In this podcast, Motley Fool analyst Jim Gillies and host Ricky Mulvey break down Hindenburg Research's report on Axos Financial. Plus, Jim discusses why investors should consider adding Academy Sports and Outdoors to their watch lists.
Plus, Motley Fool personal finance expert Robert Brokamp interviews Eileen Freiburger, managing director of the Garrett Planning Network, about what you should expect from meeting with a financial advisor.
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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Ricky Mulvey: Hindenburg Research has another target in its sights. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, good to see you.
Jim Gillies: Good to be seen, Ricky.
Ricky Mulvey: When Hindenburg Research goes after a company, a lot of people pay attention, but I'm not going to assume all of the listeners are familiar with this short-selling firm and why we would care so much about it. Why is Hindenburg particularly worth listening to? Why is it worth investors attention?
Jim Gillies: Well, as with anything in the investing space, I suppose, you are what your record says you are, and Hindenburg's record says they're pretty good at this shorting thing. I'll give you a couple, they went after Nikola, the hydrogen-based electric car manufacturer/fraud, they went after them I think in late 2020. The stock's down about 97% since then they went after CloverHealth in February I believe of 2021. I think that stock's down about 95 plus percent since then. Believe me, there are some shorts who are clown shows and should be ignored or preferably laughed at. I don't think Hindenburg is one. I have a lot of respect for what Hindenburg has done. I may or may not agree with them, but just like other shorts who I like, Muddy Waters, Carson Block, he's done some very good work, of course, Jim Chanos, he's the godfather of shorts for my generation of investors. You don't have to agree with all of their calls, I certainly don't. But I think it's always worthwhile paying attention to what they're saying because I think they can often unearth some things that are worth you knowing at least to say, no, that's not right. No, that's incorrect, or no, this is serious. This is something I should look at. I'm not someone that demonizes short sellers, I actually think they're a valuable part of the market environment.
Ricky Mulvey: Let's talk about what Hindenburg is saying about Axos Financial. The original bull case for the company is basically a digital bank that's really good investing deposits in a less risky way, and it seems that what Hindenburg is saying at a large level is actually this bank is taking on a ton of risk in commercial real estate and a lot of their loans might not be paid back by the borrowers they gave money to.
Jim Gillies: That's a risk of banking that you've made poor loans that do not get repaid.
Ricky Mulvey: It's looking a lot at the commercial real estate exposure. This is where the spotlight is going. "Axos total commercial real estate exposure has ballooned to 53% of total net loans." Points out that it's peers are closer to about 16%. A lot of these loans are in the New York area where commercial real estate has had a bit of a change in valuation. There are some highlights in the report, Jim. I'm going to give you mine first, and then I'd like to hear what your highlights are. They're talking about one loan in particular. "One reason most banks don't lend up to 97.5 million to individuals with multiple indictments and documented mob ties is that even if things go well, it can be difficult to get your money back. This is made even more challenging when things go poorly as seems to be the case with this property." That's pretty juicy. Anything in this report, any of the bullet points, you have a litany of them. Any of the bullet points, claims, takes that really stand out to you.
Jim Gillies: Well, that one actually. That was the one that stuck out to me. Mainly because you got to love something talking about multiple indictments and mob ties. But here's the thing when it comes to short reports. Again, I have all the time in the world for Hindenburg. I will absolutely listen to Hindenburg when they come for some of my companies and by the way, this is a recommendation of mine and the service I run here in James, Canada. But I'm perfectly fine with them coming out here. What I want to impress upon the listener is short reports are designed to scare you. They are designed to perhaps invoke an emotional reaction because a short, of course, makes money when the stock goes down and if you read the disclosure here, Hindenburg is short the shares. They have borrowed shares from other investors, they have sold them into the market, and they will be looking to buy them back at a later date maybe even as early as today, probably not, but they were looking to buy them back at a lower price at a later date and pocket the difference and call it a profit. Short reports are designed to scare you and sometimes some of the points that they make may be a little dressed up to be somewhat histrionic or convey a sense of just urgency and scariness that may or may not be there. The example I'll give you is in October of 2017, a short called Citron Research run by a gentleman named Andrew Left, who I do not hold in the esteem with which I hold Hindenburg, I will put that out there and let you draw your own conclusions.
