In this Motley Fool Money podcast, Motley Fool senior analyst Matt Argersinger and Chief Investment Officer Andy Cross discuss:
- The latest inflation data and the current state of play for investors.
- How skepticism around the near-term future of Airbnb sent the stock lower.
- Why Alphabet shares rose 10% after the company unveiled new devices and AI-enhanced software.
- The latest from Disney, Roblox, JD.com, and PayPal.
- The Cheesecake Factory's new rewards program.
- Two stocks on their radar: A.O. Smith and Deere.
Plus, Ross Anderson, the co-founder of Craftwork Capital and co-host of the Check Your Balances podcast, shares the most common question he's getting from clients, advice for college graduates, and the economic data he's watching most closely.
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 May 12, 2023.
Chris Hill: Software, retail, restaurants, big tech, big macro -- we got a packed show, so strap in. Motley Fool Money starts now.
Chris Hill: It's the Motley Fool Money radio show. I'm Chris Hill. Joining me in studio, Motley Fool Senior Analyst Matt Argersinger, and Andy Cross. Good to see you as always, gentlemen.
Matt Argersinger: Hi, Chris.
Andy Cross: Hi, Chris.
Chris Hill: We've got the latest headlines from Wall Street, we will dip into the Fool mailbag, and as always, we've got a couple of stocks on our radar. But we begin with the big macro. This week, we got more data showing that inflation is falling, but several things -- including and especially the debate over the debt ceiling -- seem to be casting a shadow over investors and the market. Matt, it really does seem like we are almost in a holding pattern, particularly when it comes to the debt ceiling debate. But where do you think we are now?
Matt Argersinger: I think we're always, as investors, looking for that next thing to worry about, and so we saw that CPI data come in. It confirmed that inflation is rolling over. I think most investors have concluded that we probably hit peak inflation sometime back. The Fed is probably done raising rates. But now we've got this debt ceiling to worry about. We've got that issue to worry about: How close do we actually get to the brink of not paying our debts, which we've never done, of course, in the U.S.?
Then in addition to that, I think you have this, I'll call it "emerging" banking crisis, where you're seeing deposits flowing out of banks into Treasuries, into higher-yielding money market accounts. So you've got liabilities that are real for banks, but then you've got their assets on the balance sheet which are shrinking. I think we've all experienced this. I have an Interactive Brokers account which is paying more than 4.5% now on cash. So you believe every dollar that I have that's not in Interactive Brokers, I'm trying to get into that account. That's killing the banks. At the same time, because you've got commercial real estate issues to worry about, you've got CNI lending, you've got credit issues at the banks, they're not making new loans right now. What does that do to the economy? There's a lot to worry about if you're an investor in the short term. We're past the inflation concern, but now we've got these other challenges.
Andy Cross: Well, it's not like we had enough challenges, and they throw the debt ceiling debate on top of us, which is just really ridiculous. Of all the things, you should not have to worry about the full faith and credit of the United States government to pay its bills, is one that I would always say should not be arguable. Yet there's a lot of blustering this week. We're seeing it from both sides of the aisle, and we'll have to see how that plays out. Chris, when I look, just thinking about this from an investing perspective, we talked about this earlier this morning, Matt, about the willingness to invest today as a capital allocator: Am I eager to put money to work? I'm still investing in the best opportunities, I think, I can find when I look out over the next three to five years. Interest rates, certainly over the next 12 to 18 months, will probably moderate to come down, I would think. How fast that happens, there's lots of debates, and you look at the futures markets and how fast they are pricing a cut to interest rates, I think, it's probably a little bit too aggressive. But certainly, over the next 12 to 18 months, you'll see interest rates normalize. As a long-term investor, I'm saying, well, we're going to see more volatility in the short term, but long term, where will interest rates be, what will the cost of borrowing be, what will the discount rates be? That's how I'm baking into my conviction to invest in what businesses I can find today that I think are going to thrive, and at what prices I'm willing to pay.
Matt Argersinger: Yeah, Andy, I agree. While investors are grappling with all those questions, and looking for those great long-term opportunities, they're saying, "Well, if I can sit in a 4% to 5% money market or short-term Treasury or CD, I'm actually good with that for the next three to six months."
