Ricky Mulvey (3:19)

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?

Jason Moser (3:40)

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 because 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, listen, I've got a garage full of toilet paper and paper towels. So I think we at least have the necessities for, for, for now.

Ricky Mulvey (4:05)

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 impacted my shopping habits. Apollo's chief economist Torsten Sloke released a presentation earlier this month and he kind of laid out a timeline for tariffs in a. And there's a slide with the spicy title for a PowerPoint slide. The voluntary trade reset recession points out early mid May, that's when you start seeing those container ships come to a stop. 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 in companies responding to lower sales. What, what do you think about that timeline?

Jason Moser (5:12)

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, we have to look at this and say, okay, well this is, this is self inflicted, right? We started this and it's a matter of trying to figure out ultimately what, what the goal is here. And I think that is still unclear. And we're operating just on this day to day sort of headline economy, so to speak. My, 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. And so that's, that's not far off. And if that happens, I mean clearly the consumer will, will have their say.

Ricky Mulvey (6:00)

Let's take A look at PayPal reported this morning and JMO is, 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. Things think things like payment processing and PayPal likes that is a core measure of its profitability. That was up 7% to about $3.7 billion. Free cash flow and adjusted free cash flow, both down from last year by about 45% in a quarter respectively. So there's some cash flow questions, some operating profitability targets happening. What are your big takeaways from the quarter?

Jason Moser (6:51)

Yeah, I think it was an okay quarter. It was, 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. Chris, as you mentioned, revenue growth was really non existent. But I wouldn't really look into that as much. I think what we're doing, what we're seeing with PayPal, they're doing a very good job of bringing things down to the bottom line. We saw a gap. Earnings per share up 56%. Non GAAP 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, 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 million. 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 yet using the service, so to speak, but returned one and a half billion dollars to shareholders with, 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, some European buy now, pay later receivables and then the ultimate sale of those receivables. So I, 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 now. We, I don't know, I mean, is this a sneaky ad play? It could be. I mean, they're starting to introduce programmatic, programmatic advertising and they're ultimately, they're starting to launch off site ads, which ultimately that's, that's, those are ads that are, they're generated from all of this data that PayPal and Venmo and those properties get.

Robert Brokamp (9:24)

Right.

Jason Moser (9:24)

I mean, that's the beauty of this company. They generate a ton of data because of the consumers that use these services. And so it reminds me a little bit of Amazon back in the day.

Robert Brokamp (9:35)

Right.

Jason Moser (9:35)

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. So it's kind of starting from nothing. But you fast forward to today. I mean, Amazon is generating, they're on a $70 billion run rate for their annual, 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, I think that's going to be something fun to follow with this company as time goes on, particularly as, as they're launching this off site advertising business.

Ricky Mulvey (10:16)

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 and that people are, 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, 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 is 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.

Jason Moser (10:53)

I think that's a very valid point. I mean, Buy Now Pay later is just credit card ultimately in another form. Right. And you have to count on the fact that some of those loans, so to speak, are not going to pan out and they're going to write off delinquencies and non payments there. And we are seeing consumers relying more and more on Buy Now, Pay later for Buy Now, Pay later something. It's 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, for necessities like groceries, that starts to raise at least some yellow flags in the near term.

Ricky Mulvey (11:46)

What do you think about CEO Alex Kriss 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, 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?

Jason Moser (12:04)

I, I wouldn't tell him to pull guidance necessarily. I think that what we've seen with Chris over the, 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. And I like that. Now some people will call that sandbagging. I don't care, whatever you want to call it, it's fine with me. But he sets the bar fairly reasonably so he's not setting these super high aspirations in and we know how that works, right? You set the bar high, eventually you miss it and the market really punishes you. But if you set the bar kind of just not low, but just sort of right there in that mid range, that sort of 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 kind of hit those targets and keep on moving the business in the direction that you intend. So 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.

Ricky Mulvey (13:15)

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, you know, we could be impacted by tariffs, but, you know, people still want to be entertained, they want to learn stuff, they want to listen to music. And before we get into the meat of this conversation, jmo, we, we have a content partnership 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, I'm speaking from a pretty biased perspective, but still in my view, a pretty strong company with, when you're looking into the act, actual business results. Anything there stand out to you from Spotify's quarter?

Jason Moser (14:03)

Yeah, I, I, 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, that was due to what they were calling social charge, 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, 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 and 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, right? The value focused consumer is looking for value and understanding what are they getting for their dollar and 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.

Ricky Mulvey (15:31)

We'll leave it there. Jason Moser, thanks for being here. Appreciate your time and your insight.

Jason Moser (15:35)

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Ricky Mulvey (16:10)

Are you feeling a little constant traded up next, Robert Bro Camp 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 is a drop of 20% or more from all time highs, 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?

Robert Brokamp (17:31)

Well, there are plenty of investments that may add some balance to your portfolio and we're going to talk about the most popular candidates. But I first want to talk a little bit about diversification in general. And we're going to talk about what diversifies a portfolio for what I see as sort of the typical Motley fool investor who owns stocks primarily in the S&P 500, which as you mentioned, Ricky, 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. Right? 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. And over the last 25 years there's been a good range of examples to see how investments perform during different types of bear markets. Right. We had longer ones such as the dot com crash and the Great Recession of 2007-2009. 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. So with all that said, here are some diversifiers to consider and I'm going to give each a letter grade.

