In this podcast, Motley Fool Chief Investment Officer Andy Cross and senior analysts Jason Moser and Ron Gross discuss:
- Revised first-quarter GDP data.
- Nike earnings coming in a bit light.
- The Biden administration's proposed new artificial intelligence chip-export restrictions for China.
- Two stocks on their radar: Amazon and Winmark.
Motley Fool host Deidre Woollard catches up with Dave Meyer, the VP of Growth and Analytics at Bigger Pockets to talk through how the housing market has held up this year in the face of higher rates, and whether trends like aging in place and sunbelt migration are here to stay.
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 June 30, 2023.
Ron Gross: As the first half of 2023 comes to a close, we've got some encouraging economic data, and earnings from Nike, and we'll look at how the housing market has held up so far this year. Motley Fool Money starts now.
It's the Motley Fool Money radio show. I'm Ron Gross sitting in for Dylan Lewis. Joining me today are Senior Analysts Andy Cross and Jason Moser. Fools, how you doing? Fools, believe it or not, 2023 is half over. The stock market has rebounded nicely from the 2022 lows, with the S&P up about 15.5% and the Nasdaq up a whopping 31.5%. By the way, Apple's market cap now tops $3 trillion. Today we're going to talk semiconductors and spice and everything Nike. See what I did there, Fools. But we begin with the big macro. On Thursday, revised data showed that the economy actually increased at a 2% annualized pace in the first quarter, up from the previous estimate of 1.3%, and we got some encouraging inflation data on Friday. Earlier in the week, Fed Chairman Jerome Powell said that more interest rate increases are unlikely as the job market remains strong. So Andy, not bad. All things considered, is good news actually good news here, or does this just give the Fed cover to continue to raise interest?
Andy Cross: The good news is that the US economy, the most important in the world, is doing pretty well, especially considering where many economists and, frankly, investors had thought we were heading at the start of 2023. Inflation moderating, things are looking up. But that quarter rate, Ron, is still two times where the Fed really wants to be, so the strong economy in that pesky inflation gives more cover for the Fed to raise rates, probably at least once, maybe even two or three times this year, as the Fed Chair implied. The odds are running right now at about 85% for another 25 basis increase next month after Chair Powell said his remarks over in Europe this week. When you think about the real GDP, it got revised to 2%, annualized up from the 1.3 pace that they had originally forecasted, and the Q2 estimates have been steadily moving up with the Atlanta Fed now. The GDP now forecasted at 1.8%, which is about where S&P Global is estimating as well. Consumer spending up 4.2% in the quarter revised from an increase of 3.8% as the strongest in about two years, although from that PCE number, just today, it saw that May data, that spending, is moderating up just 0.1% versus an increase of 0.6%, and that's month-to-month where it was in April. You have the US economy strong, you have employment still very strong. We are starting to see a little bit of moderation on the employment, but unemployment rate at 3.7%, so only 6.1 million Americans out of work, so that economy still looks strong. Very interesting thing is that the stocks are just rolling with this. You talked about the impressive market performance this year. I think that investors have gotten used to, we might have another one or two increases, but business is strong, the recession that everyone was forecasting might get pushed out, and things are looking pretty good for the US economy, and that speaks well for businesses and for stocks.
Ron Gross: I just hope that consumer spending is not at the expense, so to speak, of their savings or of higher credit card levels. Consumers be careful out there.
Andy Cross: For sure.
Ron Gross: On Thursday, McCormick reported strong results and raised its full year profit outlook, but the stock actually sold off a bit, Jason. You tell me, what am I missing here?
