Deep Dive
Shownotes Transcript
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The ships are slowing down. You're listening to Motley Fool Money.
I'm Ricky Mulvey, joined today by Jason Moser, the man who can do it all by himself. Jason, thanks for being here, man. Thank you for having me, Ricky. How's everything going? It's going pretty well. I'm going to Casa Bonita tonight, which I feel like is a real introduction to Denver. And I will tell you about what that is maybe after the show, because we got a lot of news to break down. Yes. Yes, we do. Let's get to this story. We have a lot of earnings going on, but I think this macro story is worthy of investors' attention today.
Gene Sirocco is the executive director of the port of Los Angeles. And anytime you start getting port directors going on cable news, it's usually not a great sign for the economy. JMO. He went on CNBC's squawk box and he said that he expects cargo volume to be down by more than a third next week compared to last year. And that a number of major American retailers are quote, stopping all shipments from China based on the tariffs. Oof.
to lay out the law, who's getting hurt by this? Maybe the better question is who isn't getting hurt by this? Because it does seem like something that is going to hurt an awful lot of folks.
covering the spectrum there. I think, generally speaking, small businesses stand out as ones getting a bit more hurt by this, at least in the near term. They just tend to not have the same financial resources and are a little bit more dependent on imports and whatnot. I think large companies like
Walmart, your Costco's of the world, they're able to shoulder the burden more just because of their scale. Now, with that said, I will say Walmart,
is particularly levered to China, for example. It's estimated that 60% to 70% of Walmart's globally sourced products actually come from China. Even more noteworthy, I think there is market research that suggests that figure can be closer to 70% to 80% for merchandise sold in the U.S. They're not immune, but
But they have the ability to shoulder that burden. They can handle it and bide their time as all of this tariff stuff plays out. I think, ultimately, that really points to the biggest question mark in regard to all of this. When is this going to ultimately be resolved? That is still very unclear, but there's no question. Small businesses are going to feel the brunt of this very quickly.
Well, I think there will at least be an inflection point when these, you know, decreased shiploads lead to empty shelves in physical stores and on online stores like like Amazon. I have noticed that these looming tariffs have absolutely impacted my shopping habits. Are you doing any sort of like pre-tariff shopping in the in the Moser household right now?
I have not yet, but it is still early. Now, when I start seeing Chewy telling me that our dog and cat food is out of stock and that shipment's not coming, then I know I've got serious problems. I have three dogs and a cat that won't stand for that, and I can't explain it to them either. But as of now, I've got a garage full of toilet paper and paper towels. I think we at least have the necessities for now.
You've got a big yard and you just might need to learn how to hunt in order to provide for your dogs. I've noticed it over here. I mean, I just bought a set of AirPods because I'm like, Oh, these are, these are made in China and better get them while I can. First of all, get them and while they're on sale. And I've also been, I mean, I've been stocking up on clothes just because I don't know what's going to happen to the shelves. I don't know if my size is going to be impacted, but yeah, it's absolutely incredible.
impacted my shopping habits. Apollo's chief economist, Torsten Slocke, released a presentation earlier this month, and he kind of laid out a timeline for tariffs. And there's a slide with the spicy title for a PowerPoint slide, the Voluntary Trade Reset Recession. He points out early mid-May, that's when you start seeing those container ships come to a stop. And
Then in mid to late May, that's when trucking demand also comes to a halt as fewer trucks are taking things off container ships. And then right in that late May, early June window, that's when you're going to see empty shelves and companies responding to lower sales. What do you think about that timeline? I think it's certainly a potential outcome in theory. Now, if that happens, I think there will be massive political consequences, right? I mean, we have to look at this and say, okay, well,
This is self-inflicted. We started this. It's a matter of trying to figure out, ultimately, what the goal is here. I think that is still unclear. We're operating on this day-to-day headline economy, so to speak. My hope is that this is a worst-case scenario and that cooler heads prevail sooner rather than later.
But we're just getting ready to start May here very, very soon. That's not far off. If that happens, clearly, the consumer will have their say. Let's take a look at PayPal. Reported this morning, JMO is an investor in this company.
