Ricky Mulvey (2:49)

They do. And Ricky, I think that number may be even higher. But the Bond market has not been acting like its sleepy self lately. What you're pointing out here may be one reason behind this. Some think that the Chinese may be selling a bit of US Treasuries to send a message to the Trump administration, which is say, hey, we hold a lot of your debt and we can put some supply on the market in a hurry. But there's another bit of phenomenon going on here as well is that I think countries are waking up to the fact that if we're not going to project stability, then why would the rest of the world still consider US Treasuries to be sort of this risk free asset? And so the demand for Treasuries has decreased a bit. That's why we saw yields going up. And this is something that I think investors may want to pay attention to. It's something that we take for granted that folks always want to buy our debt because the dollar is the world's reserve currency. But you know, that's predicated on us being maybe the least risky place around the world when you consider everything that could happen. And if we're not, wouldn't you want to go to something safer like German bonds, which is where a lot of players went this week.

Assit Sharma (3:59)

Or how about a physical asset? Gold, Maybe even the volatile Bitcoin.

Ricky Mulvey (4:03)

Even, even the volatile Bitcoin. Correct.

Assit Sharma (4:06)

You know, asset, they don't ring a bell at the bottom, but they might post a truth. Hours before the announcement that tariff pause ish was coming, Trump posted on Truth Social all caps. This is a great time to buy djt. This seems not, not good to me.

Ricky Mulvey (4:27)

Right?

Assit Sharma (4:28)

We're gonna, we're gonna foreshadow a dramatic rise in the market by telling my followers and supporters on social media that, hey, go out and buy stocks right now. And if you listened, you did fabulously well. I think politics and investing are sort of becoming inseparable. And this is another example of that. This seems not good. I don't know. How about you?

Ricky Mulvey (4:48)

So I think this is interesting on a few levels. One is that now if you have a cynical view of the world, you might want to ask, did some people profit by this who might have been in the administration so understanding that the tariffs were going to be set on pause and maybe taking some positions and for that matter, maybe last week on the way down, if this was part of a strategy, I'll leave that to other people to think about who are in a position to deal with compliance. For the average investor though, does this mean, I think what you're asking Ricky does this mean that I have to start following President Trump on Truth Social to understand how I should invest? And is this something now that I have to work into the way I invest? And I would say no, because at the end of the day, stocks follow businesses which have earnings. And so you're better off as an investor always following what happens with the business. And you can take a very similar case with some CEOs who are really great at selling their business proposition. They come with the sizzle. At earnings time, they are able to push stock prices a little bit up, a little bit down just based on their ability to convince and persuade. But at the end of the day, results come out and that's how stocks move over the long term. They really follow what the businesses output. So maybe for a while you could play this game. And of course, President Trump is an influential figure, one of the most influential figures in the world. So in the short term he may have some ability to knock stock prices around a bit. But as time goes on, that effect will surely decrease because at the end of the day, it's really the policies that are going to affect how businesses are making money. And I see as we're talking, you can't see this members, viewers, but I can see Ricky looking at me in.

Assit Sharma (6:32)

Disbelief a little bit. I think it's different and I don't want to stay here too long. I want to get to some other stories. But what's different than the CEO example is let's say Calvin McDonald of Lululemon goes out on X and puts in all caps. Now is a great time to buy Lululemon stock. Exclamation point, exclamation point, exclamation point. And then Lululemon reports blowout earnings. There might be some SEC looks at what, what that is, but I, it's, it's a weird, I don't have a smarter take other than it's a really weird time to be an investor and try not to be emotional despite the violent market reactions. Let's go to this Bloomberg story because there's some broad scale things happening. Bloomberg's Kim Basine is doing some great reporting on what's happening at Nike and these apparel makers right now because tariffs are, you know, kind of paused for now. China is the exception. And if you're Nike, 95% of your footwear production comes from Vietnam, China and Indonesia. Elliot Hill has already stepped into a difficult situation at Nike. That's the new CEO. And you have a big question. What are you doing about your supply chains especially is These countries have the potential to continue to get heavily tariffed, be really expensive, probably impossible to move that production to the United States. One example is like the GDP of folks in Vietnam is about $4,000. In the United States, it's more than 82,000. So I think as we're looking at this tariff war, there are some things that seem to be not everlasting, but really difficult to pull. And one of those is garment production. Even as manufacturing is supposed to be coming back to the United States. I know you looked at the reporting bounce that take off you. What did you think of it?

