radio show! I’m Chris Hill. Joining me in studio this week, senior analysts Matt Argersinger and Aaron Bush. Happy New Year, gentlemen! It’s our 2019 preview. We’ve got stocks to watch, stocks to avoid, CEOs on the hot seat, and more. And, of course, a few reckless predictions, as always.
Before we get to the 2019 preview, though, I think we have to talk about Apple (NASDAQ:AAPL). Shares of Apple falling 10% on Thursday after CEO Tim Cook warned investors first quarter revenue was going to be about $5 [billion to] $8 billion lower than previously expected. Several reasons for that, Matty. The trade war in China, the economic slowdown in China, the battery replacement program that they had last fall. This was still a pretty shocking development.
Matt Argersinger: Lots of moving parts, but you’re right. This was pretty bad. If you look back to their guidance in early November, looking for between $89 [billion and] $93 billion in revenue. To come in, then, at $84 billion, $5 billion below the low end of your guided range, that’s a problem. CEO Tim Cook said that really 100% of the miss was due to China and a contraction in the smartphone market there. That’s a good excuse. It’s probably the right excuse. Investors have been questioning whether or not the iPhone, especially the latest versions of the iPhones with the high price tags, could really penetrate the highly competitive smartphone market in China. I think we’re starting to see the fact that no, that’s not really the case.
Aaron Bush: I don’t think it’s that surprising, actually, that Apple has China issues. I was just thinking back, four years ago, when Matt and I were talking about China in the context of our Supernova portfolio, talking about opportunities and concerns, China was a big thing we were talking about. At the time, we realized that China is a big opportunity simply because how many people are in that country, but we didn’t necessarily expect it to play out the same way as it did in the U.S. Since then, the stock is about roughly flat with the market, which is interesting.
I think we started to see the cracks in the foundation about two years ago. About that time is when I started studying Tencent, which owns WeChat. It made me realize that iOS is far less important in China because WeChat is an in-app operating system that people do everything in. So, the same type of competitive advantage that Apple would have in the U.S. with iMessage, Notes, various services, that doesn’t exist in China. It showed in the data. At the time, the retention rate, people who would have an iPhone that would buy another iPhone, outside of China it was over 80%. In China, it was 50%, which is essentially a coin flip.
I think now, because of the economic turbulence that’s starting to happen, trade wars, slowdown, we’re starting to see that play out at an accelerated rate. People who would be the Apple buyers either already own them or did own them. Upgrade cycles are longer, and retention is still sub-optimal. Apple just has mediocre market share, and I think that’s not necessarily going to change.
Argersinger: I agree. As long as the iPhone is such a large part of Apple’s core business, they can talk about services all they want, but this is still a product that’s about 70% of revenue and the majority of operating profits.
Now, I will say this, because we’re positive people here at the Fool. Coming into this report, Apple was already down about 40% from its high. Granted, it had a horrible day this week that took it down even further. But even at the reduced earnings estimates now, you’re looking at a stock that’s only trading about 11 to 12 times earnings. Certainly below the average market multiple. Now, if earnings come down further, the stock could certainly follow suit. But it’s hard not to call it cheap right now.
Hill: That’s the thing. Tim Cook talked about how he hadn’t seen the December numbers, therefore there’s no way he’s seen the January numbers, because they’re not in yet. Their first-quarter report comes out in early February. If you’re looking at this stock, and you’re thinking, “Boy, it looks cheap,” do you buy here? Or you want to see what the actual numbers are before you put down a little money to buy some stock?
Bush: Oh, I don’t know. It sounds like another coin flip to me. We don’t really know. I do think that the valuation is somewhat compelling. You’re betting that iPhone sales stabilize, and you’re betting that the services segment can become much more than 15% of revenue, which it is now. I think that most people think that is the case. Or, at least around here, that’s the bullish stance.
