A (3:57)

I want to broaden the lens a little bit here because I think bank earnings is like holding up a mirror to Wall street and the market writ large. And so I think it's a good way to kind of focus on the vibes a little bit. And John, I'll send this to you because things like large debt issuance, M and A activity, IPOs, things like don't, don't happen as much when everyone on Wall street is miserable. So like when you have, you know, seeing these earnings, a little bit of the vibe check, John, where does your mind go as an investor when looking at what these results say about market vibes?

C (4:33)

Yeah, I think a lot about incentive structures at a time like this. I think everyone knows that I'm not like Matt Frankel. I'm digging into the big banks. That's not how I roll. But, you know, it does make me think big picture. Because of that, I'm not thinking about it down on level. I'm zooming out. And when investment banking is humming, the economy is strong. Look for good businesses, that's a good thing. There's nothing to complain about with that. But there are some incentive structures that push more things in this space and so bad things can slip through. And so as one example, like, I'm a little bit suspicious of IPOs right now. I think that there are good companies that can come public right now, but there are also some bad companies perhaps that are seeing a window of opportunity and saying, hey, let's go ahead and get through now, while the getting is good, for example, a lot of special purpose acquisition companies have come public in recent months. So that's kind of a blank check. Not really a business there. Who knows what that's gonna be? I think a company like Fermi, this is a data center play, but without data centers yet. So it's like looking way out into a decade into the future. Can it work? Certainly can. But is it a little bit more risky than perhaps we would see in other times? I think it is. So I think that discretion is a very important quality for investors to have, particularly with IPOs when investment banking is strong. And similarly, I'm suspicious of merger and acquisition deals. So good companies can pull these off, and I can think of several companies off the top of my head, good companies will pull these off in a time like this, when investment banking is strong, hey, great, they can get better access to capital and make some deals happen. But again, other companies with slowing growth can make some bad acquisitions and in the end destroy shareholder value. And so I think, once again, having that suspicious eye, having discretion as a shareholder is important. One deal that I'm looking at under a microscope right now is Mobileye in its $900 million acquisition of Mentee Robotics. Look, I get the big picture idea with, you know, vertical integration in robotics in this real world application, perhaps a big trend over the next decade, humanoid robots, but, you know, is this a value creation deal? Is this the right deal right now for mobileye? I'm not convinced yet. I'm still thinking about it. So I think it's important for investors to similarly evaluate M and A deals right now.

A (7:04)

Certainly appreciate the Charlie Munger invert, always invert sort of approach here where, you know, whether good vibes means more good vibes are on the way or good vibes are kind of making those grasps at the next leg, leg of growth in, in ways that we don't normally think of it that way. Well, a little bit on the vibe check thing, especially for banks, is that the Trump administration proposal to cap interest rates came out this week. And we'll take a look at the ripple effects of capped credit card rates after the break.

D (7:32)

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A (8:27)

Earlier this week, the Trump administration put out a statement about wanting to cap interest rates on credit cards at 10%. Now, there's a lot of paths we could take with this discussion, some of which were not too keen to walk because they'd likely turn an investing theme podcast into a political one way too fast. So there's some obvious things we need to consider as an investor when thinking about something like how changes to credit card environment would change a lot of companies, first and foremost is what are the chances of this happening for us as investors, and if so, what are the potential outcomes? So for now, let's focus on the potential outcomes aspects. I think that's a good discussion for us to have here and kind of little like scenario planning, game playing, however you want to put it. Matt, if we put this into the scenario of it actually happening, how does this look on paper?

B (9:18)

Yeah, I mean, I think everybody agrees that there's a credit card problem in the United States. It's definitely a problem that we have way too much credit card debt. We're paying too much in interest every year. I don't think a 10% credit card rate cap is practical, nor do I think it's the best solution to the problem. And it certainly is a problem. The unintended consequence would be that credit card companies would essentially be forced to drop consumers that represent a relatively high credit risk and not just like the bottom customers. I'm talking about anyone without stellar credit. Think of it this way. If a bank is forced to cap credit card interest rates at 10% and their cost of deposits is 3% for, you know, savings accounts, that's a 7% gross margin. Consider that many credit card companies, like Capital One, for example, have a 6 to 7% charge off rate. That would eliminate that profit entirely. That's before you even factor in the cost of providing credit card rewards that everyone signs up for these things for. And the general cost of running the business, you know, having branches, having Offices, things like that. Credit cards would be completely unprofitable. The only way to make that work would be to get rid of all but the top tier credit customers who ironically are the least in need of access to credit. This, this would likely have very broad economic consequences in addition to hurting bank profits, such as sharply lower consumer spending as people wouldn't be, they'd be more hesitant to spend money.