Jason Moser: Ron, you buy the rumor and sell the news. That's what they say. Seriously, though, I don't think you're missing anything here. With the slight sell-off there, as well as the raised earnings guidance, this still puts the stock around 33 times the full-year forecast. It's not a cheap stock still, so to speak. It's a little bit of a lofty multiple [inaudible] for this company. But it does garner that lofty multiple for a number of reasons: its competitive position, the nature of what they sell, its Dividend Aristocrat status. So to me, this is nothing more than maybe a little profit-taking. But I think the good news is, when you look at the quarter, the results were really strong all the way across. Volumes are up, they're maintaining pricing, and they're controlling costs, and that's really all you can ask. Management is taking a very confident tone regarding the back half of the year as well. Maybe something the market took a little bit of a note of here, we do have a leadership transition. Long-time CEO Lawrence Kurzius is going to be moving over to Executive Chairman. COO Brendan Foley will become the next CEO, starting in September. Foley has been with the company for about a decade, very experienced in this space. He was with Heinz before joining McCormick, and I think, ultimately, again, going back to the numbers, they really tell an encouraging story. Revenue was up 10%, excluding currency impacts, gross margin, up 310 basis points, earnings per share, up 25%, raised guidance, like you said, and as I mentioned, pricing remained strong, and costs are staying at our controls, so I think a very encouraging quarter for the company.
Ron Gross: More importantly, do you have a favorite flavor of Cholula Hot Sauce?
Jason Moser: I'm an OG. I've tried that lime, which is good, but really, I'm an OG.
Ron Gross: Andy.
Andy Cross: Same with me. I dislike straight-up. What I grew up with, and that's what I'm sticking with.
Ron Gross: The correct answer is sweet habanero.
Andy Cross: I have to give it a shot.
Ron Gross: On Thursday, Nike reported fourth-quarter sales that topped expectations, but profits came in slightly lower than expected. Andy, the report looks solid to me from a revenue perspective. But gross margins were down; overhead expenses were up. I ask you, do we have an expense problem here?
Andy Cross: No, more of a challenge than I'd say a problem, Ron. Margins were actually a little bit higher than the consensus analyst estimates, and those margins should really improve down the line next year with the CFO saying on the call, we can now see around the corner on the transitory cost headwinds that pressure the profitability in fiscal 2022 and fiscal 2023, they just finished their fiscal 2023, by the way, and we are confident that we will deliver above average margin improvement in fiscal 2024, that's the next 12 months. Let's look at the quarter revenue. It's up 5%. These are all not adjusting for the strong currency. Nike Direct, up 15%, Nike-owned stores, up 24%, Nike Digital, up 17%, and Nike digital now about one-quarter of revenues versus where that was pre-pandemic, which was about 10%. Wholesale was a little bit of the weakness. That was down 2%. Big strength in China, Ron, 25% when you back up the strong dollar, with footwear, up 22%, and apparel, up 36%. Now on the margin side, as you mentioned, margins were down 140 basis points to 43.6% on those higher input costs, elevated freight and logistics costs, but they expect that to roll over and improve pretty dramatically in 2024, so admin costs, up 8% too, as you mentioned, overhead expenses, up 10%, on a lot of higher wages. The one impressive part to the story was really on the inventory side. We saw inventories flat on a dollar basis and actually down on a unit basis. Nike inventories were up 16% last quarter, so that is a real improvement. They increased the dividend payouts by 9%. You have a stock that sells at about 30 times earnings, so I wouldn't be in a rush to go out and buy this. But Nike is such an institution when it comes to footwear, when it comes to retail apparel, when it comes to sports apparel, and they continue to innovate and get a lot of different athletes and new products out there. I think I wouldn't be too worried about the margin story this quarter.
Ron Gross: General Mills reported mixed results, and its profit outlook was softer than investors were hoping for. Jason, a lot of talk on the call about retailers keeping inventories tight. Was that the primary drag here?
Jason Moser: I think you're right. That was certainly part of the call. Supply chain and inventory dynamics continue to be a part of the story with companies like General Mills. But management did speak to this specifically on the call. They really don't see this as a General Mills specific problem. Furthermore, they don't really see it as a problem going forward. It boiled down for them to two of their largest customers just trying to right-size their balance sheets and their inventory levels, and that just trickles through General Mills numbers. But the numbers were respectable, and organic net sales grew 5%. That was partially offset by those inventory headwinds we're just talking about. Adjusted gross margin, up 120 basis points. Operating profit of 889 million, essentially flat from a year ago. Now these adjusted numbers account for some investments and some divestitures made over the past year so that we understand each other, Ron. You look at me sometimes with those quizzical looks. I'm, like, that's the adjustment.
