In this podcast, Motley Fool senior analyst Jason Moser discusses:
- The case for traditional value stocks like Bank of America and Berkshire Hathaway.
- Inclusion of big tech companies like Alphabet and Amazon on a top stocks list.
- Why attractive valuation isn't enough to get him interested in Madison Square Garden Sports.
Jason and Motley Fool contributor Matt Frankel review some bold predictions they made last year and share some predictions about mortgage rates, inflation, and stocks in the year ahead.
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 Dec. 19, 2022.
Chris Hill: Barron's is out with their list of 10 top stocks for the new year and we've got some thoughts on what they came up with. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool senior analyst, Jason Moser. Happy Monday.
Jason Moser: Happy Monday, indeed.
Chris Hill: To our listeners in France, congratulations on an incredible run. To our listeners in Argentina, who are we kidding? They're not listening. They're still celebrating their World Cup victory. As they have done for a while now, Barron's Magazine has put together their picks for the 10 top stocks for the coming year. I appreciate the fact that Barron's led their article with their scorecard of the 10 stocks that they picked last year. The average pick is down around nearly two percent. That's still outperforming the S&P 500 by 10 percentage points. We're not going to go through all 10 of these stocks for 2023 in great detail, but the tickers for all 10 are in the show notes for this episode so folks can check those out. We can go into a few that we find noteworthy, but it is clear, Jason, when I look at this list, the folks at Barron's are very much taking a value lens approach to stock investing in the new year. You see it in picks like Bank of America and Berkshire Hathaway.
Jason Moser: I think that's fair to say. It feels like investors, particularly this past year, we always say price always matters and it feels like a lot of investors have renewed their belief in that sentiment. We have for a long time not had to worry so much about valuation and it is certainly taking center stage these days for obvious reasons. I do like that their pick. These are 10 stocks and we don't know how long ultimately, I guess, they're really just judging themselves on a year and, so that doesn't really fully line up with the way that we do things here, but I do like that it's so well diversified. You look at this collection of companies, you've got tech, you've got financials, you got healthcare, you got homebuilders, you got airlines, you got entertainment. I think there's some commodities in there even. It is from that perspective, I think, a really attractive little collection of companies. Some I feel a little bit more bullish on than others, but I think it's fair to say that they are looking at this through their evaluation tilted lens.
Chris Hill: I did smile at the fact that Amazon was one of their top stocks a year ago and now that shares are down, call it 45, 50 percent, it's on this list again.
Jason Moser: Sure.
Chris Hill: Now that it's a lot cheaper, it's really a top pick. I did chuckle with that.
Jason Moser: Well, it does feel like you've got some businesses in here that are far more proven entities than others. Amazon, I feel like we all have a certain level of conviction in. I've been an Amazon shareholder for 11, 12 years now or something like that, and it's a foundational part of my portfolio that I never even really give it a second thought that it's down 50 percent this year. Of course, I follow the business. I want to learn why and what some of the headwinds or challenges the business faces may be. But generally speaking me, it's been a tough stretch for Amazon stock, like you said, down about 50 percent for the year. But you ask yourself, why is that the case? It's not a unique story in that we're seeing a lot of these stay-at-home stocks come back to Earth. Amazon, I think very much qualified is one of those stay-at-home stocks over the last couple of years. It was easy to see the optimism perhaps got a little bit out of control, even for such a well-established business.
They clearly overbuilt, they're dealing with a glut of warehouse space that they now have the right size and they've been dealing with growth, normalizing here over the last year versus what we witnessed the previous two years or so. But again, you look at companies like Amazon, and Alphabet being another that they recommended, to me, these are just very obvious ideas in this space today. We talked before about how some of these companies are becoming more than just what they've been, we're talking about how we're redefining the word utility, for example, it's not just your power company and your water company anymore. These cloud providers are modern-day utilities and, so from that perspective alone, I think you'd see something like in Amazon and an Alphabet and just the tailwinds that we'll recognize in the coming years through AWS and Google Cloud, those are reason enough, I think, to own these businesses, but they also have so much more to offer.
