In this podcast, Motley Fool analyst Jim Gillies and host Ricky Mulvey discuss:
- Why investors are cheering Shopify's latest results.
- An automotive supplier that can provide ballast for portfolios.
- Why excitement about the market right now isn't quite a mania.
Then, Motley Fool host Alison Southwick and personal finance expert Robert Brokamp answer listener questions about allocation, gifting to kids, and ETFs with downside protection. 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 beginner's guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Nov. 12, 2024.
Ricky Mulvey: We've got news on one stock you probably know, and one, you probably don't. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, how's everything in the Great White North?
Jim Gillies: Still relatively warm, to be honest with you. It's not bad, but you look outside, you can see the frost coming.
Ricky Mulvey: Before we get to the main event, the main event of today's show is the world's largest automotive safety supplier. [laughs] Let's hit the small Canadian tech company Shopify. You know what, Jim, you always like these stocks that nobody has heard of because that's where you go find value. You know what? I'm pretty happy to own a stock that everybody's heard of today. Shopify up about 25%. Beat gross merchandise volume projections. The amount of stuff going through its system by about $2 billion. Total number for that 70 billion. Revenue has grown 26%. We also got some commentary from Shopify President Harvey Finkelstein, about just how the company is helping its merchants with taxes, how wonderful what are your highlights from the quarter?
Jim Gillies: Well, sure, if I can reply to your mocking with my own mocking.
Ricky Mulvey: You can do whatever you want. It's your time to speak.
Jim Gillies: Well, you know when I found Shopify, no one had ever heard of it. I remember Tom Gardner was up in Canada in summer of 2016 and Ian Butler and I said, hey, let's introduce you to something. We never would have expected it worked out this well, but when I bought Shopify personally, and we recommended it in the now closed Pro Canada, we recommended it in Stock Advisor Canada, which is still going. Our cost basis is under $4 Canadian a share. It was a small cap when we recommended it.
I think there's a really interesting story to tell here from going from the unknown to everybody tripping over themselves to own it to despair and rebirth thing. Let's see if we can tell all this up. This was a great quarter. It's shocking how great this quarter given, if you look at where the world has been. Basically, free cash flow margin, 19.5% this quarter, when we wrecked it originally, free cash flow was just a glimmer in Toby Luke's eyes. Even if you go back two years ago, free cash flow margin was humming along in the 5-6% range. Now on a four quarters trailing basis, it's 17.4%, a year ago, on a trailing four quarter basis, it was 7.8%. This is always what we were expecting. Not specific numbers, but when we recommended it. It was not cheap when we recommended it. I think we took out billboards in Central Park, basically saying, look, the valuation is frothy. It's trading at a, wait for it, ridiculous 10 times sales.
As you know, I hate price or enterprise value to sales multiples because last I checked, most companies have some sort of expenses, and I much prefer an earnings or a free cash flow or other types of profitability metrics, but our thinking at the time was, look, these guys enable small and medium-sized businesses and a few large businesses to run their business online and present, and it's all little merchants and whatever, but large and small, as well. The question really boiled down to how many small and medium-sized businesses can there be in the world looking for e-commerce? I submit to you the correct answer is more. There'll always be more. There's always opportunities.
We looked at the potential here, the growth potential and said, you know what? Sometimes I'm willing to pay up for growth because growth forgives a lot of sins. Now, again, that was roughly at 10 times sales. At its peak in 2021, it got to 70 times sales. There's no rational justification ever for something 70 times sales. People paying 50-100 times sales for certain companies. Today, should probably take a look at the stock chart that Shopify threw up because even today, after this fantastic rebound and after, frankly, what's been about 2.5 years of just steady grinding, and actually, Shopify in 2022 got back to 10 times sales, which is hilarious. We went from 10 times sales to 70, went back to 10.
Now you're at about 16.5 after the earnings report last night or this morning. It's a very different company. They are printing cash. You already mentioned the growth in revenues, growth in gross merchandise volume. They're forecasting things that look pretty rosy, at least for the near term going forward.
