First Half Lookback

18:47Ricky Mulvey:I really hope so. I own some small cap index funds. And previously on the show, I had a lot of fun talking about small cap companies with Mr. Bill Mann. All right. Up next, Motley Fool Canada's Jim Gillies joins me to shine a light on some less discussed stocks that you may want to know. Stay right here. You're listening to Motley Fool Monday.

19:20Jim Gillies:Sprung from cages on Highway 9, drum wheeled, fuming, checking, and stepping out over the line. Oh, baby, this town rips the bones from your back. It's a death trap. It's a suicide rap. We gotta get up while we're young. Cause Translac. They say leadership isn't just about where you're going. It's about the conviction it takes to get there. For those who demand the world and possess the drive to claim it, there's a vehicle of equal distinction. Dynamic by design and engineered for pure impact, the Range Rover Sport rises to meet you the moment you take the lead. This is the most advanced Range Rover Sport yet, a master class in uncompromised performance and unbridled agility.

20:07Jim Gillies:Inside, the innovation is seamless. You'll find an elegant 13.1-inch touchscreen that puts total control of the vehicle's systems right at your fingertips. but it's the refinement that sets it apart. Sculpted 22-way heated seating with built-in massage function ensures every journey is defined by peerless comfort. Whether it's through unique interior finishes or custom wheel options, the ways to personalize your Range Rover sport are nearly unlimited. Command attention and experience ultimate luxury in motion. Exclusive offers are available now. Explore further at RangeRover.com.

20:47Ricky Mulvey:Welcome back to Motley Fool Money. I'm Ricky Mulvey. More people are excited about investing right now. So what's that mean for you? Earlier this week, I checked in with Motley Fool Candidates Jim Gillies to talk about speculation in the market and get some stock ideas that may represent growth at a reasonable price. So Jim, I'm starting to get some feelings like it's 2021 again. And while we're celebrating all-time highs for the market, I feel that there's some easy money coming back in and wild returns happening. You like throwing cold water on people having a good time because you're a realist, not a curmudgeon.

21:24Ricky Mulvey:Don't say you're a curmudgeon. But I wanted to ask you, do you think speculative mania is back in the market?

21:30Anthony Schiavone:I'm a fan of people having a good time, so I'll put that out there. I think speculative mania is always in some form in a market. It's just how broad is it? You know, in 1999, it's pretty broad. 2001, hard to find. Early 2020, very hard to find. 2021, quite easy to find. So, I do think after a couple of really good years in the market, 2023, 2024, of course, 2022 was kind of the pain that a lot of investors had to endure for the pleasure of 2021. But after a couple of really good years in the market in 2023, 2024, yeah, I think there's a few things that are getting a little frothy out there. Doesn't mean I think there's an imminent correction or crash or anything.

22:18Just more of a, be thoughtful of where you're going.

22:22Anthony Schiavone:Be thoughtful of what you're purchasing. Be thoughtful of the position size. There's nothing wrong with a lottery type pick or two. But if you make them 10 % of your investable capital, that might not be terribly smart. But yeah, I think that the longer we go and the rebound from the tariff schmozzle earlier this year, I think a lot of people are very excited about investing right now. And I somewhat counterintuitively kind of pare back a little bit when I see that.

22:57Ricky Mulvey:My concern is precisely that my lottery ticket positions are the ones that are doing really well. And I'm like, oh, no, this seems to be a time to get a little less excited about those. We're also seeing sort of can't-miss stocks coming back. I don't remember seeing these in late 2022, early 2023. But one of them right now is hims and hers. And we were talking about that before the recording. Why should investors beware when they see a sort of can't-miss opportunity like that?

23:26Anthony Schiavone:Well, I'm certainly not calling it can't-miss. And I do believe in the principle. If something is denoted as can't miss, you should probably be quite wary of it. You should probably step away slowly so as to not disturb it. Most Canadians, I have to do this, Ricky, for nostalgia's sake, most Canadians remember our biggest example of can't miss. That would be Nortel Networks. In the great tech bubble, it went to zero. But it was, for a time in the late 90s, considered the most can't miss stock in certainly the Canadian market. There's inherently nothing wrong with the idea of a stock that could be can't-missed.

24:07Anthony Schiavone:I'm going to call that kind of a growth stock because we tend to really, no one gets terribly excited about, and they should, but they don't, about stocks that are, say, growing at 1 % to 3 % a year, but are improving their operations by, say, 5 % a year, and they're run by good people who are excellent capital allocators, who are buying back 5 % to 10 % of the stock per year, and they're also increasing the dividends. People don't get terribly excited about that, but something with the promise of 20%, 30%, 50 % annualized growth, people get real excited about that. And when they work, Amazon from the late 90s, Shopify from the mid-20-teens, for example, when they work, MercadoLibre for the past 15 years, Chipotle since about 2007, When they work, they're beautiful things.

