In this podcast, Motley Fool analyst Jim Gillies and host Ricky Mulvey discuss:
- Being a buyer of stocks when others are forced to sell.
- Signs that the economy is fraying, and reasons not to panic.
- Celsius' quarter.
Plus, Motley Fool host Alison Southwick and personal finance expert Robert Brokamp answer listener questions about bond ETFs, asset allocation, and Social Security.
Got a question for the show? Email us at podcasts@fool.com
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: Since when has the Fed known anything about the economy? 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 the markets go a little nuts, I like chatting with you. Yesterday, we had a large drop due to this currency trading, nonsense going on between the Japanese Yen and the US dollar. Now, the markets seem to be back. Things are in the green. Things are getting better. I got a mission accomplished banner in my trunk, I got a markets in turmoil lawn sign in my basement. What should I be putting up right now?
Jim Gillies: Well, I can play the selfish game. I would argue for turmoil and that's not because I'm channeling Heath Ledgers Joker from the dark night, and some men just want to watch the world burn. There's a reason for this, and that is argue for turmoil, cause that's when you get better prices in aggregate. The old adage of the stock market is the only place where people head for the exits when the half off sale starts. It's cliche because it's true, stealing from Buffett. You know you're going to be, at least you should be a net buyer of stocks over the course of your life. All in when you're buying, when you're in a buying mood, you want lower equity prices because you're a net beneficiary in your later years. Now, of course, at some point it has to go up. That's not historically been a problem for the US stock market and other world stock markets. US is 10-12% annualized with dividends reinvested. Canada is about 8%. If you want to be a net buyer stocks over the course of your life, you want to be a net investor because it guarantees you a better retirement and better years later and maybe better wealth and generational wealth, even for your offspring or to be able to support the causes you believe in. You get there and you can do more and you have better outcomes when you are being a net buyer at lower prices so I am team turmoil.
Ricky Mulvey: Yesterday, I did a little buying. I can't say what they were due to our internal restrictions. I can't tell you what on the air. But I'm curious to hear from you. When you see this forced buying going on, this forced liquidation is these trades unwind, what are you looking for if you're looking to pick some stocks up?
Jim Gillies: Well, I too have been a buyer both yesterday and today. The Canadian markets were closed yesterday for a civic holiday, so I had to get in some of my Canadian stuff today and like yourself, can't say what I've been doing. But I'm going to challenge the point, force selling for who? I'm not under any obligation of force selling. I'm not in the Yen Carry trade, which is what's been blamed pretty widely for the last few days. I'm going to wager a large amount of money that probably the number of listeners to this who are in that probably rounds to approximately zero. It's for selling for someone else. I'll give my little parable, which is probably a little silly, but my wife claims she doesn't like to shop. This by the way, this is a lie. But she's not the fancy purses or jewelry or clothing or whatever kind of girl. But she does very much like treasure hunting. She came home yesterday with six large tubes of our preferred toothpaste brand. My tooth brushing needs are now filled for the next year. But we know we're going to be net brushes of teeth over the next year, or I guess we're going to have very expensive dentist bill. She did this on her little treasure hunt yesterday. She did this because this particular brand with the brand and size and features. It's about five bucks a tube, usually. At the store she was at. There was a sale $2 a tube, limit six per family, so she filled her boots. If we can do this for toothpaste. This is standard behavior in this house. We load up when prices are compelling, then it should make sense for equities and investments that you know you're going to be using later in your life. You know you're going to need in your retirement and post working years, or just for generally a happy life kind of thing. When you have a force selling period, remember, unless you've done something personally in your own personal account, maybe playing a little too much leverage or questionable option strategies, which of course is leverage as well, or whatever. If the for selling isn't on you, that's a time to go, what I'll call toothpaste shopping. You know you're going to need these things in the future. Now you're getting better prices. I have a story if you want one.
Ricky Mulvey: Sure. You can't set up a story without telling me.