Ricky Mulvey (18:50)

All right, what's the grade then for the dividend payers?

Robert Brokamp (18:53)

I'm going to give dividend payers a B. And here I'm talking about a diversified mix of companies that have paid a consistent and grow dividend for many years. And many have an above average yield. Right? And with the current yield on The S and P 500 being 1.3%, it doesn't take much to have an above average yield. And 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 it's 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 and they're all down this year, but not as much as the overall market. And 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.

Ricky Mulvey (20:08)

Our colleagues Matt Argusinger and Anthony Chavon, 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?

Robert Brokamp (20:32)

So I'm going to give them a C plus, which doesn't sound great though I think most people should have a little bit of international exposure and I'm giving them a C plus because frankly, over the past 15 years it's been tough to argue for international stocks, right? US 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, where when international stocks outperform US stocks, you could saw it parts of the 70s, the 80s and the early 2000s, and looking very short term. The total non US stock market is actually up 8% so far this year. While US stocks are down, developed market stocks are doing even better, returning almost 11%. I do think there's something special about the American economy and 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 plus when it comes to diversification. But there's no question that there are long stretches when international stocks will do well, and they're certainly a lot cheaper these days than US Stocks. When you look at PE or dividend yield or anything like that, which is why I personally have between 15 and 20% of my portfolio overseas.

Ricky Mulvey (21:40)

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?

Robert Brokamp (21:53)

As you hinted at, there are all kinds of real estate, so I'm going to give it a range of grades from C to B plus depending on the type of real estate. So a few weeks ago we did an episode on what happens to different types of assets during a recession and we cited research which actually found that home prices actually 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, a 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, right? 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. And they can be a good portfolio diversifier as well. Though, like international stocks, man, they have lagged the S&P 500 for a good loan now. And their diversification benefits can be mixed. They did very well during the dot com crash and the ensuing recession, but that also they were part of the real estate bubble and boy, they got pummeled in 2008. So 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 in 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.

Ricky Mulvey (23:16)

This next one has been on a run. So 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.

Robert Brokamp (23:35)

Yes, it's. It's been quite remarkable. I'm going to give gold a diversifying grade of C plus, though I urge I could easily be moved to a B minus 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 SPDR Gold Shares ETF. And 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. And 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 market in stocks. We're seeing that this year. Saw it in 2022, 2008, and in two of the three bad years during the dot com crash. So it's fine to own some gold as a hedge against bear markets, which is why I own a little myself. I own some of that spider gold shares etf.

Ricky Mulvey (25:01)

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's. 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 is 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.

Robert Brokamp (25:36)

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. And 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. Right. 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%. So 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, and it's boosted by the availability of ETFs that make it easier to invest. So 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.

Ricky Mulvey (26:25)

How about as a strategic reserve? All right, moving on. Let's get to alternatives, however you define them.

Robert Brokamp (26:31)

Yeah, and this is a very broad category that can include really 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. And for the most part, it's difficult or expensive for the regular investor to buy into these types of investments. And you're often not getting the cream of the crop. You're kind of getting what's left over. And depending on how you invest in them, they can be illiquid and or endure really long periods of bad or at least mediocre performance. So 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. And we saw that in 2022 when both interest rates skyrocketed and stocks and bonds fell. So 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, you know, I guess is the whole point.

Ricky Mulvey (27:40)

The next one is Uncle Warren's, one of his favorites right now and that is just cash, bro.

Robert Brokamp (27:45)

Yes, and cash is boring, but I'm going to give it an A, front of the class. And you know I won't belabor this, right? 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. Right. 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.

Ricky Mulvey (28:24)

Another way you can take your money out of the stock market is to put it in bonds. And bro, there are some higher yielding bond funds that look pretty attractive to me.

Robert Brokamp (28:33)

Yeah, and this is why I'm giving this a range of grades actually from C Minus 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, right? U.S. treasuries are considered very safe. Maybe not as safe as they were like five years ago. Fitch and S and 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, right? You'll get much higher yields from junk bonds and somewhat higher yields from corporates. But you got to understand that they will often go down during recessions and junk bonds really go down. I'm going to talk about 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 US 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. You're going to get how much you're going to get back when the bond matures at the 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.

Ricky Mulvey (30:16)

Junk bonds are how I started my casino chain. All right, let's wrap it up with annuities.

Robert Brokamp (30:21)

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 get it annually, which is why they're called annuities. And we all get some of this. Right. And 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. And 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 pension. 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. It's called a single premium immediate annuity. You hand over a lump sum, say, $100,000, and you'll get six 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. And if you choose the 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.

Ricky Mulvey (31:47)

Very good. Robert Brockamp, appreciate you being here. Thanks for your time and insight.

Robert Brokamp (31:51)

My pleasure, Ricky.

Ricky Mulvey (31:58)

As always. People on the program may have interests in the stocks they talk about in. The Motley fool may have formal recommendations for, against, 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.