24:57Anthony Schiavone:You just got to make sure you size them appropriately. You got to go into one. One thing I really like and that I think the speculative excess kind of misses is everyone claims to be a long-term investor all the time. Okay. it's kind of remarkable to me that in 2022, what happened in 2022, a lot of people who in 2021 were claiming they were long-term investors about everything they ever bought kind of got real silent in 2022. And I'm just here to point that out. Okay. And so when you, when you are moving into a stock, you know, and you want to be that long-term holder, Make sure you're buying companies that are worthy of a long-term hold.

25:44Anthony Schiavone:And make sure you're being brutal and honest with yourself as you assess things. Because it's your money. No one cares about it more than you do, okay? Don't worry about what other people think. Kind of go through your own process and assess, do I think this is reasonable? So you talked a little bit about him, hims and hers. And, you know, that's an interesting one. It's certainly one that's in the market right now. kind of go and look at it, ask yourself, why do I own this? What do I expect out of it? How are they making money? What do I think is going to happen growth wise? One tool that I love because I am a valuation guy and I like to say all valuations are wrong at all times, right?

26:28Anthony Schiavone:Every DCF that's ever been done has been wrong because you do not have perfect foresight. You don't know what's actually going to happen. A tool that I like is what's called the reverse discounted cash flow or reverse DCF. And that kind of done reasonably well should give you an estimate of what growth a company needs to generate to justify today's price. And then you ask yourself, well, is this reasonable? Do I think this is reasonable? So I actually did a quick little reverse DCF of, of hims and hers. If you'd like me to pine on that. I got time. Brilliant. Okay. So, you know, and again, all DCFs are wrong.

27:10Anthony Schiavone:It's more a question of is, are my assumptions reasonable? Okay. So for this real brief, like it took me five minutes, this is not, this is just a sample. It's not, you know, you would do a lot more work, I would hope. But as I looked at hims and hers and can, I don't really know anything about the company, But, you know, I know I've seen them in the news a lot recently. And I know they're tied to the GPT or the GPT. GLP1, Jim. I was going to say all these acronyms. Yeah, you know, I see this is again. I'm the guy over in the corner who's looking at other things. Yeah, okay, you're right. Exactly.

27:43Anthony Schiavone:It's tied to, you know, I think a pretty good, reasonably long-tailed, broad societal trend. Okay? I think that that's.

27:52Ricky Mulvey:And that is personalized health care and also the ability to get medical treatment on your computer. versus going into a doctor's office, please continue.

28:00Anthony Schiavone:Exactly. Yeah. So, okay. So I think that's reasonable. And, you know, and I went through and I looked at the, well, how much cash is this company generated? Because when you look at a company like, you know, we talk about, you know, doing discounted cashflow analysis, which we, of course, we have to then estimate what the cashflows are. The important thing is what they do with it, by the way. You know, it's nice to estimate it, but if it all gets frittered away on, you know, new jet for the CEO, it's maybe not the greatest use of capital. So there's capital allocation story, but, but I look at him and I'm like, okay, I estimated the free cash flow they've done in the past year, last four quarters, looked at their balance sheet.

28:35Anthony Schiavone:They got a bunch of cash. They got no debt. And I went through, I said, okay, I think an 11%, most of my DCFs, I use an 11 % discount rate. I don't go through all of the corporate finance stuff and beta and whatever and cap M because it's just like, you know what? If I could get 11 % in the market, that's kind of my opportunity cost, you know, kind of what the S &P 500 has given us for 80 plus years. So I kind of like to use my opportunity cost, my perceived opportunity cost, 11 % as my discount rate. And I said, you know what? It's going to grow at whatever rate for the next decade and then tail off kind of to about a 3 % growth rate in what's called a terminal period.

29:11It's 10 years out from a discounted cash flow perspective.

29:14Anthony Schiavone:It doesn't really matter. Add the cash, deduct the debt. There's no debt. That's fine. At today's valuation, today's valuation, hims and hers has to grow at about 20 % annualized for the next decade. I don't actually find that terribly unreasonable, given the broad trend we talk about. However, so I'm like, yeah, there's something. Now, okay, that employs a few assumptions, both good and bad. You know, again, the likelihood of it going from 20 % annualized growth to 3 % annualized growth in precisely in 10 years, the likelihood of that is zero. It's just a mental construct or a model construct.