BJim Gillies: Well, sometimes, Jim, you've gone too long, let's go on. I think we might have talked about Kontoor Brands in the past. But if I haven't, I'll give you the basic just Kontoor Brands is the parent company of Lee and Wrangler Jeans. Who doesn't love Lee and Wrangler Jeans, most people. But anyway, it's a really interesting story. It came out. It was spun off from VF Corp, May 2019. They know they're not a high-growth story so their whole road show when they were going to be spinning off was to pitch this as a total shareholder return thing. In other words, we're going to give you a big fat dividend, say 5% a year. If we get 5% a year in equity appreciation from things one or 2% revenue growth and gradually getting more efficient, and operationally efficient or whatever. Maybe you get 5% there, so you get 5% dividend yield, 5% capital appreciation, get 10% total shareholder return. What do you want? That was pretty good. That was their whole pitch. Then COVID happened, and then the pandemic happened. Again, remember, half of their return, part of their total shareholder return thing was this big fat dividend. COVID happens, and we all get locked in our homes, and everything shut down and the world just panicked. In the middle of all this, Kontoor Brands says, you know, the world has changed, this environment looks scary. We are going to cut our dividend temporarily. We're going to shelve the dividend. We're going to bring it back. They were very clear, it's going to come back. But we're taking it to zero. At that time, because they had marketed themselves as this dividend story in large part, they were really, they were held largely, I think of one ETF. A lot of these dividend ETFs had massive stakes of Kontoor brands and some of these ETFs, and the one I'm thinking of in particular, owned, I think 15-20% of contour at this point, they have a mandate. If you don't pay a dividend, they can't own them. That's a forced selling event. They had to gas their entire position, even though management said, this is temporary pandemics pass. We are going to bring the dividend back sooner rather than later as soon as the all clear starts so as we think there's an all clear. Didn't matter. Force selling stock goes from $45 bottoms at 15. I think it might have bottom below 15, but the point is, I purchased around 15. I recommended it to my members around 17, because I'm under no obligation, just because you have a forced selling event. I'm under no obligation to for sell. In fact, I'm going to provide you some exit liquidity. I'm going to buy the shares. When you do that, flash forward to today, the stock price has gone 15-70. They indeed brought the dividend back. You're now getting about I think it's $2 a year, 50 cents a quarter. On your original, if you paid $15, what is that? Eleven and a half 12% yield on cost. Because if you are not required to be part of the group that is force selling, you can exploit that situation to your benefit.
Ricky Mulvey: Schwab shuts down, and then you can't swallow.
Jim Gillies: Well, sure. I'm not a Schwab user. But the point is you and I have both also caveated this that we were both net buyers yesterday and today. This is inherently understood. I hope a lot of the listeners do. This doesn't mean the bottom is in, no one knows, and anyone who claims they can is lying to you.
Ricky Mulvey: We've got calls for an emergency rate cut right now. Now stocks's author Jeremy Siegel, let's go for it. The Wharton Professor goes on CNBC calling for an emergency rate cut, saying, "Since when does the Fed know anything about the economy?" Looking at the labor market, slowing growth. All of this. Seems like things are really dire, Jim, and you're sitting here so calmly. Maybe it's just because you had your civic holiday yesterday. What's going on?
Jim Gillies: I worked on my civic holiday, man. I think with the fullness of time, Professor Siegel is going to want that one back. There are signs that some things are fraying. I'm not going to say otherwise. The restaurant sector is not great right now. There are seeing some valuations in other places looking at you, Apple. They are not commensurate with the growth it's being delivered, five years ago, 5.5 years ago, you were paying 10 times operating profit for EBITDA, 10 times free cash flow roughly. Today, you're paying about 25-27 times. It's arguably why we don't know, obviously, but you could make the argument. It's probably why Buffett sold a bunch, sold about half of Berkshire's steak over the last quarter. But I think Siegel's wrong here. I recognize the arrogance of calling out, Professor Emeritus and Wharton. But, I'll do it 'cause I'm dumb. First off, what is the Fed known anything about the economy? That's literally their job? They're watching the economy. Specifically, their job is to set the economy up where it can be a nice just percolating nice, you want goldilocks. Your primary mandate is to fight inflation and balance the economy for that particular outcome. The famous target range 1-3%, aiming for a target of 2%. We're not heading there yet, but we are in that direction and but you've already signaled. The Fed has already signaled.We are going to start doing small measured rate cuts. Then you have Professor Siegel coming out and throwing his hands up in the air and waving them around like he doesn't care. I have seen personally what 150 basis points of emergency rate cuts does. I'm going to give you, I don't know if the benefit of that wisdom is what I want to say, but I'll say that, anyway. In March, April of 2020, the Bank of Canada, because I do live in this country, even though I greatly admire your country, of course. The Bank of Canada did 350 basis point cuts within about five or six weeks of each other. What was going on in March and April of 2020, Ricky? That necessitate that?
