In this podcast, Motley Fool analyst David Meier and host Ricky Mulvey discuss the state of home sales, and earnings from UPS and Spotify.
Then, Motley Fool host Alison Southwick and contributor Brian Feroldi continue their summer school series with a language arts class for investors.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on July 23, 2024.
Rick Mulvey: We've got two views on the macro and a look inside your ears. You're listening to Motley Fool Money. Hi. I'm Ricky Mulvey. Joined today by David Meier. David. Thanks for being here.
David Meier: Awesome. Can't wait to do this.
Rick Mulvey: Let's talk some big macro. We got some fresh existing home sales data this morning. This is an interesting market because no one really wants to sell their home right now. The market is both slow and expensive. Less than 4 million homes sold annualized from the month. That's down 5% from last month and down from more than 6 million annualized back in 2021. This is a weird economic situation where, get out your graph, but the supply is rising and so are home prices.
David Meier: What the heck's up with that?
Rick Mulvey: What is? You're the analyst. Break it down. What's going on?
David Meier: Here's what's going on. I think the N-A-R, Chief Economist Lawrence Yun made some interesting commentary that we can use to explain. Basically, he said, the market is starting to shift from a seller's market to a buyer's market. The other thing along what he said is, the supply demand curve is actually coming more into balance. Supply rising, home price rising doesn't necessarily, make sense, but, in the short term, you can get strange things like that. What's happening now is there are a few more homes coming onto the market, but they're actually sitting for a little bit longer. What that means is that, if you're a patient buyer, you're not forced to buy, you've moved or something, you have to get a home, you might be able to get some better prices. As you noted, they did increase, again, the medium price was up. It's going to be really interesting to see how this plays out because if prices lower, that might not be a good thing for overall GDP, but it will depend on what happens to prices.
Rick Mulvey: It's a good thing if you're trying to buy a house.
David Meier: Can be. One thing we have to remember, and you alluded to it in your opening comment, there are lots of homeowners right now that have absolutely no incentive to move because they're locked into an ultra low mortgage that were available between 2019-2021. That could limit the amount of supply that actually comes onto the market. Because again, if you're at, let's say, 2 and 78, which is the mortgage I used to have, why would you want to sell? I sold because I moved. I had to, but not everybody will do the same thing.
Rick Mulvey: Do you think this is just an interest rate story? Is it more than people just waiting on the Fed to see what they're going to do in September and maybe get lower mortgages?
David Meier: Yes and no. Clearly, if the Fed lowers interest rates, that will have an impact. It could bring more buyers to the market because affordability should improve. But in order for it to really impact a market, the Fed would have to cut rates considerably, because, again, think about what the anchor is. The anchor is somewhere between 3 and 3.5%. We're at, 6 and 7/8. We're around there today. The Fed is not likely to make a huge cut, like a point or something like that. It's only going to do a quarter. From that respect, no, the Fed is not really that big of a player. Is it more than just an interest rate story? Yes. We have to remember, we still have actually a shortage of affordable entry level houses. Interest rates, could help first time buyers. But what we actually need, we need builders to construct more lower priced homes for the market. That is not an interest rate story. That's about geographic and demographic issues, where you live, where are the jobs? Is it at a desirable location? That's a harder thing to shift, but with the trends changing from work from the office to work from anywhere, we'll see how that plays over time.
Rick Mulvey: It's a slow, expensive market that has an interest rate story to it, but also has some demographics going on. Let's go to UPS which I also count. I count UPS as a macro story.
David Meier: Totally.
Rick Mulvey: We got guidance from the shipper, which got volume up for the first time in a couple of years, but it's customers are choosing cheaper shipping options. They lowered guidance for the rest of the year. That's driving the stock price. But what's happening with UPS, especially, with the shipping mix-up?
David Meier: In a nutshell, what's happening is they're getting hit by the most negative trifecta that you could experience in business. UPS is getting hit by lower overall volumes. Volumes increased in the United States, not internationally and not when you combined the whole world together. It's also having some difficulty with pricing, as you alluded to. Fewer shippers are, asking for higher-priced options. They're willing to take, ground versus air, that type of a thing and their costs are too high. There is nothing good comes from that trio of metrics. The other issue is, they're not expecting this to necessarily resolve any time soon as they brought their guidance down slightly for the entire year.
Rick Mulvey: Another move is that UPS sold off a third party logistics provider Coyote, to RXO for $1 billion. It seems that that money is going straight to share buybacks. We sold this company for $1 billion, and we don't know what else to do with it, so we're going to buy our own stock. What do you think of that capital allocation move?