Personally, I have some more questions. When you have a monopoly taking 30% of every single transaction that goes on your ecosystem, regulatory issues will one day be a concern. The same thing that we’ve seen with Alphabet, the same thing we see with Facebook (NASDAQ:FB). One day, those same headlines are going to be going on with Apple, too. And then the services narrative will slowly not seem so amazing anymore.
Hill: Alright, let’s get to our 2019 preview. Aaron, I’m going to start with you. What is one industry you’re going to be watching this year?
Bush: I’m really interested to be watching the ride sharing industry. With Uber and Lyft, and maybe even DiDi, which is in China, IPO-ing in 2019, it’s really exciting that public market investors will finally have access to this new, massive, quickly growing industry. I’m excited to see what the numbers look like. They probably won’t be great from a profitability perspective. But thinking about transportation as a service, and what that means beyond just ride sharing, what it means for logistics with food, and are they going to buy more bike and scooter companies? That type of thing. I’m really interested to hear more about that longer-term game plan. We’ll learn a lot about that in 2019.
Hill: Matty, what about you?
Argersinger: It’s always interesting, but I think especially so this year, I’m going to be watching the social network, social media space. We’re already seeing for the first time ever a real, legitimate slowdown in user growth and usage rates, especially if you look at the core Facebook platform. My questions are, how does Facebook, how does Twitter, how do these companies solve for all the privacy risks that people seem to be somehow aware of these days that they weren’t aware of years before? How do they prevent all the vile and deceptive behavior without damaging free speech and freedom of expression on the platforms? These are big challenges. Throwing money and bodies as we’ve seen Facebook do, I’m not sure that’s going to solve it. It’s going to take a lot of innovation. I don’t doubt Facebook and Twitter can do it, but I think there’s a real chance we actually see a tipping point in 2019 where the powerful network effect that has sucked in so many users over the years to these platforms starts to weaken, and we start to see meaningful declines in time spent on the platforms. I think it’ll cause a reset of the businesses.
Hill: In terms of trends, Aaron, what’s got you excited in 2019?
Bush: Augmented reality. I think it’s been a long time since we’ve had a big new consumer-facing technology to invest in. I have a hunch that AR, and probably VR associated with it, is going to be one of the next big waves, even though some of the hype around it seems to have fizzled out. I might be off by one year, but 2019 could be the year in which good AR products are revealed by at least one major tech company, probably Apple. For Apple, it makes sense. They’ve been acquiring companies with AR tech since 2013. They released their AR kit, their developer toolkit in late 2017. They have all the pieces in place, controlling the hardware and the software, plus the developer community to make it happen. They probably recognize that winning over the AR market might be as big of a deal one day as winning the smartphone wars was.
I’m a bit iffy on timing, but I’m really excited to see the pieces start to come together. You never know; Apple might have a big AR glasses or something announcement and late 2019.
Argersinger: So you’re saying Apple has a chance?
Bush: I’m saying that they need to do this. Technology is going to shift past smartphones. Services won’t be enough. Fingers crossed.
Hill: The cash that Apple has on the balance sheet, that probably also helps them sleep at night.
Argersinger: It helps a little bit.
Hill: In terms of trends, Matty, what about you?
Argersinger: Big trend this year, the past year already but even bigger now this year, sports betting taking off. I’ve been known to place a bet or two in my time. I think there are broader implications for the economy. The world is far more efficient, far more innovative when it becomes gamified. A competitive marketplace of ideas and dollars that are wagered, inefficiencies tend to get streamlined out.
It’s interesting. If you go back to this fall, you could place real money on which party was going to lead the House of Representatives after the November election. You could have placed money on where Amazon (NASDAQ:AMZN) was going to open its second headquarters. We talked about that on the show. Imagine betting on things like what the weather is going to be like tomorrow, who’s going to succeed Warren Buffett as CEO of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), what’s the over and under on the minutes it’s going to take for Domino’s (NYSE:DPZ) to deliver my pizza. These might seem like silly things to bet on, but when you’re wagering real dollars at scale, it tends to be incredibly informative to the marketplace. It makes the economy more efficient. I’m excited about all the innovations that I think are going to come out of sports betting, especially when it becomes so much more of a mobile application.