Ricky Mulvey: Don't let me answer that. We know.
Jim Gillies: We know. The world was shut down. The economy, GDP fell 15 or 20% of whatever it was. People had no idea what was going on. The world was panicking. Is Professor Siegel asking us to mimic what happened in the very early days of the pandemic because some people did bad things to their own accounts with the Yen carry trade or that he's worried that maybe the Fed has not yet caught up with the economy going down, with all due respect, I saw that clip on CNBC and to me, it just looked like naked panic, and it did not look like the Jeremy Siegel I followed for the better part of three decades.
Ricky Mulvey: Let's go to a little bit of earnings.
Jim Gillies: Sure.
Ricky Mulvey: Because there are earnings coming out this week, despite what is going on with the Yen Carry trade. I take the Motley part of this show seriously. Today, Celsius Holdings reported it is a growthy company that makes energy drinks that got absolutely walloped after some Nielsen data suggested that it was losing market share. Today, we learned that the revenue hit about $400 million for the quarter, beating analyst estimates by ascos. Revenue growth is up more than 20%, earnings growth up more than 60%, and in its earnings presentation, Jim, we're learning that Celsius is contributing about half of all energy drink category growth year over year. I'm becoming more interested in the company as it's just getting beaten up, but I wanted to see where are you at on Celsius?
Jim Gillies: Well, far be it from me to suggest that a company would spin data in their investor presentation to put themselves in a good light. Lord knows that never happens. Where I am on Celsius is, this is a growth company and so you start arguing about well, all companies are growth companies. What's the level of growth? We tend to shorthand, a growth company is one that's 15 plus percent revenue growth, and where we go from there. But I'm looking at this one, and I am interested. It has a couple of things that I really like. Awareness of the brand is increasing. It's very hard for me to not see it when I go out now, if I walk in my local Costco or my local grocery store, even my local Circle K down the street, there's Celsius as far as the eye can see. it is definitely that they have really benefited from the deal they struck with PepsiCo for the whole distribution deal. I'm going to betray where I think this is going to go when I use the word Pepsi. Their numbers are good, 23% revenue growth is good. The earnings growth is good. I know that there's been a couple of people on Twitter who are, saying about how, oh, it's 27% ROE. Well, if you understand how that sausage is made, you may be not terribly impressed by that, but five year revenue growth of 80%, that's fine. That's built into the shares and certain market share. These are all backward looking things. Which are important to frame the company and your understanding of it. But what matters for the purchase price is going forward. At 42, 43 today, obviously, it's much better. To go back what I said earlier, you're a net buyer of stocks, I'd rather be a buyer at 42, probably with this growth story than at 52 week high was 99, or whatever, when there's all that euphoria about the Pepsi distribution deal, what have you. But, if you think, and I'm a cash flow guy. I know we've done a couple of valuation talks. I'm going to trundle over there for a bit. If you think that they're trailing cash flow, which is about 245 million trailing free cash flow, if you think that's a reasonable number, and it may or may not be, by the way. But if you think that's a reasonable number, then you can back in and say, this is just shy of a $10 billion company.