Ron Gross: Earning is essentially flat at 1.12. I think the outlook for the upcoming year looks strong. They're getting these inventory levels right-sized. They do feel organic net sales were poised to grow 3-4% for the coming year, and the best news really, this is why you own the stock, they raised the dividend by 9% for the quarter, so all in all, I think, not so bad. Solid dividend, only 17 times forward. I say only 17 times forward, so not bad.
Jason Moser: Everybody likes cereal.
Ron Gross: Sounds good. Coming up, we'll talk airlines and drugstores, and we'll see what's going on with the Biden administration and the computer chip industry. You're listening to Motley Fool Money.
Welcome back to Motley Fool Money. I'm Ron Gross here in studio with Andy Cross and Jason Moser. Earlier in the week, Delta reported strong quarterly results and management raised its 2023 guidance. Andy, Delta shares are up 42% this year as the airline continues to recover in a post-pandemic world. Is there still room for improvement here, or are we almost fully recovered?
Andy Cross: Reinstating that dividend earlier this month definitely helped drive some of the gains, now about a 0.9%. They had $0.10 quarterly dividend, that was versus a 40 cent quarterly before the pandemic, before they cut it. So a lot of enthusiasm for air travel on Delta. It's one of the best out there. You mentioned the quarter that they had, revenue was up 45%, and 14% higher than the March quarter of 2019, then an operating income of more than 500 million versus a loss. Operating expenses, up 26%, with non-fuel costs up 24%. So again, revenues up 45%, cost up in the mid-20s. That's a really good quarter. Their guidance was strong. Revenue, up 17-20%, operating margin of 10-12% guided. That will equate to about an earnings per share somewhere between $5 or $6. So you have a stock that sells at $46, maybe $6 of earnings, that's about a seven times forward guidance for the year. You have a little bit of a dividend. No wonder the stock has performed so well, especially with so much interest in air travel, capacity has come back. They're starting to see both consumer really ramp up on spending when it comes to air. A little bit of business, they're small and medium-sized businesses. Travel has come back. They're still waiting a little bit on some of the large and some of the international. So really Delta, really getting it done in the stock. While it has a nice run, look for a little pullback before you start adding to it.
Ron Gross: NVIDIA and other chip companies were down this week, and report is that the Biden administration is considering new artificial intelligence chip export restrictions for China. The report indicated that the curbs could come as quickly as next month. Jason, are NVIDIA and, potentially, AMD, the companies most impacted by this, or do you think this will have repercussions across the industry?
Jason Moser: I think they are two of the obvious suspects. I would throw Marvell and, honestly, others in there as well, as at least exposed to this. Marvell has 42% of its revenue coming from China. AMD and NVIDIA has more around 22%. But I think this really also goes to the nature of the technology that's being shipped out right here. This is about artificial intelligence. This is about military-grade applications and the likes. So companies like NVIDIA and AMD are two that are really playing in that sandbox, but again, so is Marvell. If you look at these three companies and their AI aspirations, recently, NVIDIA guided for 64% revenue growth, thanks in large part to "a steep increase in demand related to generative AI and large language models." AMD's CEO Lisa Su says AI is "our Number 1 strategic priority." Then you look at Marvell, they're talking about their AI revenue doubling this fiscal year to $400 million and then doubling again from that next fiscal year to $800 million. So you look at these companies, they're all exposed. Worth noting too, the Netherlands just announced they're getting on board here with these restrictions. The reason this matters, the Netherlands is home to ASML. They make the machinery that is required to produce the most advanced chips, so just interesting to see how they're siding on the US side of this equation so far.