Hill: One of the ripple effects that we saw in 2018 in terms of sports betting and the legalization played out in media. In the subsequent months, pretty much every major network, both on the regional level and on the national level, started to roll out programming aimed specifically at betting.
Argersinger: Absolutely. You see it all the time now.
Hill: Aaron Bush, what is a stock — or an industry; you can go broad if you want — in terms of upside for investors? Let’s face it, it’s been a volatile couple of months here. We’re looking for some upside. What do you have?
Bush: I’m going to go big and then narrow down. Software-as-a-service. The past two years have been huge for emerging software companies. But I do think this is an instance in which winners will keep on winning, and a lot of these stocks have been beaten down in the recent turmoil, too. Unlike the consumer-facing innovation, which is occurring mainly in start-ups and the massive tech companies, there are tons of great options to invest in small and mid-cap software companies with lots of room to multiply. Some of these will turn into the next Oracle (NYSE:ORCL) or Salesforce (NYSE:CRM). A basket of three stocks that I have super-high conviction in that I think will do well in 2019, definitely beyond: Twilio (NYSE:TWLO), which is a leading communications platform; Alteryx (NYSE:AYX), which is a leading data blending and analytics platform; and MongoDB (NASDAQ:MDB), which is a next-gen database services company. All of these companies are growing super-fast, are dominant in what they do, have very little competition. At scale, they’re going to be producing ridiculous amounts of cash flow. I’m super excited to see what these companies do, even though they’ve already been hyped in the past years.
Hill: Also, a fun basket of names. It’s fun to say Twilio. What about you, Matt?
Argersinger: I’m going to jump way out and talk about an entire sector. Real estate has really underperformed recently thanks to, as you’d expect, higher interest rates. Homebuilders especially have been really hit hard. But the sector itself is what you want to have some exposure to over the next few years. Despite what the conventional thinking might be, real estate actually does quite well in periods of higher interest rates, higher inflation. One safe, cheap way to play it is to buy the Vanguard Real Estate ETF, ticker VNQ. It pays a nice 4% dividend yield, gives you a broad exposure to a bunch of publicly traded real estate companies and REITs. I think it has a real chance of outperforming the S&P over the next few years.
Hill: On the other side of the spectrum, it can be a stock to avoid, or maybe just one to have on a really short leash. In terms of that category, Aaron, where are you?
Bush: I think the marijuana industry is super-interesting, but it was so hyped in 2018, I think 2019 is going to bring disaster to investors investing for the most part in that industry, but especially in the companies that were the most hyped, like Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY), Aurora Cannabis (NYSE:ACB). If you’re investing in those, watch out, 2019 is almost definitely going to be a rough year.
Argersinger: It was funny, Aaron and I talked back in the fall. We both said watch out. As soon as cannabis gets legalized in Canada, which was mid-October, you could almost draw a straight line from that point on. That was the peak of a lot of these stocks. They’re down huge since then, even more so than the market we’ve seen. It’s funny, it was one of the easiest calls I think you could have made. And it still has more to go.
Hill: It was interesting in part because it wasn’t just individual investors who were excited about this. We saw major companies, consumer brands that everybody knows, investing hundreds of millions, and in some cases billions of dollars.
Argersinger: Coke, Philip Morris. Amazing.
Hill: What do you have on a short leash?
Argersinger: You can probably guess. I’m going to say Facebook needs to be kept on a short leash, if not avoided altogether. All the problems I mentioned regarding the social networking space — the stock price looks cheap. You can call it that. If you assume that they’re going to continue to grow their advertising revenue at a similar pace, or even slightly slower pace, yes, the stock looks very, very compelling. I just think there’s going to be a big reset in expectations across the space. I have big questions about whether Facebook can effectively monetize Instagram and WhatsApp without damaging user experience. And I’m not even getting into the leadership questions you have to have right now around Mark Zuckerberg and Sheryl Sandberg. I just think you can do better elsewhere. Don’t try to catch Facebook, even though it’s a snazzy name with now a cheap valuation.