Jim Gillies: What does that free cash flow? We're going to do a very basic a 10 year, what's called a reverse DCF. What does that free cash flow have to grow at for the next decade, and then say it grows at 3% annually, like the roughly GDP or whatever for time immemorial past that 10 years. But over the next 10 years is an explicit forecast period, what rate does that free cash flow have to grow at? Such that discounted about 11%, such that it justifies today's stock price at about 42,43. The answer is, it has to grow about 17.5% annually for the next decade. Now, is that reasonable? That's the question you start asking yourself. Is that reasonable? It's actually probably not that bad, to be honest with you. If you believe that the current level of free cash flow is indicative, they didn't get a big working capital boost and it's going to trend down next little while. But that's probably not that bad. I might be a little bit interested in at least starting doing a starter position there and that as well Celsius, I think there's a logical natural outcome that's coming down the pipe at us. That is Pepsi will buy them. Maybe not today, maybe not two or three years from now, but frankly, I'd be a little shocked if the stock is still publicly traded in 10 years, because success will breed one of the big beverage companies or one of the big consumer product companies to probably take them out and my bet would be Pepsi. But, so I actually look at this and go, the prices, probably not bad for at least a starter position and watch and add on other opportunistic dips, that we'll call it.
Ricky Mulvey: It's got some international expansion plans, and definitely one that I am keeping an eye on. Jim Gillies, appreciate you being here and thank you for your time and your insight.
Jim Gillies: Thank you.
Ricky Mulvey: As we wrap up, just wanted to note that our latest premium podcast launched this week. It's called Epic Opportunities, and this is available to members of Epic and the Motley Fool Advanced Investing Services. You can catch the show on Spotify by linking your Motley Fool account or through the Motley Fool App. We'll also put links to all of those in the show notes for today's episode.
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Ricky Mulvey: Up next, Alison Southwick and Robert Brokamp answer your questions about asset allocation, bond ETFs, and Social Security.
Alison Southwick: Our first question comes from Martin. In an episode in late June, Bro said? "Oh, I love it when we get these Bro said questions?" [laughs] Does it make you nervous, Bro? When you see a question like that, you're like, Oh, no, what did I say?
Robert Brokamp: A little bit, but I think Martin makes a good point, so I'm happy he raised this issue.
Alison Southwick: Martin says that you said, Social Security is one of the best, if not the best source of retirement income. Yet. That's what you said. Now we're to Martin here. Yet, it is subject to a mandatory 21% cut in a decade. How can it be a great source of retirement income with cuts coming?
Robert Brokamp: Again, Martin is raising a good point. I don't remember exactly when I said what context was when I said that, but I still believe Social Security is one of the best if not the best sources of retirement income for current retirees, as well as those who will soon get the benefits because, it is backed by Uncle Sam. I adjust for inflation every year, and it's at least partially tax free. But what Martin is pointing out is that, Social Security is funded mostly by payroll taxes, and people will still keep working, but it's also partially funded by the trust funds. According to the latest report from the trustees, that trust funds will be depleted in 2033. At that point, they'll only be enough money to pay 79% of scheduled benefits. For those who are in their 40s or younger, and maybe even mid 50s, I think it actually does make sense to assume that you'll get less than what is currently projected. Likely in the form of having to wait longer to claim the benefits, and maybe they'll be more means testing. In other words, if you have higher income, maybe you'll either get less in Social Security or more of it will be taxed. I'm 55, and when I run my numbers, I assume I'm only going to get 75% of my projected benefit. But once I start to receive it, I think it'll be safe because I've never seen a reform proposal that recommends cutting benefits for existing beneficiaries.
Alison Southwick: You know, who's also 55 is Patrick, who sent our next question in. I am 55-years-old and within 10 years of retirement. About half of my portfolio is in retirement accounts. My largest portfolio holdings are an S&P 500 index fund and a total market index fund. Additionally, I have individual holdings in all of the magnificent seven companies. What are your thoughts on trimming my individual holdings, since I am already so heavily invested in these companies through the index funds? In light of the sentiment that some of these stocks may be overpriced currently, I thought this could be a way of taking some money off the table now.
