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- [00:02]
Travis Hoyam
No margin calls for the next hour. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoyam, joined today by Lou Whiteman and Jason Moser. Guys, we've got to start with the news of the week. Lou, that is situational awareness getting a margin call. The hot investor of 2020, 26 is now out of the equity markets. What in the world happened?
- [00:31]
Lou Whiteman
Yeah, so let's talk about this because this is fun. First of all, Situational Awareness, the AI focused hedge fund founded by, I hope I can say this right, Leopold Aschenbrenner. I think it is. Now Leopold has a heck of a history already. I mean it's almost like the Forrest Gump story here. All right, guys, he was at FTX with Sam Bankman Fried. He was at OpenAI. And then he went off and he actually just wrote, I think it was a substack or something, talking about situational awareness. Basically that a was going to eat the world got a lot of buzz and he turned it into a hedge fund. His hedge fund, same name. Situation Awareness focused on AI bets. And you know, as the tide was rising, so too did his portfolio. The fund borrowed heavily to multiply its returns. We don't know exactly how much, but we know this because the fund's return were better than the underlying assets that it was buying in terms of their returns. So there's obviously leverage. At its peak, it soared from a couple undred million to twenty billion in assets, up 440 in the first half of the year. But guys, we've seen in the first
- [01:33]
Travis Hoyam
half of the year, I want to highlight this, the first half of the year which ended exactly one month ago today.
- [01:38]
Lou Whiteman
Yeah, yeah, yeah, but look, we have all seen this movie enough times to know what happened here. You know, the AI infrastructure trade has taken it on the chin of late. Some of the situational positions, you know, these companies, Micron, sk, Hynix, coreweave, they were down big and short positions that they also took on betting against software like they were basically in on. The AI is going to eat all software. So short software companies to the ground. Those started turning against it too. The banks that provide leverage called said hi to avoid liquidation, the firm negotiated a rapid fire sale to Citadel. Don't cry for Leopold though. He retained the private assets include and this is the last scene of the movie here, including a $5 billion stake in Anthropic. He still has that. But yeah, a heck of a week. Lots to learn here. This is actually, I think there's A lot of. I don't know if Jamo and I are going to be building similar portfolios, but I still think there's a lot we can learn here.
- [02:36]
Travis Hoyam
I want to start with the margin piece of this because I think this is important for investors to understand. This is why we talk about not using margin. But I want to explain a little bit of the math behind it before we get to the Citadel bio because I think that is also really interesting. That has, they've become the villain in a lot of circles, but they actually may have saved the day. But Jason, the math on this, just, just on a basic sense, I think that we, the reporting is that he was about 4x levered. So $20 billion fund, let's just use that simple math, owns $80 billion worth of stocks. If those stocks go down 25%, you have nothing, you have nothing left. All you have is your debt. Your, your equity is now zero. That's how you get in trouble really, really quickly because it's not. You're leveraged on the upside. When things are going well, like Lou said, you can have a 400%, six month run. By the way, I think that 430 something percent number was after fees. So the real return was probably well over 500%. But this is, this is where a, you know, a big move. But these companies aren't going bankrupt. Can, can get you in a lot of trouble.
- [03:48]
Dan Boyd
Sure.
- [03:48]
Jason Moser
Yeah. And I mean that's, I think so. I personally, I, I don't invest, you know, on margin. I don't use debt to, to invest. It's just, it's just not my styles, it's not what I do. And I think part of that is at the end of the day, you don't really control what's going on. Right. You don't ultimately call the shots. At some point, if you have any sort of thing that shifts in the market for whatever reason, I mean, you're completely out of control. Right. Somebody else is going to call you. But like Lou said, the bank call says, hi, how are you, we'd like our money back, please. And there's nothing you can do. And so I think it's always worth remembering that, yeah, it can really amplify returns as things are going well, but when the tide turns, it can be catastrophic to say the least. And I mean, I think this is just an interesting story. Just Aschenbrenner himself, he was not a trader, not an investor, not a dumb guy, clearly very well educated and obviously had some interesting jobs along the way. It does kind of remind you of that Dunning Kruger effect, though, right? I mean, you just sometimes maybe you think you're a little bit better at something than you really are. And I'm sure he was feeling great. I saw it on social media. I mean, apparently, you know, he was, he was having interviews. Yeah. And fast forward to today, and I mean, it's. It's pretty much yesterday's news, but I mean, to lose point, too, don't cry for him. I mean, he's still doing just fine at private stakes and companies like Anthropic. I mean, he's going to walk away from this doing. Doing just fine. But it certainly made for. For a lot of headlines this week, for sure.
