In this podcast, Motley Fool senior analyst Jim Gillies and host Ricky Mulvey discuss:
- Medpace shares hitting an all-time high.
- If investors should prepare for a market correction during a "dopamine fiesta."
- The bull case for airbags and seatbelts.
Plus, Motley Fool retirement expert Robert Brokamp takes a look at how Americans are saving for retirement, and how to make better use of a 401(k).
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on July 25, 2023.
Ricky Mulvey: Hey, remember what higher interest rates were supposed to do to stocks? You're listening to Motley Fool Money. I'm Ricky Mulvey, the joined today by Jim Gillies. Jim, good to see you on this earnings season.
Jim Gilles: It's good to be seen, Ricky.
Ricky Mulvey: So before we dive into some of these off-the-beaten-path companies that you want to talk about. We got a great question from Marco in Mexico City. He wrote to us, "I just started investing early this year. Thanks in no small part to you guys. As you know, this year has been amazing for investing and so far it's been a dopamine fiesta to see everything go up and up and up. However, I feel like I need to start to mental lies, FERC, correction very soon. Isn't everything overvalued right now? Is the rally justified? I'm seeing the Nasdaq 100, the S&P 500 in almost every major stock following the same pattern of 2021. I know these things are impossible to predict. The past performance does not indicate future performance and that I should keep my mind focused on the long game. But seeing major indexes reached the same value they had in late 2021 makes my primitive mine screen panic and I feel like I need to be mentally prepared for another fall." Do you have any advice for this novice investor?
Jim Gilles: I have actually quite a bit of advice for this novice investor, or at least a few comments. Advice may be generous. First off, investing is not short-term, but I'd, first of all, I think this is a great question. I really do. This is a new investor who is not taking the lessons perhaps of 2021. Then they were bad lessons. But the lessons of 2021 when people saw everything going up and up and up and up was to sit back party and go, this will always continue. So I really like that. This question is actually Marco is taking the opposite tack. I think that's a healthier way to start. I also think Ricky, if we're not, I think dopamine fiesta might be my new favorite term, which I'm going to be probably using everywhere for the next three months. So really what's going on here is you're making a couple of perhaps unconscious assumptions. You're assuming that it has to fall. The things have to fall because things have been really good. Number 1, things never have to fall just like they never have to rise. Things are kind of unfold the way they do and the way that we know markets and stocks do unfold as we know that three out of four years, stocks go up 1-4 years, they go down. They went down pretty good last year so some of this is as a reaction to how bad things were last year. The other thing is investing it's not a short-term sprint. We hope that investing is a lifetime pursuit pastime, series of accomplishments. So I've been doing this personally for about 25 years. I've been doing this publicly for almost 20 years. I've seen a lot of markets go up. I said a lot of markets go down over the long term. We know that the indices generally do about 10-11% annualized, assuming dividends reinvested and that is without any picking our spots, picking individual company. I'm just talking about indexes.
Marco is talking here about indices. But then we can start looking at individual stocks. I'm keying in on where he says, ''Isn't everything overvalued right now?'' I will hardly say, no, everything is not overvalued right now. I'm saying that as a stock picker who is doing a public stock pick every two weeks now. This might be a case of, if you go to the barber and ask if you need a haircut, what are they going to tell you? They're going to tell you to think so. [laughs] I could tell you need a haircut. You've asked an investor, everything overvalued? Most investors will say, no, not everything is overvalued. Just based on a market return. I think Marco was fine as long as Marco was just dollar-cost averaging, looking over the long term, it'd be dollar-cost averaging every paycheck, every month, whatever into stocks for the long term. Then that's just indices and then if you want to start picking individual stocks, we're going to talk about a couple in a minute here. I think there's opportunity all over the place and individual stocks, I do tend to look in the smaller areas of the market.