I think that it's OK, and I'm going to shock a few people. I think it's OK to pay 10-15 times sales for this type of growth profile. You just have to say, I'm a long term investor, company still needs to perform, because that's the other thing. Look, if you paid 70 times sales at Shopify's peak in 2021, you are still down about 30%, but 30% is better than 90%, like a few other companies from that era I could mention, where investors seem to be willing to pay any price for stock, and the growth did not emerge at the underlying company.
Even though from the post COVID bubble peak of 70 times sales down to today, again, share price is only off by about 30%, but the multiple has contracted from 70 to, as I said, 16.5. I think that when you're buying a growth story, you have to hope like hell that the growth does, in fact, emerge. With Shopify, it did. They had a couple of little stumbles along the way, but so far, the last 5-6 quarters looked pretty good. Cash flow, like I said, is expanding. The answer to how many businesses can they help enable online still remains more.
Even on a discounted cash flow basis, which you can now value Shopify at, which you couldn't back in 2016 when we bought it the first time, I've got a reasonable DCF. It's overvalued today, but it's not as bad as you might think. I can make a reasonably conservative case for 75-$80 a share, and it's what? 112, I think, this morning. There are worse things to have than just be a long term shareholder of Shopify. Again, know the ride you're signing up for, if you bought your shares, put them away, look at them every couple of years. But I think it's been pretty good.
Ricky Mulvey: You just used price to sales a lot for a company that's generating free cash flow.
Jim Gillies: I did. I said discounted cash flow.
Ricky Mulvey: You said discounted cash flow, and then you're talking about software companies with 70 times sales going to 16 times sales. You talked about how much you hated the price to sales multiple, and then you just sold like five times. Now that this company's maturing, the cash flow for the quarter grew about 50%. That's what happens when you make your margins better, and that's what happens when you grow revenue. How are you thinking about the company's valuation? What should retail investors that are excited about the company seeing what's going on, but maybe haven't socked away those shares for a 3-5 year period? What are the metrics they should be looking at for Shopify?
Jim Gillies: Is the growth continuing? Well I always watch GMV, gross merchandise volume flowing through their system. Watch revenue, watch cash flow. It's not really any more complicated than that, because, again, this is an overvalued company today, but it's not that overvalued, to be honest with you. At least it's overvalued, in my opinion, but it's not bad, and I could tweak a few growth metrics in my VCF, and probably get pretty close to today's share price. I still think this is a company that you buy in thirds.
I think you want to have some a touchstone for it. We would buy in thirds, I just simply mean just buy a little bit, then, another opportunity shows up later, buy a little bit more, buy a little bit more. I think I bought it three or four times personally. There are Fools who have probably bought it 10 times that many times than I have, and God bless, but just be aware, just keep one eye on the valuation, but when you do have a truly long term double digit growth story, I think you can afford to be a little less price sensitive than I usually am, which is handsome. I'm not buying this one today, but I'm also not selling, will put it that way.
Ricky Mulvey: Let's move to Autoliv the main event of today's show. This is the leading supplier of seat belts and airbags. Yesterday, the company announced that it would raise its dividend by 3% and extend its share repurchase program. So far, it's taken 11% of shares off the market since 2021. Jim, this is when we leave the listeners aside. If you're excited about a capital allocation story, you have my attention. This is a company that absolutely passes the David Gardner snap test, supplying 50% of vehicles with airbags, but tell me, why is this a capital allocation story that you're interested in for this company making seat belts and airbags?
Jim Gillies: Sure. I've owned this one personally. I think I bought it the first time in 2006. I added significantly in 2008, you might have noticed something was going on in the world in late 2008, something about a global financial crisis or something. I don't know. The stock had a weird, near death experience there. I'll explain why in a moment. I had owned it before that, and the thesis is basically quality company, making a decent amount of cash flow, using that cash flow intelligently in the service of shareholders.