- [05:31]
Travis Hoyam
Yeah. And the fund does still exist. The. I think he sent a letter to investors overnight, actually, said they're still up 80% for the year. So that anthropic stake is doing a lot of work there. Lou, I want to talk about a couple of the mechanics here, because this is one of the things I think a lot of people have gotten confused about or think there's market manipulation going on. I'm going to try to walk through this and see if you agree with sort of the number of events that happen here. So a bunch of these positions, which people, they have to file 13F. So we know some of these public positions that he held at least as of the end of the second quarter. Actually, those, those aren't even out yet.
- [06:08]
Lou Whiteman
We would only know first quarter.
- [06:10]
Travis Hoyam
We would only know through the end of the first quarter. But, but it's relatively well known, at least some of the positions, and that he has a leveraged portfolio. So these stocks start to go down, what then ends up happening? And, and I'm saying that this is not new because Jim Cramer wrote about this in Confessions of a Wall Street Addict, which I think was published in the late 90s. Other hedge funds start to smell blood in the water. They start to go, oh, somebody's in trouble. And guess what? When your stocks are going down and you have, let's say that $80 billion number is the number, you can't just go to the market and say, you know what? I'm gonna, I'm gonna take my bets off the table. Because if you start selling in bulk, it's gonna just exacerbate the problem even worse. So you have people betting against you, going short against you. Your valuations start going down. That's what you're talking about. Eventually the banks, the brokerage calls and goes, hey, you know that $60 billion that you owe us, you got to come up with that money. We got to figure something out. And that seems like that's what started to happen as early as last weekend.
- [07:11]
Lou Whiteman
I think so. And look, you know, yeah, a lot of people like to bag it, but this is a competitive industry. And look, even if you didn't have the 13F, Leopold's doing a lot of interviews. He's talking about a couple of trends. We're all smart in this room. We probably could have guessed some of the stocks that he was in. And look, if. If your favorite football team finds out that the cornerback for the other team has a bad knee.
- [07:34]
Travis Hoyam
Yeah.
- [07:34]
Lou Whiteman
And they start throwing to that side, is that cheating or is that just smart or somewhere in between. Right. So if I don't think Citadel or any of these big investment companies, they weren't even saying, let's target situational awareness. They were looking at the market and saying this is a very, what they call crowded trade. There's a lot of people using leverage. I bet that there or it was a reasonable thing to say, like, if there's pressure here, it could snowball and this is where we want exposure. So I don't think it's even like a vast conspiracy. Let's put Leo out of business or something like that. It's just this is how market dynamics work. A trade gets crowded and people say a market is always two people with different opinions coming at a fair price. The crowded or more crowded one side of a trade gets, the more appealing the other side looks. That's what a high valuation is. So, yeah, you can see Citadel as a villain here because they probably saw this coming and they probably have, well, now, slowly or orderly, liquidate a lot of this and get their money back quick. Or you can see them as a hero, because one of the things, and I don't want to make them a hero, but one of the things I think as individual investors, we always talk about, do not panic in a downturn because there's a lot going on. If Citadel or someone hadn't have stepped in. The other option here was to liquidate to sell $80 billion worth of positions.
- [09:01]
Travis Hoyam
And now you're talking about, yes, some of these stocks are down 50, 60%, but they could go down another 50,
- [09:06]
Lou Whiteman
60, 70% really quickly, really quick, and frankly, it should be temporary. It's just an influx of supply and it puts supply and demand always. The real takeaway here from this story all the way back to Long Term Capital Management and before that is the reason we say, do Your best not to pan panic in a downturn is because there is a lot going on that isn't tied to long term price appreciation and fundamentals. So if you're focused on price action and not fundamentals, you can really get bit. I mean, there's sometimes where you just need to sell. But so often in these panics, there's more to it going on than everybody hates this stock and it's going to zero. And that's why literally sitting on your hands tends to be the best thing you can do in a panic, even though every fiber of your being says get out, run.