Hill: This happens at this time every year: Investors and particularly the business media start to look ahead in terms of private companies going public. Despite the volatility that we’ve seen recently, you’ve got executives on Wall Street saying, “Actually, that might accelerate plans for private companies to go public.” In 2019, some of the best-known names, Aaron — Uber, Slack, Airbnb, Lyft. Is there one that you’re either really hoping goes public, or you’re just eager to get your hands on the S-1 filing?
Bush: I hope Stripe goes public sooner or later. It might not IPO this year. They’re a payment platform that makes it super easy for companies to sell things online. Their developer tools are known to be excellent. They continue to roll out new solutions. The founder and CEO, Patrick Collison, seems to be a super-thoughtful. It wouldn’t surprise me if one day, because this market is so big, buying things online, that Stripe becomes a larger payments company than PayPal (NASDAQ:PYPL). I think that’s super-fascinating. Right now, they have a market cap of about $20 billion, so I would love for them to go public sooner than later [laughs], before they start hitting the upper tens of billions in their valuation.
Hill: Do you think they’re at the point now where they’re way past the acquisition standpoint?
Bush: It would be a big acquisition. I doubt it would happen, at least from another payments company. I bet they’ll go solo public.
Hill: Matty, what are you eager to get your hands on?
Argersinger: You mentioned it, Airbnb. My wife and I have actually been Airbnb hosts for over a decade now. What you have is essentially the world’s largest, most expansive hotel company that really doesn’t own any of its rooms. It’s fascinating to me. It has somewhere on the order of 5 million listings, 150 million users in close to 200 countries. It has a profound network effect, maybe actually the strongest in the world. I think we’re going to realize that. I don’t know what the market cap is going to be when it becomes public, but just in terms of room count and customer count, it’s bigger than all the major publicly traded hotel companies combined.
Hill: OK, I really wasn’t expecting that at the end. I’m assuming the answer is yes. Do you have a good rating? What kind of rating do you have.
Argersinger: We have almost a five-star rating across our listings.
Hill: Nice! I’m not surprised, but I’m very pleased for you. All right, we’ve got just a couple of minutes left before we wrap up. We do this every year — reckless predictions. Make them reckless. They don’t have to be about business, although they can be about business. You can go off the board to sports, pop culture, whatever. Aaron, what do you have?
Bush: Even though the Chinese trade wars and economic slowdowns will continue to generate headlines, I predict that in 2019, we’ll see the largest technology acquisition in which a Chinese company buys a U.S. company. I don’t know if that’s Tencent buying one of the big three video game companies, maybe Alibaba acquires eBay as a way to get into U.S. e-commerce. Maybe DiDi, which is larger than Uber at their last valuation, acquires Lyft as a way to get to the U.S. markets and get a partnership with Waymo. I don’t know. There are interesting possibilities.
Hill: That would be fascinating! Matty, what about you?
Argersinger: I think Warren Buffett’s going to buy an airline.
Hill: [laughs] Really?
Argersinger: Berkshire Hathaway already owns major stakes in all the major U.S. airlines. The industry has changed. Consolidation has made this much more a value creator than a value destroyer. You have a strong airline like Delta that’s actually been assigned an investment-grade credit rating. It’s buying back shares and paying a dividend, and the valuation is very cheap. This is a different industry now. Much like how Buffett viewed the railroads 10 or 15 years ago, I think he views the same with airlines today.
Hill: That would be maybe the greatest example of someone taking emotion out of investing, when you think back on how much Buffett used to openly hate the airlines as an industry.
Argersinger: Oh, absolutely!
Hill: Alright, Matt Argersinger, Aaron Bush, guys, thanks for being here! Happy New Year!
Coming up: Our 2019 preview rolls on with Ron Gross and Jason Moser. Thanks for being here, gents!
Ron Gross: How are you doing, Chris?