Ron Gross: After an initial sell-off on Monday, Carnival shares shot higher this week on strong bookings and better-than-expected results. Andy, Carnival stock is up 130% so far this year, but that is still way off from pre-pandemic levels. What stood out to you in this report?
Andy Cross: Ron, the $17 stock today, that hit almost 70 in 2018 when it was making three billion operating profits versus losses for the past four years. But the turnaround is clearly in place, and investors are warming up to that. You saw revenues more than double this quarter, ticket revenues up 144%, onboard revenues of 59%. They're going to start generating some of their EBITDA, or earnings before interest, taxes, and depreciation, and amortization of more than 600 million this quarter versus a loss of 928 million in Q2 22. That was above our high-end guidance of 600-700 million. Cruise ticket prices are now above 2019 levels. Net per diem are suspending onboard when you're on the cruise ships were up 7.5%. That was above guidance. Their guidance for 2023, they expect 100% occupancy, even with a 5.7% more capacity into their ships with higher overall net ticket prices compared to 2019. So when you look at this business, you're saying, wow, the cruise business is cruising right along, doing quite well. But overall, I got to say, it's not a great business when you look at the long-term trends of Carnival. It just meander. There's a long returns on capital of the low double-digit operating margin. Even operating margin can be quite good. But there's so much capital that has to go into these businesses. I think the returns are really pretty much more like market-matching at best. Especially after this, Ron, I wouldn't chase Carnival, especially when it sells at probably 33 times or so forward earnings.
Ron Gross: Earlier in the week, Walgreens' stock fell sharply as the company lowered its financial outlook amid weaker consumer spending. Jason, I'm curious, is this a macro problem in your eyes or something specific to Walgreens?
Jason Moser: Probably a little bit of both. I'm going to waffle there, Ron.
Andy Cross: Waffle away.
Jason Moser: Thank you. It does look like the headwinds are going to continue for some time to come. Management set the table for a potentially challenging fiscal 2024. Any time you see mention of the word turnaround and the release, and we saw that here, that's a bit of a yellow flag, at least. There are a couple of main dynamics at play here though, the demand for COVID shots and testing has cooled off considerably. That's clearly not a Walgreens-specific problem. CVS was just talking about the very same thing last month, and I think that these companies are going to have to gear for that going forward. But management also did note, there is a more cautious and value-driven consumer out there. One thing that's sticking out of my mind here now that we've seen this Supreme Court ruling come down in regard to the student debt relief, and then we know these payments are going to start back up here around October, it's reasonable to think that consumer might be a little bit more crimped here in the near term. So it'll be just keeping an eye on that as far as retailers go.
The good part for Walgreens though they do continue to invest in their US healthcare segment, and they continue to grow the top line in that business, but it's one where they continued to invest a lot as well. So it's recording operating losses, but it brings more of a tech flavor to their business in healthcare solutions, so partnerships with things like VillageMD, Shields, and CareCentrix. These are working well for the company, but the bottom line, at the end of the day, you're right, they cut full-year earnings guidance by about 12%. That's a big deal for a company like this that has a track record of really meeting and beating expectations on a regular basis. So I don't know. I feel like there's probably a light at the end of the tunnel, and maybe this represents a time for investors to get interested in the stock. But it also looks like the near-term headwinds are going to continue for Walgreens for some time to come.
Ron Gross: Quick answer, yes or no. Jason, the Nasdaq is higher or lower at the end of the year than it is now. I won't hold you to it.
Jason Moser: Yes.
Ron Gross: Andy.
Andy Cross: Yes.
Ron Gross: I say no.
Andy Cross: I'm going to hold you to that, Ron.
Ron Gross: All right, Fools. We'll see you a little bit later in the show. Up next, the conversation with Dave Meyer, the VP of Growth and Analytics at BiggerPockets on the state of the housing market. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Ron Gross. We're halfway through the year, so it makes sense to check in on where things are sitting across the market. Motley Fool Money's Deidre Woollard caught up with Dave Meyer, the VP of Growth and Analytics at BiggerPockets to talk through how the housing market has held up so far this year in the face of higher interest rates and weather trends like aging in place and Sunbelt migration are here to stay.