Dividends, buybacks, maintaining a reasonable leverage profile, probably going to do 10-15% annualized returns at that point. We run into 2008, and the stock dropped like a rock. I think it was $64 in the summer of 2008, and by Christmas of 2008, it was 12. I had a good learning from that environment and that is, just because something says long term debt on the balance sheet doesn't necessarily mean it's long term debt. They'd been financing themselves with some commercial paper facilities, which were long term facilities. They had four or five years left to run on them, but you had to roll the commercial paper every six months, which effectively made them short term debt. Given that the financial world was imploding at that time, it looked like they might not be able to refinance their short term, not long term debt.
They managed to do a new financing. It was expensive at the time, but it kept the company back on track. That's when I added a significant amount, should have bought the preferred shares they sold at that point in time that had subsequently been retired. That would have been a smarter play, but anyway. I like to think they learned a little bit, too. The near death experience will not be repeated. The debt they have is reasonably good. My look at this is, look, this is a company that is absolutely necessary.
You talk about it passing the David G. snap test. Absolutely. The auto world is in a bit of flux. We obviously have electric vehicles kicking around. We have plug in hybrid electric vehicles, which I like to call a cheat code because they're fantastic, but a lot of people don't really know them or are a little skeptical of them. I have two, so I'm not an unbiased audience. But even as the transition goes from ice vehicles to PTVs to BEVs and whatever, they're all going to need airbags, and they're all going to need seat belts, and that's what Auto Live does.
As you say, they're basically 50% of the market. It has been a really good run since 2008. The stock's roughly a 10 bagger, if you include a spin off of the Vanier subset, which is then taken out, as well, I think, by private equity and then it's carved up for parts, subsequent to that, but you've got about $25 and change dividends since the credit crisis well more than the share price you paid at that time.
That's another reason I still hold it. I was dumb enough to buy it in a taxable account, so I'd get a hell of a tax bill if I sold it today, but also, too, I look at Auto Live as a ballast type stock. They're not going anywhere. This is a critically important company in the car space. I would hazard a guess that even if you ever got full self driving vehicles, or autonomous driving, and by the way, the Vanier spin off that they did in 2018, that was their autonomous driving sensor division, and they sold it off, so that might tell you what they thought of the potential at that time, but even autonomous vehicles, I suspect they are still going to have seat belts. I suspect they're still going to have airbags. Might be even more important to have airbags in those cars.
These guys are here for the long term, and I look at them and I call this ballast for my portfolio. I'm expecting a total return, dividend plus share price appreciation from here in the 10% range. Some years will be more, some years will be less, but I'm willing to bet with my own money that 10 years from now we'll come back and the annualized return from here will be 10-12%, and that's fine. Not everything needs to be growth stock gladiatorial games. It's still run by smart people who make a lot of cash, who are doing intelligent things with that cash. Only added difference from the credit crisis era is they don't have that ticking time bomb of short term financing that's masquerading as long term financing and I like that.
Ricky Mulvey: As we close out here, maybe a little mindset thing. I just get the feeling we're back in a little growth stock mania, maybe not quite like late 2021, but it feels like we're getting back in a mania. I remember asking you at the beginning of the year, are we in a mania, and is that meaningful for investors? You're like, there might be a little froth, but we're not in a mania. I'll ask you again in November. Are we in a mania?
Jim Gillies: There's more froth. I'm still not sure I'd call it mania. I think there are pockets of mania, certain companies trading north of 50 times sales that I would argue most people who own them have no idea what they do or how they make money. I would consider that a mania, but, by the end of 2021, I was openly calling it tech bubble two electric boogaloo. I was just like, if history has shown us anything, Ricky, it's that some people just have to learn a lesson. They can learn no other way. I think that's what 2021 did, but I think there's a lot of fairly richly priced companies out there right now, but I'm still finding lots of opportunity for adding different stocks in the services I run or contribute to. It's not as bad as 2021. When it is, I won't be shy about saying it. We'll put it that way.
