In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss:
- The reactions to Donald's Trump's victory across the crypto, currency, and stock markets.
- Super Micro's woes, and the outlook for a company with no auditor, no annual report and, perhaps soon, no listing exchange.
- Nvidia topping Apple as the most valuable company in the world and joining the Dow Jones Industrial Average.
- Why Novo Nordisk and Eli Lilly are giving totally different reads on the markets for GLP-1 drugs like Wegovy and Zepbound.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Nov. 06, 2024.
Dylan Lewis: The results are in. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me.
Asit Sharma: Dylan, thank you for having me.
Dylan Lewis: Well, Asit, the market loves certainty, and the day after the 2024 election, we have it. Donald Trump has more than 270 electoral votes and a large lead in the popular vote. He has been elected our 47th president of the United States. As we tape today, S&P 500 is up about 2%, dollar having one of its best days ever in eight years, and Bitcoin at all-time highs. There has been no shortage of chatter about the Trump trade and the market pricing in a win. Does anything jump out to you as we see the market process the news?
Asit Sharma: Dylan, I think what jumps out to me most is the broad-based movement across different sectors, across different investing styles. As you point out, the market doesn't like uncertainty, it likes certainty. One thing we have here is a quick result. That certainly helps rather than us piecing together over days and weeks who actually won. This is a net positive in the market size, and also the certainty that comes with having seen the Trump administration in action, A dry run, if you will, for four years.
The market already understands the priorities that a new administration is going to bring. It's going to be one that is less harsh on the regulatory side. It will favor things like crypto. As you mentioned, there's a strong dollar element to that, a lot of talking up of USD. Small caps could finally have their turn in the sun because of business climate that will just favor lower corporate tax. Let's put it this way, not raising any corporate tax. Investors also, I think, just were expecting a longer wait, again, to circle back to that. With that out of the way, there's just some relief trade going on as well as the specific types of trades that we collectively call the Trump trade.
Dylan Lewis: If we bring that down to what's going on with some individual companies, we see businesses with crypto upside, like Coinbase and Robinhood up today. Also a lot of businesses in the financial services segment are big today. Tesla up over 10% today, Elon Musk close with President Trump. I will offer up what I think is maybe a helpful note, and I am speaking to myself a little bit here as well as an investor. The assumption going into a Trump administration would be lower taxes, probably tariff and trade elements, probably a little bit more of a friendly regulatory environment for businesses. But the administration and any administration does not exist in a vacuum.
They inherit what's been going well, what's been going poorly, both in the United States and around the world, and that means that there are going to be a lot of factors that sway the priorities of this administration. I think as we are seeing headlines about sectors that will do well during a Trump administration, sectors that will do poorly during the Trump administration, we need to caution ourselves a little bit here this week, Asit.
Asit Sharma: I really like that, Dylan, because every election cycle, we do get money flowing in or flowing out based on the results. But that in retrospect, is just always temporary. We have to get back to life. You and I are back to work today. I'm sure a lot of people, we were up a little bit later than usual just to see what the results would be, and whether you're on either side of that vote, there's been a lot of mental concern regardless in what's going to happen. Because we as humans don't like uncertainty either.
We want to see our candidate win for some of us that happened, for some of us, it didn't, but life goes on. I think you're absolutely correct, markets understand this inherently. Markets tend to focus on corporate earnings, the bigger waves in society, what's going on on the macro front, what's going on in global trade, geopolitics. All that quickly becomes the norm again. I would say for people who are listening today, wondering, how long will this exuberance go on. Personally, I don't think it'll go on that long. Things will return to normal, they'll normalize, and we go back to our jobs as being investors who are focused on companies first and foremost and their business prospects.
Dylan Lewis: I will say, we very intentionally published an episode this past weekend stocks to buy no matter who is president. That's because here at the Fool, we are net buyers of stocks, we are focused on following quality businesses, buying and holding them for the long-term. Nothing about what's going on today, this week, next week is going to change that.
Asit Sharma: Totally.
Dylan Lewis: As Americans waited for results on the 2024 election, investors finally got results from Super Micro Computer one week ago. The company's auditor Ernst & Young resigned, and they scheduled their earnings release for after the bell on election night. Asit, I'm going to say that that is not a great sign.