Ricky Mulvey (8:25)

Yeah, if you're Eliot Hill, I think you are in a tough spot. Elliot Hill was around for 25 years at Nike before he left and came back. So he was there for almost the entirety of the company's push away from China as sort of the concentration of its supply chain. It took 30 years for Nike to make this much progress. So you can imagine how difficult it is. And sure, Ricky, that's not a bad figure. To cite the per capita GDP of Vietnam, it's roughly correlated with what the average salary is, which is some $360 a month. So you can imagine if you ask the average American worker, hey, work 10 or 12 hour shifts, five to six days a week, and you'll get 360 bucks. And you'll realize the difficulty of this proposition for major companies. And there is a rough analogy that's been presented by the Trump administration, which is the iPhone. Like, hey, instead of so many millions of people, armies of people, making the iPhone by hand, we want to bring that back to the US and have robots do that. And here it really bumps up against reality on both fronts because the robotics as they exist, either in China and the US they're advanced. So we've all seen the Boston Scientific Dogs. You and I saw one just the other day, Ricky, live and up close. And we've seen the sort of clumsy humanoid robot prototypes that Tesla has, and we've seen the cobots, which are just arms that pick things up and put them someplace else that Amazon has and other companies have developed. But the manual dexterity you need to sew a garment or to assemble an iPhone is years away on an industrial scale in robotics. And so therefore, if it took Nike 30 years just to still be concentrated in South Asia and its supply chain, you can imagine the difficulty of figuring out how to reorient this supply chain. So I don't envy that task that's on his hands. But we'll get to this in A minute. As we talk about some other retailers, there are some longer term plays I'm sure that Nike is exploring and how it makes its products.

Assit Sharma (10:35)

Yeah, Nike is not alone in manufacturing in Vietnam. Adidas, Puma, Lululemon, Skechers and Allbirds all have a presence in Vietnam, according to be seen as reporting. You're probably not moving your factory from Vietnam to Alabama if you're these companies. Realistically it would take tariffs in the thousands to make it economic, to make economic sense for these companies. But what do you think these extended tariffs mean for these apparel manufacturers?

Ricky Mulvey (11:04)

Well one, they're all smaller than Nike. So they do have the ability to do something like funnily enough, IT consultants have done in the past, like 10 to 15 years, which is to spread supply everywhere in Asia, in Eastern Europe, in Latin America, even in Africa. So when you're smaller and nimbler, the consequences are less. And you look at a company like on holdings as an example, it tends to lease buildings rather than buy them. So it's really going to be easier for it to move supply around. The other element is technology. All of these smaller competitors to Nike have leaned into tech to develop shoes. So again on holdings developed its own sort of robots to spin shoes out of filament. Now that's a really high end shoe and it costs a lot of money. But you can see the writing on the wall that they're going to explore that tech in the years to come is what I was alluding to with Nike. Everyone's going to explore how can we get to that point where some of this stuff really becomes automated and we start to see scale where we don't have to rely on human fingers working in concert to produce our product.

Assit Sharma (12:12)

One company that is probably in my view going to get caught in the middle of this tariff war with China. This trade war is Lululemon. When you look at the last quarter, America's revenue rose 2%. And this was one the Lynchian approach or the Lynchian investor in me. I was at the mall and I'm seeing lines backed up at the Lululemon store. I'm feeling great as a shareholder Assid. Then I look back into the reporting. America's revenue just up 2% in the past year. International revenue rose 30%. And a lot of that growth is coming from mainland China. There's a scenario in this trade war where the, the People's Republic of China government says yeah, we're shutting down your stores, no more business here, go buy from Chinese legging manufacturers. Is this kind of Scenario though inevitable. How much are you thinking about? Or how much should I be thinking about this as a Lululemon shareholder?

Ricky Mulvey (13:08)

Yeah, it's funny, the concentration in Asia at one time looked like it was going to be much more than it is today for Lululemon, but they still have substantial amount of growth, as you point out, centered in places like China. Now it's an advantage in a tariff space world because they're manufacturing and selling within the same geography. But what you bring up is the P word again and I think this is really legit. Okay, well what if the government just says out of here. We've seen the Chinese government play hard with US retailers and really the only one of consequence that's been able to keep on their good side for extended periods of time is Starbucks. Other companies have really come to terms with the fact that you could be asked to pick up stakes in a hurry. There was a book called the One Trillion Dollar Prize. It was put out by some thinkers at the Boston Consulting Group several years ago, which was about how great the Chinese market was and how vast it was and the opportunity there for any US company that could master it. The risk section in that book was at the end and very small. But it turns out a lot of us underestimated the political risk that exists within China. So if you're Lululemon, you are thinking about the benefits you have currently in this tariff based world. But I think you're going to think more about some of the newer things they're doing, like expanding in the Middle east, in Dubai and other affluent areas.