So smaller stocks, maybe mid-caps at the largest. But I think there's all opportunity if you have the right mindset, and I hold that the right mindset here is to be a lifelong purchaser, an owner of stocks, a lifelong investor. So I understand why Marco's perhaps a little bit perturbed because it can be. You got to think, oh, it's got to go down. The answer is remember this is independent events. It doesn't have to go down just like it doesn't have to go up. Be a lifelong learner, be a lifelong investor. The last thing I'll say is avoid trading in and out because trading in and out, we know that that is hazardous to our wealth. People who sell everything because they think the market has to go down and then it doesn't, then they buy back in 20% or 30% higher and that's when the market goes down. So avoid trying to make decisions based on what you assume the world is going to do. Because I promise you whatever you assume, whatever everyone assumes, I promise you, you're going to get some or all of it wrong.
Ricky Mulvey: Jim, if you ever want to start a jam band with me, I think Dopamine Fiesta is a strong candidate for a name.
Jim Gilles: Absolutely.
Ricky Mulvey: Let's move to Medpace. Medpace reported yesterday. It's a medical research company based in Cincinnati, Ohio. It runs clinical trials and contract research for biotech pharma, medical devices. The stock hit an all-time high today, some highlights from the quarter included revenue being up by a third from last year, its backlog of projects reached 2.6 billion and it's net income hit 61 million for the quarter, that's up about 20% for the prior year. What stands out to you? I know you follow this company closely.
Jim Gilles: I do. You say it hit an all-time high today. I haven't actually looked so, well, that's too bad, isn't? Facetiously tongue in cheek because this is a two-time recommendation for the service I head up, which is Hidden Gems Canada, once was early in the pandemic. I think we got on the scorecard, but $65-$70. The next time was just about a year ago when I was pounding the table because this was a company that was dramatically undervalued to go back to what we were talking about for Marco earlier. I think we got the scorecard the second time around 140, if I remember correctly. This is a favorite company of mine. I really like what Dr. August Troendle, who is the CEO and the founder of this company, has been the only CEO the company has had since he founded in 1992. Really like what they're doing there with their business. I liked that he'd likes to seems to like to tweak analysts who asks silly questions which always amuses me. So this is, as you say, revenue was up by a third from last year. Yes, this is a growth story that a lot of people and maybe fairly recently haven't noticed is a growth story. The backlog of projects is worth about 2.6 billion. I prefer to express it in terms of book-to-bill ratios. So the amount of new work they've booked in any given quarter versus the amount of revenue they build out. That's at about 1.25 times as of this quarter. Slightly less than last quarter, slightly more than a couple of quarters ago. But what the number of when a book-to-bill, anything over 1.0 indicates a growing company. So again, we're back to a growth story and all things equal. A book-to-bill ratio of 1.25 says you're going to get 25% growth in the near future. Net income, yes, is up about 20%.
That's pretty good. But what really stood out to me about Medpace this quarter because I was reading the transcript this morning from the conference call and remember I said that he likes Dr. Troendle likes to tweak analysts and I've seen him tweak analysts and the passover things like not growing fast enough for them and he's like, we're growing 20 plus-percent. We're very comfortable. What do you care? Another time it talking about EBITDA, where he says our EBITDA is real EBITDA. We don't do these adjustments that everybody else likes to do. But this time around, one of the analysts on the call said basically said are you taking market share? It's a very generic question. Dr. Troendle responded back with, look, this is a quote, ''Look, I don't know what that really means and we've on an entirely organic basis, we've outstrip the growth of any of our peers and I guess the way I hear most analysts talk about it, it's bookings that our share on that basis, I guess we've been losing share for a decade, but I tend to look at things in terms of revenue and profit. There we appear to be taking share, but I can't quantify what that represents.'' So basically, I'm going to truncate that and say Dr. Troendle basically telling the unnamed analysts on the conference call, stop asking silly questions. That's how I too long didn't read that.