Deidre Woollard: We're right about the halfway point of the year. What would you say has been some of the main stories in real estate, so far?
Dave Meyer: I think there are two primary stories in real estate. The first is about inventory. We all know that mortgage rates are rising, so I guess you could say that is the story, but that is the well-known story. I think the thing that people were not necessarily expecting is that inventory, or supply in the real estate market, would come down at the same time as higher interest rates were pulling demand out of the market, and it would provide some stability in the housing market, and so overall, I think what most people who follow the housing market are surprised to see is how resilient it has been in the face of rising interest rates in 2023.
Deidre Woollard: It's true. Existing home sales have been down about 20%, but prices have fallen, I think, about 3%. So really what we're seeing is, you don't have that massive price drop that people thought that we might have.
Dave Meyer: That's right, and I know that's confusing to people because there is demand leaving the market. We do see that there are fewer home sales, we do see mortgage purchase applications are down, but inventory is historically low. Redfin actually just came out a couple of days ago and said that May of 2023 was the lowest amount of inventory they've ever seen in their history of tracking that. So that helps provide some background context for why prices aren't in freefall while some people were expecting them to be.
Deidre Woollard: Do you have any predictions for the future for the rest of the year? Is this inventory crisis going to resolve itself?
Dave Meyer: I don't think it's going to anytime soon. There are some pretty big factors that are driving this extremely low inventory. The first is, of course, the rapid increase in interest rates and that has created what people in the industry are calling the lock-in effect, and that's basically that people don't want to move because if they wanted to make a lateral move and go to a similar house, they would be paying significantly more, sometimes 40% more on their mortgage. If they wanted to move up, it would be extremely expensive, and I think one of the main dynamics going on here is that, even if you wanted to downsize, maybe you're an empty nester, and you're looking to downsize, you could be paying just as much or more to have a smaller house, and so that's really keeping people in place. That to me is the primary dynamic. But there are other trends. We've seen the average homeowner is now staying in their home for more than 12 years, whereas if you go back to 2005, it was six-and-a-half years. So it's nearly double. People are staying in their homes longer, so we're just not seeing the same velocity of sales that we were used to in previous decades. Of course, during periods of economic uncertainty, you also just see people not wanting to make big financial decisions like moving.
Deidre Woollard: That's true. One of the factors that I'm watching is the whole aging-in-place phenomenon because we thought that people were going to move to Arizona or Florida, and certainly people are moving to Arizona and Florida. But most people really are wanting to age in place, and that I think is going to have to shake out at some point. Our baby boomers are in their late '70s now. It doesn't seem possible that everyone's going to be able to stay in their homes into their '90s. Over the long term, how should we be thinking about that demographic shift?
Dave Meyer: It's really interesting. I think we're just starting to see. We've heard a lot about the intention for people to age in place, but as you alluded to, we don't know if that's really what's going to happen. I do think this dynamic is one of the main reasons we're seeing that increase in homeowner tenure increase as people don't move out or go to another living situation. But I think this has a big impact, not just on total supply, but it really stops and clogs up the entire housing market system as it works. Typically there's this pattern where young families, people in their late '20s or early '30s, they buy a "starter home". Then a couple of years later, they move up to their family home. Maybe they have one or two of those, maybe if they have kids growing up. Then at a certain point, they want to downsize into a smaller place. But given some of the things we've been talking about, we're not really seeing people downsize, and that means that they are clogging up this whole upward trajectory of people and the changing hands of these different property types. What you see is that the type of housing that the boomers are in are often the same type of homes that are for first-time homebuyers because they're the smaller where they've downsized into them. So that creates this bottleneck, and as you've probably seen, first-time homes, smaller homes, starter homes are just not really available, and I think this is one of the major drivers of that is that boomers are not vacating them.