Hill: I’m doing well! The 2019 preview rolls on. Real quick, though. We talked about Apple at the top of the show. Jason, any thoughts in terms of one of the largest companies in America and where it is right now?
Jason Moser: As Aaron was saying, I’m really surprised that people are surprised by this. It’s not something that I’m all that taken back by. In November, we were talking about Apple’s chip suppliers ratcheting back their guidance, which was more or less implying that there may be some weakness in iPhone performance like we’re seeing. Granted, they seem to be holding China accountable for most of this. But it all makes total sense. As iPhones get better, they last longer, you don’t have to upgrade as much. They can only raise prices so far until consumers become a little bit more sensitive. Everybody wants to just get on Apple’s case here and predict that this may be the beginning of the end. But let’s be clear, it’s still Apple. They’re still selling millions upon millions of devices. They lost control of the conversation a little bit because they’re not going to be announcing those unit sales anymore. But there are a number of different ways they can win. It’s not going to be just services. Services will have to be part of it. But when you look at services, other devices, the portfolio of wearables, you can’t discount the potential big acquisition at some point or another, either, with that balance sheet. It’s all like, just take a step back here…
Gross: I’m all for the take-a-step-back approach. I think that makes good sense. I’m going to be really curious to see if Warren Buffett and Berkshire Hathaway are buying stock during this period of weakness. I would be one of those analysts that would recommend that investors take a position at these levels. Eleven to 12 times forward earnings, there’s not a lot of growth built into the stock at this price, and they’ve got a lot of ways they can win.
Moser: And let’s remember, too, we have a whole generation of smartphone users that haven’t bought smartphones yet. There are going to be plenty of opportunities to get new smartphones in new consumers’ hands, and there’s a brand loyalty there that’s quite impressive.
Hill: Ron, let’s get to the preview. When you think about 2019, what’s your biggest question as an investor?
Gross: My biggest question is, will value investing rise from the dead? As most of us are aware, growth has nicely outperformed value over the last, let’s call it a decade. Not just a few months here and there, but quite a few years. FAANG stocks are perhaps the most obvious examples of growth stocks that have led the way. Obviously, we’ve had an extended bull market. That tends to favor growth stocks. So, my big question is, do we see a resurgence of interest in stocks that are considered value? Growth often does underperform in bear markets. If, perhaps, we are entering a bear market, are we going to see a sustained bear market, then one would expect value to come back into vogue. But, you know what? We haven’t seen it anytime in recent past.
Hill: What about you, Jason?
Moser: We’ve talked a lot about Disney (NYSE:DIS) and their move to over-the-top distribution. They own part of Hulu, which I think they’ve done a good job building out, especially with that live Hulu offering. ESPN+ seems like it’s gaining some traction. And now, Disney+ is going to be their service that launches sometime in 2019. We talked before on the shows, they really need to make sure they execute there. I do think that’s a compelling product. It’s going to take a lot of content away from other streaming partners, namely Netflix (NASDAQ:NFLX). I find it interesting to see that the shows on Netflix that garner the most views as a percentage are all shows that are not Netflix shows. I think that’s telling. Netflix is still having to put up a lot of money to get content that people want to see, and Netflix is not the one producing that content. They still, have a little ways to go in succeeding on that original content front to justify all of that money that they’re spending. I think that Disney+ is going to reemphasize the competitive advantage that they have there in that intellectual property. I’m excited to see how that product arrives. I’m certain that we will at least be testing it in our house, if not becoming full-fledged subscribers, unless they really drop the ball.
Hill: Wasn’t there a minor freak-out in the Netflix universe when they said they weren’t going to renew the show Friends?
Gross: In my household, for sure.
Moser: That is something that they need to pay attention to. As a percentage of views, Friends is No. 2 on the list just behind The Office. When you look at that list of the shows that are garnering the most views on Netflix, it takes you back, not a lot of their original content is on that list. It just tells you they still have a little ways to go.
Hill: What’s a trend you’re excited about this year, Ron?