29:54Anthony Schiavone:And, you know, they've got a lot of dilution, a lot of options, a lot of equity cookies. I haven't taken any of that into account because, again, this was a five-minute DCF. But you would probably want to get an understanding of how much of this company is going to be hosed out to insiders in the future because shares in their name dilutes your holding. So it probably would be more than zero, which is what I have. But you can work through this and go, okay, 20 % for 10 years annualized. It's probably not that unreasonable. But I can tell you, Ricky, if I were to look at a few other story stocks out there right now, or I'll even go back to the story stocks of the recent past.

30:38Anthony Schiavone:I looked at a couple, you know, well, okay. We are currently conducting this interview via Zoom. Zoom was a darling in 2021, okay? And I think it nearly topped out at$700 a share. And today, it's about, you know, it's below 100. And what happened? Well, because at that time, and I remember saying this on various other Foolish shows and, you know, probably being ignored by most, the growth was rapidly slowing what they were delivering. And so as people piled into this stock that was, you know, down 10%, 20%, 30 % from its all-time high, because, you know, oh, well, you know, people were looking in the rear view and investing is about looking in the forward view.

31:19Anthony Schiavone:And it's like their growth is rolling over. I'm not sure how much more they're going to have. So even if they have a great business and they're run by a great founder with a meaningful stake in the company, the growth is rolling over and people were buying it with implicit growth rates for the next decade of 40, 50, 60%. That's not going to happen, guys. And in fact, it didn't happen. And a lot of people got whacked on that. So it's about being mindful. It's about being thoughtful about what assumptions are based on the stocks that you own. And again, you can own lottery ticket type stocks. I own a bunch myself.

31:56Anthony Schiavone:But just understand what goes into it and understand what the actual payoff for most lottery ticket type stocks is. Most lottery tickets go to zero. So we're not going to speculate that HIMSS is going to zero. But, you know, you might not get, you know, the easy money you think you're getting in it.

32:14Ricky Mulvey:So one of the great pleasures of doing this show for a few years, Jim, has been getting to talk to you and look at companies I would not have otherwise looked at. Thinking of Windmark, Academy Sports and Outdoors, Aritzia, even TKO Holdings, which I was like, oh, this looks expensive. And now it's a position I have. So for my last show, just real quick, can you give me a stock or two that I should be looking at as I go into the great beyond?

32:39Anthony Schiavone:I believe, as we were talking about beforehand, we were talking very specifically about kind of in the GARP bucket, growth at a reasonable price. I'm going to give you five, if that's okay, real quick. Sure. Well, because, you know, I care, Ricky, and I've really enjoyed doing this show with you. And so, you know, and I wish you all the best going forward. And so I would say, well, my first one would be Medpace Holdings, which we've talked about many times. It's a particular favorite company of mine. I recommend it multiple times. It's a small contract research organization run by a very foolish leader trading at a very reasonable price right now.

33:15Anthony Schiavone:Although it's gone up the last couple of days, so maybe we're getting a little bit less reasonable. Because the market is assuming that recent bad news will continue into the forever future. And it won't. So MedPace, really like them. Lululemon is interesting to me at this point. I really enjoyed the story from our record date. It came out yesterday that Lululemon is selling Costco for knockoff yoga pants. It's always tough to see your children fighting. I will say that. I do, of course, like Costco a lot. But Lululemon is now trading. They make a lot of cash, great-looking balance sheet. I've said before in multiple venues, they make clothing that makes people feel good about themselves.

33:58Anthony Schiavone:Do not dismiss that easily. Trading at a decade-low multiple, that's interesting to me. Simply Good Foods. It's a company I have been steadily wrong about. It's SMPL is their ticker. They are the company that owns the Atkins diet brand as well as Quest and recently purchased something called Only What You Need, which is a plant-based protein shake style company. It's run by really good industry veterans who I think might be setting the company up to put it for sale too in the near future. But they made the acquisition of only what you need less than a year ago. All their numbers are going up, all their business numbers are going up and the stock has been going down.

34:43Anthony Schiavone:And like I said, I have some evidence that suggests they might be priming it for a sale and the people running it have a history of selling companies. The fourth one is Atelman Global Education. It's a for-profit education space. ATGE is their ticker. You may know them and may be disdainful of them. Their prior name was DeVry University or they were the company that owned DeVry University. That's long gone. It's been hived off, run by good leadership, make a lot of cash. They focus on medical education. Doctors, nurses, nurse practitioners and veterinarians. As my vet friend says, real doctors treat more than one species.