I'm pretty happy to own a company that's not making big moves on earnings right now. I'll take some stability. And that seems to be what PayPal is offering. Revenue up 2% on a currency neutral basis. Transaction margin dollars, which is just direct transaction revenue minus transaction expenses. Think things like payment processing. And PayPal likes that as a core measure of its profitability. That was up 7% to about $3.7 billion today.
free cash flow and adjusted free cash flow, both down from last year by about 45% in a quarter respectively. So yeah,
There's some cash flow questions, some operating profitability targets happening. What are your big takeaways from the quarter? Yeah, I think it was an okay quarter. It was right in that meaty part of the curve, as George Costanza might say, right? Not showing off, not falling behind. It was their fifth consecutive quarter of profitable growth, which I think is really encouraging for Alex Criss. As you mentioned, revenue growth was really non-existent. But
I wouldn't really look into that as much. I think what we're seeing with PayPal, they're doing a very good job of bringing things down to the bottom line. We saw gap earnings per share up 56%, non-gap earnings per share up 23%, and really just flew past the guidance that they offered from a quarter ago. And I think when you look at the metrics that really matter for the business, things like total payment volume, that was up 3%.
$417 billion going through those networks there. This is up 4% currency neutral. Payment transactions and payment transactions per active account saw a little bit of a decrease, but that's in regard to the payment service provider part of PayPal. And so ultimately, those numbers actually excluding that payment service provider part of the business were up as well. And active accounts grew 2% to 436%.
And remember, they went through just a period not too long ago of trying to cull a lot of those inactive accounts that really aren't using the service, so to speak. But returned $1.5 billion to shareholders with share repurchases, which I think was very encouraging.
And in regard to cash flow, I think the one thing with cash flow and with PayPal, it's going to ebb and flow a little bit, particularly because of the buy now, pay later side of the business. That fell a little bit just because of some timing stuff between originating some European buy now, pay later receivables and then the ultimate sale of those receivables. So I wouldn't read too much into that. This is still a business that generates a ton of cash.
The one thing that stood out to me, though, in the quarter that I just can't help but wonder what the future holds for this, because PayPal is building out this little ads part of the business right now, PayPal ads. And they're making some progress. And we don't know. I mean, is this a sneaky ad play? It could be. I mean, they're starting to introduce programmatic advertising. And they're ultimately they're starting to launch offsite ads online.
which ultimately, those are ads that are generated from all of this data that PayPal and Venmo and those properties get. That's the beauty of this company. They generate a ton of data because of the consumers that use these services. It reminds me a little bit of Amazon back in the day. If you remember with Amazon several years back,
We knew they were getting into advertising, didn't really know if it was going to be anything material. It was starting from nothing. But you fast forward to today, Amazon is on a $70 billion run rate for their advertising business alone. Now, I'm not saying that PayPal could get to that scale.
But I do think PayPal could get to meaningful scale relative to its business. And that is very high margin revenue. And so I think that's going to be something fun to follow with this company as time goes on, particularly as they're launching this off-site advertising business.
I mean, I think one of my big questions then for PayPal's future is the buy now, pay later initiative. You see here, Alex, Chris sort of touting the growth in that, in that people are, uh, when they use buy now, pay later, they're making more transactions. But if we're skidding into a self-induced recession, there may be consequences for that. And, you know, uh,
On a personal level, I'm not super thrilled about Buy Now, Pay Later. I understand it's part of the business. But speaking strictly as an investor, it's a growth lever. If you're looking at the growth in that, and you're also seeing credit card delinquencies going up, maybe that's not a great thing for that part of PayPal's business. I think that's a very valid point. Buy Now, Pay Later is just credit card, ultimately, in another form.
You have to count on the fact that some of those loans, so to speak, are not going to pan out. They're going to write off delinquencies and non-payments there. We are seeing consumers relying more and more on buy now, pay later. Buy now, pay later is a clever product for
things that maybe aren't necessities. But when you start seeing data that shows that consumers are using Buy Now, Pay Later for things like their groceries, that's where you start wondering, okay, what is the real condition or what is the real state of the consumer? And when you see consumers resorting to BNPL for necessities like groceries, that starts to raise at least some yellow flags in the near term.