David Meier: In the earnings announcement, they said they're going to allocate the first $500 million. There is no doubt that the stock is a lot lower than it was before. But the thing we have to ask is, is it necessarily attractive yet? I don't think so. If you look at all the metrics, not just domestic volume, they need to start turning in the other direction before the stock at this level becomes attractive. If I was CEO, what I would be looking to do is what productivity enhancement investment could I be making? That helps your business not only in the relatively short term because they can take some time to implement, but it puts it on a stronger foundation because this is a cyclical business. Shipping goes up and down, in good times, your business should be able to make more profit than if you didn't make these investments.
Rick Mulvey: To be clear, it's making investments internationally, opening up some shipping lanes from Taiwan to Europe. Any other big takeaways from the quarter for UPS?
David Meier: Yes. The CEO did remark that adjusted operating profits should increase in the back half of the year. That could be good news. Maybe they have hit the inflection point. Maybe things are going to start to turn up. But unfortunately, we'll have to wait and see because the shipping environment is not easy right now. Clearly, she's confident that things should improve, but we got to have the proof in the pudding in terms of the numbers that come out.
Rick Mulvey: There's a part of my brain that's like, we got a cyclical stock that's clearly in a down cycle right now. That's usually, if you want to play that game, David, that's the time to start looking at it. But you're saying it maybe isn't worth a spot on our radar quite yet.
David Meier: Again, there's a lot of challenges going on right now. For me, this isn't a stock I necessarily follow very, closely, but if you're an investor and you have some experience in the shipping market or some specific insights into how things might be changing for the better, that could be a time where you would get excited about today's valuation metrics because you actually can project forward and say, yes, this is actually a good price. One of the other things that we can consider if you're a patient investor along the way, this company still generates tons of cash flow, pays a great dividend, and that dividend does not appear to be at risk at all right now. You could get paid to wait, if you will, but capital appreciation is still likely a little bit of a ways off until investor sentiment changes.
Rick Mulvey: It's not a stock that's had a ton of capital appreciation over the past five years. I think none to be exact. If you like the dividend, maybe something to look at. Let's talk about Spotify.
David Meier: Yes.
Rick Mulvey: Before we talk about Spotify, I want to note, because I got some bias coming into this, David. We got a content partnership with Spotify. Premium members can listen to the show, Stock Advisor Roundtable. The Motley Fool recommends the company, and I also personally own shares of Spotify. How about that? We got a trifectas of bias coming in, but the streamer added 7 million new paid subscribers from just last quarter. That was 1 million more than they forecasted. We can concern troll the monthly active user growth, but I think that's pretty impressive. In just a year, the company went from losing a quarter billion dollar in operating income for the quarter to flipping that to making a quarter billion. Those are the numbers. What's the story behind that? What shifted in Spotify?
David Meier: It's a simple story. Price increases pushed gross profits higher and cutting costs reduced their operating expenses. When you combine those two things, that drove the massive swing from a significant loss to a significant gain over the year. To CEO Daniel X credit, he did exactly what he promised to do. This puts the company in a much stronger position going forward. The profitability increase made its way all the way down to the cash flow statement. That gives the company options to make future investments, and more cash flow is always music to any investor's ears.
Rick Mulvey: This is something I've been thinking about where it's going on with Netflix, and it's going on with Spotify. Spotify has, I'm going to round, about 250 million paid subscribers.
David Meier: Yes.
Rick Mulvey: Netflix has about 280 million paid subscribers. When you think about just the number of people in the world that can afford music and streaming subscriptions, I feel like there's got to be a limit. Do you think we're getting close to a saturation point where those millions and millions become harder to find?
David Meier: Your logic is good.
Rick Mulvey: Why? Give the but.
David Meier: But I would say no. Even more so than Netflix, Spotify is a global business. Its largest cohort of customers is actually in Europe and not the United States. Again, if you take that whole global market to your point, there are demographics in terms of the income disparities around the world. But there still should be plenty of opportunities to grow listeners at all levels, not just the subscriber level, but you can do it at the ad base level as well. I think there's still plenty more markets out there for them to go out and try and capture.
Rick Mulvey: I was thinking about this. This is from last quarter, but Daniel Ek trying to tamp down investor expectations saying, basically, we had a stand out year in 2023, but you shouldn't be expecting that going forward.
David Meier: I actually love to hear statements like this from the CEO. Just like you said, it's working to tamp down expectations. That could be really important right now for Spotify because its growth is solid, and it has gone through that inflection point of profitability and cash flow generation. What you want is you want to reign in investors just a little bit, and the stock has done extraordinarily well this year. Reign them in just a little bit such that the incremental improvements that are made can be rewarding for shareholders going forward.
