Emily Flippin (3:12)

Yeah, it sounds like more of that K shaped economy that is the new buzzword it feels like to talk about the economy in the second half of this year. I've heard more about the K shaped economy and the pressured middle class more this year than any other year in the past. But it does seem like that is true, right? Big spenders are willing to still spend big but unfortunately the middle class is being pushed out for a lot of these retailers. If you aren't positioned to be a discount retailer, it is concerning. And asit I know we we talked a lot about how resilient the consumer has been over the years. You're pretty good at zooming out. I'm surprised that the resiliency has been what it is despite the inflation, the tariffs, the challenges that we've seen. But when you look at the holiday season, is there any trends in particular you're watching that would indicate the status of the consumer for you heading into 2026?

Asit Sharma (4:01)

So Emily, I don't see it a lot differently than Jason. The trends that he mentioned are playing out very easy to spot. So affluent shoppers, they're propping up the overall numbers and the more strapped of us are still shopping. It's just that I think we are exercising more selectivity. That's what I'm seeing in the marketplace. Ensure Buy Now Pay later is increasing as a funding source for strapped consumers. When we think about selectivity as a phenomenon, that may be what's driving a K shaped destiny for retailers. For example, better results from Walmart symbol wmt. As we said before that we saw earlier in this season, they exercise broad based pricing. They can attract affluent shoppers who are dripping down and they also keep appealing to those of us who have less to spend tjx companies, they have the selection and they're really great at getting their inventory from distribution centers into stores on almost a weekly basis. And Shopify S H O P Shopify is great at choice. So if you have less to spend as a consumer, where will you find the place you will spend your dollars well with your specific niche interest and that often comes from a Shopify based store. Now speaking of larger trends, when you look out at Cyber Week I saw the data that you did Emily and I also looked at some other data, maybe more online commerce specific from Adobe analytics that seems to suggest that the mega retailers like Walmart think of Target Best Buy symbol BBY and Amazon symbol AMZN are focused or have been focused this season on moving big ticket items. So they're going straight to those affluent customers. They have deals to bring them in. Put that together with what the higher end consumers are doing. They're power users of AI tools so reportedly they used a lot of AI chatbots this Cyber season to find those deals. So the two matched up with each other and so we end up with a 7.7 increase in cyber Week sales. This online commerce portion that's about $44 billion, nearly matching last year's increase which was just over 8%.

Emily Flippin (6:18)

I consider myself a little bit of an AI laggard unfortunately. But even you know, the people like myself, I I used AI tools to help me with some holiday shopping over the course of the past weekend and I expect that to your to your point Austin A. It's probably driving a lot of the E commerce expansion, but also just providing a new avenue for for consumers who are willing to spend. But point it does seem like consumers have been picky with the the what they're purchasing in terms of stocking their their hypothetical stocking here. But maybe investors should be just as picky with businesses they put on their shopping list too. So up next we're going to be turning to Jason. He's going to talk to us about the first stock that he's considering and looking at as we head into the end of 2025 and why it could be a winner just beyond the holidays. So stick with us.

Jason Hall (7:05)

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Emily Flippin (8:10)

Welcome back to Motley fool money. I'm Emily Flippin here with Jason hall and Asad Sharma talking about our favorite rule breaking stocks for your holiday shopping list. We talked about 2025 holiday spending and what it might be telling us about the consumer. But now let's turn that into a concrete stock idea. Jason, what is the stock you're putting on investors holiday list this year and why does it deserve a spot in a portfolio?

Jason Hall (8:31)

Emily, what do you say we head down to Mexico for some holiday grocery shopping at BBB Foods? What do you say?

Emily Flippin (8:37)

I think that sounds great, Jason.

Jason Hall (8:39)

Okay, so let's start with what it is. It's a hard discount grocer and one of the fastest growing, most dynamic economies in the world. Business model is really simple and it's proven. Instead of offering a lot of different versions of the same product like you might see at a Walmart, which by the way has a pretty huge presence south of the US Border, BBB Foods offers a far more limited selection, prioritizes private label products when possible. This helps in some really, really important ways. First, it simplifies its inventory management, reducing the number of SKUs that it carries, reducing buyer interactions that helps keep operations from the distribution all the way through the store shelf more efficient. Next, it helps in two massively valuable ways inside the stores. By having fewer single product choices, it has more room for more product types. As a result, customers spend less time clogging the aisle trying to choose which dishwash soap to buy and more time grabbing more products across more categories. Business model is really, really working. Sales at existing stores are routinely growing in the high teens. Even as it opens stores new stores at a breakneck pace. Companies over the past four quarters has opened 528 new locations, now has over 3100 stores has a goal to almost 5x that count in coming years.