It does make sense to see those on that list. Bank of America, I think, is a really interesting one because it definitely feels like it's set up to succeed given this rising interest rate environment. But when you look at how the stock has performed this year, it's underperforming the market year-to-date and time we think many would have probably predicted the opposite given what we know. We've been waiting for a while to see this interest rate environment start changing and we know that that will ultimately have a good impact on banks' financials in regard to the net interest income that they generate. But this has not been a good investment this year, it's not been a great investment over the last three and five years either.
But back to your valuation point, Bank of America is trading at a discount to JPMorgan, Morgan Stanley, US Bancorp. on a price to tangible book value basis and, so perhaps they see an opportunity there in the valuation, as well as the favorable bigger picture for these banks. I think another thing to keep in mind with Bank of America is, you look to the efficiency ratio as a metric to tell you how well, how efficiently banks are operating, and that ultimately is just non-interest expenses divided by revenue. You want to see it lower. If you see over the last quarter that they reported the efficiency ratio was 62 percent and it's trending downward. But if you go back to 2019, that number was 45 percent and, so I think that really shows you there's clearly room for improvement for Bank of America on this front and it feels like the trend is headed in that direction, which leads me feel this could be another good pick on their part.
Chris Hill: You mentioned the track record over the last few years for the stock. That shows up in one of the other stocks on Barron's list, which is Medtronic, which really hasn't been a great stock over the last five years. But you talked about how this group of stocks is pretty well-diversified, and I think you can say that in a couple different ways, certainly by industry, but also by, what am I expecting out of this stock? I think it's reasonable to have different expectations. You look at a company like Medtronic, which is so good at what they do in terms of medical devices, and it's a dividend aristocrat.
I don't own shares of Medtronic, but that's one of those stocks where if you do, as long as you have your expectations in line with what to expect out of the stock, I think you're in pretty good shape. I wanted to get your thoughts on Comcast because Comcast is on this list as well. It's a business we don't talk about all that much, but it seems like one of the knocks on Comcast has been the Peacock streaming service relative to other streamers out there, lower adoption, fewer paying customers. Is Comcast, in your opinion, being unfairly dinged for that? It's a diversified business and some parts of the business get more attention than others and I understand why Peacock gets the attention that it does, but I'm wondering if that's part of the reason it's on this list where it's like Comcast is doing a lot of other things that make a decent amount of money. Yes, they want to get Peacock to the point of profitability, but let's not unduly punish this company.
Jason Moser: I don't know if they're being unjustly viewed through that lens. It does feel like they are being lumped together with all of the other streamers really more or less. You've got, obviously, Disney has been dealing with some headwinds in the space and it feels like with Comcast, it's a tremendous business in that they have this very robust broadband offering and yet by the same token, its cable business is suffering due to, of course, cord cutting and so enter Peacock and Peacock ultimately we know, it's their streaming service, it's NBC centric. It was never meant to be a Netflix competitor in that, oh, they're just trying to get as many subscribers and it's a subscription business and that's how they generate their money. Of course, Peacock has a number of different tiers for subscribers to pay from free to no ads altogether, or at least minimal ads.
Jason Moser: But it does feel like given the shift in the landscape, you're going from this cable centric media landscape to a streaming centric media landscape. I think that investors are starting to view Comcast through that lens. I think that we see a lot of uncertainties still in that space as to how this is ultimately going to shake out and ultimately really how profitable it's going to be. You go back to Disney and the challenges that they're facing. We talked about this switch from Bob Chapek leaving and Bob Iger coming back in. That's all fine and dandy, but what is Iger going to do differently? Because even though you've got new leadership in there that maybe is a better cultural fit and maybe people have more faith that he really is the right person to lead this business through this changing environment. What ultimately is he going to do differently? Because we know that's been a key point of focus is Disney getting that streaming operation to profitability.
Not only profitability, but you want to see robust sustainable profitability. I think that's the big question with Comcast right now. You've got the advantage there in the pipes and how a lot of that information is being delivered to us, but beyond that, what it has done so well for so long and in having that diversified offering and doing more than just being the pipes, having that entertained offering the cable business. There's just less certainty right now as to how the future of the streaming business is going to look particularly in the next several years. There's going to be some consolidation. There's going to be some spinning off of things in where Comcast falls is yet to be determined. Then I think the wildcard with Comcast at the end of the day is it just has such a bad reputation for customer service. I'm not a Comcast customer. I'm not a Comcast shareholder. But I feel like I here at least a story or two every week about someone's escapades with Comcast and how miserable they are as a Comcast customer.