He came out with a short report on Shopify, which at the time I think was about $10 Canadian ballpark. The split adjusted somewhere $10 and $15 Canadian. It was histrionics, it was basically saying that they would have to be shut down by regulators and authorities. If you actually went through and thought it through, a lot of their bullet points that they made, which were all scary just like Hindenburg's ones are here, didn't hold a lot of water. Like talking about, well, they was in the referral business, so people could get referrals for starting a new business on Shopify. You get $2,500 for starting a referral blah. You could get these finders fees, but you can only get them for people that started giant businesses on Shopify. You and I starting a sock reselling business on Shopify wouldn't have gotten a penny, but if you brought Nestle on board, you'd get a $2,500 finder's fee for bringing a company the size and heft of Nestle onto the Shopify platform. But I'm going to give you a couple of things here. An investor, when they hear about a short report, first off, the best thing you can do is to do nothing. Take your time, you're not going to get out in front of the people panic selling because of the short report. The stock, I think it opened up down 15% today. As we speak, it's down about 7-8%. It's already starting to rebound. Second off, forget what Hindenburg has done, but if I tell you here, if I tell you that in the most recent quarter, Axos boosted net income by 38%, boosted earnings per share by 44.5% because they have been buying back their own stock. Their net interest margin, a very important metric for banks was 4.87% up from 4.42 a year before. To put that into context, being Canadian, I watched the big Canadian banks a lot. Again, Axos financial, formerly known as Bank of Internet, 4.87% net interest margin. In Canada, the big banks which are all beautifully solid and whatever, the average was up 1.74%. Their capital looked good, their book value was up 24%. They're actively repurching. They had a bunch of cash well above the uninsured deposits. Their deposit growth has been great. The weighted average loan to value of the specialty real estate portfolio was 40%, that's a very safe loan on a lending basis. Are there problem loans in Axos' financial books? Absolutely, just as there is for every other financial. But tell me why? I've just given you all these wonderful growth metrics and performance metrics from the most recent quarter for Axos. Tell me why these scary bullet points that Hindenburg has brought out, why should those trump the actual pretty good performance that Axos has been posting up?
Ricky Mulvey: I'll give you a straw, man. I don't know if that was rhetorical. I think Hindenburg would say it's because they've gone so far out on the risk curve that eventually as many of these projects break down especially, apartment buildings in New York City, for example, that that's going to dramatically change the returns and Axos isn't necessarily as forthright about the risks involved with the investments underlying their assets.
Jim Gillies: Sure. That's a great rebuttal. But number 1, how do you know beyond just reading Hindenburg's report? Given the recency bias going on here, I would argue none of us know that. Second of all, I just did quote you that the average LTV of the specialty real estate portfolio was 40%. What that means is, don't come after me for individual loans but in aggregate, that portfolio could lose 50% of its value and the LTV would still be 80%. The other rejoinder I would offer up is apartments in New York might be coming down on price, but I still think they're probably going to hold their value. I don't think I will ever see a world where New York real estate is terribly cheap. But the point is you've got Hindenburg's assertions, which are front of mind right now for a lot of people and as I mentioned about that Shopify short report, when that came out, a lot of people panic sold Shopify. Shopify has been about a 10 bagger since then. Not pack predicting that for Axos, but I'm just saying here, yes, what essentially it boils down to for Hindenburg here is they are saying Axos' future is going to look a lot different than its past. You can have shorts who I respect, like I mentioned Jim Chanos before. Jim Chanos went after Restaurant Brands International back in the day, franchising parent of Burger King, Tim Hortons, Popeyes, and Firehouse Subs. I read his report, I said, I think that's wrong. It's been a great investment since. Another one, Carson Block and Muddy Waters, I have all the respect in the world for them. They took down Sino-Forest, which was basically a forestry plantation in China traded on the Canadian markets, a bit of a fraud. They, of course, protested and screamed and yelled, and rent their garments and then filed for bankruptcy a year later so they had the goods there. But Muddy Waters themselves went after Fairfax Financial, which is another Canadian company. A lot of times people equate them to Canada's Berkshire Hathaway style company. Extremely puzzling why they'd go after that company because they went after them based on an accounting minutia that frankly was silly. You can have even a well respected short seller who brings receipts. They can still frankly, come to erroneous conclusions. But let's say they are successful in driving the share price down 10%, 20%, 30%. They're going to be very quiet and cover their position and you won't know it. There may be a lot of smoke here and a lot of fire here, there might not be. The day to figure that out is not on the day when the report drops and everyone's panic selling. Take your time, think it through, try to check up and independently verify. I will say this, the last thing I'm going to say about this report in Hindenburg. What if I told you there's a mistake in the first bullet point where it says it's headquartered in San Diego? It's not. It's headquartered in Las Vegas. You've made that silly little error in the first bullet point. Are there others?