Asit Sharma (10:02)

I like this pick on many levels. I am a fan of the long term trajectory of the Mexican market and I like this simpler consumable selection that you're talking about. I just got back from a trip to India and realized when I was there like yeah, okay, commerce is becoming more and more like the west, but it's still so nice to walk into a store as a consumer and not have a gazillion choices for simple items. So I think that's to the favor of the retailer. Good economic model Jason the only thing that worries me here, here a little bit is that the balance sheet looks a bit stretched. I mean working capital is upside down. Accounts payable is three times the size of inventory, which means they could really be stretching their vendors and their high lease liabilities on the books. I think operating cash flow looks good, but part of this might be on that inventory payables mismatch I just mentioned and they seem to have a lot of capex needs as they go forward with that store build out. So just any concerns there that the company might become capital constrained in the future?

Jason Hall (11:04)

Yeah, I don't think so. But I'll say this, that working capital deterioration is one of the things that I have noticed since the company went public a couple of years ago. But the interesting thing is that in a way there's a little bit of a feature going on and less of a bug. It has a negative working capital cycle which means in a lot of cases it's actually selling goods and getting money from its customers before it has to pay its vendors. Now that's not going to last forever. But because the business is in this phase where two things are happening. Its comps are 16, 17% comps growth. So it's having to bring a lot more inventory into its existing stores and it's opening new stores at like a 15 to 16% rate. It's bringing a ton of inventory into its stores, but it's selling it out of the stores and collecting cash flow before it has to pay those vendors. So that's why you're seeing that the money that it owes out growing at a faster rate than the inventory in. So it's not going to last forever. But in the current high growth, high comp stage, the mismatch you identify, like I said, is really more of a feature, especially when you combine it with a lot of the cash outflows on the balance sheet are tied to assets that it now owns that are tied to its store count growth, it generates a lot of operating cash, and that operating cash is largely sufficient to support its growth. When you especially when you pair that with about 130 million in net cash, a really small debt position, and a pretty decent amount of cash, it kind.

Emily Flippin (12:36)

Of reminds me of a hybrid between Dutch Bros. And Sprouts Farmers Markets. Those tickers are B, R O S and S, F M. It's not exactly a fair comparison, but when you guys talk about the balance sheet and the extension there reminds me a little bit of what Dutch Bros. Is going through. Also building out its store count at around that 15% clip, but also with some of the niche that Sprouts Farmers Market has cultivated in terms of a grocer here in the United States. Obviously not the same footprint and different competitive positioning, but this is certainly one that I'm really interested in. Jason and Asit, I think you have your work cut out for me at least to convince me about your idea. But up next we're going to be talking about your own rule breaking idea for your holiday stock list, as well as how to put them all together in a long term portfolio. So stick with us.

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Emily Flippin (14:32)

Welcome back to Motley Fool Money. We're building a holiday stock shopping list of rule breaking ideas. Jason's already shared his pick, but Asit, I want to turn to you now. What stock are you putting on our holiday list this year and why should we be excited about it today?

Asit Sharma (14:45)