But no, I think it's a great quarter. They talked a little bit about the health of their customers, the people who are booking for the contract research that Medpace does. Dr. Troendle said after a couple of quarters where it looked a little lean says now everything is looking pretty good this quarter, everything has come back. So I think it was a really solid quarter. I was a little excited when I saw last night after they reported earnings, I was a little excited because the stock immediately reacted was down about 9% or 10%. But I did see in the pre-market this morning that a race and as you say, it's hit all-time highs. I have now looked since we started this conversation. It looks pretty good. This is again to go back to Marco with is the theme or go back to Marco from the third. This is now a company I've owned personally or over three years. It's accompany that as I mentioned, it's been recommended multiple times, at least in the service that I run. This is a company that I intend to ideally hold for another decade plus if the fates align and allow us to do that. So an earnings report like this, I'm really happy about it, but part of me is a little wistful. I was hoping we get another opportunity to add some more, but it looks pretty good. We look forward to, like I said, another decade plus of what's going on here.
Ricky Mulvey: You really like CEOs who hit earnings calls is what I've been.
Jim Gilles: I really do.
Ricky Mulvey: Let's move on to the auto industry, Jim, because General Motors reported today, but that's too far on the beaten path. Let's turn our attention to Autoliv ticker, ALV. This is the world's largest automotive safety supplier. They like seatbelts and airbags. This is the farthest thing from an exciting story they reported on Friday. Seems like they have serious network effects though, because they sell to all major car manufacturers.
Jim Gilles: You're saying it's not exciting enough. How dare you, sir, who doesn't love airbags and seat belts, and of course, airbags or not just what's in the passenger side or in the steering wheel now, there are curtain airbags in cars, there are under-knee airbags. There are other types of airbags that basically work with the seat belts, pretensioners in the seat belts such that your seat belt, this all happens in milliseconds, of course. In the event of a crash, your seat belt actually let's out to allow you to actually move forward, which sounds like, no, we want a seat belt holdings down. The seat belt actually let's out, so it doesn't hurt you as you come to a sudden deceleration and stop. The seat belt let's out, the airbag deploys. That protects you from the frontal crash. Then the seat belt grabs you and pulls you back. This all happens in milliseconds. It's really what Autoliv has done in full disclosure. I've owned Autoliv shares personally since 2006. I've purchased again multiple times. This was a great quarter for them. The strides that they have made in terms of automotive safety over the years is fantastic. There's airbags now on the exterior of cars, for example, in some models, to protect pedestrians who might get in the way.
Autoliv is developing as well airbags for motorcycles, which is interesting. But yes, as you mentioned, they are in every manufacturer, practically every model. It's been a while since I've seen this stat, so it might be a little bit out of date. But I believe the last number I saw, there's some Autoliv content in 50% roughly of the vehicles on the road. Whether you're a GM fan, whether you're a Ford fan, Fiat fan or BMW, even a Tesla, there are products from Autoliv in practically every making model that's out. This was an excellent quarter. A lot of cash-generated. It's much better than last year. Revenues were up significantly. I'm just pulling up. Revenues were up 27%. Cash-flow went from a loss a year ago to almost $380 million. Adjusted earnings per share were pretty good. A lot of this and a lot of this. If you looked at what happened to the auto industry during the pandemic, how the inventories got all skewed, pulled part, if you just kept the faith and said, good companies, everybody had some issues during the pandemic. As we emerge from the pandemic stoppages and shortages, good companies tend to reassert their good company characteristics. That's what Autoliv has done. Really happy to see what they did this quarter. That's a little gushing, I suppose.
Ricky Mulvey: Highlighting and improving global supply chain looks like the kinks are getting worked out there. Jim, traditionally though, auto stocks are highly cyclical, why don't you think this is a company to play the cyclical games with?