- [09:59]
Travis Hoyam
Jason, I'm going to give you the last word. What did we learn this week?
- [10:02]
Jason Moser
I like the idea of sitting on your hands. I think that Lou said it perfectly. I mean, emotions are difficult to control in investing, but it is a crucial, crucial part of being able to invest successfully over the long haul. And when you see headlines breaking out like this, you see the markets reacting with volatility. It's easy to say, I've got to do something. But for the most part, in most cases, the best action is just inaction. Just keep investing. Every time you get paid, put that money in your index fund. If you own individual stocks and you know why you own them, then feel good about that. But oftentimes the best action is inaction.
- [10:47]
Travis Hoyam
Yeah, I think this is where I keep going back to a lot of these long term foolish principles that they work over years and over decades. And that is the most reliable way to not only compound wealth, but also to even beat the market long term. And the investors that we're talking about here, whether you're talking about Citadel or whether you're talking about situational awareness, are playing a completely different game. And that's another thing to keep in mind, is that you as an individual investor are not doing the same things that they're doing. Citadel is making markets. This was, this was a great opportunity to make a market and make maybe make several billion dollars along the way. But it doesn't necessarily mean that, that, you know, these businesses are broken or anything like that. So focus on that long term.
- [11:32]
Jason Moser
And anonymity is a good thing. Like, you know, I, I don't want to be the guy on social media making headlines and people talking about my fund and what a genius I am. I'm, I'm okay. Just kind of flying under the radar, just kind of doing my thing. Anonymity is a good thing.
- [11:47]
Travis Hoyam
Maybe, maybe next week, Lou, we should talk about what a genius Jason is on the show.
- [11:52]
Jason Moser
Please let's not do that. Let's not do that.
- [11:53]
Travis Hoyam
When we come back, we are going to talk about hyperscaler earnings. You're listening to MLE Fool Hidden Gems Investing.
- [11:58]
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- [12:59]
Travis Hoyam
Hidden Gems Investing. We had a huge week of earnings from a lot of the biggest companies in the world. The big tech companies, the hyperscalers, as they are known. And Lou, what has been absolutely crazy, if you look at a chart of, a chart up right now of Microsoft, Meta, Google, Amazon and Apple and they go completely opposite directions. For the week we have Microsoft up 19%, Amazon is up 14%. Most of that is today. Meanwhile, Apple down 9.4% and Meta down 9.6%. What did we learn? Why are these stocks diverging so much right now?
- [13:36]
Lou Whiteman
So I'm going to carve out Apple because they kind of chose not to play in a way here. So I think for them there might be separate things. But I think with the hyperscalers, what's going on is right now the market has one question for these companies and the answers varied. And what we saw was the stocks react based on the answer. The question is when rlic, when returns. All right, now to be clear, I don't think the market is yet punishing spending. That was kind of, I saw headlines about that, but I don't think we see that, you know, spending bad. I think some, to some extent, especially for some of these, toning down spending might be appreciated. But I don't think that right now it's, if you're, if you're if you don't lower your capex, your stock is just sent to the top.
- [14:23]
Travis Hoyam
Because that seemed to be the story last week with Alphabet. Right? Yeah, they went negative free cash flow, but. But they have recovered since then. So that was what I was keeping an eye on this week too. Yeah, yeah.
- [14:34]
Lou Whiteman
I don't think they're punishing capex. I think there needs to be a clear sign that these management teams have just a map to get to the pot of gold at the end of the rainbow. And Meta, based on its current business and its history with the metaverse, I think they have the least credibility on that front. They may get there, but if you look at their history, if you look at what they've said so far, they have not articulated why all of this will end up in a happy ending. Microsoft and Amazon, they've done a little better telling that story. And they also have, I think, the most diverse diversified revenue streams, which. That's the best story to tell, that everything is going to end up okay. I really think that that explains the divergence. I think it's just, where are we going with all of this, guys?