Chris Hill: Let's get to some of the big earnings news of the week. We're going to start with Airbnb, where first-quarter profits and revenue came in higher than expected, but guidance for the second quarter scared investors. Shares of Airbnb falling 10% this week, Andy.
Andy Cross: A very solid quarter. I think maybe the "whisper numbers," if you really going to talk as a trader, were a little bit higher than even the earnings estimates were in there. Revenues were up 20%. By the way, that revenue number was at $1.8 billion. That included $146 million in interest income. That was up from $5 million a year ago, just talking about interest rates. Airbnb benefiting from the higher interest rates as the capital, the cash, gets stored into their accounts. Gross bookings at $20.4 billion, up 19%. Nights and experiences booked up 19% to 121.1 million. And this is where I think, maybe investors are looking for a little bit more, when you think about what we've seen from the likes of Booking.com, and from Marriott and others, that the travel market is really coming back. Maybe the numbers just weren't as high for that.
But Chris, as you mentioned, it was really the expectations going forward, a little bit weaker guidance when they start looking forward. Average daily rate was at $168 this quarter, that was flat versus a year ago. Total active listings were up 18%, that was an acceleration from the 16% in the fourth quarter. But the expectations for the rest of the year were more muted, not seeing a lot of growth that could get anyone really... The market really expected to see a little bit more of a surprise going forward. Now, as a long-term investor, I'm seeing this as a business that has shown the ability to generate both revenue and lots of free cash flow, and that's good for shareholders long term.
Chris Hill: CEO Brian Chesky, in talking about this current quarter, talked about -- hey, we've got a tough comp, if you think back to a year ago, the summer of 2022, all this pent-up demand. He's right about that. But when you look at what happens with the stock, it's almost like the market is taking a wait-and-see approach.
Andy Cross: Well, on the margin side, they're seeing the expectations for their operating profits on an EBITDA basis in this quarter coming up to be a little bit similar to what last quarter was, and actually a little bit lower on the margin side. So the market's trying to get to figure out where the steady state is with Airbnb. Obviously, the market opportunity is huge as they just had their summer release, and they continue to be a really go-to brand for short-term rental and travel. But when they're turning that into revenue growth, into margin growth, and then obviously, into free-cash-flow growth, and maybe the market was expecting a little bit more in the short term, but long term, I still think the opportunity for Airbnb shareholders is pretty bright.
Chris Hill: Disney's second-quarter results showed continued strength in the parks division. But the streaming business lost 4 million subscribers and $400 million. Shares of Disney down 9% as a result, Matt.
Matt Argersinger: Yeah, that was what caught, I think, investors by surprise, was the drop in the subscription numbers. Now, if you dig in a little bit though, I don't think it was as bad as maybe the numbers in the headlines suggested. If you look at the domestic (U.S. and Canada) subscription numbers, yes, they did drop about 1%. But the overall drop was largely driven by an 8% drop in their Hotstar product, which is an India-based subscription platform. If you strip out Hotstar and you just look at core Disney+ subscribers, which includes domestic and international, that actually rose 1%, and ESPN+ subscribers, that rose 2%, and Hulu subscribers were mostly flat. And the average monthly revenue per user -- ARPU, as we've come to know it -- that was up 13%. I think as a whole, the direct-to-consumer streaming business wasn't that bad. I just think that the actual drop caught investors by surprise.
You mentioned the parks being up 17% -- that's a big strength for the business. I think, in going into the quarter, a lot of investors were just really focused on the cost cuts. What is Disney going to do? What is Bob Iger going to do to right the ship here? And I think they're doing it, by all accounts. Operating profits were up 40% year over year. They generated $3.2 billion in operating cash flow. That was the highest quarterly figure since 2018. In a few years -- and you don't have to take my word for it, if you just take the consensus -- this is a company that could be generating $7 to $8 per share in earnings. I think that makes today's share price look pretty good to me. But of course, in the short term, there is that overhang with the subscription business.
Chris Hill: Well, and to go back to the point that Andy touched on earlier about the broader market and where do you allocate your capital -- it seems like, just if you timestamped this moment for Disney, there are enough question marks that certainly the professional investors would say, "You know what? Over the next three to six months, I'm going to look for other ways to invest my money."