Assit Sharma (14:26)

Quickly, I want to hit this shareholder letter from Amazon CEO Andy Jassy released this morning. The headline Offset 2024 was a strong year for Amazon and he backed that on up revenue growing 10% for that company. That means it grew to $638 billion. Also highlight to eliminate bureaucracy, the movie on Amazon Prime Roadhouse. There's a comma in there and also a meditation on the value of working together in person. And then an extended part about enabling a why culture, what that's meant in the past for Amazon and also what it's going to mean in the future. When you looked through that annual letter to shareholders, what were your high level takeaways?

Ricky Mulvey (15:08)

Yeah, I liked the why culture framework because it is very Amazon. They have made a lot of progress in asking why. I liked the call out to Amazon Web Services but want to point out here, so this is one of the whys. Like why why should companies have to build their own infrastructure? Really, some of These whys have been converted over time into simple, like opportunistic business thinking from Amazon. Right. Your margin is my opportunity. And so just looking around the landscape, seeing what they could attack in retrospect, Jassy sort of dressing it up as, well, we just thought, why do things have to be this way? Well, they're this way. They had to be this way because you guys are sharks. You dominate every market you go into. So, of course, in retrospect we can say why. But I actually do want to honor that part of Amazon's culture. You can be both at the same time. You can be just an assassin and also be someone who likes to sit after an assassination and have a cup of coffee and think, well, looking at the field, why not that target? So this is a compliment that I'm trying to make about Amazon, but I found that a little disingenuous.

Assit Sharma (16:17)

I said the part about Roadhouse, tongue in cheek as well. It's definitely a focus on streaming there. But the part later is the one that really caught my attention. For the next generation wise, big focus on artificial intelligence, as you can imagine. And one of the questions was, why do chips and AI have to be this expensive for customers? Jassy pointing out the ways that inference will be less expensive in the future. And they have a track record of doing that with compute and storage and Amazon Web Services. I think this would be one of the big value drivers for Amazon moving forward. So as we wrap up here, do you think Amazon can do to AI inference what it did to the cost of compute and storage with Amazon Web Services?

Ricky Mulvey (17:00)

Yeah, I think it can over short periods of time. The strategy it's taking is to have very specialized chips to lower those costs. But as the technology changes from what we need out of the LLMs, those chips. So these ASIC chips, very specific type of chips, which are the backbone of Trainium 2 and now Trainium 3, those may have to be replaced on a quicker cycle than they are today. So the jury is still out on that. But the near term looks good. They're starting. Shave some costs and show those savings to customers. It's a great value proposition. I love that why question. That is a great why question to ask, like, why should we have to pay Nvidia so much? Why should customers have to pay so much for inference? And just one more why question that I'll add in, Ricky, which I really liked, is, you know, why should Elon Musk have control over the skies? I mean, we figured out how to get stuff to people's doorsteps overnight. Why can't we put satellites up there? And they're launching their competition to Starlink in short order and we'll see how that fight goes in the next quarters and years.

Assit Sharma (18:08)

Asta Sharma, appreciate you being here. Thank you for your time and your insight.

Ricky Mulvey (18:11)

Thanks a lot for having me. Ricky.

Ricky Mulvey (18:15)

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Assit Sharma (18:36)

All right, you know what red flags look like in a relationship, but how about in a company's earnings report? Up next, Tim Byers joins Mary Long to discuss some of the icks, the red flags he looks out for when companies report. And on Monday they're going to share some of the green flags.

Tim Byers (18:59)

Tim, you and I, we're both based in Denver, Colorado. We like to go into a co working space. When you get people together in person, sometimes that spurs interesting conversation. Some creative energy happens. And once upon a time I actually forget what company we were talking about. But it's we started talking about something we didn't love that we were seeing in management and you mentioned that that was kind of an ick and that that single word started an idea about wait, what are your other icks? And on the flip side, what are your kicks? What do you love to see a company do? And so we're going to kind of break that down and get a little bit inside Tim Byers head and have a better understanding first of the icks and then of the kicks that you don't and do like to see when management rolls them out. So we'll start with the icks because this is what inspired this whole idea in the first place. Atop Tim Byers ick when a company changes reporting metrics fitting because that was what we were talking about initially. An example you flagged as you and I were going back and forth was of Ichi. I had not even heard of this company before. They're an entertainment company out of China that was spun off in 2018. Once upon a time it was called or referred to as the Netflix of China. But post Covid, Ichi was struggling to release content, partially due to increasingly sensitive government censorship that led to a slow but steady decrease in Ichi's popularity. And as a result of that, management began pointing to a new metric, the number of connected TV monthly average users. Why wasn't that useful?