- [15:18]
Jason Moser
I think Lou's right on the meta part. I mean that to me, like right now the market is just the market. It's actually like excited to hear these companies raising capex guidance. Microsoft, they're going to spend $175 billion this year. Alphabet's going to spend close to $200 billion. Those numbers are going to increase next year. We've already seen Alphabet explicitly stated. I mean, their capex next year is going to be materially higher than it is this year in the market so far is going along with it. And I think when you look at companies like Microsoft and Alphabet and even Amazon, I mean, you're seeing at least some sort of path toward the returns based on the infrastructure investment in the utility that customers are getting from their AI investments. With Meta, I kind of look at these investments in AI. There are two different ways to kind of view it. Is a company investing in AI the infrastructure to provide all of these services and bells and whistles for us, the broader consumer, or is it a company that is investing all this money in AI that really, that is just benefiting their business? I think with Meta right now, clearly that those investments are benefiting its business. Right. Its core ad business, because that's really, at the end of the day, all it really is still granted, they have 3.6 billion users, so I think they're in a pretty good spot. But you do wonder, at least in regard to the money that a company like Meta is spending, where is that return going to be beyond just their core ad business? And I think with Amazon, with Alphabet, you know, I or with Microsoft, we're seeing that they're able to monetize this to a degree which we just haven't seen with Meta yet.
- [17:11]
Travis Hoyam
So is the idea there, Jason, that they have, we would think of as a platform, a cloud platform, so it can provide compute. Other companies can build on top of them. And that's, that's. If you look at Amazon or you look at Alphabet, a lot of that is actually coming from anthropic, a lot of that demand. Whereas Meta is building Compute and going, well, we'll figure out what to do with this later. And that's a unsatisfactory answer to the market.
- [17:34]
Jason Moser
I would say that's unsatisfactory because it kind of rhymes with what's been going on with Reality Labs right to this point. And we've been hearing this for a lot of quarters now as investments in Reality Labs. Eventually it's going to pay off and the returns will be there. And it just quite honestly has not materialized at this point. And I think it's fair to assume going forward that you probably aren't going to see a return on that investment. I don't know if it's just we as consumers aren't there yet in regard to immersive technology. Maybe one day it will pay off, but to this point it certainly has not. And I think those questions only grow a little bit louder when you start looking at all these investments they're making in AI Lou, this seems like the
- [18:21]
Travis Hoyam
questions seem to change every quarter about what the market is looking for. As you look at right now, we're starting to see phenomenal revenue growth. So I don't think there's any question that the revenue is coming in. More questions about what's the return on that invested capital. Because if you're putting $200 billion in the ground, you better get some revenue out of it. When are we going to get real answers that are going to show up in the financial statements about if there
- [18:46]
Lou Whiteman
is ROIC better come soon. And I don't know. And in a market's defense, we're still early days. So if the market keeps asking different questions, maybe that's what it's coming. My biggest fear here, guys, is there isn't a lot of RO I see in the frontier models and that's where all the spending is going that most of the AI goodness will just come from lesser models. And that I think is the huge fear hanging out. But look, someone's going to make money off of this and probably the companies with big cloud businesses that just can do that for whatever's going on. I think that's probably the way I'd lean right now. Just because you feel like there will be demand there. Whatever, whatever the future holds.
- [19:24]
Travis Hoyam
When we come back, we're going to ask Lou and Jason which stocks they would rather buy. You're listening to Motley Fool Hidden Gems Investing.
- [19:35]
Narrator/Advertiser
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- [20:28]
Travis Hoyam
Motley Fool Hidden Gems Investing. Let's play a little game called would you rather. I'm going to give Lou and Jason two stocks in the same industry that have very different valuations and see which one they would rather own. Lou, I'm going to start with you. Tesla and gm. Tesla, I'm going to give you a couple stats here. Trades for 11 times sales and 160 times forward estimated earnings. General Motors trades for 1 time sales and 6 times estimated forward earnings. Which one of these stocks would you rather own?