Rick Mulvey: Let's zero in on the inflection point you were talking about, because, just a couple of years ago, this was a company where a lot of people were worried that, it's going to have a lot of trouble being profitable because even as you get more and more subscribers, you're paying all these royalties, you have an ad market to deal with. Maybe those margins won't expand quite like management is hoping to. It seems like that story, that thesis has broken down a little bit when you look at just the cash flow generation that this company's been able to produce.
David Meier: Let's think about it this way, the company has made some price increases, but that's across a fixed cost base of royalties. The royalties aren't necessarily changing as frequently as the price increases that recently were enacted. They'll get the benefit, but at some point, the music owners will come back and say, Hey, we want a little bit more. They're going to have to figure out how to deal with that, but at the same time, their user base is growing. We're not going to see the big leaps in margin expansion going forward. That's the math works against that. But I think the company doesn't have to do that. It just has to keep making incremental improvements from here. All those incremental improvements will drop, the earnings line, as well as the cash flow line going forward. I think the Spotify is in a really good position here.
Rick Mulvey: That's a good place to end it. David Meier. Appreciate coming on, and, thanks for your time and your insight.
David Meier: Thank you for having me.
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Alison Southwick: Welcome back to language art students. Yes, it is still summer school. You might think that investing is just a bunch of mathy math numbers, but the truth is, the world of investing also has a language all its own. Just turn on CNBC and you'll hear a number of idioms and jargon and a surprising amount of animal references. Today, we're going to learn more about the vernacular of trading and define some commonly used idioms that you might hear on Bloomberg, CNBC, the places. Joining me yet again is Prof. Brian Feroldi. Not actually technically a real professor, though.
Brian Feroldi: Who's to say, Alison? No, but I'm not. [laughs]
Alison Southwick: You're still teaching, maybe that counts. I don't know. All right. Our first idiom is catch a falling knife.
Brian Feroldi: What this means is when you try to buy a stock that has been in free fall. Let's say, a stock is trading at 100, it goes to 90, it goes to 80, it goes to 70, it goes to 60, and you think I know, now's a great time to buy it, and you go in and buy it at 60, and then it goes to 50, and then it goes to 40 and then it goes to 30 so you are buying something that is in free fall and you're getting hurt on the way down. That's where the idiom comes from.
Alison Southwick: I don't think I've ever heard the idiom used to successfully describe someone catching a falling knife. Does that tell me just how hard it is?
Brian Feroldi: It can be very hard. Generally speaking, if a company is in free fall, that is because there is something horribly wrong going on in the business. Of course, if you can catch a falling knife by the handle, there is a chance that you could actually make money, but that assumes that the stock does recover eventually.
Alison Southwick: A next idiom is, Sell in May and stay away.
Brian Feroldi: This is what I've heard many times over the years and what it effectively means is when May comes around, you want to sell your stocks. That's when huge swaths of Wall Street go on vacation and liquidity drives up, and essentially, nothing good happens over the summer because so many big money managers are on vacation. They say, sell in May and go away. There have been studies that have shown there is some validity to this kind of thinking and especially, if you're a trader.
Alison Southwick: Do you think traders started using this because they wanted to actually be like, listen, we need to go on vacation? Let's just tell everyone, we're gone. Let's just agree to this. It feels like something they agreed to.
Brian Feroldi: That sounds extremely smart on their behalf to do so. If I was a trader, I would absolutely be advocating, let's just sell and take the summer off.
Alison Southwick: Right? Head to the Hamptons. All right. Next one is buy the rumor, sell the news.
Brian Feroldi: The idea here is that when a rumor comes out about a company getting acquired or a new product or a partnership or something good coming along, you want to buy when the rumor mill is swirling because the company tends to trade up as the rumor gains validity on Wall Street. Oftentimes, if there is a rumor that is later confirmed by an actual press release and the news coming out, it's actually fairly common for the stock to sell once that good news becomes confirmed and becomes public knowledge. For example, this happens a lot of times with acquisitions. Oftentimes, it's a rumor that a company is going to buy another. Then if that rumor proves to be true and an acquisition is actually announced on the day of the announcement, the stock price actually falls because it had been bid up before hand. For traders, again, the idea here is, when there's a rumor, you buy, and as soon as the news comes out, you sell.
Alison Southwick: Our next one is docks take the stairs up and the elevator down.