Jim Gilles: Because essentially they're off their breadth. There has been periods where this stock has not been a great purchase as every company has prices where you probably shouldn't purchase a stock. But no, this one has been the breadth of their offerings. Again, across all major makers and many of their makes, the fact that there has been a long-term trend going back three decades now of increasing safety content per vehicle. You think back to the '80s and '90s when you sit back in the '70s when seat belts were mandated and then you started having airbags generally only on the driver's side. Now we're going to add the passenger side. Mid-2000s, they start adding curtain airbags on the side. Like I said now, there's now a knee airbags in certain makes and models to protect your knees in the event of a frontal crash, the exterior content or the exterior bags. Plus, our cars wear out. We tend to like to buy more cars. The cars today have increasing safety content per vehicle than they did in the past. But again, you want to add to your holdings when prices make the most sense. If you are paying today's price for Autoliv, it's not bad actually, today's prices pretty good. But if you bought, say , in the wake of the global financial crisis, 2008, 2009, that was an excellent time to buy. You wanted to by say, the middle part of the decade 2015, 2016,I hope you've enjoyed the dividend you've received because you haven't really gotten a lot from that purchase price. As with everything, price matters, valuation matters. But over the long term, this company has been frankly a winner.
Ricky Mulvey: Jim Gillies, appreciate your time and your insight.
Jim Gilles: Thank you.
Ricky Mulvey: Quick note before we get to our next segment. Sometimes it pays to wait for a pullback. Our analysts at Motley Fool Stock Advisor have compiled a list of five stocks whose prices have tanked but still have strong fundamentals and potential growth ahead. Just one example is a company that lost more than three-quarters of its value despite showing surging revenue, we're revealing this stock along with four more and our new five pullback stocks report available free only to Stock Advisor members. Simply go to fool.com/pullback to learn about these picks. We will also put a link in the show notes. Now, do you have a good 401(k)? Robert Brokamp breaks down the numbers and the features you probably aren't using.
Robert Brokamp: If you want to have the same lifestyle in retirement that you had while working, indeed, to save a lot of money, your Social Security will replace around 35%-40% of your pre-retirement income and even less for higher income workers due to the way security is designed. The rest of the money you need will have to come from savings. The best way to save for retirement is to contribute to a tax advantaged retirement account. How many workers have such accounts? While according to a survey from the US Census Bureau in 2020, 18% of working age adults had an IRA. 35% of working age adults had an employer sponsored defined contribution plan, better known as something like a 401(k) or 403(b), or the Federal Thrift Savings Plan. There are a couple of takeaways from those stats. Number 1, the majority of workers do not have a retirement account and that's pretty scary. But the second takeaway is that the most common retirement savings account is an employer sponsored defined contribution plan, like a 401(k). For most workers, the quality of that account and the extent to which they take advantage of it will be key determinants of the quality of their retirements.
Ricky Mulvey: Bro, let's say you're in the one in three workers who have a 401(k), 403(b), that thing, what makes for a good 401(k)?
Robert Brokamp: Well, the interesting thing about these employer-sponsored accounts is you're stuck with whatever the employer provides. Another regulations from the IRS and treasury department, those folks allow for all kinds of features and frankly, a good deal of flexibility. But it's ultimately up to the employer to determine the costs and features of the plan they offer. To get an overview of the retirement plan landscape, let's take a look at some key stats from Vanguard's recently published How America Saves report, which is an analysis of the five million accounts within the 1,700 defined contribution plans that's administered by Vanguard as of the end of 2022. Of course, Vanguard isn't the only provider. But what's going on in these plans? I think is likely somewhat representative of the overall 401(k) universe, especially within medium-sized and larger employers. The first thing people want to know about their 401(k) is. Are they going to get a match? According to Vanguard, at least for the plans they administer, the good news is that 95% of 401(k) offer some a match. For almost half of them, you don't even have to participate in the plan. You don't have to contribute anything to get the match. The employer just throws it in. For the others, you'd have to put in some money and then you'll get a match based on a formula. They're over 100 different formulas in the Vanguard plans. But the most common is that if you contribute 6%, your