Ricky Mulvey (20:30)

It's not that it isn't useful, Mary, it's that it was sudden and it seemed entirely designed. It's a bit like moving the goalposts. You may have heard this term in sports. Like, you know, hey, you know what, don't pay attention to this over here. If I do this, I am amazing, right? And that is, that's the thing. It's moving the goalposts. It's, you know, you know, you go out to, you go out to play golf and you know, like today, you know what I'm, I shot five under, but I shot it from the blue tees, not the black tees. But that doesn't matter. That doesn't matter. It's, it's still the tease. And so once you change the, the context of what it is you are measuring and if you do it suddenly and if you do it to make yourself look better, that I think is, is a real ick, Mary, because, and in the case of iqi, again, not necessarily wrong. Like, connected TV is a big thing, it's an important thing and you want to be able to isolate, you know, how you're doing here. But I would have been a lot better, I would have been a lot more interested in it if you had kept the old metric and said, like, look, here's the whole universe of things that, you know, we're, we're looking at. And by the way, something you're going to want to pay attention to over the next several quarters is this connected TV stuff. That would have been different, would have been like, okay, I see you're going in a direction. You're not playing three card Monty with me here. What you're doing instead is pointing me in a direction. But that wasn't the thing. It's like, it's, it's trying to get you to don't look over there, look over here and see how good we're doing. It's just a little bit weird. And especially where this gets really icky. And I can't say that I cheat did this, so I don't want to accuse him of something that, that isn't, isn't true. But it always raises this ick is so important, Mary, because it raises the possibilities. Once they do the, you know, the diversion tactic, then it is sometimes followed with, in the proxy statement, a whole new set of incentive pay items that are tied to these newly achievable goal posts.

Tim Byers (22:57)

Yeah, changing incentive structures is one thing that we can perhaps tackle a bit later. But it also sounds like what really turns you off in this setting is like the timeliness of it. So it's the sudden change rather than, hey, we're preparing you, we're steering the ship in a different direction. Here's a reasoned explanation of why we're steering the ship in a new direction.

Ricky Mulvey (23:19)

Yep.

Tim Byers (23:19)

As we change that, we're going to be paying attention to new metrics. This is what those metrics are. So, okay. Another company that comes to mind when I think of this ick in particular is Netflix. They change their reporting metrics.

Ricky Mulvey (23:32)

Great example.

Tim Byers (23:33)

Yeah. Do you get the heebie jeebies when. When they stopped reporting quarterly subscribers growth and average revenue per membership?

Ricky Mulvey (23:41)

No, Exactly. They are the model of how to do this. Right. So I'm glad you brought up Netflix. They had been preparing the market for like two years. Almost like, hey, you know what? Average revenue per user, that's still thing. We're going to keep reporting it. But just so you know, that's not really going to be the big emphasis here. You know, our total. Our total member count is not going to necessarily be the biggest metric here. And part of the reason for that, it made sense. Average revenue per user. I shouldn't have said average revenue per user certainly is an important metric. But they were talking about total memberships, like total members, and everything was tied to how many members could they get. But that was changing as soon as they started talking about advertising. And then it was about, look, we want to be able to maximize the amount we can get from every member we can get. So it isn't necessarily just about scaling a massive number of new members. It is about how efficient we are, how profitable we are on a unit basis. Because this advertising business is going to be really interesting for us and the context of our membership, like the contours of it, is going to change. And all of this made a huge amount of sense. And they didn't get rid of the old metric right away. They kept reporting it, kept reporting it, kept reporting it, warning people from when the change was coming. And then they did it and it was like, okay, I can see what is happening here and you aren't springing this on me suddenly. I think Netflix did this exactly right. If IQI was weird and did it a little, you know, fishy, Netflix was totally not opposite end of the spectrum.