Matt Argersinger: Exactly. That's the conundrum right now. By the way, in six months, you have to start also worrying about Bob Iger's succession. I don't think investors want another Bob Chapek experience here. That's going to be another concern down the road.
Chris Hill: Roblox started its fiscal year on a relatively strong note. Sure, they lost more money than Wall Street was expecting, but Roblox showed nice growth in both daily active users and overall engagement, and shares up more than 10% this week, Andy.
Andy Cross: Chris, let's just start with that -- little bit more of a loss now than expected. However, what's really interesting with Roblox is, right now, most of their metrics are going back to the 20% level. When you think about it -- average daily users were up 22%, revenue was up 22%, hours engaged were up 23%, bookings were up 23% -- so that's the revenue they'll be able to recognize going forward. But what's really interesting with Roblox is, they were very clear on how they have spent a lot of money, and very transparent on their cost structure. Hiring people, they've gone from 1,700 to 2,300 employees. But what they said is, they expect that, basically, has topped now, and they expect going forward they're going to see their bookings growth is going to be higher than their compensation expense and higher than their capital expenditures. I think when you think about the initiatives they're implementing with their advertising, just starting to test out some other advertising, using more and more AI. They're starting to really build that metaverse in there, and they're starting to attract more and more people over the age of 13. That's really good news, I think, for Roblox shareholders.
Chris Hill: Also good news for shareholders, this stock has quietly been up nearly 40% over the past year. They string a few more quarters together like this, and it starts to get really interesting.
Andy Cross: We had talked about the changes and the comparables. If you look at the last five quarters of growth and of bookings, it was minus 3%, minus 4%, then up 10%, up 17%, and then up 23% this last quarter. They were coming off those very tough COVID comps. That really knocked the stock down. Now, we're starting to see a little bit more of this rebound, and a little bit more of a stability and what's going to drive the business, the cash flow and drive the business model, and hopefully, user growth that drives all of that for the shareholders.
Chris Hill: After the break, Alphabet serves notice of the old adage: "When you come at the king, you best not miss." Stay right here. You're listening to Motley Fool Money.
Chris Hill: Welcome back to Motley Fool Money. Chris Hill here in the studio with Matt Argersinger and Andy Cross. Shares of Chinese e-commerce company JD.com got a boost Thursday morning after first-quarter profits were higher than expected. But JD's report came with the somewhat surprising news that CEO Xu Lei is leaving after just one year on the job due to personal reasons. Definitely a surprise there, Matt.
Matt Argersinger: That was a surprise. This was someone who had been earmarked for the job for several years when Richard Liu was going to step down, which he did. We know Richard Liu has a little bit of a colorful history -- the founder of JD.com. But Xu Lei being only there a year in the top job after having such a long career was surprising. He only pointed to the fact that, "Hey, I want to spend more time with my family." You're not going to get a probably a lot more insights into that.
But I will point out that China has reopened. I think there has been a lot of excitement, especially among the big e-commerce players like JD.com, Alibaba -- how would they perform with that new potential resurgence in commerce activity? But JD's revenue was up less than 2% year over year. I think that was disappointing. I know the stock got a bit of a pop. They've been emphasizing their services more, the third-party sellers on their platform, and that business is actually doing quite well. But here they are: They're handing over the reins to JDs CFO. She's only been there since 2018. They're also talking about spinning off their JD Property and JD Industrials businesses. This is after spinning off the logistics business several years ago. I think with management reshuffling, I think with the spin-offs coming up, this is a tough one to nail down: What is the core earnings power and revenue power of this business over time? Being a Chinese company, it's already more opaque than you'd like it to be.
Chris Hill: PayPal's first-quarter results got overshadowed by current-quarter guidance that was lower than Wall Street was looking for. Shares of PayPal are down more than 15% this week, Andy, hitting a new five-year low.
Andy Cross: It's fascinating to think about this. I was talking to some investors here behind the scenes, and just what do we make of PayPal? This is a business that, when you look at the traditional metrics, it's just a slow steady grind right now. Dan Schulman, the CEO, is going to be leaving later on, so there's uncertainty around there. Active accounts up 1% this quarter, not really super crazy. But the revenues were up 9% -- that was ahead of their own guidance. Total payment volume's up 10%. Take rate was about flat -- so, the percentage of that volume of transactions [that] turns into revenue. But it's interesting, the balance between the branded PayPal business and some of those unbranded solutions they have for clients. They're driving more transactions to the unbranded, and that's a little bit lower-margin, so the guidance in the margin, even though the growth will be there and maybe the margin isn't there, they back-ended the guidance into the full year, into the second half of the year, as you mentioned, Chris, a little weaker in this next quarter.