Ricky Mulvey: It's because they have so many bullet points. All these short sellers want to have as many bullet points as possible. There's one in the report. It's like banking started in Mesopotamia. We got to wrap this up. Speaking of wrapping it up, I want to hit this retail topic because we're running low on time. We're going to go to the DICK's Sporting Goods and the Academy Sports call because DICK'S Sporting Goods is a specialty retailer in sporting goods. It's gone off like a rocket over the past five years. You think something similar might happen to Academy Sports and Outdoors, which has had a good track record over the past five years. It's a little bit more of a discount option to your DICK'S Sporting Goods where, for example, you can pick up and try on shoes at their stores without having an associate go in the back and grab one for you. But give me the call on this, let's talk Academy Sports before we go.
Jim Gillies: Sure. Academy Sports, five years ago, they came up with a five-year plan, and their plan was ambitious. I think 2019 they were voted the most likely to take the sweet embrace of bankruptcy, management came in or new management rather, I should say, got revamped. They came out with a five-year plan. Five years later, they hit all their targets. They did a really good job. They produced a lot of cash flow, and they used that cash flow in the services shareholders. The interesting thing about Academy Sports is the stock since IPO absolutely just murdered the market. Generally, I say stay away from IPOs for a year or two just to let them get their public feet. Academy Sports would be the exception to the rule. They've done fantastic. Last year, with the successful five-year plan now in the rearview, they came up with another five-year plan and again, they've hit reasonable targets. As I've worked through this retailer, as I look at them and say, they talk about, well, here's our store growth plan, I've hair cut that. Here's our margin plan, I hair cut that. Here are our return on invested capital, here's how fast we want to turn our inventory, and here's our e-commerce penetration we're aiming for. All of that is hair cut. I like to run various valuation techniques, but one of the more common ones is a discounted cash flow, which is generally an exercise and false precision, but we try to get around that. As I work through Academy Sports, and this is another recommendation that hit James candidates for full disclosure. Even as I start hair-cutting things and start smacking things down, I think the share price is demonstrably undervalued versus what it can do. Then we just saw as you mentioned, DICK'S Sporting Goods, their most recent earnings report was really far stronger than the street was expecting, and the stock reacted accordingly. I'm sitting here with a company that is very similar. It is a bit more of a discount, it's a bit more regional. They have more growth expectations and plans than DICK'S does at this point. But I'm like, as they keep on enacting their growth plans, I think there's a reasonable case to be made that the current price is significantly undervaluing the future cash flows of the business. Then what if they actually deliver what they said they were going to do? Because like I said, I hair cut the whole thing. What if they actually deliver what they said they're going to try to do? If they do, then this stock is not just demonstrably undervalued, it is significant.
Jim Gillies: That's where I'm coming down Academy Sports. There have been some strange stories in retail of late. I will grant you that. But I look at Academy Sports, and I think hat's what's pretty good.
Ricky Mulvey: That's a good place to end it. One of these days, Jim, we're going to hit three stories. One of these days. But not today.
Jim Gillies: Not today.
Ricky Mulvey: Jim, thanks for your time and your insight. Thanks for hopping on.
Jim Gillies: Thank you.
Ricky Mulvey: Ricky Mulvey with Motley Fool Money here to tell you about a vehicle that is redefining sporting luxury, the Range Rover Sport. The first thing I noticed when I sat down in the driver's seat is that I felt like I was in a cockpit. You're up off the ground in a focused interior that promotes exhilarating driver engagement. I also really appreciated the overhead 360-degree cam review that let me know exactly where I was going as I was backing out of the parking space. I went for a drive in the Range Rover Sport out in Littleton, Colorado and tested the accelerator just a little bit and felt the performance and agility. It's an instinctive drive with engaging on-road dynamics and effortless composure. To put it plainly, the Range Rover Sport is powerful. It's also quiet and comfortable. Advanced cabin technologies such as active noise cancellation and cabin air purification offer new levels of comfort and refinement. The third-generation Range Rover Sport is the most desirable, advanced, and dynamically capable yet. I'd like to invite you to visit landroverusa.com to learn more about the Range Rover Sport. Up next. A fee-only financial planner sounds very similar to a fee-based planner. But the difference can be significant. Robert Brokamp caught up with Eileen Freiburger, Managing Director of the Garrett Planning Network to discuss what you should expect when you go to see a financial advisor.
Robert Brokamp: What is a fee-only financial planner? What makes someone fee-only?