Gross: It piggybacks off of what Jason was just discussing. 5G technology, fifth generation wireless cellular technology, is coming, and it’s coming pretty quickly. It’s going to be pretty exciting. It’s going to make devices more capable of accessing the internet, it’s going to deliver much faster speed than 4G — some say 20 to 100 times faster than 4G. Lots of companies are going to benefit here. The most common names would be AT&T, Verizon, T-Mobile. But I think Nokia, even Apple will benefit as people upgrade to 5G-enabled phones. It’s going to be a really exciting trend to watch from an investment perspective, but also from a consumer perspective, because I think we’ll all benefit.
Moser: I’m glad you mentioned Apple there. That’s another point with 5G. I think they’re going to be a little bit behind others in getting their devices up to speed. But once that does happen, that’s going to be another catalyst there in the upgrading.
For me, I’m excited about podcasts and where podcasts are heading.
Gross: Shameless plug!
Moser: I’m not going to just pat ourselves on the back here too much, but it’s worth noting that you and Mac and our partners here, you had the senses to make some early bets in this market back in 2010 and 2011. And lo and behold, now, in 2019, we’ve got a full-fledged family of podcasts. They’re doing very well. We’ve seen Sirius XM acquire Pandora, noting in their call that, to their dismay, they passed on podcasts for a while. They admitted that mistake, and they’re going to start putting some resources into podcasts and building out that environment.
I think we’re in a day and age now where Netflix really changed the game for content for people being able to watch what they want, when they want, and where they want. Now, we’re seeing the same thing play out on the audio side. We’re able to give people what they want, where they want it, when they want it. It’s nice to be a part of it.
Hill: Let’s talk stocks. Ron, whether it’s an industry or a specific stock, what do you think is poised for upside this year?
Gross: An industry I’m looking at, it’s a sector-slash-industry. I’m not ready to call the big R-word yet, recession. I’m not freaking people out yet.
Hill: You are a little bit, by saying that.
Gross: I think it’s important to have some allocation to some defensive stocks in the environment that we may be approaching. So, when I think of companies in those sectors, I would say some utilities might be a good bet right here. Some of the discounters, in fact, discount retailers. Costco, Dollar Tree, Walmart would be some nice stocks, defensive stocks to have as we enter an economy that might not be as robust as it has been.
Hill: What about you, Jason?
Moser: I don’t want to time when a recession might hit, because really, that’s bad for everybody, but I do think we are entering a period where banks are going to have some opportunities to boost their earnings a little bit as interest rates continue to nudge upward. In particular, I’m looking more at small banks, and one we’ve talked about before, Ameris Bancorp (NASDAQ:ABCB). This stock has a tremendous risk-reward scenario playing out here. The stock is now trading around 15 times earnings. They recently announced this merger with Fidelity Bank in Georgia. It’s about a $750 million deal. Given that Ameris is about a $1.5 billion company, you can see, it means a lot. The market rightly sold the stock off. There’s some skepticism there. That’s rolling in a big acquisition. But they’re two very similar cultures. It gives Ameris tremendous exposure to the valuable Atlanta market. It’s also going to help grow that asset and deposit base, particularly in a period where a lot of these banks are competing for getting those deposit bases. So, to me, this could play out like the McCormick thing. Remember when McCormick acquired RB Foods? The market thought, “Whoa, this is a big one to digest here,” and they held off for a couple of quarters to see how things worked out. Lo and behold, it worked out pretty well. The stock recovered nicely. I think we could be looking at the same thing here with Ameris if they execute this acquisition well.
Hill: Ron, if defensive stocks have you interested, what’s at the other end of the spectrum? What are you avoiding this year?
Gross: Specifically, I have one stock in mind. I come back to it often. It’s Fitbit (NYSE:FIT). I’ve really never been excited and probably will never be excited about this one. They entered the smartwatch market in 2018. I give it to them, they’ve done pretty well. But this is a formidably competitive market, with the likes of Apple, for one, right there behind them. You even have some Chinese upstarts that could be a problem, as well. I don’t see Fitbit being the company that is constantly able to innovate, either take market share or defend market share. I’d be really careful about this one.