So some of the guidance just gives us a little bit of question marks. I still think the stock is a buy. I still think it's very inexpensive based on their cash earnings potential. They're buying back lots of stock, they still generate lots of free cash flow. But I just think until we figure out what's going to happen to the CEO, the stock might just be stuck in a limbo mode here.
Chris Hill: I was just going to say, because Schulman announced in February that he was stepping down at the end of the year, they're being diligent -- if you want to be kind -- in terms of the process. If you don't want to be kind, you can say (I think fairly): What is taking so long? I really feel like three months from now, they need to have a lot more color on who the next CEO is going to be. Because I'm a shareholder, but I look at this business, I think: Who's the next CEO going to be? Until you can answer that, I'm not sure I want to load up on this stock even though it's at a five-year low.
Andy Cross: Especially Chris, because cost control and cost maintenance is a big part of this. So they're really in this operational-mode debate about it. Or we can get a strategist or an operator in the CEO role? We talked about Disney. We've talked many times in the show that the challenges that many companies have on succession planning, I think they were trying to be transparent and be out front, saying, "Hey, he is leaving and we're going to find the best candidate and we're going to let you know." But there's also just some uncertainty around that, that investors would prefer to have a person in right now that they know they could talk to and they could have a conversation with and build that relationship with.
Chris Hill: Although, on the flip side, it does seem like an attractive job. This does seem like a company with a lot of optionality, a lot of good things to like about it, that presumably, they're going to attract some good candidates.
Andy Cross: Well, and also, it is still a very popular brand. I mean, 433 million people have these accounts, and they have continually more and more user engagement recently, and that's been a good sign. But the question is, how do you continue to innovate and compete against the likes of these other competitors in both the branded side and the unbranded side that are coming after PayPal?
Chris Hill: On Wednesday, Google held its annual developers conference, where the company unveiled new gadgets including a folding phone with a price tag of $1,800, as well as new software fueled by artificial intelligence. Shares of parent company Alphabet up more than 10% this week. Matt, it really seemed like one of those events that reminded everyone how strong this company can be when they're on top of their game.
Matt Argersinger: That's a great word, "remind," Chris, because I think there has been a bit of a narrative shift. I think when ChatGPT broke into the market earlier this year or late last year, there was all of this sudden excitement about AI, and it turned into this arms race between Alphabet/Google and Microsoft. I think most assumed at that time and up until recently that Microsoft, they felt like they were first to market. They had their investment in OpenAI, that Microsoft has more to gain from infusing AI into things like Bing and its other tools and making them available on Azure for other users.
But I think what Google laid out successfully -- and as you said, reminded everyone of at this developer conference -- is that they have this really extensive ecosystem of products that people use already. So forget about search. Think about Gmail, Chrome, Google Docs, Google Sheets, Maps, Google Cloud. These are services used by billions of people, and Alphabet has the ability to infuse AI into all these services that people are already using, making them smarter, more efficient, better. So if I'm a Google user, why am I going to go away from that if those are already so popular?
Andy Cross: Well, they also had just a little bit of a challenge in explaining where they are specializing. They have multiple divisions, they've now unified their divisions. They have an investment in Anthropic. I'm a bull on Google and Alphabet, I think the shares are attractive, but I do fault them for how they've gone about communicating this, especially as Microsoft has been so aggressive in directly going after Google.
Matt Argersinger: Yeah, I think that's what this past week was. Let's remind everyone how good we actually are and what we've done. And we've been doing this for years. We've been investing in AI for many years.
Chris Hill: I just find it funny and also a little odd that when Microsoft made that investment in OpenAI, there were some people out in the financial community who were basically like, "Well, I think it's over now," and it's like: Really? You think the people at Alphabet are just going to sit back and do nothing?
Matt Argersinger: Let's remember, going into this on a valuation basis, Alphabet was a lot cheaper than Microsoft, so it had more upside anyway, as soon as more good news came out.