What do you think about CEO Alex Chris reaffirming the full-year guidance? We talked about the macro pressures that will have an impact on this company. A lot of PayPal transactions are consumer spending. If you're in the office of the CEO, what are you telling them? Are you telling them to pull lower guidance? What's going on with that? I wouldn't tell them to pull guidance, necessarily. I think that what we've seen with Chris over the couple of years that he's been with the company at this point, he seems to at least
like to under-promise and over-deliver. I like that. Some people will call that sandbagging. I don't care. Whatever you want to call it, it's fine with me. He sets the bar fairly reasonably. He's not setting these super high aspirations. We know how that works. You set the bar high, eventually you miss it, and the market really punishes you. But if you set the bar just
not low, but just right there in that mid-range, that Goldilocks range. You can hit those targets, you can continue to grow at modest rates, and you're not disappointing the market in the near term. You're not really thrilling everybody in the near term either, but at least you're able to hit those targets and keep on moving the business in the direction that you intend. I don't mind them maintaining that guidance,
Because it does seem like they are offering relatively modest expectations. But as we know, and we're seeing as the headlines change day to day, things can materialize very quickly. So it'll be something to keep an eye on for sure.
Let's go to Spotify real quick. Monthly active users growing 10% for the company. Premium subs grew 12%, but the analysts did not like the user growth projections. That's why the stock is getting punished a little bit. CEO Daniel Ek quickly on the conference call saying, we could be impacted by tariffs, but people still want to be entertained. They want to learn stuff. They want to listen to music. Before we get into the meat of this conversation, J-Mo, we have a content partnership with
with Spotify. The Motley Fool actively recommends the stock. I own the stock. How's that for bias? I also want their algorithm to promote this podcast as well. So I'm speaking from a pretty biased perspective, but still in my view, a pretty strong company when you're looking into the actual business results. Anything there stand out to you from Spotify's quarter?
Yeah. I mean, the stock has been on a heck of a run here recently. So, a pullback, a little pullback is understandable. There was a bit of a miss on operating income there. And that was due to what they were calling social charges, what they call social charges, which are ultimately payroll taxes associated with employees' salaries and benefits in other countries. But to me, I mean, this is still just such a strong business. You see the growth
in the users, whether it's premium or ad supported. I mean, it just is amazing to see what this business has become. And it's evolving so much so far beyond just being like, you know, a music streaming app.
And I think that when you consider that, you consider the fact that Spotify has such strong market share in the entertainment industry at large. To me, yeah, I mean, I understand there's some macro concerns there in the near term, but I think when you look at it at the end of the day,
Spotify and things like Netflix, those are the subscriptions that consumers will probably cut last. The value-focused consumer is looking for value and understanding what are they getting for their dollar. That monthly charge for Spotify or for something like Netflix, given how much we all use those, they, I think, give this company a resiliency that probably more don't have.
We'll leave it there. Jason Moser, thanks for being here. Appreciate your time and your insight. Thank you. Hey, it's Ricky. And I want to shout out another podcast called Radical Candor. Based on the New York Times bestselling book, Radical Candor talks about how to be a great boss without losing your humanity. Kim Scott, Amy Sandler, and Jason Rozov deliver actionable insights each week to help you improve your career and relationships.
They have other business experts, including Guy Kawasaki and Stephen Covery, to stop in and share how they use radical candor concepts in their work. Their guidance will help you move beyond ineffective flattery and brutal criticism towards guidance that drives real growth and development. Listen every Wednesday for new episodes wherever you get your podcasts and see how you can apply radical candor in your life.
Are you feeling a little concentrated? Up next, Robert Brokamp joins me to discuss some ways to diversify your portfolio.
This year has been a reminder that stocks can be volatile. In 2023 and 2024, investors were treated to 20% plus returns in the S&P 500. This year, both the Nasdaq and the Russell 2000 were in bear market territory, and the S&P 500 got pretty close. That's if we define a bear market as a drop of 20% or more from all-time highs. A
A drop that in and of itself is the cost of doing business in the stock market, even if the reason this time is, well, you can decide for yourself. Still, it's a good time to ask some questions. If you're near retirement, are you too concentrated in tech stocks? This is a question that even indexers should ask, since about one-third of the S&P 500's market value lies in just seven companies.
Should I follow the lead of institutional investors spreading their bets outside of the United States or even Berkshire Hathaway, which now has the most cash on the books of any company bro ever? All of this is to say, how can I diversify my portfolio to take some of the bite out of bear markets?