- [20:57]
Lou Whiteman
So I'm looking at my Scantron and it's no fair. I don't see D. I don't see none of the above here. So that, that's Baham bug. So if you're going to force me here, I have actually worked with the automakers before. I kind of know the insides of the business a bit. It's a brutal business. Even in the best of times it is a slog. You have the most complex supply chains in the world. I am not going to buy an automaker, period. So I'm sorry. Gm, I respect what you're trying to do with subscriptions and services and all that, but I'll believe it when I see it. Tesla, I can't get my. I do have concerns about the valuation. But Tesla has a lot more optionality away from that core auto business. I do believe, despite the valuation, that if they execute on their plan, there is a lot of ways to create value there outside of just the moving metal on the car lot. So I am going to lean into my valuation fears or, and choose Tesla.
- [21:53]
Travis Hoyam
Jason, are you going all in on dancing humanoid robots?
- [21:57]
Jason Moser
Well, you know, I, I, I'm with Lou in that I, I don't own any automakers. I kind of look at automakers and airlines and I'm like, you know what, I'm just not interested. So I, the Scantron reference wild and holy cow.
- [22:11]
Travis Hoyam
I, I wanted to.
- [22:12]
Lou Whiteman
Hold on. I'm old. I'm old.
- [22:13]
Jason Moser
Okay, that's great.
- [22:15]
Lou Whiteman
I really enjoyed that number two pencil.
- [22:18]
Jason Moser
You know, I thought it was interesting. If you look back, look at year to date, look over the last 12 months, look over the last three years and look over the last five years GM has outperformed Tesla in every regard. This has been the better investment and I, I was a little surprised to see that if I have to choose one. I like Lou's point there about the optionality in regard to Tesla. I mean there is a little bit of a jockey play there. Musk just seems to kind of get what he wants. I don't know how he does it, but just he does it and there's, there's obviously this, this potential for Tesla and SpaceX to, to roll up together as well at some point. I don't know. But I think generally speaking the optionality is, is why I would say I, I, I go with, with Tesla in this case. And it's, it's not to belittle GM at all because again, looking at the track record last five years in, in, the company's performed very well and investors have done okay as well. But yeah, it just, it doesn't have the same optionality that Tesla has.
- [23:21]
Travis Hoyam
You know, I, I, we always think that everything is going to repeat with, with General Motors because Lou's right, they kind of keep, keep making the same mistakes over and over again when you go through some sort of downturn. We would love to buy one of these big GM vehicles as we have, you know, a bigger family and a dog and all that kind of stuff. They never go on sale, so, so that's an indicator of their pricing power in the market. Right now I don't know if that will hold, but at least through 2026 it looks like you're not going to get any sort of deal on a Tahoe or A Suburban. All right, let's go back to the pharmaceutical industry. Jason, I'm going to start with you, Eli Lilly. Everything going right for Eli Lilly right now, but the market is pricing that in. Enterprise value to sales is 14. PE multiple is 40. Would you rather own that or Novo Nordisk? Enterprise value to sales is three and a half and the PE is 11.
- [24:09]
Jason Moser
Yeah, another. Another industry that I tend to shy away from because I just don't have, I don't, I don't feel like I have any sort of expertise or full understanding as to, you know, how, how these businesses operate. I understand they can be very hit or miss. A lot depends on pipeline. A lot depends on approval. We've seen Lilly and Novo both performing, I think, well, literally more so than Novo, but really benefiting from these, these weight loss drugs. Right, the GLP1s. And it seems like Lily with Bounjaro and Zepbound, that is just a one, two punch that's really working very well for business right now. So this is kind of a. Your classic growth versus value. And I mean, the bet on Novo would be that, right, they are going to return to growth, that their pipeline will then, you know, help, help them sort of reignite that growth. I, I just, I don't know that it will. I think for me, I'm going to kind of look towards the winner and kind of expect that winner to keep on winning. And so therefore, I think I would go with Lilly in this case.