Chris Hill: I think it's a sign of how bad the customer service at Comcast was. Go back 5,7 years or so, that they have improved it. They have legitimately improved their customer service and you're still hearing those stories. One last stock before we wrap up. Madison Square Garden Sports, the parent company of the New York Knicks and the New York Rangers, is on this list. I understand the valuation case when you look at where the stock is trading relative to the value of those two teams. But I look at that business and I only have one question and that is, is Jim Dolan still running things? Because any New York Knicks fan listening right now is nodding and saying, oh yeah, one of the most dysfunctional owners in professional sports in America is still at the head of the org chart. I don't care how attractive the valuation is, Jim Dolan still at the top of the chart, makes me say, no, thanks. I'm going to pass on this one.
Jason Moser: Well, you raised a very good point. I think that's something that a lot of people should keep in mind is that even if a business may present an attractive value proposition, there's more to consider, and leadership is certainly one of those things. I think Elon Musk is probably a good example today of, you could probably look at something like Tesla and say, man, this is a company that's really led the way and holds an enviable market position, but it's being led by this mercurial leader. You just never know what you're going to get. There's a trade-off. I feel like that trade-off also exists here with Madison Square. I do agree, you have to understand this is a ticket derived with The Dolan family. As I say, every investment requires a certain leap of faith and there's probably a greater leap of faith involved with this one.
Over any real stretch of time, this has not been a good investment. That said it's not to say it couldn't work out, but ultimately, if you're going to play that value side on an investment like this, it's ultimately about the value being realized. You need to realize the true value of those teams. As it stands, it doesn't seem like the Dolan family has any inclination to let go of those teams anytime soon. Then they have to realize that value other ways. That's through media deals, that's through ticket sales, whatever it may be. That certainly could be something that develops over time. But realize, and I'm with you, this is not an investment idea that really attracts me because of that, that Dolan leap of faith I've just seen through time. I've heard pitches through time of this business. I understand the logic. But we've seen how this has played out over the past several years and it just doesn't seem to be working. For those reasons as they like to say on Shark Tank, I'm out.
Chris Hill: Jason Moser, good talking to you.
Jason Moser: Yes, sir.
Chris Hill: Now that we've talked about stocks for 2023, let's talk about bingo cards for 2023. Jason Moser and Matt Frankel are keeping score on their bold predictions from the past year. They've got new predictions for the year to come about, mortgage rates, inflation, and the stock market.
Jason Moser: Before we get into how things are looking for 2023 in your bold predictions, let's take a look back at 2022, this year that was. Let's be honest. I think you're going to enjoy this segment because you did pretty well. Let's go ahead and talk about what were your predictions for this year 2022 and how did everything shake out?
Matt Frankel: Like you said, I did pretty well this year. I went through my five predictions last year. I said that value stocks were going to outperform growth. They have by about 27 percentage points as of right now. So I'd call that one a win. At the beginning of 2022, the projections had the Fed raising interest rates once or twice by a total of about 25 basis points. I said the Fed will raise interest rates faster than expected. That definitely happened. I said home prices will rise by double digits again, which a lot of people thought was a crazy thing to say given what happened the year before. That went well. Home prices are up 13.5 percent year over year as of the end of October, the most recent data. I said crypto was going to have a rough year. Not that I knew the FTX collapse was going to happen, but Bitcoin and Ethereum both did pretty poorly. The one that I got wrong was I said SPACs were going to make a comeback. That's not even worth acknowledging. That one did terrible.
Jason Moser: Yes. SPACs has been a disappointing story for the year. Honestly, in looking back at it, it's not terribly surprising. I think with SPACs, that's one of the bigger lessons I took away from 2022 is that while SPACs have brought some very interesting companies to the public markets and given investors the opportunity to consider them, the downside is that they bring so many of these companies to the public markets far earlier than they probably should be going public. Ultimately that really plays into to the price that you pay. We've seen obviously, many of these SPACs dwindle. It's not terribly surprising in hindsight when you look at the actual businesses and the numbers that record. It's not to say that they don't have bright futures, but it really alters the timeline. That SPAC investment, I think you have to adopt a much longer time horizon there in that investment.