Asit Sharma: Well, it's a good try. You got to give him credit. This is amping up the old filing on a late Friday afternoon, your 8k earnings release, or if you have bad news, I should say, because earnings are typically scheduled in advance. Bearing that before the weekend or if there's some other big business news trying to get underneath that. Look, management here has been beat up in the press a lot, and probably deservedly so. Let's give him credit for that timing. However, it's painfully obvious here, the results were underwhelming, Super Micro gave a net sales figure a range that's very small. Now it's basically 5.9 billion to six billion bucks, and they were guiding to almost seven billion in their range before. That is related to what's going on. I read reports earlier that now NVIDIA may be rerouting some of its orders from this server supplier to protect their own supply chain because they understand Super Micro is in a little bit of trouble here, maybe at risk of a delisting, and that has all follow on effects.
These weren't great earnings, the stock is down today, but really the problems here are snowballing, and I think so much is related to that initial short report by Hindenburg in August, followed by the resignation of Ernst & Young. Maybe, Dylan, we could chat about this for just a second here. The resignation was so interesting because Ernst & Young really didn't point a red hot finger at anyone issue. But to translate their audit ease, they said, look, we can't rely on the assertions in these financial statements anymore. We don't recommend that anyone else does either. That's saying a lot because auditors get paid to put their stamp on financial statements and to say, look, we've tested the assertions, so you can rely on these financial statements. It was very interesting communication saying that they couldn't rely not just on the financial statements, but the representations by the audit committee. I wanted to chat about that a bit and maybe get your thoughts first on it.
Dylan Lewis: I was going to ask you, Asit, does that break your heart a little bit as a former auditor?
Asit Sharma: Yeah, it does, because I always think, look, if you can't rely on the financial statements after a damning report by a third party, which has just gone in there and done some research by rolling up their sleeves, you is the auditor who has access to not just the financial statements, but also lots of schedules that the company's required to supply to you, so you can test those assertions. It breaks my heart that after the fact, so often the auditors come and say, I wouldn't, don't listen here, I've looked at these statements, I wouldn't rely on these. Come on. Where were you? All these quarters.
Dylan Lewis: I think what's maybe equally or more troubling with that is you mentioned the specter of Super Micro being delisted. That has happened before with this company. You go back to 2019, they faced similar issues, failing to file their 10-K on time. You look at the management team currently in place, same as back then, more or less. Founder and CEO Charles Liang was in charge then. The CFO of the company now, David Wigand, was the chief compliance officer since 2018. A lot of the folks that were there when this company has previously experienced problems with this are calling the shots right now.
Asit Sharma: Yes. I think this is something that was so persuasive in the Hindenburg report. They did talk about their assertion or their claim that the distribution of inventory sales was looking sketchy. Maybe they are channel stuffing, maybe Supermicro is just sending product to record sales, bad instances of timing. That's there, but just the fact that not even three years after all this fine and reprimand by the SEC, they went and hired back most of the same team. I think you're right, Dylan. That's so bad to see, and it's so disappointing. But here's something else. I've used this word so many times in this conversation already. I'm going to bring it up again. The idea that the auditor said they couldn't rely on the representations is specific and it's something to beware of. If you're an investor who's thinking, maybe I buy this thing, it's so beat up, maybe it comes back.
As an auditor, you've got to test very specific statements that a company makes, and these have to do with the rights to assets, your obligations out in the marketplace, your allocations, your valuations, completeness of the assets, display of the financials, presentation of those financials. Each of these assertions, you really make sure you can understand and say, they're legit and taken as a whole, A person out there who's just a lay investor can read these financial statements and rely on them. The fact that they didn't point to something specific, and said, look, the internal controls over financial reporting, they really need to be fixed here. The fact that they're walking away like these financial stink means to me or signals to me they cannot verify the completeness assertion. They don't know if inventory is indeed being shipped. They can't really nail down the revenue recognition piece. They don't understand or can't verify that the sales that are being recorded are legit. This is a real red flag. Be careful out there if you want to trade this as maybe a turnaround play. Wait, just be patient, be very careful here.
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Dylan Lewis: While Supermicro is a former AI darling that is falling on some hard times, the granddaddy of AI darlings keeps winning. This week NVIDIA passed Apple to become the largest company in the world as we taped the chipmaker worth 3.5 trillion. Is there anything Jensen Huang can't do at this point, Asit?