So Emily, I am putting a very rule breakery and frankly slightly risky stock on my holiday list for you this year. Astera Labs is the company symbol A L A B. Happy Holidays. This is a specialty company in the semiconductor industry that makes components that boost signal speed and data transfer within data center. So think of components in a Data center, maybe GPUs and CPUs talking to each other. It makes components that boost signal speed and data transfer within data centers. So think of GPUs and CPUs in the data center. Astera Labs makes the widgets that speed up the conversation between those components. This is a niche manufacturer. It supplies to Nvidia, symbol nvda, amd, Advanced Micro Devices, also symbol amd, intel symbol intc, and many cloud hyperscalers that you have heard of. Now it's working on a next generation technology Emily called Compute Express Link. And this is sort of exciting because it will allow different parts of a server or a server rack to share memory, to pull memory together to make all of the processing within that rack go a lot faster. This is going to fuel growth for the next few years. Astera Labs is already profitable. It has an operating margin of around 15%. Revenue is growing at a double digit clip. What I like about this company is that it's founder led, the two co founders own about 9% of shares and it scores high in our rule breaker database on several fronts. The proprietary Motley fool rule breaker database, it has a Super score of 82 which is pretty good. Now this is a classic case of a first mover in an important emerging market. So that is the signal interconnect market. And also you could say it's overvalued, which is another trait of a rule breaker. The stock does trade at a premium. It fails the COLA test. If you snapped your fingers, would the world miss Astera Labs? I mean most people have never heard of this company. So right now the answer is yet it fails it. No one would miss this business. But could it become more important with this Compute Express Link technology I mentioned? Yes, companies like Nvidia are very interested to see that platform developed. I would urge anyone who wants to invest in this to do your homework and maybe dollar Cost average in take a rational position size.

Jason Hall (17:10)

My question asit is how much of this is just the picks and shovels play on the continued proliferation and build out for AI infrastructure that's happening now. Is it mostly that or is the cloud broadly and accelerated computing broadly enough to make this a winner if the current AI race doesn't lead to the monetization promised land that we're hoping for?

Asit Sharma (17:31)

I love this question Jason, because I think this is a question we need to ask of almost every company that we invest in that is getting a tailwind from all this build out. The answer is that Astera's technology is going to be important either way. So I think there's a place for this company even if the promised build out doesn't materialize to the nth degree. We should remember here, and I should have mentioned this earlier, it does have a high concentration of customers. So just a handful of these big hyperscalers and big semiconductor players will make up 70% plus of revenue in any given quarter. So that may be spread between three or four companies. So for the time being it's concentrated in this idea, but as the years go on it's going to become less concentrated and also I think either way it's still going to be around. The question is how much we'll be able to get out of this very huge build out in AI scale.

Emily Flippin (18:25)

I will say I think the bar was that high. I love a Mexican retailer here, but with a Super score of 82 Asset, I think you undersold that in the rule breakers database for Astera Labs. It's incredibly high. Certainly a very interesting company. Jason, as we wrap up today's show, I want to pass this question off to you. If if our listeners are somebody like me and they like BBB Foods and they also like Astera Labs and they're thinking about how they can add these to their portfolio just impulse buying stocks the same way they might be impulse buying shopping lists this holiday season. How should they think about adding these to a portfolio?

Jason Hall (18:57)

Well, FOMO is real and the data does suggest that maybe thinking about FOMO and buying all of the stock you want to own up front is the best thing to do in the aggregate. But we're not aggregates. We're humans in the real world and we have to find a strategy that we can stick with that will work in our real life. And for me that generally means that I do start with a small starter position and I can add to it over time. And you think about these two companies we've talked about. They're younger, newer, very volatile, very exposed to macro things that can make the stocks move a ton. And they're the kind of businesses that you want to add to over time. I think generally BBB Foods, for example, I've bought at much lower prices than today's and I've bought it at prices that are very similar to the current price. So I think what matters more, evaluation is important, but business execution for a company that's trying to like 5x its size over the next 10 or 15 years, that business execution is how we're going to profit. So a deliberate process that focuses on adding more money to winning businesses, this probably sounds really rule breakery. Helps me avoid both the FOMO and the trap of the impulse buy. I'll save the impulse buys guys for the junk food at the supermarket checkout.

Emily Flippin (20:15)

Those are certainly fine impulse buys to have. What I'm hearing is to keep our portfolios a little bit longer term. Focus on our holiday shopping lists here. But for our listeners, I hope this gives them a couple of interesting new stock ideas that they might add to their own holiday shopping list as we round out the end of the year. Jason and Asit, thank you both so much for joining today.

Jason Hall (20:32)

Thanks, Emily.

Asit Sharma (20:33)

Thanks a lot, Emily.

Emily Flippin (20:34)

As always. People on the program may have interest in the stocks they talk about in the Motley fool, may have formal recommendations for or against. So don't buy or sell stock based solely on what you hear. All personal finance content follows the Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for Jason Hall, Asit Sharma and the entire Motley fool money team. I'm Emily Flippin. We'll see you tomorrow.