Robert Brokamp: Let's go over what is generally considered to be the "Magnificent Seven," Mag seven stocks. They are Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and NVIDIA. If you look at the top holdings of the SFB 500 or just the total US stock market, six of those are the biggest holdings, the only exception being Tesla, which floats around maybe number 10, depending on which day you look at it. If you hold those index funds and you hold those individual stocks, you have a lot in those companies. Is it too much? Ask 10 different Motley Fool analysts and you'll get 10 different answers, likely depending on their individual assessments of each of those companies. If your assessment is that, those companies will be the biggest winners over the next decade as they have mostly over the last decade, then I'm not going to argue with you. What I'll do is give you the answer you'd likely get from a certified financial planner, such as myself. We CFP professionals often approach these questions from the perspective of risk management. Start by seeing how much you have in each company, including the exposure you have in the funds you own, and you might need a spreadsheet to do this, or use something like Morning Stars, portfolio tool, X ray tool, which factors into funds holdings to let you know how much you have exposure to each individual company. A rule of thumb is that anytime you have more than 10% of your portfolio in one stock or more than 30% of your portfolio in one sector, it might be time to take a closer look at your portfolio and maybe do some rebalancing. That doesn't necessarily mean selling your holdings. You could rebalance your portfolio by just making sure that you use future contributions to your accounts to bulk up other types of assets, small caps or international stocks or different sectors. Also, don't reinvest the dividends paid by those companies, and a few of them do pay dividends. Use that cash again to bulk up your other assets. But, if that would likely leave you still pretty over concentrated in those companies, you also might want to trim those holdings a bit on top of that. Again, this isn't a commentary on those specific companies and their current valuations. This is just good risk management, which based on how you phrased your question sounds like something that might be important to you.
Alison Southwick: Next question comes from Joshua. I have a bunch of individual stocks that have not been performing well. Joshua, I'm sorry, we've all been there, and are in the negative since purchased several years ago. Should I sell all these negative stocks to get some tax benefit, and then redirect these funds to a safer S&P index fund, or use it to pay down a 40k car payment that has a high 7% interest rate? Also, I'm contributing 6% to my 401(k) to get the full match. Nice job, Joshua. I have lowered this from 15%, so I can help pay off that 40k car loan. Should I continue to do this or do I need to increase my retirement savings?
Robert Brokamp: Well, let's start with how much you should be saving for retirement. It depends on several factors, your age, how much you've already accumulated. But most people should be shooting for saving 15% of their income. That would include the match you received from your employer. You didn't mention your match. The average is about 3%- 4%, so I assume you're then saving around 9%-10%. You're a little bit behind there. Also, by contributing to your 401(k), you get tax benefits. That said, 7% is not a negligible interest rate on that car loan and paying that off sooner, it's a guaranteed return. Whereas, you don't know what return you'll get from the money you contribute to your 401(k). Since the 1920s, the stock market has returned in averages 10% a year, but there have been plenty of stretches when it's been lower. Paying off debt, is a guaranteed return. Plus it often has a psychological benefit, and since you bring this loan up twice in your question, that tells me that maybe this is eating at you. I can't make a firm recommendation, but if you want to sell the investments that you feel no longer have much promise, take the tax loss, which will reduce your tax bill, and then put that money toward the loan, I wouldn't argue against it. Whether you should continue to save less in your 401(k) in order to pay off the loan sooner, is a little fuzzier. If the rate were a good bit lower, I'd say, keep the loan and save more, but 7% is on the line where there's no clear cut answer once you've taken full advantage of the match, what you're doing, which is great. I think it really comes down to your preferences and how important it is for you to pay that loan off sooner. If you go that route, once you've done that, make sure you ramp up your retirement savings.
Alison Southwick: Next question comes from Admas. I've been approved for a new credit card. I want to try this one out since it seems to be a better cashback option than the one I have now. I was wondering what to do with the one I already have? I've heard it's not good for your credit score if you cancel an account like a credit card. Do I just leave it in my wallet and not use it?