Ricky Mulvey: Jim Gillies, thanks for being here. Appreciate your time and insight.
Jim Gillies: Thank you.
Ricky Mulvey: Up next, Alison Southwick and Robert Brokamp answer your questions about gifting to kids, ETFs, and allocation close to retirement. If you've got a question for the show, email us at podcasts@fool.com, that is podcasts with S @fool.com.
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Alison Southwick: Our first question comes from Nick. My question deals with when to cash out my gains and not risk what I've made. I'm a firm believer that any stock I buy I plan to keep for 5-10 years. I was lucky and bought 200 shares of Royal Caribbean for $39 a share during the pandemic. Now it is at $234 a share. I would be happy selling, but I also don't want to leave more gains on the table since their sales still appear strong. What general advice do you have on when to get out and take the win versus staying in too long and risking a drop?
Robert Brokamp: Well, Nick, congrats on making that very successful investment. Unfortunately, I don't have an opinion about Royal Caribbean stock, so I can't help you there. But there are plenty of ways to think about when to sell, so let's talk through them. First off, it always starts with your time frame. If you need this money in the next 3-5 years, it makes sense to sell a good portion of that investment and keep it safe in cash or short-term bonds. Secondly, how does it fit into your overall allocation?
Some general rules of thumb that we've talked about in the past is that, once an investment becomes more than 10% of your portfolio or it's part of a sector or industry that has say maybe 30% of your portfolio, you might want to pair it back a bit. Those are just general guidelines, but they highlight when investment should perhaps bear a little bit more scrutiny. You can also think in terms of how much a stock shares the same types of risks as others in your portfolio. Royal Caribbean is a company that is very sensitive to the overall economy. If and when a recession occurs, fewer people take cruises.
Is your portfolio full of stocks like that, or do you have a good mix of companies that are consumer staples or others that hold up maybe a little bit better during downtimes? Then of course, there's your assessment of the company itself. It sounds like you think Royal Caribbean still has potential. That's great, but definitely do some more research.
Look for opinions from other investors and analysts. See if there's anything you're missing, both good and bad. There's always the question of valuation, and I would say among the analysts here at Motley Fool, we have a range of opinions about how much valuation matters. Some include it as just a factor to consider. Others pretty much ignore it altogether. But Royal Caribbean stock has a PE in the high 20s, so I wouldn't say it's exactly cheap. Then as I often say, a good question to ask about every investment you own is, if you didn't already own it, would you buy it today? If the answer is no, then maybe that suggests you should cut it back a bit, especially if it's in an IRA and there are no tax consequences.
Which gets me to my final point. This isn't an either or decision, You can take some profits, especially if there are other investments that you think are more promising, but still keep an investment in the company. This is what I often call the regret minimization strategy. By selling some shares while still holding some, you'll feel partially good whatever happens.
Alison Southwick: Our next question comes from Paul. Hi, Alison, and Bro. You two rock.
Robert Brokamp: [laughs] Thanks.
Alison Southwick: You are a discerning man with excellent taste in people. If only our political leaders would earn trust in approval ratings like yours, we'd live in a better world. Well, I don't know about that.
Robert Brokamp: Alison for president, that's all.
Alison Southwick: No, thank you. If I help pay off my kids student loans, are those considered gifts and subject to annual and lifetime limitations? If yes, is there a smart legal way to avoid such limitations? When the kids were in college and I paid much of their tuitions and fees, I never considered those payments as potential gifts.
Robert Brokamp: Paul, the quick answer is yes, it would be considered a gift and subject to the annual lifetime limitations if you help them pay off their loans. Those limitations in 2024 are $18,000 from one person to another person, so if you're married, you could each give $18,000, and if you give more than that, you have to file Form 709. But that doesn't mean you owe taxes, you'll just eat into your lifetime annual gift and estate exemption of 13.6 million per person, so twice that, if you're married. That's this year. By the way, those numbers are going up in 2025. There'll be $19,000 for the gift per person to recipient in 2025, and 13.99 million for the lifetime gift and estate exclusion.