Eileen Freiburger: What's been fascinating to me is how the industry has changed this term as it's been used. Fee-only absolutely means the only payments are made from the consumer directly to the advisor. That would mean no commissions, no kickbacks, no third-party reimbursements. Fee-only is that sense of I the client am absolutely paying you directly either from a debit from the account if it's an assets under management, or by a credit card, if it's advice only, if it's an hourly project, by check, by credit card, and by that relationships project scope. Now, where the industries changed a bit is now some people can still be fee-only but still have an arm that might be affiliated with another sector. Maybe it's still affiliated with a broker-dealer, maybe it's still affiliated with the wirehouse. A lot of people are fee-only on one side of the house but not necessarily the other side of the house. Again, that's also come up a little bit I think with the use of fiduciary. We'd like to believe that everyone that says they're a fiduciary is also fee-only 100% in compensation only from the client but you've got to dig and that's the shame of what I think has happened to the wording of the industry. I'm hoping as me being here as part of Garrett, educate the consumer what you ask for must be confirmed to be true. You've now got to do a little bit more digging in order to confirm the person you're engaging with really is what you intended. The last part which you've heard, everyone thinks fee-based is fee-only. Fee-based to me means that person might be wearing the two hats. One side can do the hourly or the project-based or the retainer model, the other side might be doing a little bit more on the product side. Again, the average consumer tosses around all of these terms and the future advisor nods their head but it doesn't mean that they got what they were expecting.
Robert Brokamp: One of the points, of course, is that if you are paying the planner directly as opposed to commission, there are fewer conflicts of interest because if someone is being paid by a commission you're not always sure they are recommending something to you that is best for you or it's best for them because they're getting the biggest commission.
Eileen Freiburger: Correct. I'm going to take this even further by saying there's always conflicts in every one of these relationships. Even if someone is fee-only and is charging an asset under management a lot of people will say there's a conflict because then the advisor wants more assets under-wing. But again, a true fiduciary is going to say, hey, I understand that you're considering buying a property. Let's look at the mortgage situation. Should we take 100% of those monies out of your account to have you with no mortgage? Or should we look at the planning and see if maybe keeping some portion of a mortgage makes more sense for you? What's best for the consumer? Even in the world of fee-only, and again, fee-only would also encompass somebody that's managing assets, there's always conflicts. Again because I've worn so many hats in the industry, in some cases maybe a one-time commission is still better for the consumer than an ongoing retainer relationship or an ongoing assets under management. There's never really going to be an absolute, you have to do it this way. Consumer must continue to ask the questions and become educated.
Robert Brokamp: Let's say someone has used Garrett or NAPFA or any of the other networks and they've identified, let's say three financial planners that look like could be a good fit. What's the next step and how do you narrow down to the one person you want to work with?
Eileen Freiburger: I think that's a great question. I would encourage a consumer to say to the advisor, "Am I a good fit for you? Have you worked with other people like this? How much experience do you have in this specific type situation?" You're interviewing each other and it's just as important that the advisor feels that you're a good fit for them. Versus also, are they a good fit for you, because you don't want to be with someone that took you just because but that's not really their strength or their background or their experience. I personally experience and sometimes you look at someone's profile and it might say they've only had their advisory office for a year or two. But you know what? They had background in the industry. They didn't open their own firm but they had very strong industry background. Or now when I talk to many second-career people maybe they had a disabled child. Maybe they've done life planning on behalf of parents that are now in care facilities or end-of-life planning and hospice planning. You wrap that person with not necessarily having run their own advisory firm for many years but having life experiences and have pursued the CFP and passed the CFP and have experience now it's a whole different world. Again, I think a lot of it comes back to, are you familiar and experienced enough in my situation, or under what I'm describing, are you learning on my time? I would be very open in asking those questions. It's the same on someone who might need budgeting help. Maybe a very experienced planner maybe that's not the right person to call and say, hey, I want to work on getting out of debt or budget planning? That might no longer be that person's specialty but it may have been when they first opened 10, 15, whatever years ago. Perhaps though now they have someone else in their office. Under that same question, if I later hire you, I'm talking to you today. Are you the person I'm interacting with in the future or did I get assigned to someone else or a team, how often if I'm interviewing you or you my point in the future? You're looking for is at the right fit on all these different levels.
Robert Brokamp: The examples you use emphasize an important point. When people think of financial advisor some people might think of mostly portfolio management, but it can cover everything, retirement, tax planning, estate planning, insurance planning, college planning. I think if you are looking for a planner one thing to do is to write down exactly what you are looking for beforehand. You're clear on what you want from that person. When you have that first discussion about whether you're a good fit you know exactly what type of financial planning you're looking for.