Brian Feroldi: If you've been an investor, this probably feels true. Bull markets grow slowly, prices gradually go up, meaning that stock prices increase on a step basis up the stairs, but when bad news comes along and when a bear market hits, boy, do stocks fall extremely quickly. This is something that I have personally experienced many times. It seems that like bull markets take forever, and they're skeptical. But when something like COVID happens or the 2008 financial crisis happen, stocks drop like a stone fast.
Alison Southwick: I think we see this a lot with our members at the Motley Fool, too, especially, if you're new to investing, and you're probably coming into investing along with a wave of the market going up. That's how it works often. Newbies like to get into the market when everyone's getting into the market. Then, of course, inevitably, there's going to be some big precipice. That is a lesson that I think everyone learns earlier on in their investing career, and they can't take it to heart, because you got to then get back on those stairs for the long term. A lot of these idioms that we've thrown around here, Brian, we were talking about, these are idioms that traders use. But this feels like a good idiom for a long term investor to remember.
Brian Feroldi: Or at least to keep in mind. This is going to happen to you if you invest over a period of years. It's just an unfortunate thing of human psychology, Alison, which you just mentioned. People tend to be most interested in investing at the worst possible time, and they give up on investing at the worst possible time. But hey, that's what makes a market.
Alison Southwick: Our last idiom to cover is the Dead Cat bounce.
Brian Feroldi: This is a funny one. The idea here is that, again, we have a stock that is absolutely plummeting. It starts at 100. It goes to 90, it goes to 80, it goes to 70, it goes to 60 goes all the way down to 10, and then from 10, it recovers back to 15 or 20. In other words, a company that has experienced a catastrophic loss on the way down has a very small recovery at the end. The idiom there is that, even a dead cat bounces.
Alison Southwick: [laughs] I don't love that one. It's so gross, but I just love it. All right. Speaking of animals, of course, you've heard of bulls and bears, but there is a lot more animal related name calling that happens in the Wall Street school yard. Let's talk about a few animal names you might get thrown around. First one, we're going to cover our Hawks and doves. What are hawks?
Brian Feroldi: Hawks are broadly speaking, referring to policymakers and specifically Central banks, and when the Federal there, for example, is hawkish. That just means that the number one priority is controlling inflation, and when they're feeling hawkish, that means that they are likely to raise interest rates in the near term future. Now, the exact opposite of that is when they are feeling dovish. If the Central Bank is feeling dovish, that means that the priority number one becomes stimulating economic growth and they are likely to be lowering interest rates in the future. If you hear the Fed is feeling hawkish or the Fed is feeling dovish, now you know what that means.
Alison Southwick: Another animal you might hear about is a Whale.
Brian Feroldi: This is commonly used in gambling rings too. A whale is just an individual or an entity that holds a significant amount of capital, so much capital that they actually have the ability to move market prices when they buy or when they sell. A whale just refers to a big investor. For example, if Warren Buffett takes an interest in a stock, you can bet that that stock is going to move up or down in either direction. I think Warren Buffett qualifies as a whale.
Alison Southwick: Whales from Whales, we're going to go to wolves.
Brian Feroldi: The Wolves is a term that was probably popularized by the term the Wolf by the great movie, the Wolf of Wall Street. What a wolf means is when a trader or an investor is dealing with very aggressive or even unscrupulous trades, basically, getting high-risk, high-reward strategies and pushing those onto the market. These investors are known for creating opportunistic behavior and sometimes engaging in market manipulation. You don't want to be labeled as a wolf.
Alison Southwick: You probably also don't want to be labeled as a lame duck, either.
Brian Feroldi: A lame duck is an investor that is in a very difficult financial situation. Perhaps they are unable to meet their obligations, perhaps, they use leverage, and that leverage went against them. This term can also be used sometimes to refer to companies that are in trouble. A company that is on the brink of insolvency would be called a lame duck.
Alison Southwick: The last animal we're going to talk about, although there are others, we could include here, but we're going to end with pigs.
Brian Feroldi: Pigs are investors that take on very high levels of risk in pursuit of very high returns. They tend to become overly greedy with their investing, and they keep their money in the market for too long. In fact, there's a famous saying on Wall Street that, Bulls make money, bears make money, and pigs get slaughtered. You don't want to be a pig, meaning, you don't want to be known as taking on an unusually high level of risk to get that extra bit of return.
Rick Mulvey: As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
Alison Southwick has no position in any of the stocks mentioned. Brian Feroldi has positions in Netflix. David Meier has no position in any of the stocks mentioned. Ricky Mulvey has positions in Netflix and Spotify Technology. The Motley Fool has positions in and recommends Netflix and Spotify Technology. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