Chris Hill: Well, there are plenty of investments that may add some balance to your portfolio. We're going to talk about the most popular candidates. But first, I want to talk a little bit about diversification in general. We're going to talk about what diversifies a portfolio for what I see as the typical Motley Fool investor who owns stocks primarily in the S&P 500, which as you mentioned, Rikki, has a tilt towards growth-leaning tech-oriented, tech-adjacent companies, and a lot of our listeners also own those companies outright.
So, that's the starting point here. And I do want to emphasize that diversification is somewhat of a double-edged sword. You often have to own a diversifying asset through many stretches of, frankly, pretty mediocre ho-hum performance in order to eventually get the payoff. And then, as I talk about these various things, I do think it's important that when you're looking for a diversifier,
It's helpful to know how they performed basically during past market downturns. Over the last 25 years, there's been a good range of examples to see how investments performed during different types of bear markets. We had longer ones such as the dot-com crash and the great recession of 2007-2009. The market dropped more than 50% then. It took more than five years for the market to recover. But then we've also had shorter ones like the pandemic panic and 2022.
With all that said, here are some diversifiers to consider, and I'm going to give each a letter grade. Alright. What's the grade then for the dividend payers? I'm going to give dividend payers a B. Here, I'm talking about a diversified mix of companies that have paid a consistent and growing dividend for many years, and many have an above-average yield. With the current yield on the S&P 500 being 1.3%, it doesn't take much to have an above-average yield.
It's not necessarily the dividends themselves that make these good diversifiers, though getting a reliable stream of income is nice, especially since historically that stream will outpace inflation. It's that these types of companies tend to be more value-oriented, a little less volatile than the overall market, and score high on other factors such as quality, which is defined by different people in different ways, but basically comes down to a company that is profitable, the earnings growth is less volatile, and they have a strong balance sheet, meaning not a lot of debt.
I recently looked at the returns of the 10 biggest dividend-focused ETFs. They're all down this year, but not as much as the overall market. In 2022, when the S&P 500 was down almost 20%, Nasdaq was down more than 30%, the losses in these ETFs were in the single digits, and a couple actually made money.
That said, the diversification among dividend payers is important. During the Great Recession, some of the best dividend payers were financial stocks, and they got walloped. So, you definitely want a diversified portfolio of dividend payers. Our colleagues Matt Argersinger and Anthony Schivone, who run our dividend investing and service, would also tell you that dividends are great for companies to pay because they make them a little bit more disciplined on capital allocation decisions when they're not maybe pursuing growth at all costs and they have to return a little something to their shareholders.
Another idea, international stocks getting outside the United States. Bro, how are you feeling about these? What's the grade right now? I'm going to give them a C+, which doesn't sound great, though I think most people should have a little bit of international exposure. I'm giving them a C+, because frankly, over the past 15 years, it's been tough to argue for international stocks. U.S. stocks have outperformed them by so much, and by some measures, an historical amount.
But looking longer-term, there are many long-term periods, several years, even a decade or more, when international stocks outperform U.S. stocks. You saw it in parts of the 70s, the 80s, and the early 2000s. Looking very short-term, the total non-U.S. stock market is actually up 8% so far this year, while U.S. stocks are down. Developed market stocks are doing even better, returning almost 11%.
I do think there's something special about the American economy. It explains why U.S. stocks have outperformed the vast majority of other national stock markets over the last century or so, which is why I'm giving international stocks a C+ when it comes to diversification. But there's no question that there are long stretches when international stocks will do well. They're certainly a lot cheaper these days than U.S. stocks when you look at P/E or dividend yield or anything like that, which is why I personally have between 15% and 20% of my portfolio overseas.
The next one is a big one. We could be talking multifamily REITs, rental properties, office buildings. We could be talking about the Vanguard entire real estate index fund, but I'll make it easy for you, bro. How are you feeling about real estate? As you hinted at, there are all kinds of real estate. I'm going to give it a range of grades from C plus to B plus, depending on the type of real estate.
A few weeks ago, we did an episode on what happens to different types of assets during a recession. We cited research which actually found that home prices hold up well. In fact, they tend to do better during bear markets and stocks than during bull markets, with the very notable exception, of course, of 2007-2009 recession, when both the economy, the stock market, and home prices collapsed.
