When is it a Trend? When is it Hype?

0:01Tyler Crowe:Is the investing trend your friend? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime pool contributors Matt Frankel and Jon Quast. Guys, I think it's fair we talk about trends a lot in investing, but there is a difference between hype cycles and durable business trends and stuff like that. We're going to dig into that a little bit. But we're actually going to start on the opposite end of a hype cycle and talk about an apathy cycle. And that's in housing kind of specifically. We're in the off season for earnings, but there's always those few off cycle companies we're following.

0:43Tyler Crowe:And Lenar, it's the largest home builder in the United States. So I think that sort of qualifies here. The market kind of shrugged at its results. But here's what stood out to me, guys, as a home builder. Its stock right now trades for less than book value. So to use housing terms, the market's implying the company is basically, we're underwater. It's worth more liquidated than trying to operate it as a business anymore. So Matt, you like to dig into home builders numbers probably more so than anyone else in the show. We could fight over it, but I'll give you the title here. Was this really that bad?

1:21Tyler Crowe:I know we just had a rate hike and everyone's scared of housing, but were the numbers really that bad?

1:25Jon Quast:Well, yes and no. So Lennar missed on both earnings and revenue and cut its guidance, and the CEO gave pretty terrible comments. The stock is down by -

1:35Tyler Crowe:Oh, that sounds like a great start.

1:36Jon Quast:Right. The stock is down by 2%. Can you imagine what an AI infrastructure stock would be if it had that four pack of bad news. But Lennar, the numbers were terrible. And it's not just that they missed expectations. It's that they're having to incentivize buyers. This could be good news if you're in the market for a house. Incentives for Lennar's closed homes have been about 12 % of the selling price. That means if you're buying a$400 ,000 home, Lennar is giving you$50 ,000 or so worth of incentives. That's pretty remarkable. I mean, construction costs are down a little bit. There's some bright spots here.

2:12Jon Quast:The company's been buying back stock, as are a lot of other homebuilders. But I mean, it feels like Lennar and some of these other homebuilders are essentially running clearance sales on their products for the past three to four years. And now with the new Fed hike, there's really no end in sight. It's a pretty good time to have money to buy a home right now.

2:33Matt Frankel:Yeah, I mean, there are some headwinds in the home space, aren't there, Matt? And interest rates are playing a big part of that. The president, of course, saying that he would love them 1 % or less. The reality is that ain't happening. He has his guy in there. They were not able to bring rates down. In fact, they were looking at the debt and saying, we actually need to raise rates. I mean, I feel like Wesley in the pit of despair, in The Princess Bride. I mean, I would like rates to be lower. A lot of people would like rates lower. And for a variety of reasons, the reality is it's not happening right now.

3:05Matt Frankel:And that is the space that we find ourselves right now.

3:08Tyler Crowe:Matt, we've been talking about this and John, we've had this conversation about housing for a while. It's lousy. We've all been kind of waiting this long time. It's like, well, when interest rate cuts, interest rate cuts, we're now looking at hikes again. This seems relatively similar to the story in 2022, 2023. I'm not going to say we're going to go like these jumbo hikes that we saw during that time, but we're back into a credit tightening cycle. This doesn't pretend well for the housing market. It's not great. And we have been talking about this for a while. It's hard to see like over the next couple of years that changing.

3:47Tyler Crowe:There are lots of companies that will likely be lousy investments for a while in this industry, but they're cheap. Like I was just saying, Lennar is trading for less than its book value. Maybe they're good investments for like five to 10 years, but I think a lot of people will be like, well, I don't know if I necessarily want to wait five years to wait for a payoff that may or may not come. So looking at it and being like, it's OK, there's maybe something worth getting at here. What are some companies in housing related stocks that actually have near term catalysts?

4:21Matt Frankel:Well, as far as the risk spectrum goes, you're going to be far less riskier with Lennar than the company I'm about to mention. But I do want to highlight figure technology solutions. That is ticker symbol FIGR. I believe that this business could enjoy some tailwinds given the market dynamics that we see right now.

4:40Tyler Crowe:So figure technologies, what exactly does it do?

4:45Matt Frankel:So figure technology solutions is a technology platform for home equity line of credit origination. So HELOC origination, it is a tech platform for that. It is built on blockchain technology. the value proposition is that it can originate some HELOC loans faster and more cost effectively than maybe some other things that are out there.

5:09Tyler Crowe:Faster and more effective. It sounds great for the business, but I guess my question is, how does that translate to like cheaper rates for investors or I guess lend or people who want to take out HELOCs? Because one of the things that has really shouldered companies like Home Depot and Lowe's and home improvement stocks and a lot of these others is that people aren't using HELOCs because the rates are too high. Is what figure does actually designed to bring down rates like they're more competitive than your traditional market?

5:40Matt Frankel:Can be, can be. It's certainly kind of a little bit like it's reminiscent of upstart in a way. It's trying to match credit profiles more effectively than the traditional methods. But, you know, I push back a little bit because the trends are showing that with more people being locked into their rate, they do still want to access that capital that they have tied up in their home. And traditionally, they've done that when they've sold perhaps, or they refinance, and that's how they get it out of there. It's kind of trapped right now, and they still don't want to give up those mortgages. So the home equity line of credit, maybe not what it's been in the past, but it is showing an uptick here recently.