Asit Sharma: Well, I'd like to see him beat me in a foot race. [laughs] No joking. I would think that Jensen Huang could beat me in a foot race with his leather jacket on. I don't know if there's much more that he can do or can't do at this point. I will say, though, it's interesting that the Dow waited so long to put NVIDIA in, and it could be that the Dow is what it seems, an old school index that waits until a company is in its absolute prime. But the best days of fervent growth may be behind, so you've got this really solid earnings play that could rise some more. Just a little weird to me how long the Dow often seems to wait, versus, say, the S&P 500 in identifying the companies that are going to lead the future. What did you think on seeing that?
Dylan Lewis: We had speculated back when they had announced the stock split earlier this year, that ten for one split that the Dow inclusion was coming and that they were paving the way for that, the high share price being prohibitive for it entering the index because it is a share price weighted index. I think it's a win if you want the average to be representative of activity and importance in the market and for companies. What I think is fascinating about this is, as the largest company in the world, NVIDIA will be the largest component of the S&P 500, 7%. In the Dow, it will be in the bottom half and only make up about 2.5% of the index.
Asit Sharma: Dylan, I seem to remember you pointing out to me that UnitedHealth Group would have a lot more sway over the future of the Dow than a company like NVIDIA, which just seems a little backward as much as I admire UnitedHealth Group as a company.
Dylan Lewis: Maybe in the ultimate sign of the times, NVIDIA replacing Intel in the Dow. That is the company that will be exiting. If you're looking at the market cap side of things, Intel and $100 billion company, NVIDIA, 35 times larger with its current market cap. What's interesting enough though, NVIDIA has about 100 billion in trailing 12 months revenue, Intel about 50. The size and scale of these businesses swings pretty dramatically. I think it is interesting to think about how market cap plays into the way that we represent the economy in one way, but sales tells a very different picture for a company like NVIDIA, because so much growth is being priced into it, and in a weird way, the Dow normalizes for that.
Asit Sharma: I think the Dow does, and I think it's also interesting that over time, the Dow's focus on earnings capability also is telling on how the economy changes, because we should remember here that Intel in the 90s was the NVIDIA of its day. As much as it may surprise some younger investors to hear this, the hype was even bigger. Intel was thought to be this juggernaut that would never give up share. There were some voices back in the 90s, but few people thought that its business would become as commoditized as it did. The same might happen to NVIDIA, so I will be so interested to see if we take another stretch where 30 years later, NVIDIA is in the Dow, what it contributes to the movement of the Dow, and whether it's still relevant. I'm guessing it's got a shot at being relevant, though.
Dylan Lewis: I think there's a chance. To your earlier point on the types of companies that the Dow tends to focus on and tends to bring into the index, there are six new entrants in the past decade if you include NVIDIA just being added soon. We have Apple in 2015, Salesforce in 2020, Honeywell in 2020, Amgen in 2020, and Amazon in 2024, a very different look than the traditionally Industrial index.
Asit Sharma: I think that industrial today means something different than it did in the 1920s or all throughout the 20th century. I guess maybe one day it might be more appropriate to change the industrial's name, but it still has so much I don't know, [inaudible] the Dow Jones Industrials.
Dylan Lewis: It has a real ring to it, doesn't it?
Asit Sharma: If you use a walking cane like I do,.
Dylan Lewis: [laughs] I am going to throw a trivia question at you. I promise listeners, I did not prepare Asit for this one, so I'm curious where he goes with this. Do you know the longest running company in the Dow? It entered the index in 1932.
Asit Sharma: Oh, my God. I would have to say this would be, 1932. Would it be AT&T as AT&T still in the Dow entered as the bell company, something like that?
Dylan Lewis: It's Procter & Gamble.
Asit Sharma: Wow.
Dylan Lewis: Not traditionally an industrial company. Even going back to the longest running one, there's a little bit of a misnomer there in the name, I suppose.
Asit Sharma: That's so great, and it goes to show, I think, what Warren Buffett has preached for so many years, these staple businesses, and I can't remember his Berkshire's investments in Procter & Gamble over the years. But the idea that big consumer goods company staples, they're great companies if you have duration on your side. If you don't, what does it matter? But if you've got multidecade duration on your side as an investor, and you're going to pass some stock off to, I don't know, relatives when you go, they're not bad companies. But let's just say this also, there's so many companies that were more specialized than Procter & Gamble that just never made it. They stayed in decades, but then look at Whirlpool, and so many parts of GE, which have been spun off and actually are no longer in the Dow.