Deidre Woollard: That's true. The starter home thing is tending to exist less because people, mostly, I think due to the impact of student loans, they're buying their first home later. They're buying their first home later. They're trying to save money before that. They expect to stay in their homes much longer. Like the NAR profile of home buyers and sellers, we talked about people staying in their homes like 7-10 years. They forecast when they ask people how long they think they're going to stay in their home, they're saying 15, 20 years which may or may not play out. But there is this expectation that, I'm buying my forever home the first time, and that's just it.
Dave Meyer: That would be a big change in dynamics, but it does seem more that that's what's happening. We also see builders reacting to that because builders are now not building the "starter home," which most people categorize as a home of 1400 square feet or less. We're now seeing the average home that people buy, even on the first one, is 2500 square feet. That would be more conducive to what most people would want if they had a couple of kids, and so we see those people buying those right away probably in preparation for what you're saying. It's that they don't intend to leave. They don't want to do the starter home, the family home. They just want to get in one home and stay there for as long as they can.
Deidre Woollard: It's interesting. The other part of this, I think, is new homes. The new home, permits and everything, had been down about last year, so maybe starting to go up a little bit now. But home builders, they want to try to time the market. They want to build when people are ready to buy. But at this point, one of the things I'm noticing is that, with existing home inventory being so low, new home inventory is a greater part of the total homes for sale. I wonder, do you think that's going to be a long-term trend?
Dave Meyer: I think it's one of those interesting dynamics going on, and my guess is that, at least for the time being, I don't see really how some of these impediments to inventory alleviate themselves in the short term. The lock-in effect doesn't seem to be going away. People seem to be wanting to stay in their homes longer, and honestly, it's not a good experience to buy or sell a house right now. It's really stressful to people. I think people are avoiding it, and builders are reacting to that. During normal years, new home sales, new construction, comprises about 11% of total home sales. It's above 30 right now, and in some places, it's even higher, and builders are seeing this as a huge opportunity, I think. You see, yes, it is down from the peak, but just in May, new permits went up 5% month-over-month, which is a pretty considerable increase, and I think most people, myself included, thought builders were going to be really pretty bearish over the next couple of months. But I think the opposite, at least in single-family home construction, is happening. I do think they're staying away from commercial construction, but that's another topic.
Deidre Woollard: I think this month was the first time the builder sentiment survey went back up over 50%, which means builders are feeling more positive, and I think the incentives that they're having to offer have dropped a little bit too, so it really is a sign that people are back out there looking, and I think part of that is, the sticker shock of the mortgages may have sunk in a little bit. Thinking about mortgage rates, do you think that we are in now getting into a more stable place?
Dave Meyer: It's very difficult to forecast mortgage rates these days.
Deidre Woollard: It certainly is.
Dave Meyer: But my best guess is that we're probably going to see similar mortgage rates through the rest of the year, which is high sixes, somewhere around there. We have obviously heard that the Fed intends to raise interest rates another 25 or 50 basis points which would put upward pressure on mortgage rates. But what I think people need to know about where mortgage rates stand right now is that they are most closely correlated with the yield on the 10-year treasury, not with the federal funds rate, and normally, the spread between the yield on the tenure and mortgage rate is about 170, 190 basis points. Right now, it's about 320 basis points, and so there is a huge risk premium in mortgage rates, and so there is room. I think you could see it going either way. Like the Fed raises interest rates, mortgage rates could go up. But if inflation keeps coming down, even if the Fed raises interest rates, if that spread starts to come down, there is reason to believe mortgage rates will at least be stable. A lot of economists are forecasting that mortgage rates will come down, maybe not by the end of this year but probably early in 2024, maybe to the low sixes.
Deidre Woollard: Sunbelt migration, big story for the last decade or so. Do you see that as the future? I'm starting to see some data showing up, maybe a little bit more of a move to some of the Midwest areas just because of people chasing value. What are you seeing in terms of demographic trends?