6:20Matt Frankel:People do want access to that cash. And so the tailwind is there. What's so good about figure in my view is that it's not actually shouldering the financial risk that comes with the HELOCs themselves. It's essentially partnering with other financial institutions. So they're the ones adopting its platform to originate more HELOCs. And that is why it's able to enjoy less risk perhaps, and also great, great profit margins. So you look at this thing, 42 % operating profit margin, 39 % net margin. This is actually a really, really profitable business and growing fast.

6:59Tyler Crowe:Certainly the idea of like partnering with somebody who doesn't actually have to lend right now sounds a little bit better or more appetizing in this certain environment. But Matt, I have to imagine that's not the only place.

7:12Jon Quast:I agree that things are not going to get better quickly for housing. I've kind of changed my tune on that. Anyone whose thesis is rates are going to go down needs to rethink their thesis right now. I mean, that's just what has to happen. And to be honest, I have no idea where mortgage rates will be in six months, one year, et cetera. And neither does anyone else. Even if the Fed does exactly what you expect, mortgage rates don't necessarily track what the Fed's doing. For near-term catalysts, I'd make the argument that the best bets are on the landlords, not on the home builders. And what I mean by that is a higher interest rate environment for longer means that more people are going to be renting than buying.

7:53Jon Quast:There are two real estate investment trusts that focus on single family rentals. They're called Invitation Homes, INVH, and American Homes for Rent, not the most creative name in the world, but ticker symbol there is AMH. American Homes for Rent's especially interesting because they're kind of insulated from that new federal mandate that large investors can't buy single family homes anymore. They like to build instead of buy their homes to cost advantage if they do it well. It could also be a near-term catalyst for the home builders. Lennar's CEO specifically called out built-for-rent housing.

8:29Jon Quast:A lot of these companies are partnering with builders as a bright spot in the quarter. But I mean, I would sum it up by saying I don't know if the home builders are necessarily a five to 10-year investment. As you mentioned, a lot of them are trading below book value. it wouldn't take much good news to cause the market to re-rate these. I mean, home building has been weak for a while and these stocks traded for a lot more than book value for a while. I mean, like I said, Lenar only fell 2 % on a double miss, a guidance cut, terrible CEO commentary. I mean, I agree that my thesis with home builders is a five to 10 year one, but right now the short-term downside risk reward profile could be more favorable than you think?

9:13Tyler Crowe:Look, I don't want to come off as being like, look, I think home builders are lousy. You'll actually find one or two in my own investing portfolio. So it is something I have bet on in the past. It's an industry I do and plan on keeping invested in in the future. It's just that it's hard to see the short-term catalysts that are going to be like, yeah, we need to do this now. For me, it almost seems like an investing window. I personally don't take any contention and be like, yeah, I could be lousy for a year or two. It's just, HOTS can be a challenging thing for investors who are trying to get into this.

9:50Tyler Crowe:But that's one of the challenges here is being able to see through the short-term noise and make those long-term investments that are actually going to work. And on that topic, not only do you have the apathy cycles like we have here with housing, you can also get into hype sequels. And that's what we're going to talk about after the break.

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11:30Tyler Crowe:Learn more at schwab.com slash trading. I was reading the Wall Street Journal this morning, just as, I don't know, every middle-aged father of two seems to do at this point. And one of the discussions in the markets newsletter was the fading fortunes of the nuclear trade. I think last year, we saw a lot of investor enthusiasm for nuclear stocks because of all the demand for power, electrification of everything, AI infrastructure. You know, where are we going to get all this power? Or, oh, it's going to come from nuclear because it's cheap, it's clean, we're not dependent on other nations for it with fossil fuels, all of the arguments that it has.

12:09Tyler Crowe:But as of today, most of that enthusiasm has faded. And several of those highly touted nuclear stocks are now down 50, 70. I think one of them is even down like 88 % from their all-time highs with, I think it's fair to say, little change to the business outlook for the industry. I don't want to get too deep into nuclear specifically. I think the topic here is investing in hype cycles because there's probably a lot of investors who bought into this hype cycle around nuclear and are sitting on huge losses. It hits an immense challenge for investors. It's identifying the durable business trends versus getting caught up in the hype cycles and trying to separate one from the other.

12:52Tyler Crowe:There is probably a durable trend here in terms of growth of nuclear power, more power demand in general but obviously there was a lot of hype that left a lot of investors burned i've certainly gotten burned before i think my biggest fault was uh betting too hard on shale drilling uh in like 2013 2014 being thinking like oh it was going to revolutionize revolutionize the industry it did and it kind of ruined the industry at the same time and we saw lots of bankruptcies lots of stocks basically go to zero i think i had maybe one or two of them I think C-Drill is one of the companies I had. But guys, I'm assuming you guys have also had similar experiences of getting burned on these hype cycles.