But usually, over the long-term, residential real estate, whether it's your own home or perhaps investing in rentals, can provide some excellent diversification. Now, you hinted at REITs, real estate investment trusts. These are stocks and companies that own and operate real estate. It could be all kinds of real estate. Apartment buildings, medical facilities, office facilities, storage. They can be a good portfolio diversifier as well. Though, like international stocks, man, they have lagged the S&P 500 for a good while now.
Their diversification benefits can be mixed. They did very well during the dot-com crash and the ensuing recession, but also, they were part of the real estate bubble, and boy, they got pummeled in 2008. As a starting point, I think it makes sense to have maybe a 5% allocation to REITs, and you can use that Vanguard ETF that you suggested. That's what I choose, especially if you're close to retirement since they have above-average yields. But they're still moderately to highly correlated to the overall stock market, so the diversification benefits are going to be mixed.
This next one has been on a run. Two investments over the past 12 months. One of these has returned about 7%. The one that I'm talking about now has returned 42%. Bro, this is the comparison between what the S&P 500 has done over the past year and gold.
Yes, it's been quite remarkable. I'm going to give gold a diversifying grade of C+, though I could easily be moved to a B- on this. Gold has been in the news a lot lately because, as you pointed out, the return has been exceptional. It's up 26% so far this year based on the performance of the Spider Gold shares ETF. As you may have seen on social media, it's actually returned about the same as the S&P 500 over the past 20 years, almost identical.
So why am I giving it a C+? Well, first of all, part of it is just philosophical. We at The Fool believe in owning businesses with products, services, innovations. They generate a growing stream of cash.
Gold, on the other hand, just a piece of metal, passive decorative industrial uses, but mostly you're just betting that someone will be willing to pay a higher price for it in the future. Not because it's going to be generating more cash in the future, but you're just hoping that there'll be more demand. Gold has gone through some really long stretches of lousy performance. It did really well in the 1970s due to the high inflation, peaked in 1980, went the other direction, and it took around 25 years to get back to its 1980 peak.
All that said, it is true that gold has done well during bear markets in stocks. We're seeing that this year, in 2022, 2008, and in two of the three bad years during the dot-com crash. It's fine to own some gold as a hedge against bear markets, which is why I own -- a little myself -- some of that Spider Gold shares ETF.
So by the time you notice it's outperforming, maybe that means you're a little late to the party on gold, bro. And you know, it is, you're betting on someone to pay more for it than you are today. However, gold has been around for thousands of years that people have been accepting it as a story of value. So a little bit more of a track record there than something like crypto or even the tulip bulbs I was trying to sell you before we were recording. All right.
Let's get to crypto because this is one that is kind of interesting and some investors still see it as a store of value. Let's talk for hours about Bitcoin as a digital gold in this economy we live in. Okay. Yeah, we could talk for hours. And in terms of a grade, I'm giving this one...
incomplete. I'm going back to my teaching days. I just feel like I can't give it a grade right now because it's just too soon to say what kind of diversification benefit you're going to get from crypto. We'll talk mostly about Bitcoin, but as you know, there's so many varieties of it. It just doesn't have a long enough history for me. Bitcoin is flat for the year, which means it's doing better than the stock market, so that's good news. But in 2022, it plummeted more than 60%. For me, the jury's still out.
There's no question that it is gaining wider adoption, both in terms of by investors, by countries. It's boosted by the availability of ETFs that make it easier to invest. I'm more comfortable investing in it than I would have been maybe three or four years ago. But the value of it as a diversifier is pretty much still unproven.
How about as a strategic reserve? Moving on. Let's get to alternatives, however you define them. Yeah. This is a very broad category that can include all kinds of investments that aren't commonly held by everyday investors. We're talking commodities, managed futures, currencies, hedge funds, private equity, and so on. For the most part, it's difficult or expensive for the regular investor to buy into these types of investments. You're often not getting the cream of the crop, you're getting what's left over.
Depending on how you invest in them, they can be illiquid and/or endure really long periods of bad or at least mediocre performance.