- [25:18]
Lou Whiteman
Yeah, I'm going with Lily. This is another tough industry. Like, even blockbusters only mean so much because of patent laws. I mean, Pfizer might have changed the world with statins, and Pfizer did not. The stock did not behave like Nvidia. So I think that that's worth keeping in mind. Lilly, to their credit, is taking advantage of the moment and buying everything in sight. They've done, what, two dozen deals today and what's that doing? That's maybe if half of them or if a third of them become drugs, but they are using the cash from this blockbuster to augment, to improve, to build out the pipeline for the future. I really like that strategy. So they're my choice there. Even if they are, the less of a value play.
- [25:59]
Travis Hoyam
All right, let's look into financials. Lou, would you rather own a big bank? And I'm going to put JPMorgan Chase here. Price to book multiple is two and a half. If I'm pulling my numbers correctly.
- [26:10]
Lou Whiteman
That's what I have and that's high for a bank. So Tell me what's next.
- [26:13]
Travis Hoyam
That's very high for a bank. Three year growth rate is 8%.
- [26:18]
Dan Boyd
Okay.
- [26:18]
Travis Hoyam
Okay. Decent growth rate. Second stock SoFi, price to book is 1.9 cheaper on a price to book basis, but the three year growth rate is 27%. Which one would you rather own?
- [26:29]
Lou Whiteman
I'd rather own JP Morgan. And I'll tell you, you pick price a book, I'll go PE ratio. And it's rare for a bank to, you know, above 10 to 15. J.P. morgan, I was looking at it kind of looks pricey to me. At 14x forward earnings, SoFi's double that. And I still think that there is just. Sofi is a great young bank. And yes, their growth rates are better because they are younger. So there's a denominator issue. But look, Jamo, I know you used to do the financial show, you know this. I was shocked when I saw Sofi bragging that their average customer has 1.5 relationships. A community bank would laugh at that. And I think the effect, I think that the best growth days are behind it just as the denominator changes. And I think it is going to eventually be valued like a bank because that's what it is. So I think there's probably more equity upside for slow and steady J.P. morgan right now.
- [27:28]
Jason Moser
Yeah, I think that's right. I'm going with scale here. Sofi, $20 billion business obviously done some good stuff. What it started out initially as was a student loan business, wasn't it?
- [27:41]
Travis Hoyam
Student loans and personal loans.
- [27:42]
Dan Boyd
Yeah.
- [27:42]
Travis Hoyam
All the stuff that big banks don't want to do.
- [27:45]
Jason Moser
Yeah. So I mean it's nice to see they've been able to expand and, and become more things for more people. I do agree. When you said one one and a
- [27:55]
Lou Whiteman
half times 1.54 customers per customer.
- [28:00]
Jason Moser
Yeah, that, that doesn't seem that rate,
- [28:03]
Lou Whiteman
that was their record high. That was the record high.
- [28:06]
Jason Moser
That number should be bigger. That number should be bigger for sure.
- [28:10]
Travis Hoyam
We talked about this on Wednesday. I do think it's funny how banks trick you into increasing that number.
- [28:16]
Lou Whiteman
But Travis, it's not a. So here's my honest explanation about it and sorry jmo, I'm hijacking but I think they have been so, so laser focused on. I don't even want to say juicing or spiking because that sounds like there's no conspiracy here. But they've been going so hard on bringing in new and not actually monetizing. You could say the bull case is actually slow. Your role on just kind of getting Everybody through the door and actually not more opportunity. But be careful because Wells Fargo could tell you a story about how that can go wrong.
- [28:47]
Jason Moser
Yeah, well, I'm glad you brought up Wells Fargo because like I said, I'm going with scale here with jpm. But it's not to say that something bad couldn't happen. Now, I think that JP Morgan has done very well under the leadership of Jamie Dimon. And we also know that he's not going to be there forever. And he's kind of, I think, one foot out the door. Right. They're starting to talk about succession planning there. And so it will depend on future leadership, making sure they can keep things going in the right direction. But the bank is, I mean, it's basically a $1 trillion company today. Right? I mean, it is just, it plays such a pivotal role in our broader economy. I like the dividend yield. I think the dividend should continue to grow. I like the fact that they continue to buy back shares and I love the fact that they really focus on keeping that war chest balance sheet. Right. They really want to make sure that they keep the company in, financially in good health. And so, yeah, I think, to me, I would just feel a lot more comfortable owning that one as opposed to SoFi.