Chris Hill: Andy Cross, Matt Argersinger -- guys, we'll see you a little bit later in the show. But up next: What's the most common question financial planners are getting these days from their clients? Our guest Ross Anderson weighs in on that and a lot more right after the break. So stay right here. You're listening to Motley Fool Money.
Chris Hill: Welcome back to Motley Fool Money. I'm Chris Hill. Joining me now is Ross Anderson. He is the co-founder of Craftwork Capital, a certified financial planner, and co-host of the weekly podcast Check Your Balances. Ross, thanks so much for being here.
Ross Anderson: Pleasure to be here with you, Chris. Always enjoying being on.
Chris Hill: A bunch of things I want to get your thoughts on. Let's start with the big macro because we're getting this constant barrage of inflation data and interest rates. I'm not saying that's not important. But we're also getting more talk of a potential recession, and I'm curious. Someone in your position, what do you find yourself focusing on as being particularly meaningful for investors?
Ross Anderson: I think like everybody, I'm looking at some of the same data, some of the CPI data. We're hoping that we're done with interest rate hikes for now. A lot of the same things that everybody is talking about. When I look at the bigger situation, I think one of the more concerning items is just the amount of credit debt and just what seems to be the consumer levering up. You've seen a lot of strength in the U.S. consumer. But if that is on the back of credit card debt and then we plow that into a recession, I think that that's a little bit of a scarier situation.
But really, I try to zoom out from a lot of it. I think just with humility around, even if you get the macro situation right, how does that help us make individual decisions in a better way? I think an interesting example would be to look back at 2020. If I told you, Chris, what was going to happen in 2020 at the start of the year, and I said we're going to have a 9% decline in GDP in the second quarter amidst a global pandemic, incredible amounts of unemployment -- I think it ticked up to 12%. And by the end of the year, we're not really going to have this thing figured out: Do you want to be a stock investor? You would have said, "No, I think I'm going to sit this one out."
Chris Hill: "I'm going to sit this out and I'm going to hoard cash."
Ross Anderson: Exactly. With perfect foresight. You could have perfect foresight into what was going to happen in the U.S. and global economy, and you could have still blown it. I think that that is so indicative of just how I view some of this as noise. I think we need to be making personal decisions on a risk-management level, making sure that we've got our cash reserves in the right spot and making sure our portfolios aren't levered up in ways that they shouldn't be for our risk tolerance and our time horizon. But beyond that, I just don't see a situation where you can take that input and completely make perfect choices even if you get it right.
Chris Hill: Obviously, I don't want you to disclose anything from any of your clients, but to the extent that you can, I am curious if you are seeing any sort of common theme in terms of the questions you're getting from clients, whether it is the aforementioned potential for a recession and fears associated with that, or something else. I'm curious about what you're hearing and what you're telling them.
Ross Anderson: I think probably the most common question right now really shifted, and it went from "How exciting are Treasury bills?" to "Oh my god, are we going to default on Treasury bills?" We've had this really incredible shift from people being excited that they could get a 4.5% to 5%-plus yield on a Treasury to then, "Wait, how safe is that investment that I just made? Is that really what I should be owning right now?"
I think as people are re-looking at these sources of safe yield -- we've been in an environment for more than a decade of incredibly low-interest rates and basically being told there's no other game in town other than stocks. If you want any growth out of your assets, if you want to grow your purchasing power, stocks are the answer. And now, we're seeing places where you can put your money in a bank and earn 4%-plus, and you can put your money in a Treasury and earn 5%, and you go: "That sounds pretty good in an uncertain market, that I might have some of that exposure." I think Treasurys, and then really the bond market as an extension of that, has become a more interesting place to be an investor, and to re-look at what role that plays in your portfolio even though that's certainly not the sexiest thing that we can talk about.
Chris Hill: It's not, although I am -- and I'm sure I'm not the only investor of a certain age who is in this situation -- I am having flashbacks to 2011 when the debt-ceiling conversation dominated not just Capitol Hill but Wall Street, and there was -- I don't want to say "paralysis," because that's probably overstating it -- but it was just this cloud hanging over every part of the investing conversation. But in the back of my mind, I just think, "Well, we're not actually going to default, are we?"