A good lesson learned from 2022 that I certainly plan to take forward. Hats off to you. You nailed it right there.You got a lot of things right. I will jump in there and say listen, the Motley Fool Money Preview Show last year as we were previewing 2022 I said, don't be surprised if we have a down year in the market. The last down year was 2018 before then. The saying goes at one of every three years the market is down on average. I think if you go all the way back to 2002, not including 2022, we've had four years where the market was actually down. 2022 is, of course is going to be down as well. But I was saying the same stuff. We're going to see some level of inflation, stimulus becoming a thing of the past, interest rates will be going up. Certainly that's all played out and the market has suffered for it. But hopefully 2023 will be a better year. No guarantees. But you've got some bold predictions for us for 2023. Let's jump right into those. What is your first bold prediction for 2023?
Matt Frankel: First one is that the Fed is going to get inflation in check. Actually amend that to say that they already have inflation in check a little bit more than the market is giving them credit for. What I mean by that is if you see the headline inflation number, which last month was 7.1 percent, that's a year-over-year number. That's comparing it to November of last year. But if you look at the month-over-month inflation data, it tells a totally different story. The CPI increased 0.1 percent month over month in November. Even if you take out energy and look at just core inflation it was 0.3 percent month-over-month. Extrapolate that over a 12-month period and you've got less than four percent inflation. I think inflation is already under control more than the market is giving it credit for. With the Fed's actions, I think that's just going to get even more apparent in the New Year.
Jason Moser: Yeah, it feels like they are not going to be easing up anytime soon based on Jay Powell's recent comments regarding 2023 and even going into 2024.
Chris Hill: Do you feel like there's the chance that they overdo it though with this rate policy? I mean, I understand the mindset. I think the worst thing they feel like they can do is to ease up too soon and then things get back out of control. They feel like maybe it's safer to go a little bit too far than not far enough. What's your take there?
Jason Moser: In the leads, we're at the bold prediction Number 2 is that we're going to see the Fed funds rate decline in 2023. I think because of prediction Number 1 that inflation is going to be a little more under control than the market seems to think right now, and I think that's going to happen toward the beginning of 2023 when we're really going to see the inflation numbers come down significantly. I think the Fed is going to say, well, we might have overdone it a little bit and start to pump the brakes. I think we're going to end 2023 with a lower Fed funds rate than we have right now.
Chris Hill: Interesting. That's fascinating, particularly given their comments in regard to not try to ease up until probably 2024 or at least, I guess they said no cutting of rates until 2024. How do you feel this all plays out for the market in 2023?
Jason Moser: To be fair, they were saying the complete opposite at the beginning of 2022 that actually happened. Take it with a big grain of salt, but with the market, I think the market is going to have a great year in 2023. I'm not an eternal optimist, most of my predictions for 2022 were pretty negative. I think that 2023 is going to be a year of a rebound. For those reasons, they're going to get inflation under control, they're going to start cutting rates, I think, quicker than the market and even they think they're going through right now. I think the market is going to have a very strong 2023. There's a lot more that can go right than wrong in the market right now, and that's the first time I've said that in a long time.
Chris Hill: It feels like what's going on right now with Fed policy, just the economy in general, I mean, we're seeing the consumer is getting into a tighter spot. I mean, I could definitely figure out, you go through these bank earnings calls and they talk about the consumer being in a great place. Certainly, that narrative has changed here just over the last month-and-a-half. I think I was looking at Bank of America's call, Brian Moynihan back in October talking about the consumer being in a good place and then a couple of weeks ago, we saw the headline where Moynihan and Wells Fargo and others saying that they're starting to see the consumer become a little bit more stretched. It feels like to me, we're going to enter 2023 with a lot of what's going on right now and it leads me to wonder, I mean, do you feel like maybe that market performance, do you think it will be weighted more toward the back half of the year?
Jason Moser: I would say that that's fair to say. I don't think we're going to come roaring out of the gate in January, February. It really depends on when that inflation starts to get under control. But having said that, I think we're going to see a very nice rebound as we get into that back half of the year. No matter what happens with inflation, the Fed is not going to issue an all clear right away. It's going to get to ease back into it. It's going to be a little while before we can say that inflation is definitely under control. I think that's fair to say. I think a second-half rally is more likely than a first-half rally.