Hill: What about you, Jason?
Moser: Zillow (NASDAQ:Z) (NASDAQ:ZG). I’ve changed my tone on this company over the past year. I used to be excited about the potential there. I feel like they’ve failed to convince me of the sustainability here. They’re yet to become meaningfully profitable at all. Now, in this most recent quarter, they put in their shareholder letter that Zillow Group has entered a period of transformational innovation. To me, that’s code for “We’re not going to be profitable anytime soon.” For a company like this, a company that’s been around for a while in such a big market opportunity as our housing market, they should not be entering this period. They should be coming out of this period. I think that’s what they were trying to do over these past few years. This instant offers business, it’s not up their alley. Buying homes and renovating them and selling them, it’s not scalable. There are a lot of people out there doing it. I don’t know that they have any real advantage there. Good will now represents essentially half of the total assets on the balance sheet.
It’s not a bad company. I’m just disappointed in the way they’ve executed. They still have a ways to go before they get to meaningful profitability.
Hill: One of the things that ties these two businesses together, Fitbit and Zillow, is the word “optionality” has been used in connection to both of these businesses. They were seen as, “They have options, in terms of where they can go.” Optionality is something we like to see as investors, but Ron, it almost seems like optionality works better if you’ve got one dependable cash cow in your portfolio.
Gross: You nailed it. Optionality is great for additional upside. Maybe you can’t even see the different options that a company might have three to five years down the road. But if they don’t have that profitable cash flow producing segment of the company, then you’re relying on all of the value of that company being in the optionality category, and that’s just too much risk for me.
Hill: Guys, 2019 has just begun, but The Motley Fool is already looking for summer interns in investing, editorial, software development, and much more. Come, spend the summer!
Gross: Join us!
Happens every year, Jason. There are a few CEOs who are on the hot seat. We’re long-term investors, but let’s face it: Over the long term, if you’re not delivering, that means in the short term, you’re on the hot seat. What do you have?
Moser: In 2018, I certainly had Kevin Plank of Under Armour on the hot seat. He’s not off yet. I’m calling him out again. While we are seeing signs that he is embracing relying more on his team, particularly the CFO and COO of the company, Frisk and Bergman, when you look at the expectations we’ve had for this business over the course of the last several years, as it’s been a recommendation in a number of our services, this has been a phenomenal disappointment. The real disappointing part there is, they were essentially self-inflicted. They just made some dumb investments for the sake of growing as opposed to making good strategic decisions and letting the growth come from making good decisions.
I think he’s on the right track. We need to make sure that team stays intact here. If we see that CFO or COO leave, we have a really big problem. But at this point, with the market seeming like it wants to recover, if we don’t have a recession, this is a company that should be performing a lot better than it is today.
Hill: What about you, Ron?
Gross: I think Wells Fargo‘s CEO, Timothy Sloan, probably should go. He was probably the wrong choice from the get go, as he’s been at the company during all of the controversies. Having taken over the CEO role in 2016, he’s really not done anything to turn the tide. From an operations perspective, the company’s not really doing very well. From a controversy perspective as well, things don’t seem to be getting better. I think it’s time for some outside blood to come in and right the ship.
Hill: I think back to last year’s show. I mentioned that John Flannery, who was CEO of General Electric at the time, I mentioned that he was certainly a CEO to watch because I thought he was laying all his cards on the table. I thought, “Boy, this is going to be a really interesting company to watch.” In hindsight, I probably should have said he was on the hot seat. I didn’t think he was on the hot seat! Then he didn’t make it to the end of the year.
Gross: That’s how it goes!
Hill: As I talked about with Matt Argersinger and Aaron Bush, it’s interesting to see not only the companies being named in the private market as potential IPOs this year, but the possibility that the recent volatility we’ve seen might accelerate those IPOs in the first six months of 2019. Whether it’s the S-1 that you’re eager to look at, or a company where you just think, “I want this thing to go public now so I can get a few shares,” what’s on your radar, Jason?