Dave Meyer: People think I'm crazy, but I've been saying that I'm long on the Midwest for a long time. I just think we see these big macro trends that our people want affordability. They don't need to be close to the economic engines as they used to be, like San Francisco or New York. You can live remotely, not everyone, but more and more people can, and I think we're going to see a lot of the cities in the Midwest that are affordable and start to grow, and I think the quality of life, which is hard to measure, it's hard to quantify, but that seem to be another major predictor of where people are going to live. Obviously, everyone defines quality of life a little bit differently. But generally speaking, the cities that rank high for high quality of life do start to see big trends.
Dave Meyer: I don't think the Southeast is really going anywhere. I don't think we're going to see like an exodus from that at all. But I do think like their relative growth rate will probably slow, and we'll see some other places, like you said, Midwest. You see places, like in Arkansas, which is the Southeast but is not what most people think of. I think most people think of the Carolinas and Tennessee and Georgia and Florida. So some of these other places really start to grow, mostly at the expense of Western cities which are seeing the biggest out migration.
Ron Gross: You can catch more from Dave on BiggerPockets on the market podcast. Coming up after the break, Andy Cross and Jason Moser return with a couple of stocks on their radar. Stay right here. You're listening to Motley Fool Money.
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. Welcome back to Motley Fool Money.
Ron Gross here with Andy Cross and Jason Moser. Fools, we have time for two quick stories before we hit stocks on our radar. Prices of sriracha, if I say that correctly, the spicy ketchup like sauce are as high as $70 on eBay and $124 on Amazon. Huy Fong Foods has been struggling with a years-long shortage of the chilis that are used to make the sauce which is hurting production and causing some shortages. Gentlemen, thoughts. Are you a fan of this product? Would you pay up for this product?
Andy Cross: Big fan. I have it in my fridge now. I don't know that I'm going to pay up for it. The thing is funny. These things feed on themselves. They're like runs on banks. [laughs] The more these thing is published, the more panic it creates, and it bids that price up and up and up. But I tell you, it's a good sauce. I use it on its own and also as ingredient for other sauces.
Jason Moser: I got a bottle sitting in my closet that I don't think. If you need some, you know where to call.
Ron Gross: Sticking with the theme, on Independence Day, Pepsi will unveil Pepsi Colachup, which is perhaps exactly what you're thinking it is. Ketchup infused, yes, with Pepsi. Guys, I got to say on a hamburger or a hotdog, it may not be ridiculous.
Jason Moser: Maybe not. I have heard of soda in barbecue sauces before, Stubbs and Dr. Pepper, for example. Stubbs is owned by McCormick, by the way. Throw that in there. Really what this boils down that reminds me the beginning of the season here, I need to go ahead and make up a new match. My big daddies boy, howdy mustard sauce. [laughs] We just call it the house sauce at home. It's that recipe that I made up. We talked about it before on the show, Ron, and maybe as we celebrate freedom this year, maybe I should celebrate by giving that recipe out finally, after all these years.
Ron Gross: You can add some like Mr. Pibb or Dr. Pepper to it.
Jason Moser: No, it just doesn't require.
Andy Cross: I'm waiting for the Mountain Dew-infused mayonnaise, and I'm going to drop off a bottle at Ron's house.
Jason Moser: You need to build up an IPA barbecue sauce.
Ron Gross: Fools, it's time for a couple of stocks on our radar, and I'll bring in our man, Dan Boyd, to ask a question and pick his favorite. Jason Moser, you're up first. What do you got?
Jason Moser: I've been keeping an eye on Amazon, ticker AMZN, and I think this is just a story to watch play out over these next several weeks. We get the FTC planning to file a suit targeting Amazon's core online marketplace in the coming weeks. This is something that has been a long time coming. The main allegation by the FTC is that Amazon uses its power to reward the online merchants that use its logistics service and punish the ones that don't. Now if that's true, that certainly doesn't sound right. So it's going to be interesting to see how this really goes. They've also got the FTC investigating Amazon's deal to buy Roomba. We're looking at actions being taken against [Alphabet's] Google, obviously MicrosoftActivision Blizzard on the microscope. Just it's a tough time to be big.