Dylan Lewis: Bring us home today, a company that may be at odds with the consumer packaged goods you were just talking about and some of those snack foods. We're going to have a little bit of a read on the weight loss drug market. Last week, Eli Lilly reported earnings, provided some guidance that were below expectations due to underperformance in its Zepbound and Mounjaro weight loss and diabetes drugs. Asit, this week, competitor Novo Nordisk out with earnings and news that their blockbuster weight drug, Wegovy posted better than expected results. What's going on in the weight loss market?
Asit Sharma: I think the tug here is between what investors want really long-term out of this market and what these companies can produce. Right now, the results are phenomenal. Sales of Wegovy, a bit estimates by a little bit, I think they came in at 2.5 billion, and maybe the consensus on sales of those drugs. That drug in particular, sorry, was 2.3 billion. That helped ease the market concerns a little bit. But on the other hand, Ozempic sales also made by Novo Nordisk fell a little bit short. Here's what investors are left with.
You've got this class of drugs, which seems like a miracle class of drugs, and you've got this planet of people who are not that healthy. Shouldn't companies like Novo Nordisk and Eli Lilly just be able to sail into the sunset by supplying these drugs? The answer is more complicated because there's still a lot of capital investment on the manufacturing side that has to be worked through billions of dollars in manufacturing capacity. Also, right now, the compounding of these drugs, pharmacies is being allowed by the FDA in the US, they're biggest and strongest market for the GLP class ones, both for diabetes and weight loss.
On the compounding side, you've got the potential for lots of small outfits to take away some of the share that rightfully investors want to be in the hands of Novo Nordisk and Eli Lilly. That's what I worry about a lot, if I'm looking at this as a long term investment. They could still be blockbuster drugs, but will they be those mega blockbusters that carry these companies for a long time? So much of that relies on how the FDA looks at these drugs in the future as well. I think the picture is murky after this, although overall Novo Nordisk maybe, even though the stock is down a little bit this year, maybe those numbers reassured investors a little bit about the near term trajectory for these drugs.
Dylan Lewis: It feels like this industry is generally heading in the right direction. What does this actually look like at scale type moment where all of these people who are supplying these drugs need the cold storage options to be able to make those drugs available and hold up? They need to get their inventory levels right when it comes to how much they should be stocking, they need to understand what their recycle and refresh rates are going to be. This is, I guess, the growing pains that come with figuring some of those things out and understanding exactly what a more steady state demand might look like.
Asit Sharma: Dylan, and that's complicated by the stuff that's in the R&D pipeline. What else can these drugs be used for? There's some evidence that there may be some cardiovascular therapies that could result from this class of drugs in years to come. That has to be balanced in there too, and for investors, this all becomes really complicated. But we should note that the major manufacturers of these drugs aren't just focused on GLP-1 drugs, and they've been great investments. Again, since we're talking duration today, let's go back decades. People who held Eli Lilly in the 1990s are doing just fine today if they're able to hold that company.
I think once you get to a certain scale in the pharmaceutical industry, you've got staying power, and you have the R&D capabilities and the manufacturing capabilities for the next big thing. They may be for those who look beyond a five-year time horizon, that classic Motley Fool hold for at least five years. If you're looking out ten years or 15 years, I would say that the GLP drugs are a signal to buy these companies and to hold them. The fact that they've been able to capitalize so quickly on that, and we should also lump in here something that has nothing to do with these drugs, but look at mRNA companies that came of age during COVID. There's some signals out there right now in the healthcare industry that say it's always like it has been companies who can hire the best scientists, have big balance sheets, have that capacity to manufacture, have good marketing organizations, they market to the doctors. They're not bad. Buy them and forget about them. I have a few like that in my own portfolio.
Dylan Lewis: All right, Asit Sharma. I know you and I were both up late last night. Let's get some sleep. Thanks for joining me today.
Asit Sharma: Let's do it. Thanks a lot, Dylan.
Dylan Lewis: Fools, 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 or sell stocks based solely on what you hear. All personal finance content follows Motley Fool's editorial standards, they're not approved by advertisers. Motley Fool only picks products it'd personally recommend to friends like you. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Asit Sharma has positions in Amazon, GE Aerospace, Intel, Nvidia, and Salesforce. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Bitcoin, Coinbase Global, Intel, Nvidia, Salesforce, and Tesla. The Motley Fool recommends Amgen, Novo Nordisk, and UnitedHealth Group and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