employer will throw in another 3%. The average matching rate when you throw in the matches where the employer just throws in something versus how much you have to get as a match of your contributions is 4.5%. That's pretty good. Employers are throwing in 4.5% of a salary into the 401(k). Another key feature these days, in my opinion, is the percentage of plans that offer Roth accounts, that's 80%. That's good. That goes up a little bit every year. It's still amazing to me that 20% don't offer the Roth, but I think we'll get to 100% at some point. Now one of the tricky part about putting money in a 401(k) is that you do have to generally leave it alone until you reach 59-and-a-half. There are some ways to get the money earlier. One of those is through a loan, and 83% of plans allow for you to borrow most loans, it's up to 50% of the vested balance or $50,000, whichever is less. The good news about buying from your 401(k) is, is even though it's called a loan, you don't have to apply for it. You can just get the money and the interest on this loan you paid yourself. Downside is you do have to pay it back. If you don't pay it back, it's considered a distribution and you'll pay taxes and penalties if you're not 59-and-a-half. Then another way that you can get the money out if you need it is through something called a hardship withdrawal, and 95% of plans allow this. It could be for all kinds of different things, but you have to check with your plan to see what is considered a hardship so you can take the money out. The thing to remember though, is with a hardship withdrawal, you still pay taxes. You might still have to pay the 10% early distribution penalty if you're not 59 and half. If the reason for the hardship withdrawals doesn't fall under a certain approved list by the IRS. Be very careful with hardship withdrawals.
Ricky Mulvey: Let's say you're not taking the money out, you're deciding how to invest it wants the money is on the 401(k). What do we know from these studies about what people are doing with their money in investing accounts?
Robert Brokamp: This is another challenge of 401(k) in that for most of them, you just have to choose from the investments that are offered. According to Vanguard, the average number of funds offered within their plans is 17.4, then the average number of funds as actually used by a participant, is just 2.4, so they're not choosing that many funds. Now, 20% of the plans do offer a self-directed brokerage account on the side. This is great, because it's like any other brokerage account. You can buy stocks, other mutual funds, ETFs, a lot of flexibility, and I think we as Motley Fools, would wish that more plans offer this, because then we can buy stocks within our 401(k), and not just the mutual funds that are offered. That said, the evidence from Vanguard, is that, even for the plans that offer this, it's actually not that many people take advantage of it. If you're curious, how much these folks are investing in the stock market across all Vanguard plans, 72% is invested in stocks. Now let's move into perhaps the most popular investment within 401(k) these days, and that is a target date fund. So target date fund. Each target date fund has a date in it, and then within that fund you will have other mutual funds that provides a prudent asset allocation based on that retirement date. For far away retirement dates, it'll be very aggressive, mostly in stocks, some cash and bonds, and then as you get closer to that retirement date, it gets more conservative, and it's a very diverse set of large cap, small caps, US international, all kinds of stuff. Nowadays, 96% of plans offer target date funds. The percentage of participants who have access to a target date fund, and are using lenders 83%, and for 59%, they're just investing at the target date fund, and nothing else.
Ricky Mulvey: Even if you walk your way up the income spectrum, folks making more than $75,000 a year, about half of them are in a single target date fund. In many of these are workers in their late '20s, even in their early '40s, bro. I would imagine that a target date fund probably isn't the best option for all of their money, because it includes things like debt instruments, and bonds which they may not need as a younger worker.
Robert Brokamp: Even the most aggressive target date funds, people who are going to retire in 2060, will have a good 5-10% of invested in cash and bonds, and theoretically, as long as you have the risk tolerance, you probably don't need cash and bonds at that point. As you get closer to the retirement dates that get more conservative, and some of them have only 40% in stocks by the time you reach the retirement date, and that's probably too conservative for most fools as well. Definitely makes sense to look at the fund to make sure you have a good one, doesn't really reflect your risk tolerance, and as you become a more advanced investor, you may not need them in at all.
Ricky Mulvey: We've talked about some of the benefits that many get from their 401(k)'s Roth accounts matches from their employer, even brokerage accounts. But how are people doing when it comes to taking advantage of those features?