Eileen Freiburger: Ask what kind of output? Is it a financial plan? Is it an on-the-fly? Are we talking through this together? I'm a really firm believer under the current advisory scene. Anyone that's paying for assets under management. Again, for some people that might be right and they might be willing to do it but I really hope if you're paying a percentage it came with a financial plan. What I call a financial plan is the person you're working with should be able to say, here's where you are today. Here's your spending. Here's what you're putting into savings toward retirement. Gee, if we look at today's financials and we fast forward 15, 20, 30 years in the future, what might it look like? Then if that's the appropriate long-term relationship. Again, then this could be hourly project-based. But an appropriate long-term relationship means, you then periodically say, "Okay, now I veered a little bit." We did the original plan, we looked at spending less, retiring at different ages, college planning for kids. Life happens, things change. Anyone you interview should be able to explain to you how they will be able to be there in the future to answer whatever financial question comes up for you. I'm going to go so far as to say when I had my advisory firm, I've had clients call me saying, hey, I'm in this other state on vacation and my gosh, I think I saw the perfect property. What can I afford to bid up to? That's not a question that you want to say, we've never built a financial plan. I really don't know. You want to be able to say, my gosh, that's a great question. Gee, since we've already spent the time working on baseline planning let me factor in some ranges. Are you still retiring at these times? I can look at the tax ramifications, I can look at the down payment, I can look at the mortgage. Let me get back to you and I'll be able to give you a better sense of what do you think you can afford. We can discuss what you might have to give up if you're making a little bit above that range to just be fair to the conversation. But that financial planner should be the first person you go to Illnesses, life happens, college planning, special decisions. All of that's a part of it. It shouldn't be, I only manage your portfolio I wish I could help you with this. No, that's what you should be paying a financial planner for.
Robert Brokamp: Let's move on to the discussion of becoming a financial planner. I know there are many Motley Fool readers and listeners who have become so involved in learning about finances. They become very interested in it and they think, well, Golly, maybe I should make this my career. It's one of Garrett's specialties in that it helps people move on from one career to another to transition to the financial planning profession. Let's start with that and if someone is thinking about it what are some of the things they should start doing to investigate whether it's a possibility for them?
Eileen Freiburger: Great questions because there's such a need and what a great career path. For starters, the industries, NAPFA, National Association of Personal Financial Advisers. Go to their meetings, go to the website, start meeting people. As you've mentioned earlier, Michael Kitces, is an XYPN is very similar to the Garrett Planning Network. You're looking for local organizations, membership-driven organizations that if you wanted to hang a shingle, how do you get through the RIA process? How do you file? Are you getting insurance? Are you getting training? I'm going to toss out something that I think has become very new, but Hannah Moore, I'm happy to give her a pitch is Amplified Planning. She's doing an eight-week externship program at rates, $350 for eight weeks to be able to monitor and view and practice real client meetings, get a sense of the technology. Again, if you think you're interested in this, find ways to incorporate, how would I do it? What does it look like? Go to NAPFA, go to Garrett, go to XYPN, find advisors in your community, ask to meet them for socially. Can they do a Zoom meeting? Just to talk about the industry. Can they invite you to some of the various sessions or retreats or conferences that are going on out there? There's so many people that enjoy doing what we do that even in retirement are managing their own monies, they're playing with the software, they're doing all of this because they enjoy it. Again, this is taped, but come on, if it's no longer a hobby, but it's a business. Think about all of what you can be doing around this profession.
For anyone that's earlier in their careers, starting entry levels I recently saw an advisor was posting a position for over six figure with the partnership track. I know depending on the affluency of the communities I've seen entry-level positions with people in the CFP profession, meaning they're pursuing it and they've started it 60,000-90,000 for starting positions. Don't get yourself. This is a career and a profession that has so many different ways to develop and explore. More and more so for the iron core career second career person. This is also the opportunity for a lifestyle firm. If you're not managing assets and you're working hourly project base, one of the reasons why it's difficult to find an advisor, they might not be working a full year. They take off also around certain seasons. When you're managing assets, there's a much different level that you have to be there daily. When you're working on an hourly project basis and helping people self-implement, it is a little easier to take it a lifestyle if someone chooses to. But on the other side of that the fun part about coming back to the Garrett Planning Network is folks that started with me when they were first starting out are still there they're running some very large firms now. Again, what firm do you want to create? What's your vision in the future or earlier in your career? What a phenomenal profession.
Ricky Mulvey: 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 anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
Jim Gillies has positions in Academy Sports And Outdoors, Berkshire Hathaway, Restaurant Brands International, and Shopify. Ricky Mulvey has positions in Shopify. Robert Brokamp has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Axos Financial, Berkshire Hathaway, and Shopify. The Motley Fool recommends Academy Sports And Outdoors and Restaurant Brands International. The Motley Fool has a disclosure policy.