Andy Cross: Amazon, you say? Am I pronouncing it correctly? I'm not familiar with it.
Jason Moser: Newfangled company. You'll hear more about it.
Andy Cross: In England, they pronounce it Amazon.
Ron Gross: Dan, a question from you.
Dan Boyd: Yeah, sure. So Amazon is one of these companies that has its claws in every part of everyday life for the majority of Americans, at least. Is anything the FTC going to do to disrupt that, or are they going to sit back and continue to be one of the most important companies in our economy?
Jason Moser: I have a feeling they're not going to be able to do a whole heck of a lot. It just remains to be seen. These things are always so tricky, and typically companies, they negotiate ways to spin things off or sell little pieces off to appease regulators. But time will tell.
Dan Boyd: Andy, you're up. What are you looking at?
Andy Cross: Let's go from a 1.3. trillion-dollar company to a 1.2 billion-dollar company. Dan, this is a very small company, so tread carefully. It's Winmark, symbol W-I-N-A. It operates as a franchisor of five secondhand resale brands like Play It Again Sports, Plato's Closet, which is for teens, Once Upon A Child, children's cloths, Style Encore, women's clothing, and Dan, Music Go Round, musical instruments, secondhand, you can buy. It also owns a little technology leasing arm. It has nearly 1300 franchises in the US and Canada that sign 10-year lease terms and pay franchise and royalty fees 4-5% of the sales. As a franchisor, Winmark provides services and support to their franchise partners, like marketing and technology, e-commerce. Since 2010, they've recycled almost 1.6 million products. They get a second life as part of another user, and that's more than 450 items per day. Such speaks a little bit to the sustainability play here. Winmark speaks really to the interest of consumers in reusing and recycling products to support that more sustainable lifestyle rather than having to buy a bunch of new products from a store. That takes a lot more energy to make. This whole thing creates a really outstanding business model, Dan, 94% gross margins, 60% plus operating margins, and 40% plus free cash flow margins, with not a lot of assets, really only 40 million of assets for an 80 million in sales and 40 million in profits. So a single-digit grower, but it's increased the dividend more than 40% annualized for the past few yea rs, Winmark, W-I-N-A. Dan?
Dan Boyd: I was independently, of this podcast, looking at this stock to purchase this week already. I love this stock as a dad. I love buying things secondhand. It is a great way to get good products on the cheap. So I'm a big fan of Winmark Corporation.
Andy Cross: The stock is up 40% and sells at 35 times free cash flow. So it is a little bit pricey, so maybe just wait for a little pullback.
Ron Gross: But do you have a favorite, Dan? I think I know the answer to this. Little known Amazon or Winmark?
Jason Moser: Go Winmark, Ron.
Ron Gross: Andy Cross, Jason Moser, thanks for being here. That's going to do it for this week's Motley Fool Money. Our engineer is Dan Boyd. I'm Ron Gross. Thanks for listening. We'll see you next week.
Suzanne Frey, an executive at Alphabet, 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. Andy Cross has positions in Activision Blizzard, Alphabet, Nvidia, PepsiCo, and S&P Global. Dan Boyd has positions in Activision Blizzard and Amazon.com. Deidre Woollard has positions in Alphabet, Amazon.com, Apple, CVS Health, Nike, and Nvidia. Jason Moser has positions in Alphabet, Amazon.com, Apple, and Nike. Ron Gross has positions in Amazon.com, Apple, and Nike. The Motley Fool has positions in and recommends ASML, Activision Blizzard, Advanced Micro Devices, Alphabet, Amazon.com, Apple, Nike, Nvidia, S&P Global, and Winmark. The Motley Fool recommends CVS Health, Carnival Corp., Delta Air Lines, Marvell Technology, and eBay and recommends the following options: long January 2025 $47.50 calls on Nike and short July 2023 $47.50 calls on eBay. The Motley Fool has a disclosure policy.