A (10:45)

Yeah, the people who don't carry a credit card balance but you know, benefit from all those perks are a little bit of a loss for a lot of credit card companies. So certainly one of the things you could see going away pretty quick. And to be honest, and I'm a little dubious of the practicality of this as well, we actually saw something relatively similar try to get implemented during the Biden administration. Back I think 2022, 2023, they tried to cap interest rates on payday lending using the Consumer Financial Protection Bureau. But instead of delivering, you know, interest rate savings to the borrowers who are using payday lending or other like small sum, short term, uncollateralized loan products, it just made payday lenders much more selective in terms of credit rating and the ability to get people pay back because they wanted to lower, lower their counterparty credit risk rather than benevolently give up interest rates. So I struggled to see a different outcome in credit cards than what we saw in payday lending, even though payday lending is a much, much smaller business than credit. That said John, as you mentioned in our pre show planning, there are some people that say look, this can work, it will work. And it's not just consumer advocates.

C (12:04)

Well one person who is very excited about this idea of capping credit card rates is Sebastian Simitowski. He's the founder and CEO of Buy Now, Pay later company Klarna. So not exactly a neutral party. He does have incentive to see this and because listen, he's actually publicly advocating for a 0% cap on credit cards going even further. And so this would in theory benefit a company such as Klarna, which is why he's very excited about it. You look at Buy Now, Pay later, it's 0% interest over 12 months. And so some people are looking at this as okay, if we cap credit cards at 10% or 0%, that would push them more into competition with Buy Now Pay Later. But as Matt points out, I mean it's not that simple. You change the entire financial structure of a credit card when you, when you change the cap rates and so it impacts the credit card points, slash miles and what they're offering, they're going to drop certain customers because the profits just aren't there. In fact, Wells Fargo analyst Mike Mayo points out that at the current proposal and it would wipe out one year of credit card profits. And so that completely upsets the apple cart in this industry for sure. Yeah, it would in theory push more people to a company like Klarna, which is why Sebastian Simachowski is so in favor of it and why I think that maybe we should watch companies in this space. And as a reminder, you know, Klarna is more than just Buy Now, Pay later. It's also has its Fair Financing product, Fair Financing Service. This allows for larger purchases and it's more than four payment installments. And so this is a little bit more towards the credit card territory as far as what people are buying. So yeah, maybe a proposal like this completely pushes people towards these, these companies like Klarna and more Neobanks.

A (14:02)

Yeah, certainly the Buy Now, Pay later proliferation might make it. Again, trying not to inject too much of my own thoughts into it, but again, I'm dubious. But having the proliferation of Buy Now, Pay later might able to help thread the needle with something like this here. So John seems a little bit more on board with Buy Now, Pay later as companies to watch should this happen. Matt, I know you're a Buy Now, Pay later fan as well, but again, not considering the probability of this actually happening. What are some of the banks, specifically the traditional bank credit card companies that you see would be more affected than others?

B (14:37)

Yeah, so I mean, just to be clear, I don't think a 10% rate cap has any chance of happening, but we could see some sort of restriction on the credit card industry. It's kind of a bipartisan thing. Now, the President messaged about it then. Elizabeth Warren has been crusading for this for years. The two of them actually had their first ever phone conversation about this. So some sort of restriction could be placed on the credit card industry. So there are the obvious credit card heavy banks, like you have your Capital One, you have your American Express, but I mean all the big four, the bank of America, JPMorgan Chase, Citigroup, Wells Fargo, all have substantial credit card exposure. So I don't think that the 10% thing is going to happen. But think like I mean, John mentioned, Buy Now, Pay later is an obvious beneficiary. But think of any company that focuses on alternate ways of borrowing money. Home equity loan companies, companies like SoFi. The President said absolutely nothing about capping personal loan interest rates. So anything that has offers alternative ways of providing the credit that Americans have grown accustomed to could could be companies to watch here.

A (15:40)

There will always be a new and inventive way to get access to credit. That's one thing that banks are very, very good at doing. After the break, we're loose. Stocks on our radar.

D (15:49)

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B (16:52)

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D (16:52)

It's only while supplies last. That's drinkag1.com fool. Drink ag1.com fool and we'll wrap up.