35:19Anthony Schiavone:It's good price, good valuation, run by smart people. The last one is one we've talked about before, Contour Brands, the parent company of Wrangler and Lee Jeans, and now of Helly Hanson, run by smart people, make a lot of cash. The Helly Hanson deal was done with all debt, which they have said, hey, we're going to pay that off super fast. That's actually my favorite kind of acquisition, because as they pay off all that debt, the cash flows, the revenue, the earnings, the cash flows that came with Helly Hansen into the greater contour empire, that goes across all of the pre-existing shareholders once the debt's gone.

36:00Anthony Schiavone:Again, it's kind of the opposite of when companies are doing dilutive actions that kind of take away from you. This is a good thing. So I hope those five find a way into your portfolio. And it's been a great pleasure, sir.

36:11Ricky Mulvey:As always, appreciate your time and your insight, Jim. Thank you. 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 them. 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, advertisements, or sponsored content provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Up next, Radar Stocks, stay right here. You're listening to Motley Fool Money.

36:46Ricky Mulvey:I'm sane, but I'm overwhelmed. I'm lost, but I'm hopeful, baby. And when it all comes down...

36:56Jim Gillies:Support for the show comes from Fundrise. For the past 70 years, there's been a room in finance most people couldn't enter. A room where you could have invested in some of the biggest names in tech, companies like Airbnb and Uber, before their multi-billion dollar IPOs. I'm talking about venture capital. Fundrise recently took a sledgehammer to those closed doors by launching a venture capital product that's available to anyone. Their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. You can visit Fundrise.com slash fool to check out Fundrise's venture portfolio and get in early today.

37:31Jim Gillies:All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. This is a paid advertisement.

37:42Ricky Mulvey:Welcome back to Motley Fool Money. I'm Ricky Mulvey. joined again by Motley Fool Asset Management's Bill Mann and Motley Fool Senior Analyst Anthony Chivone. Each week, we close out the show with a couple of radar stocks that our guests are keeping an eye on, and our man behind the glass, Dan Boyd, will throw them a question, concern, or backhanded compliment. Bill Mann, what are you looking at this week?

38:07Jim Gillies:My company is Alphabet. There was a really interesting article that came out a few weeks ago in The Wall Street Journal, and it was talking about how generative AI is taking the place of internet search, particularly those affiliate links and the things that make Google search way less clean than it used to be. And so, it's having a huge effect on the companies that use search engine optimization. But my question then became, well, if this is where Google makes most of its money, then how is this not something that is a massive risk to Google as well? Now, the Google folks are very smart, and they are attempting to change their business fundamentally, but it is a fundamental change that they are going to have to try and stay ahead of.

38:55Jim Gillies:So, for that reason, Alphabet is the stock that I'm watching.

38:59Ricky Mulvey:As a reminder, radar stocks, it's not always a good reason that our guests are keeping a close eye on those stocks. Dan Boyd, a question about Alphabet, the letters or the company.

39:09Jim Gillies:Are we sure that Alphabet knows what they're doing? Because

39:13Anthony Schiavone:search in the past six months has really gone to the dogs, Bill.

39:18Jim Gillies:I love that question simply because it belies the thing that people are so annoyed about when it comes to Google search. You get these clickbait glurge, you get search engine optimization links that have nothing to do with what you have gone after, which you were looking forward to start with. I actually think that they are in a little bit of trouble here.

39:46Ricky Mulvey:Anthony Chavon, what's the stock on your radar?

39:49Bill Mann:Yeah, I'm taking a look at Target, ticker symbol TGT. Everybody knows Target, one of the largest retailers in the U.S., but they're currently in one of their largest stock price drawdowns in their history. And Ricky, you know I like dividends, and Target pays out a more than 4 % dividend, and they've grown that dividend for more than 50 consecutive years. And I think the key question that I'm asking myself is, is Target in a cyclical or secular decline? And to me, considering Target has done a good job of shifting towards e-commerce, which is the biggest threat facing many retailers, I think this might be a cyclical decline and potentially a good investment opportunity for the long term.

40:30Bill Mann:And I also wonder if Target isn't ripe for maybe an activist investor to come on board at some point, which could be a catalyst for the stock.

40:39Ricky Mulvey:There's a lot going on there. Dan Boyd, which stock are you going to be putting on your watch list for this week? Well, I can't say I like going to Target, Ricky, but I do like a nice dividend. So let's go Target. That's it for this week's Motley Fool Money Radio Show. I'm Ricky Mulvey. Thank you to Dan Boyd. And thank you to our guests, Bill Mann and Anthony Chavone. For one final time, thanks for joining us. And the show will be back next time.