- [29:54]
Travis Hoyam
I'm just going to disagree with you guys on almost everything here today. But, but that's what makes market. All right, let's go quickly with this one. I wanted to touch on this quick. Costco versus Target. Give you a couple of numbers here. Costco's price to Earnings multiple is 48. Target's price to earnings multiple is 19. Fun fact here, Jason. Target stock is up 43% this year. But which one would you rather own from here?
- [30:17]
Jason Moser
Well, I like the membership model. I think membership has its privileges. And I remember early on in my first days here working at the Fool, a number of us were questioning kind of how much further Costco could go with this. And did they really have the ability to raise prices in regard to that membership fee? Because we know they're going to keep prices as low as they can in the store. Fast forward today, we've seen clearly they've been able to raise prices just incrementally here and there while maintaining those 90 plus percent renewals. And that to me has just been a, a phenomenal part of this business is just that, that renewal rate. And every time I drive by Costco here by our house, I mean, it's like, it's like an airport parking lot. I mean, the place, it is the
- [31:04]
Travis Hoyam
most annoying parking lot in the city.
- [31:06]
Jason Moser
It is so full always. And I'm just, I mean, we're not members at Costco, so I don't go there to shop, but I'm always just amazed to see how busy it is and just, just a very loyal customer base that keeps on coming back for more. And as long as they adhere to keeping prices low within the stores, geez, I don't see any reason why the business can't continue to grow and succeed.
- [31:32]
Lou Whiteman
So I don't like investing in retail, but if I do, I want to see what are you special at? What's your reason? What is it that you do that it can't get elsewhere? I think Target's up off the mat here, but there is. We've seen with Kohl's, we've seen with J.C. penney's, we've seen with Kmart. You just don't have a right to exist here. And with Target, I kind of wonder how hard it's going to be for them to have just a I go to Target for blink, you know, versus other things kind of Costco by default here. As expensive as it is, I know why they exist and I know why people go there.
- [32:06]
Travis Hoyam
When we come back, we're going to get to the stocks on our radar. You're listening to Motley Fool. Hidden Gems Investing.
- [32:15]
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- [33:12]
Travis Hoyam
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 the Motley Fool's 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. I did want to get to some news that came in overnight, Lou, that is that the Wall Street Journal is reporting that Tesla is weighing the sale of its China business to pave the way for a merger with SpaceX. What do we need to know about this?
- [33:50]
Lou Whiteman
Right, and the first thing we shouldn't need to know is Elon says it's fake news. But if you read the story, it basically, it sounds like they've been thinking about this for a long time, that the division.
- [34:00]
Travis Hoyam
And it makes sense, they would probably not be able to have that business and merge with SpaceX.
- [34:05]
Lou Whiteman
Yeah, yeah, yeah. Folks, think about it this way. Everything we accuse, I mean, right now we're facing that Mercedes Benz might not be able to sell cars in the US because they have a investor that a Chinese investor that owns 10%. That's how the US views this. So what are they going to say? If there is a major, major Chinese presence to a defense contractor, which is in part what SpaceX is, they would have to do something here for a merger. So that is the natural implication. But look, this has been a criticism for a while because Elon owns both companies. So it's out there. I think it probably. I am really curious how much Tesla cares about automobiles anymore. We haven't seen any. I mean, we've seen kind of refreshes, but we've kind of cut the model lineup in half without a lot of plans for more. This would be a real symbolic move of the future of this business. Isn't electric vehicles. I think you'd only see it in a merger, but I do think a merger's coming. So I guess this is just part of the process.
- [35:08]
Travis Hoyam
Jason, it's wild that the plant that I think was supposed to be the growth driver for Tesla makes the. I think it's over half of their vehicles. Could potentially just be they're not going to give it away, but there's probably not going to be a half trillion dollars of value taken out of that Chinese state.