Moser: One that probably a lot of people are thinking won’t end up by IPO-ing. I hope it does. SpaceX, Elon Musk’s rocket company. They’re set to raise $500 million at a $30.5 billion valuation shortly. To me, space is one of these markets, one of these trends that’s going to open up a lot of fascinating investment opportunities over the course of the next decade and beyond. I think SpaceX is going to be a part of that.
One thing that SpaceX is doing today is this project called Starlink. Essentially, the idea is looking to build out a constellation of satellites all over the globe in low orbit that will basically be able to beam high-speed internet connection to every corner of the globe. It seems like he’s getting buy-in from all the regulators. We’ve seen what he’s been able to do here in the rocket launches that have taken place thus far.
I think this is a fascinating company. It’s going to offer a lot of opportunities. If we do get a chance to see it go public, I more than likely would want to own a few shares just to be a part of it. But, I’d really want to read that S-1.
Hill: Do you think Tesla shareholders are eager for the prospect of Elon Musk at the helm of yet another public company?
Moser: Maybe we save that for another show. [laughs]
Hill: Ron, what about you?
Gross: A favorite company in my household is fast-casual Mediterranean restaurant Cava. They recently acquired publicly traded Zoes Kitchen. I’ll give them a little time to digest that acquisition, decide what they want to do with all the Zoes locations. But then, let’s take the whole darn thing public. Some great capital that they can use for growth to take the world by storm and expand the concept.
Hill: Have they given any more color on what they plan to do with those locations? I remember, we talked about that acquisition on this show. The only thing that surprised me was the fact that they seem like, “No, we’re not necessarily going to turn these all into Cavas.” I think our general reaction was, why not?
Gross: I’ve seen more along the lines of making some menu changes, changes to the way the kitchen operates to be more efficient and have offerings that are more appealing to the consumer.
Hill: Alright, just a couple of minutes left. Reckless predictions for 2019. What do you have, Jason?
Moser: I was thinking about going with the Red Sox repeating as World Series champions. Then I thought about it — that’s not that far-fetched, really. I’m calling it, they’re going to repeat. That’s not my reckless prediction.
I’ll go with a more business-related story here. I was talking earlier about the potential acquisitions that Apple could be looking at here. What would stop them from wanting to acquire Square (NYSE:SQ). You want to look at expanding your business and becoming a little bit more of an integral part of the commerce scene here, not only domestically, but globally. I think Square and Apple have a lot in common. They’re both in the business of developing sleek hardware that people like to use, generating some pretty strong brand loyalty there. Then, we know, of course, the payments space is one that’s growing very quickly.
I’m not saying it’ll happen, but it’s certainly an acquisition that Apple would be capable of executing. Maybe it will happen.
Gross: I went a little off the rails here. There’s going to be more definitive signs of previous life discovered on Mars in 2019. That’s going to build off of the work done by the Mars Curiosity Rover that, earlier in 2018, found some organic molecules. We’ll figure out where those actually came from and build on that. There aren’t going to be any signs of actual Martians running around —
Hill: Or will there?
Gross: — but I think we’re going to see signs of some previous life.
Moser: Alright, reckless prediction No. 2: Ron Gross and Jason Moser will be heading up the new Motley Fool Space Investing service to launch either late 2019 or 2020.
Gross: [laughs] Sell that short.
Hill: I’m just going to say that regardless of where free agent Bryce Harper ends up, the Washington Nationals are going to the World Series.
Moser: Wow! That is reckless!
Gross: I’ll take that bet.
Hill: Ron Gross, Jason Moser, guys, thanks for being here! That’s going to do it for this week’s edition of Motley Fool Money. Our engineer is Dan Boyd. Producer Mac Greer on a well-deserved vacation this week. I’m Chris Hill. Thanks for listening! We’ll see you next week!
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