Ross Anderson: I certainly hope not. But the political theater of it -- I was told one time that the way you win a game of chicken is that you throw the steering wheel out of the car, and you make sure that they saw you do it. The way that you actually win a game of chicken is that you make them believe you're crazy enough because literally, you've lost control. That's what it seems like we're headed for, is a little bit of that style game of chicken, where it's going to come down to the wire, I think. I really believe that they're going to dig in and make a show out of it. I don't think that that's necessarily good for us, but my hope is that we get resolution on this and certainly that we don't put the faith of the U.S. Treasury in the kind of harm's way that it would have if there was a default. I really believe they'll get a deal done, but again, I think it's going to be a long road still from here.
Chris Hill: Let's move to a more positive topic then, and that is the fact that this month, millions of students are going to graduate from college. Any financial advice for them? Or if you could hop in a time machine, is there something you wish your younger self knew when you were walking across the stage accepting your diploma and graduating from college?
Ross Anderson: Well, I think you teed this question up without completely knowing this, but I graduated college in 2007. That turns out to have also been headed into a fairly choppy time in terms of financial markets, and was a real great time to start a career in the financial advice business.
So I had a couple of rough years, and so I think my takeaway from that is, No. 1: Don't extend yourself in terms of your overhead. If you're used to living like a college kid and having roommates, that is a good choice early in your career. Get your feet under you, get your career going in the right direction. You don't have to make all of the super-adult choices, and go out and take on big car payments or big overhead in whatever format that takes for you, right at the start. You can take it slowly, you can stay entrepreneurial. And really the more nimble you are, the more you're going to be able to take advantage of opportunities, whether that's moving to a different city for the perfect job for yourself, whether that is simply getting your savings going or starting to reduce your student loan debt.
I just think there are so many things that can happen for you in a positive way if you don't bite off too much. And I'm saying that very much from experience as somebody that bit off too much coming out of college, and then really paid the price for it and had to unwind a lot of bad choices, and it took a few years to do it. And ultimately, I'm a different person and a different advisor as a result of that, so I can't completely hate on those experiences because I think it did improve what I can do for other people. But definitely, I learned the hard way, and so I would hope others don't have to do that as well.
Chris Hill: We are in the back half of this earnings season, and one of the themes that I've been seeing is a little bit of a continuation of something we started to hear rumblings of in the earnings season earlier this year. And this is the fact that there are company executives, as well as some market commentators, who are talking broadly about the second half of 2023 being better for their businesses and the market in general. I'm wondering if that is an optimism you share, and regardless of that, as we approach the midpoint of 2023, what are you watching for the second half of the year?
Ross Anderson: I mean, there's no question that to me, what you're seeing a lot of companies do is focus on belt-tightening, profitability, being more responsible capital allocators. We've come out of this growth-at-all-costs environment and moved toward an environment where profitability -- which again, that's sounds like such a silly thing to talk about as investors, we should have always been concerned about profitability. But let's be honest, we've spent a bunch of years where we weren't. I think that that focus from a lot of these management teams is starting to be reflected. You're starting to see some of those choices flow through and be shown in terms of increases to profitability, even if the top line isn't growing as fast as maybe it was or maybe we would like to see.
I also think that the uncertainty of this year, as you think about your personal buying decisions: If you haven't had to go out and buy a house this year with interest rates up; if you haven't had to go out and make a massive investment or take on, like I said with the college folks, the big overhead -- you would delay that if you could. I think that as we see what's going to happen, as we see what the extent of the recession will be, I think you're going to see those management teams be more comfortable allocating their capital because it stops being the fear of, "Well, what are we headed into?" [and turns into] "OK, it's here, this is what it is. Let's continue to evolve our businesses."
I don't think you can defer those purchase decisions, I don't think that you can defer those investments, forever. And so I think there has been a little bit of can-kicking going on. I'm generally optimistic that as we stop having questions about what the future will be and start getting into it, you're going to see people go back to "OK, we still have a business to run," and that should be positive.
Chris Hill: Are you at all surprised when you hear people talking openly on financial television about interest-rate-cutting coming in the second half of the year? It seems like there's a growing number of people who just assume once inflation is under control, interest rates are going to get cut, and they're going to go back to where they were before. I just have a hard time believing we're going to go back to the era of free money for everyone forever.