For most people, I don't think they're necessary. However, I will add that the proponents of these types of investments do make some good points. Primarily, they say that a standard portfolio of stocks and bonds isn't as diversified as some people think because they often rely on a single factor like the overall economy or maybe just the movement of interest rates. We saw that in 2022 when interest rates skyrocketed and stocks and bonds fell. If you have the time and the inclination to research more about alternatives,
you actually might find some things that strike your fancy. Just be prepared to pay higher fees, to hold onto something that will behave very differently from a standard portfolio, which I guess is the whole point.
The next one is Uncle Warren's, one of his favorites right now, and that is just cash, bro. Yes. Cash is boring, but I'm going to give it an A. Front of the class. I won't belabor this. Cash is king or queen when times get tough. It's the only investment that you can feel reasonably sure won't drop in value. Just make sure you're putting in the effort to get the highest yields possible, which these days is close to or around 4%.
And you're going to have to accept the fact that returns will never be great. When you invest in cash, you're making a trade-off. You're choosing lower return certainty over the unpredictable possibility, and you could even say historical probability, that you'd earn a higher return in stocks given enough time. But for money you need in the next few years that you want to make sure holds up in value, it's hard to beat cash.
Another way you can take your money out of the stock market is to put it in bonds. Bro, there are some higher-yielding bond funds that look pretty attractive to me. Yeah. This is why I'm giving this a range of grades, actually, from C- to A.
Because when it comes to bonds, the returns will depend on the issuer, the duration, meaning short or long-term. Shorter-term bonds are going to be less volatile. Longer terms are much more volatile. And how you own them, individual bonds versus bond funds. But let's start with the safest and move on to the riskiest. U.S. Treasuries are considered very safe. Maybe not as safe as they were like five years ago. Fitch and S&P have downgraded them. And Moody's made some announcement recently about they might be doing some things as well. But they're still considered the safest investments in the world.
Investment-grade corporates are considered safe. Not super safe, but safe. And then you have below-investment-grade corporates, otherwise known as junk, and they're very risky. This is where you get the higher yields. You'll get much higher yields from junk bonds and somewhat higher yields from corporates. But you have to understand that they will often go down during recessions. And junk bonds really go down. I'm talking like 20% or more during the tough times.
Bonds are holding up pretty well this year, by the way, returning around 3%. But they've been disappointing over the past several years. In fact, it's really been one of the worst stretches for bonds in U.S. history. I would say the future looks brighter. But if you want more certainty from bonds,
Explore investing in individual bonds, because you know exactly how much interest you're going to get, how much you're going to get back when the bond matures at maturity date, assuming the issuer is still in business, of course. And I would also explore what are known as either target date bond funds or defined maturity bond funds. These only own bonds that mature in the same year. That way, you have a little bit more certainty about what they'll be worth when that year arrives. The two biggest issuers of these ETFs are iShares and Invesco.
Bro, junk bonds are how I started my casino chain. All right, let's wrap it up with annuities. Yes, annuities. Not everyone's favorite topic, but let me explain. And I'm going to give these an A for the right people. So when I mean annuity, I'm saying anything that sends you a regular check in retirement for the rest of your life.
In the original versions of annuities, you'd get that check or that payment every year. You'd get it annually, which is why they're called annuities. We all get some of this. By this, I'm talking about Social Security. Yes, Social Security is in trouble. People in their 50s and younger may not get everything they're promised, but you'll get most of what you're promised. You'll get that check every month, regardless of what's happening in the stock and bond markets. It adjusts for inflation. It's partially tax-free.
So, I think if you can maximize your Social Security benefit to some degree, that is a great diversifier in retirement. Same principle if you're getting a defined benefit pension, the traditional pension, if you can maximize that, that's good. Now, you can buy more, actually buying annuity from an insurance company. But the only kind of annuity that appeals to me personally is what you call a single premium immediate annuity.
You hand over a lump sum, say $100,000, and you'll get $6,000 to $8,000 a year for the rest of your life. You give up a lot of liquidity, so don't do it without understanding the loss of liquidity when you do that. If you choose to go that way, you take that money from the portion of your portfolio that would otherwise have been taken from the bond part of your portfolio. Very good. Robert Brokamp, appreciate you being here. Thanks for your time and your insight. My pleasure, Ricky.
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that we personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.