Robert Brokamp: The good news is that for the most part, if people do have access to a 401(k) or that type of plan, they are participating in Vanguard, 83% of eligible folks are participating. How much are they saving? Well, the median employee contribution rate is 6.2%, and the average is 7.4%. Why the difference? That's because relatively handful of very wealthy people are super savers, and they're pulling up the average. That's 6.2%. medium is probably more reflective of the typical worker. That's just what they're putting in, doesn't count the employer match. The percentage of workers who contribute more than 10% is 24%. The reason I'm throwing that out there is we probably all know that most people are not saving enough. Most people should be saving between 12 and 15%, and most people are not there, even when you throw an employer match. If you throw an employer match, coordinate Vanguard, the median person is saving about 10%. Again, you should be saving between 12 and 15%. Now, how can you get more money in your account, while making sure you're taking full advantage of the employer match? At Vanguard, only 69% are taking full advantage of match. That means 31% are not contributing enough to get the full match. To me, that's like getting a bonus check, and deciding not to cash it. I fully understand that some households are struggling financially, doing all kinds of factors, but for those who are not, and not getting the full match, contributing at least that much is a no-brainer. For other people who are behind in their savings, once they reach their '50s, they can contribute more at this year. In a 401(k), you can contribute another $7,500 if you're 50 or older. What percentage of folks are taking advantage of that? 16%. I find that low as well, because once you reach your '50s, you're probably in your peak earning years. Ideally, the kids are out of the house, out of college. This is the time for you to become a super saver to catch up, but it looks like only 16% are taking advantage of that. Then there's the Roth accounts. We already said 80% of plans offer it, but only 17% of participants are contributing to a Roth account.
Ricky Mulvey: That's a negative view of the Roth account, Bro. However, about five years ago, just 11% of people were contributing to those. It's either, what is it about? Less than one-fifth of people are using a Roth account, or there's been a 50% increase in Roth account usage over the past few years depending on how you want to frame it.
Robert Brokamp: Yes. That is good news, and I think it's going in the right direction. Why do I think people should be contributing to the Roth? That's because, we're at historically low tax rates. Tax rates are definitely going to go up. At the end of 2025, by law, they're going to go up, unless Congress acts plus. Security is under-funded, Medicare's underfunded, the government spends too much. At some point tax rates have to go up. Even those in a middle to high income bracket might contribute at least some money to Roth accounts to hedge against those higher tax rates, because remember, as long as you follow the rules, withdrawals from a Roth are tax-free.
Ricky Mulvey: We've thrown a lot of statistics and features of 401(k)s, what's your parting advice and, what do you do if you've listened to all of this and thought, My 401(k) isn't that great?
Robert Brokamp: The good news is, you can ask for changes. I've told the story on the show before that when I joined the Motley Fool back in 1999, we did not have a very good 401(k). In a group of employees banded together, and said to the Fools in power, said, Hey, we should have a good 401(k). Can we have better features? Can we have better investments? Fortunately, the Fool was nice enough to listen to us, and we have a pretty good plan now. I would say talk to your HR department, maybe get your colleagues on board. Your boss is in the same boat you are. You all will benefit if you have a better 401(k). Identify the features that you'd like, identify the investments that you think would be better, and generally, it won't cost your boss more money to do this. They might have to amend the plan, and there might be a onetime fee, but basically, everyone will benefit if you have a better plan. The other thing I will just say is, take advantage of your plan. You can have the best 401(k) in the world, but it doesn't matter if you're not participating in it. You got to save at least 12-15%, and that percentage is a combination of what you put in as well as the employer. But, if you really didn't start saving until your '30s or '40s and '50s, maybe you need to save even more. Then monitor the investments that you're choosing, to make sure that you're choosing the best investments for you in the right asset allocation for your risk tolerance
Ricky Mulvey: As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
Jim Gillies has positions in Autoliv and Medpace. Ricky Mulvey has no position in any of the stocks mentioned. Robert Brokamp, CFP(R) has positions in Tesla. The Motley Fool has positions in and recommends Medpace and Tesla. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft and General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