Robert Brokamp: The quick answer is yes, so let's talk a little bit about what determines your credit score, and this comes from FICO. The biggest factor, 35% is your payment history, so just make sure you pay your debts on time. Thirty percent is the amounts owed, and I'll get a little bit more into that later, 15% is length of credit history, 10% credit mix 10% new credit. With that 15% of length of credit history, if you cancel an older card, you might be shortening your credit history, so that could have a harmful effect on your credit score. The other factor is the amount owed. Here you need to understand something called credit utilization. They look at all the credit that is available to you. Every credit card has a limit, and then how much you're using as a percentage of that overall limit. You want to keep it definitely below 30% and better 10%. By having two credit cards, you have more credit available to you, and if you're only using a little bit of it, that keeps your credit utilization ratio low, which again, can help your credit score. I would say generally speaking, yes, keep the other credit card.
Alison Southwick: Next question comes from Craig. I'm thinking about adding some more bond ETFs. I've been looking at high yielding bond funds, SCYB, and USHY. They have a yield of more than 7% and seem like a good idea. The risk seem spread out since there are a bunch of different companies in the funds. Are there any other categories I should consider when I'm putting together the bond side of my savings?
Robert Brokamp: Well, Craig, when it comes to choosing bonds, I think it makes sense to start with the goal for that investment, because different types of bonds have different risk reward and tax characteristics. In fact, the bond market is actually bigger than the stock market. For money, you want to keep super safe. Stick with short-term funds that invest in investment grade bonds or even just treasuries, such as the Vanguard short-term Bond Fund, BSV is the ticker, or the iShares zero to three month Treasury ETF ticker of SGOV. If you're willing to take a little bit more risk and are looking just for some overall diversification to your portfolio, a good intermediate term or total bond market fund that invest in investment grate funds is worth considering. A couple of possibilities here are Dodge and Cox income, ticker DODIX, and the Vanguard Total bond market ETF BND. Couple of other things to consider are target date bond funds issued by Invesco and iShares. If you want to invest in bonds that all mature in the same year, maybe you're creating a bond ladder in retirement, so definitely check those out. Now let's talk about the two funds you mentioned.
These are high yield bonds, otherwise known as junk bonds, so these are below investment grade. The SCYB is a Schwab high yield bond fund. It's actually pretty new, but it follows an established index, so I'd be comfortable with that. Then the other one with ticker USHY is, the iShares broad, USD, High yield corporate bond, ETF. They do both own hundreds, actually, almost 2000 bonds. If you're going to invest in high yield bonds, this is the way to go, very diversified. The problem is, some of these bonds will definitely default, even in a good economy. But during a bad economy, when the next recession comes, I don't know when it's going to come, but there will be one, you'll see more defaults, and these funds will drop 15%-25%. Junk bonds are very sensitive to overall economic conditions. They're actually considered a hybrid of stocks and bonds. That's very surprising to people. They invested in bonds. They thought they were safe, but you're going to see big drops in these during tough times. If you're investing in bonds so that a portion of your portfolio holds up much better than stocks during a downturn, then I would say, stick to short or intermediate term bond funds that invest in investment great corporates or treasuries. These can and do drop in value, but not nearly as much as stocks. If you want to invest some of your portfolio in junk bonds, that can be OK, but I would limit it to no more than a few percentage points of your portfolio.
Ricky Mulvey: If you've got a question for Alison and Bro, email us at podcasts@foolcom. That is podcasts with S @fool.com. 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.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Alison Southwick has positions in Amazon and Apple. Jim Gillies has positions in Amazon, Apple, Berkshire Hathaway, Kontoor Brands, and National Bank Of Canada. Ricky Mulvey has positions in Meta Platforms and iShares Trust-iShares Broad Usd High Yieldorate Bond ETF. Robert Brokamp has positions in Tesla, Vanguard Bond Index Funds-Vanguard Total Bond Market ETF, and iShares Trust-iShares 0-3 Month Treasury Bond ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Celsius, Meta Platforms, Microsoft, Nvidia, Tesla, Vanguard Bond Index Funds-Vanguard Short-Term Bond ETF, and Vanguard Bond Index Funds-Vanguard Total Bond Market ETF. The Motley Fool recommends Kontoor Brands and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