- [35:28]
Jason Moser
No. And I think Lou's right. We're talking more and more about Tesla being something other than an auto company, which is just kind of weird to think about. But I mean, Musk has said time and time again that, I mean, it's, it's all about humanoid robots. Right? I mean, that's kind of, it's AI and humanoid robots and So I, I think even, even Musk may say this is, you know, fake news or whatever. My suspicion is we will see this murder happen within the next couple of years. I think that he's going to want to make sure to try to get this done during this current administration because I would imagine he wouldn't want to take the chance on a future administration that might not be so embracing to this type of a deal. So my bet is we see in the next Couple of years SpaceX and Tesla roll up into one.
- [36:18]
Travis Hoyam
Lou, as you look at Tesla as a stock right now, does the fact that they're potentially getting out of China, it's been become a very, very competitive market there, could that actually be a positive thing for them?
- [36:31]
Lou Whiteman
Remember that what they do in China is make vehicles for the world. So it's a lot more than just competing locally with China. I don't think this happens without the SpaceX merger. So I think it's, you take the two for one. If they independently of SpaceX just decide we don't want to, we're dumping China, that would be a concern for the business. But I think, I think there's only two paths here, either the status quo or the merger.
- [36:54]
Travis Hoyam
Well, it'll be very interesting to see what happens because there's obviously a lot going on with both SpaceX and Tesla Musk running both companies. So you know, if they are going to merge something is probably going to happen have to happen with this stake. All right, we'd like to end the show with stocks on a radar. Bring in Dan Boyd with his thoughts. Jason, you're up first. What are you looking at this week? Week?
- [37:13]
Jason Moser
Yeah Dan, I'm looking at keysight Technologies. The ticker is K E Y S and you know this world is more tech driven than ever and it takes a lot to bring this technology to market. Dan from design and development to testing and deployment is an arduous process requires near perfection. Keysight delivers a portfolio of hardware, software and services that enable its customers to do it all. And the company operates ultimately in two different segments. They have have the communication solutions side of the business which is electronic design and test software, instrumentation systems and related services. Their end markets are commercial communications, aerospace, defense, government end markets. And then they also have the electronical industrial solution side of the business which consists of also electronic design, testing and simulation software, computer aided engineering solutions. Those end marks include end markets include automotive, energy, semiconductor, general electronics. They make their money by selling the hardware, software and services to a global base of over 30,000 different customers. I like the fact that software and services now represents approximately 36% of the business. That's higher margin recurring revenue and so definitely business to keep an eye on.
- [38:27]
Travis Hoyam
Dan, Quite the pitch. But also I like the ticker. Just keys.
- [38:31]
Dan Boyd
Yeah, good ticker. This is one of those companies that is both like boring and completely inscrutable. I'm looking at their Wikipedia page and I got to tell you, I don't understand any of this.
- [38:43]
Jason Moser
It's boring, but it's crucial. And that's the key. That's the key, Dan.
- [38:49]
Travis Hoyam
All right, Lou, what are you looking at this week?
- [38:51]
Lou Whiteman
So, Dan, I want to take a look at Defense Prime L3 Harris Technologies. This week they released earnings. They beat expectations on both revenue and earnings. They also raised full year guidance. Yet the stock traded down more than 10% after earnings. So what's going on? Well, early in the year, L3Harris teamed with the Pentagon to spin off its missile business in an IPO that would come with billions in government funding to increase missile manufacturing. The market liked that deal because it would allow L3Harris to keep some of the upside of that missile business while saving its capex for higher margin areas like space. But yesterday, L3Harris said the IPO is going to be delayed until 2027 because of choppy, frothy market conditions. I get why the market is disappointed, but I think the sell off is an overreaction. L3Harris finished the quarter with a backlog of $42 billion. In future business, they are the go to contractor for areas like Golden Dome Missile Defense. A lot of this defense electronics at this higher margin. They also have a better international business than most of their peers. Because of this, L3Harris normally trades at a premium to those of the defense contractors. Today you can get it at basically the same multiple as General Dynamics. That looks like an opportunity to need to have Dan.
- [40:04]
Travis Hoyam
Dan. Another critical company, but a ticker of lhx, that's not as good working. Not, not working for me.
- [40:11]
Dan Boyd
Yeah, based on tickers, you know, we gotta go Keysight here. But I, I get why L3Harris seems like a, a juicy investment these days, but I gotta, I gotta imagine that Keysight is probably selling components to at least some of the supp.