A (16:59)

The show here as is our Thursday tradition with stocks on our radar. We drew straws at the beginning and John gets to go first this week. John, what are you looking at?

C (17:07)

Yeah, I'm looking at 5 below ticker symbol F I V E. This Stock is hitting 52 week highs, getting back close to all time highs that it reached a couple of years ago. So maybe listeners wish that I would have highlighted this sooner but I have highlighted it before but I'm highlighting it here again today. Just as a quick reminder, this is a discount retail chain for teens and preteens. New stores have a really short payback period of about a year. So that's really cool. When they use that cash, they make it back in profits pretty fast. And they're going from roughly 1900 locations today to over 3, 500 long term is what they're targeting. But Tyler, do you know what the problem is with a chain like Five Below? The name Five Below means items that are priced at $5 or less. And so with inflation, investors have worried that a company like this may be not able to raise its Prices as it needs to. And new management came in last year though and is proving that indeed this business can. So old management had a five beyond section of the store and it did okay. So basically that was a section of the store where it was more than $5. New management came in, got rid of that section and just started selling products at all price points throughout the store. Customers have not cared at all. In fact they are buying these higher priced items. It's boosting same store sales far beyond what management expected. So the holiday same store comp is supposed to come in at 14 and a half percent. Management only thought it was gonna get 6 to 8%, so roughly doubled its expectations I think at this point, five below. Unlocking these higher price points bodes extremely well for the business long term and it's why I'm looking at this stock today.

A (18:48)

Certainly a nice intrastate dynamic era with a traditional box retailer. Matt, what are you looking at? And I think it's going to be a bank. My guess.

B (18:56)

Yeah, I'm looking for Capital One. Wouldn't you know it, the president wants to cap credit card interest rates at 10% and capital one pulled back by 10% in response. Nice coincidence there. As we've discussed this, the 10% cap is unlikely to happen. I don't know what's going to happen, but I mean this bank has excellent profitability. It trades for less than 12 times earnings right now. The Discover merger which was completed last year creates some really interesting possibilities. Capital One is now the only major bank that owns a payment network. It will take time, but the company's gradually moving its own portfolio, especially debit cards, onto the Discover network, saving the interchange fees that it would normally be paying to Visa and MasterCard. And it could ultimately provide third party processing for other banks cards with its own network. Capital One, it's a founder led bank. A lot of people don't realize that it's the largest founder led bank in the country and has an excellent credit card business, a massive customer base even, especially now after the Discover merger. And it's doing a great job of taking deposit market share from the other branch based institutions by offering things like high yield deposit accounts that the big four don't offer. So Capital One's one that I'm really watching right now.

A (20:06)

Well, I go last, which is typical of my B track, deep cut, whatever you want to call the slightly off brand stuff that I like to do. And the company I'm looking at is Southeast Airport Group or Grupo Aeroporto del Solreste. Apologies for the bad pronunciation. Either way, they both. Whatever name you choose to say the ticker is ASR. This is one of the three companies in Mexico that has an operating license to operate airports in the country. And as the name suggests suggests most of the airports are in the Southeast. It owns the operating license for Mexico's second largest, second most busy airport, which is Cancun, and is one of the larger sort of operations in the country and is a little bit more touristy focused because of the Southeast exposure. But it is an incredibly lucrative industry, one that people don't think of very much because it's basically like they get a. It's almost like a regular regulated utility in the sense where their profits are kind of capped and they have these set fees for everything they do, but they basically have a regional monopoly wherever they work. Because it's an airport, you. You don't get a lot of competition when it comes to airports. So it's been an extremely lucrative business for more than like 25 years. They basically are allowed to raise rates as they put in new capital plans very similar to regulated utilities we see in the United States. And basically anything that involves higher traffic, so higher tourism, things like that. It's been a very good time in the Southeast area of Mexico, at least with operations in the airports. It's a company right now. Its stock trades about 15 times earnings. It has an irregular dividend. It's past 12 months it paid an 11% dividend. I wouldn't expect that to happen again in 2026. But still it tends to pay rather lucrative dividends over time. So solid long term business trading at a pretty cheap valuation and one that has a propensity to throw off cash is something that I really like to own. And that is what I can give you for that one. And that brings us to the end of the show. We got five below Capital One and Southeast Airport Group as our stocks today. All the time we have. Matt, John, thanks for sharing your thoughts as always. People on the program may have interests in the stocks that they talk about. And the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored, confident and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd and the rest of the Motley fool team for Matt, John and myself, thanks for listening and we'll chat again soon.

D (22:51)

It.