Tim Byers (25:38)

So we'll move on to another ick, but we'll maybe kind of stick with this theme of time. Because another ick that you flagged was sudden leadership changes, especially CFO departures. So again, it falls in this same bucket, there's, there's the groan, the grumble, but it sticks in the same bucket of you're unprepared and you're not warning investors and shareholders of these changes and how you're going to adjust moving forward. So I was trying to think of an example of one of these and Lucid Motors came to mind. The EV startup. They went through a CFO shakeup in late 2023. Sherry House resigned pretty immediately to pursue other opportunities, but didn't outline what those opportunities were at the time. This was after a pretty volatile year for the company. It had cut production expectations, reduced headcount, seen a pretty steep stock decline. More than a year later, Lucid continues to struggle, but House is now CFO at Ford. So she definitely won the breakup and did indeed leave to pursue other opportunities. So the thing that I found interesting about this, that I wanted your take on is okay, sometimes leaders realize that the current company doesn't have the resources or the will to support them on the vision that that leader has. Sometimes people just get poached. Like when is a sudden departure like that a reflection of a company leader saying actually there are better making a move for themselves versus leaving because there is no more room for them at the company? You see the difference, the distinction that I'm trying to make.

Ricky Mulvey (27:05)

First, I just wanted to say I love that you use the term won the breakup. Great, that's fantastic. This one is harder to tell, but I think the real ick here is when you see a sudden departure and it's like in an 8K filing and it's one of the, you know, we sometimes call them the, you know, it's a bit like a non denial denial pursuing, you know, leaving to spend more time with their family. Oh, that's adorable. Except it's not true. Come on, that's a standard excuse. Or pursue, at least pursue other opportunities is more truthful. You know, it's probably closer to the truth, but they can't say more than that. I prefer, especially when we're talking about executive transitions, we say like so and so has let us know that they are intending to leave, retire, whatever it may be, and it's going to happen within a quarter or two. Just like give a quarter because you're a senior executive. It's when it happens suddenly that it really raises questions. And more often than not, what's happening here is they have either been given a great opportunity at another company, winning the breakup, to use your words here, or there are warning signs here, or there's a, there's a disagreement of some sort and they have said, like, okay, I'm done, I, I need to be out. You will sometimes see in some of these announcements that there was no disagreement with management about blah, blah, blah, blah, blah. You'll sometimes see that. And that in itself can, can be a tell. You're like, oh, okay. Well, that's, that's interesting. They feel like if they're saying that there is at least a general feeling that there may be some discontent inside the company, whether or not it's with this specific person. Maybe not, but there's. There are some real questions here. The suddenness of it is, is very important. But the, the excuse is one of those, like, so the real warning excuses are leaving to spend more time with their family. That's probably the big one. Or no excuse at all. Pursue other opportunities. Not great. At least it's more truthful retirement, not a big deal. Especially if it's been. This person is going to spend the next three quarters helping find their successor and then they're retiring. Who cares? That one doesn't matter.

Tim Byers (29:49)

We'll move on to our final ick to close this out. And that was turning acquisitions to fund growth. So when you and I were brainstorming, brainstorming the outline for the segment, you said Cisco is the prototypical example of this. Why do you have beef with Cisco's acquisitions? Tim?

Ricky Mulvey (30:04)

Yeah, I like that, I like that you personalized it there.

Tim Byers (30:07)

What, what's, what's the problem?

Ricky Mulvey (30:09)

Why do you hate Cisco? What is wrong with you?

Tim Byers (30:12)

Answer.

Ricky Mulvey (30:13)

Okay, I think Cisco from years ago, not the, not the current incarnation of the company, but they had just, it was, it was just really becoming obvious that they were having a hard time accelerating the growth in their core market because they were, back in the day, they were a router company. They were making routers for the infrastructure of the Internet, routers, switches, gateways, things of that nature. So networking equipment. And that business was good. And then it was just not as gangbusters a business. And so in order to keep growth going, they started thinking like, where else can we buy growth? And they started looking around the market for places to buy growth, even if the businesses were not directly related, even if they were only loosely related. And so they just bought an absolute ton of businesses. And it was every year, they were doing it every single year. And even though a lot of them were related businesses, when you keep doing this and loading up your balance sheet with more goodwill. More goodwill, more goodwill. There's a law of large numbers here, Mary, that if you're gonna buy a lot of inorganic growth, that inorganic growth is not cheap. It's gonna result in goodwill on your balance sheet. And the more you do this, the more likely it is one of those acquisitions is going to fail. And when it fails, and if you pay a lot of money for those acquisitions, then the goodwill write off can be enormous. And that can really hit the stock. It just. You. You are essentially. The way I would describe this is if you are trying to grow by just acquisition or primarily by acquisition, it's kind of like eating an all carb diet. Yeah. You might get big, you might get muscular. You also might get fat. You might get. You might get fat as well.

Assit Sharma (32:21)

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. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.