Basically, most people really don't have to worry about paying gift taxes. Now, your payments for your kids college tuition likely wasn't considered a gift. That's because there are no limits on the amount you can pay for the education or medical expenses on behalf of someone else, as long as it's paid directly to the provider. If you send a check to a college or to a hospital on behalf of someone else, you don't have to report. But if you instead gave money to someone and then they sent that money to a college or hospital, it would be subject to all those aforementioned limitations.
Alison Southwick: Our next question comes from Mary Ann. What do you think of these ETFs that offer 100% downside risk protection? Yes, they limit your upside, but if you just want to make something closer to a market return and more than what bonds can typically offer. Could these be a good option?
Robert Brokamp: These are a relatively new breed of ETFs, but the underlying strategy isn't new. What these ETFs do is they use options to create basically a limited range of possibilities that's basically dictated by the performance of an index, most commonly the S&P 500, but also you'll see them based on the Dow, or the NASDAQ, or the Russell 2000. For example, the issuer may say that if you buy this ETF, the return from, say, December 1st of this year to December 1st of next year, will track the price return of the S&P 500, but you can't earn more than 8%. If the market goes down over that period, you'll get 100% buffer against any losses before fees.
In times like now, when the S&P 500 is over 30%, over the past 12 months, you'd be earning a return that is just in the high single digits. Now, you can choose ETFs that have higher caps but with lower buffers. You higher potential upside, but you may actually lose some money if the market goes down, though generally not as much as the overall market. I should point out that when the return of the index is calculated to determine the return of the ETFs, dividends aren't included, so that knocks off about 2% from there. Now, to get these stated guarantees, you pretty much have to buy the ETF right after it's issued, and you have to hold it for the designated term, which can be anywhere from six months to a couple of years, though most of these are issued with one year terms. Those guarantees are before the fees, and the fees on these ETFs somewhere range between 0.7%-0.9%, a little under 1%.
The issuers of these ETFs often provide information on their website, so that will let you know the range of returns you might get if you say bought one of these ETFs four months after it was issued. Then once the term ends, the ETF company will set new guarantees regarding the upside and downside limits, basically based on the pricing in the options market and interest rates at that time, and then you as an investor can decide to just roll it into the next term or cash out. The bottom line for me is that these acts are intriguing. I can see how they could be appropriate for people who are near or in retirement and as they say, some of the upside of the stock market, but they want to limit the downside. But over the long-term, they'll likely underperform the stock market, assuming the future looks mostly like the past. If you also find these intriguing to learn more and see what's available, visit the websites of two of the biggest providers of these ETFs, First Trust and Innovator ETFs.
Alison Southwick: Next question comes from Just a Fool. That's what they put, I'm not calling them names. I have a 401(k), an unallocated IRA, and a brokerage account that is 99% in stocks. I want to allocate some of the IRA to ETFs and /or dividend stocks. I am six years from official retirement. Are stock prices too high? Should I wait? Bro, can you predict the future for us, please?
Robert Brokamp: That's exactly why I'm here. I will tell you 100% guaranteed that the stock market will either go up or down. How's that for you?
Alison Southwick: It's about as much as I can hope for.
Robert Brokamp: [laughs] Anyways, Just a Fool, at six years before retirement, you're pretty much in what they call the retirement red zone, which also includes the first several years of retirement. The retirement red zone is a time when a significant bear market can have a huge impact on your retirement plans. If there's a bear market and you're 30 years from retirement, no big deal, but if it happens right before retirement or right after retirement, it can be a pretty big deal. If you're at six years from retirement, it really is a time to be playing it safe with at least a portion of your portfolio at the very least, building up the amount you have in cash and bonds to pay for your first five years worth of portfolio provided income in retirement. We often call it income cushion. Maybe you've already begun doing that in your 401(k).