Chris Hill: Now I feel like bold prediction Number 4 makes a lot of sense. I would volunteer that this is probably the case as well, but you think that crypto will continue to be weak. Why is that?
Jason Moser: We're just seeing a domino effect from this FTX collapse. I just saw news this morning that a lot of the celebrities who were on FTX commercials are now not only coming out and saying, I was just the page spokesman, I didn't really have anything to do with it, now they're saying, I don't believe in anything crypto, it was just a paycheck for me. You're seeing a lot of sentiment turnover.
It seem like a house of cards in a way, FTX did, and not just in terms of the business, in terms of the effects that it had on the public's perception of crypto because now you're seeing all these celebrities who for the past two years have been saying, oh, buy Bitcoin, buy this, it's the future and now they're reversing course. I don't see what the next leg up in the cryptocurrency market would be. I don't see a speculative bubble coming back anytime soon. I don't see interest rates going to the point where money is essentially free to be perfect with crypto. I think the Fed is going to reduce rates cautiously. I do think that the catalysts are all toward lower cryptocurrency prices going forward.
Chris Hill: It does feel like we have a situation here with what's been going on with FTX and all of the other shakeout in the industry for what is still a very nascent industry to begin with. I would say probably mostly full of early adopters, they probably have a lot of people who have been on the fence in regard to crypto and considering it as an investment and wanting to be a part of that and they're seeing what's going on right now, and that is just the straw that breaks the camel's back. They're like, oh, I was on the fence before considering, but now, no way, I'm out.
Jason Moser: The last bold prediction is a minus, says mortgage rates are going to be below five percent by the end of 2023. That might sound like the boldest prediction of the five right now, a lot of people might say, considering what's happened in the market. Mortgage rates are about three percent at the start of 2023.
Chris Hill: That's bold.
Jason Moser: They peaked at over seven percent. They've come back down a little bit. They're about 6.4 percent right now on a 30-year mortgage. It's not that far from the below five percent target. But what a lot of people don't realize is, one, even if the Fed doesn't start cutting rates in 2023 like my prediction Number 2 says, mortgages, they're supply and demand-driven. They're not tied directly to the Fed's reaction, so mortgage rates can rise if the Fed is lowering rates and vice versa. Right now there's no supply and no demand in the real estate market. The market is just terrible. I think you're going to see, as inflation starts to come under control, lenders are going to be more willing to take on risks.
Right now lending standards are very tight compared to the past couple of years, which often happens in times of economic uncertainty. But if we can get inflation under control and avoid a recession, you're going to see much more of a supply of mortgage loans coming back into the market, the lenders more willing to lend and demand is virtually non-existent right now, so to get that demand up, lenders are going to have to start reducing mortgage rates. I think the natural direction of mortgage rates is going to be down in 2023. I think Freddie Mac's mortgage rate prediction was 4.5 percent at the end of 2023. I'm not alone in this one, but it does seem like a bold prediction given where the mortgage market is right now.
Chris Hill: Now, all I can tell you, man, is I am very grateful to, month after month, just get to take a glance at that three percent 30-year fixed rate that we locked in on our house not all that long ago. I don't know that we ever get back to that level, but certainly those rates have gone up very quickly. It made it prohibitive for a lot of buyers in the market, so it's very understandable real estate is having a tough time. Those are five very interesting predictions. You know what, I'm already looking forward to this time in 2023 where we can go back and review these and look to your bold predictions for 2024.
Jason Moser: Thanks for having me on. Hopefully, we do this again next year.
Chris Hill: Absolutely. It's always a pleasure. Matt, I hope you and your family have a wonderful holiday season.
Jason Moser: Thank you.
Chris Hill: As always, people on the program may have interest 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Chris Hill has positions in Alphabet, Amazon.com, JPMorgan Chase, and Walt Disney. Jason Moser has positions in Alphabet, Amazon.com, and Walt Disney. Matthew Frankel, CFP® has positions in Amazon.com, Bank of America, Berkshire Hathaway, Walt Disney, and Wells Fargo. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Bank of America, Berkshire Hathaway, Bitcoin, Ethereum, JPMorgan Chase, Netflix, Tesla, and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long January 2024 $145 calls on Walt Disney, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