Ross Anderson: No, I agree with you there. I think they will probably come down a little bit, eventually, but I don't think that they're going to come down to where they were. We have to recognize that post-2009 was not a normal environment, it was a very extended period of very low rates. If you look at where rates are on average going back 20 or 30 years, you're going to see that that 4% to 6% range is basically what normal is, and that we've just been below it. I think that they're going to normalize a little bit. I don't think it'll be immediate. I think the Fed is going to be very cautious in terms of what that first rate cut looks like, and I think that they're going to be cautious about what that signals to the market. I'm not suggesting or encouraging that we're immediately going to head for rate cuts. I think the people making that bet are really betting on a recession. I think that the bet that they're making is that we're going to plow into something uglier and they're going to have to cut rates, but it just doesn't seem that's the likely path to me right now.
Chris Hill: New episodes of the Check Your Balances podcast are out every Wednesday, so add it to your weekly listening. It is a great show and definitely worth your time. Ross Anderson, thanks so much for being here.
Ross Anderson: Appreciate it, Chris. See you later.
Chris Hill: After the break, Matt Argersinger and Andy Cross return. They've got a couple of stocks on their radar, so stay right here. You're listening to Motley Fool Money.
Chris Hill: 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. Welcome back to Motley Fool Money.
Chris Hill here in studio with Matt Argersinger and Andy Cross. Our email address is firstname.lastname@example.org. Got a note from Ben in Sacramento who writes: "Thanks to everyone at Motley Fool Money for helping shape my investing mentality from my young adult years. It's helped me grow my level of wealth significantly over the years despite having a very mediocre salary." Sorry about the salary, Ben. He goes on to write: "A few stocks I own have fallen more than 90% since I bought them in early 2021. My four lowest-performing stocks combine for now less than half a percent of my portfolio, and I'm trying to decide if I should sell these and reallocate the money elsewhere or pretend they don't exist now and leave them be, and take whatever potential future return I get as gravy. What are your thoughts?"
Matt, what do you think?
Matt Argersinger: Ben, right there with you.
Chris Hill: I got a couple of just like this.
Matt Argersinger: I know. I've got a bunch of stocks that are also down 80% to 90%, and they're a very small percentage of my portfolio. I think what we found over time at the Fool is that you're almost always better off just letting them be, because one or two of them might end up rebounding and being a decent-sized position again for your portfolio down the road versus trying to sell and just moving on. I don't know, it might be best just not doing anything.
Andy Cross: Then the only thing I would say is just in general, from a tax strategy, if it is in a taxable account, you can maybe use that to offset some of your taxable gains. I think when we say if you are going to sell, look at the bottom part of your portfolio rather than the top first, which is different than a lot of financial planners plan, but I think that's a better approach to think about how to continue to hold onto the great winners.
Chris Hill: Shares of The Cheesecake Factory have trailed the market's average return over the past few years, but this week, the company announced it will be launching a new loyalty program in June. Unlike most loyalty programs, Cheesecake Rewards -- and yes, that is the name of the program -- Cheesecake Rewards members will not earn points based on how much they spend. Instead, the company is going to use customer data to surprise members with rewards throughout the year. I'm interested to see how this goes, Matt, not just because they're taking a different approach on the rewards, but also, this is a higher-end restaurant. We don't see this type of thing.
Matt Argersinger: You don't. You see it all the time at quick-serve casual restaurants where they expect people to frequent more often, but this is an interesting bet. Now, unfortunately, I've only been to Cheesecake Factory I think once in my life, many years ago, but my parents absolutely love it. Mom and Dad, if you're listening, sign up. Let me know how it goes.
Chris Hill: What do you think, Andy?
Andy Cross: Well, I think it's an interesting take on the rewards program, as Matt said, thank goodness and not doing it by the calories ingested, considering the cheesecake, which I love, but boy, that is super-rich, but I do like this surprise mentality -- very Costco-esque.
Chris Hill: Let's get to the stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Matt, you're up first. What are you looking at this week?