But if not, then I would factor that into how much you want to invest your IRA in the stock market. You said it's allocated, I assume that means it's in cash. If you haven't done that in your 401(k), you might want to play it safer with your IRA. That said, if you enter retirement with different types of accounts, most analyses indicate that it's probably best to take withdrawals from your taxable brokerage account first and then tap your IRA or 401(k).
Just a general rule thumb, everyone's situation is different, but you might want to start building up some cash in your brokerage account by not reinvesting dividends and perhaps strategically, gradually selling stocks that you think have reached their peak potential. I do think that it makes sense for those who are near in retirement to have a diversified collection of dividend paying stocks or ETFs that focus on them because dividends are more consistent and predictable than stock prices. You know you're going to get cash every year every quarter, and that allows you to gradually build up that stash of safer assets or give you money to spend in retirement.
If you're looking for some ideas in terms of ETFs, here are three that I own, the Vanguard Dividend Appreciation ETF, ticker VIG, the Vanguard High Dividend Yield ETF, VYM, and the ProShares S&P 500 Dividend Aristocrats ETF, ticker NOBL, and the aristocrats are basically companies that have grown their dividends for at least 25 consecutive years. Finally, you asked whether stock prices are too high. I would just say they are definitely high. By some measures, the S&P 500 is trading at the highest valuation since the dot com days of the early 2000s. For long-term investors, it's generally best to just keep holding on. The S&P 500 reached over 1,500 right before the dot com crash, and today it's over 6,000, and that doesn't even include all the dividends you received over those years. But for people who are in the retirement red zone, close to retirement, just retired, I would say it definitely makes sense to play it safe with a sizable portion of your portfolio.
Alison Southwick: Our next question comes from Elena. I've heard you recommend working with a financial advisor. Is it a good idea to hire a financial coach when you're just getting started, budgeting, investing, and saving?
Robert Brokamp: Well, Elena, I see financial coaches as the personal trainers for your money. They can be very helpful with providing education, getting you set up, maybe building a budgeting system, introducing you to other financial tools. There's all financial tools out there. Maybe you don't know which one is best, and a financial coach probably has some good opinions. They can also be basically accountability partners. They help you stay on track, maybe encourage you and troubleshoot issues if you come across any challenges. But it does depend on whether you have a good one. This is not a regulated industry.
Really, anyone can call themselves a financial coach. Fortunately, there is a certification offered by the Association for financial Counseling and planning Education. You might want to look for someone with the accredited financial counselor designation as a start. Then be very clear what you're looking for and make sure that the service that this person provides is part of the deal. I would say definitely get it in writing or through some agreement, engagement letter or something like that. I would say that a financial coach is best for someone looking for help with, budgeting, more foundational money management, maybe paying down debt. Unless the coach has other certifications or licenses, they really shouldn't be providing detailed advice about investing, tax planning, estate planning, things like that. While coaches are cheaper than your typical fee only financial planner, they're not cheap.
Coaches charge between $100 and $300 an hour. But if that sets you up on the path for better financial success, I think it would be a really good investment. But before you spend the money, you might see what's already available to you through your employer. These days, many companies have financial wellness programs that offer some coaching or an employee assistance program that have some financial component. Your 401(k) provider might also offer access to someone that they might call a financial counselor. You might be able to get some level of financial coaching.
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 stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
Alison Southwick has positions in Shopify and has the following options: short December 2024 $95 calls on Shopify. Jim Gillies has positions in Autoliv and Shopify. Ricky Mulvey has positions in Shopify and Vanguard Dividend Appreciation ETF. Robert Brokamp has positions in ProShares S&P 500 Dividend Aristocrats ETF, Vanguard Dividend Appreciation ETF, and Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF. The Motley Fool has positions in and recommends ProShares S&P 500 Dividend Aristocrats ETF, Shopify, Vanguard Dividend Appreciation ETF, and Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