13:37Jon Quast:Yeah, I mean, you're right. Nuclear stocks have been declining for a year now. It's some big lessons to learn there. I think you're talking about Okla with the 80 % decliner. It was almost$200 in 2025. Now it's about$40. One of the biggest lessons about trends, and it applies to nuclear, is while investors can be directionally right, I don't think any of the three of us think nuclear is going to play less of a role in the power landscape in 10 years than it does now. Things like valuation and company-specific investment thesis, they still matter. And you're right. I've been burned by trends before.

14:09Jon Quast:I'm going to call myself out big time here. My big one was the 2020 to 2021 SPAC boom, which I wasn't the only one. You can't tell, but I'm looking at John right now. We both kind of had some duds in that era. Thankfully, I limited my positions for the most part. I think John did too. But I invested in several companies and we had some overlap here that were very hyped and were trading for valuations that simply didn't make sense. And I'll call out three of mine. One was a company called 23andMe, which a lot of people know, they're the genetic testing company. There was one called Latch, which don't even get me started on that one because I might shed a tear or two.

14:45Jon Quast:And then there's OfferPad, which, you know, the future of real estate. They all had revenue, but not that even remotely justified their valuations. The projections were compelling and for a while there, investors were driving these companies higher and the momentum seemed reasonable and money was free. These companies could borrow money whenever they wanted to. But if I had just used a little quick hype check, it would have prevented some of these losses. You know, does the company have revenue, real revenue today or is the valuation mostly based on projections? Latch, for example, had pretty crazy projections that, you know, in hindsight didn't make sense.

15:25Jon Quast:The other question, how many things need to go right before the business is truly worth what I'm paying? 23andMe is a real business, but a lot had to go right. Their whole thesis was based on, okay, we're going to use all of our genetic testing data to develop drugs, which in itself is not a guarantee. How many drugs actually make it through the trial process and into production? how many of those actually make the money back that they that it cost to develop them a lot had to go right that would have stopped me in my tracks right there if i just used that and another question to ask yourself in trends like nuclear is there a quote boring company that will make money and do well from this trend even if the trend fizzles or takes a while that by the way is why i'm using ibm to play the quantum computing trend and not one of the pure play quantum stocks.

16:13Jon Quast:So I've been burned by trends. All we can do as investors is learn our lessons and apply them in the future.

16:20Matt Frankel:Yeah. For me, personalized health and fitness, you know, I still think that's probably a huge long-term trend, but I really saw it playing out a lot faster and a lot differently than it has so far. I really thought that wearable devices were just going to revolutionize both of those spaces, I could envision a reality in which you're wearing a wearable device. It's tracking all of your important health data. And that is then transferable to a connected fitness device, such as a Peloton, or transferable to a remote doctor consultation, such as through Teladoc. And both of those are companies that I really saw as the trend is here.

17:06Matt Frankel:It's now, it's big, it's going to be fast. And both of those found their way into my portfolio and both were incredible losers from there. I think it probably still is a long-term trend, but perhaps a little bit too fast, too soon. And the businesses were not quite ready to take off the way that I envisioned them.

17:28Tyler Crowe:It is always one of the more frustrating things is because there can be durable trends behind them. I think perhaps one of the more frustrating things is watching a company be able to tap into that trend, but not execute on it. I think there's a couple examples here. There is something there to the idea, but having the execution at the business level to translate that into actual revenue and earnings is always a different story than the actual trend itself. Back in the 90s, there was a researcher at Gartner. It was called the Hype Cycle for Emerging Technologies. And I feel like a lot of things we're talking about here really falls onto that.

18:09Tyler Crowe:You have the rapid early innovations. It comes with this, they call it the early enthusiasm. And then after, like a lot of these trends here, that goes through a trough of delusionment and then this slow and steady march towards actual progress where the promises of the tech become realized and then plateau productivity. It's here. It makes sense. It's a mature market now. Not everything follows this to a precise thing, but it tends to go along there. And there are plenty of examples who investors have been immensely successful in all of them. Investing early, maybe you're waiting for the hype to die down, waiting till it's actually productive.

18:49Tyler Crowe:Like the best part about investing is you can find success in any of these flavors.

18:55Matt Frankel:Well, Tyler, I do think that we need to distinguish between the business hype cycle and the investor hype cycle because they're not necessarily the same. To circle back to nuclear, I mean, some of these nuclear stocks out there are pre-revenue and they're expected to be pre-revenue for perhaps the next five to 10 years. You're not investing in a business at that point. You have to have a really good reason to invest in a pre-revenue company. What does it have that is going to give it some sort of any quantifiable competitive advantage or edge or hope that it's going to be a big winner when it's not even generating any revenue yet, right?

19:31Matt Frankel:So there's an investor hype cycle that definitely comes to bear often in investing. There are also business hype cycles. And so those are a little bit different. So just a few years ago, if you could count up mentions on company earnings calls, and it was all about metaverse, metaverse, metaverse. We're doing this in the metaverse, doing that in the metaverse. And I think these companies really were trying to say, oh, here's this emerging technology that we've got to be a part of. And so they were leaning in that way. and turns out, okay, there's not really anything to monetize there right now.