Matt Argersinger: Chris, I'm going with A. O. Smith, AOS is the ticker. This is one of the country's leading makers of commercial and residential water heaters. So exciting -- but it is an exciting business. First-quarter sales in their key North American segment were up 3%. That doesn't sound great, but it builds off some really impressive results they had a year ago. And it was surprising because a lot of investors thought volumes are going to come down for them. They had a 400-basis-point improvement in their operating margins, which drove earnings up 22%. Very impressive there. They also have big presences already in China and India. In fact, sales in India in the quarter were up 28% year over year, so that's huge. Inventories were a big concern going into the quarter. No longer a concern, those have been normalized. They generate a ton of cash. They upped their target for share buybacks by 100 million, but the dividend they paid in the quarter marked the 83rd consecutive year that AOS has paid a dividend to shareholders.
Chris Hill: 83 years?
Matt Argersinger: 83 years. Going back before the U.S. entered World War II, they've been paying dividends every year.
Chris Hill: Dan, a question about A. O. Smith.
Dan Boyd: Is Ron here? I'm very confused at the moment because this sounds exactly like the kind of stock that Ron Gross would be harping about every other show, yet he doesn't seem to be in the studio today.
Matt Argersinger: He's not, but you know, I learn from the best, Dan, and this is definitely a Ron Gross pick. You're absolutely right.
Chris Hill: Andy Cross, what are you looking at this week?
Andy Cross: Well, Dan, if you'd like 100-year-old companies, I think I got one that you might be interested in. It is Deere spelled with three Es, Dan, D-E-E-R-E, symbol DE.
Deere is the world's largest manufacturer of agricultural equipment, known for its tractors, lawn and garden equipment, construction, golf sport mowers, forestry, and so much more. They're also known for their brand, one of the most widely followed brands in the industrial space. $110 billion market cap, delivers more than $50 billion in sales, $7 billion in earnings every year, founded 180 years ago.
Food is essential. I love food. We talked about Cheesecake Factory earlier. We need to be more efficient in growing and harvesting that around the world. Deere is really leading that when it comes to technology and best-in-class products to make farming more automated, much more efficient. They're focused on smart machines that can use this geographic information system and on-the-ground data to really optimize production. The five-year returns, Dan, this stock has 173% versus 65% for the market. 10-year returns, 400% versus about 200% for the market. So I know a lot of technology companies, rightly so, get a lot of respect for their stock returns, but Deere, over the last five and 10 years has really delivered for shareholders. Priced at about 12 to 13 times earnings. A lot of excitement about what will happen this year, a little bit more risk coming next year. It is a very cyclical company, so we have to watch out a little bit for that. But very impressive performance by Deere, and the stock is down 12% year to date, so I think it's a buying opportunity.
Chris Hill: Dan, question about Deere?
Dan Boyd: A couple of things here, Chris. First, Deere with three Es, while accurate, is misleading, Andy. So I'm going to ding you for that. Second, so early this year, John Deere let farmers fix their own equipment instead of having them go through their own recurring revenue stream of fixing equipment. How much is that affecting the stock price today?
Andy Cross: I don't think so very much, Dan. They still have such great brand loyalty. The reason they can do that is because of that brand loyalty and a lot of after-part sales for Deere. So I think that's not a reason for the stock's underperformance. I think it's just short-term trading.
Chris Hill: Two very old companies. Dan, you've got one you want to add to your watch list?
Dan Boyd: This is a tough one because they both seem like really good shops. I'm going to go with Deere simply because I like the color green.
Chris Hill: [laughs] All right. Andy Cross, Matt Argersinger, guys, thanks for being here.
Matt Argersinger: Thanks, Chris.
Andy Cross: Thanks, Chris.
Chris Hill: That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you next time.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andy Cross has positions in Alphabet, Microsoft, PayPal, Roblox, and Walt Disney. Chris Hill has positions in Airbnb, Alphabet, Costco Wholesale, Microsoft, PayPal, Roblox, and Walt Disney. Dan Boyd has positions in Costco Wholesale and Walt Disney. Matthew Argersinger has positions in A. O. Smith, Airbnb, Alphabet, JD.com, PayPal, and Walt Disney and has the following options: short May 2023 $100 puts on Walt Disney. The Motley Fool has positions in and recommends Airbnb, Alphabet, Costco Wholesale, JD.com, Microsoft, PayPal, Roblox, and Walt Disney. The Motley Fool recommends A. O. Smith, Deere, and Interactive Brokers Group and recommends the following options: long January 2024 $145 calls on Walt Disney, short January 2024 $155 calls on Walt Disney, and short June 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.