In today's MarketFoolery, host Chris Hill talks with senior Motley Fool analyst Jason Moser about some market headlines -- mostly the company-based variety, plus a dash of macro, because, boy, that macro news sure is a real honker today. Meanwhile, Advance Auto Parts (NYSE: AAP) reported yet another cruddy quarter, but Wall Street hardly seems to hold that against the company. Constellation Brands (NYSE: STZ) (NYSE: STZ-B) is selling off its whiskey portfolio, calling its strategic focus mindset into question. Verizon (NYSE: VZ) offloaded social media platform Tumblr for a paltry $3 million (yes, with an M) -- a far cry from the $1.1 billion that Yahoo paid for it. At least, Automattic, the company behind WordPress, got a good deal. Tune in to learn more!
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Aug. 13, 2019.
Chris Hill: It's Tuesday, August 13th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, the one and only Jason Moser. Thanks for being here!
Jason Moser: Thank you for having me!
Hill: We've got some earnings. We've got a couple of high profile sales that we're going to get to. We've got to start with tariffs.
Moser: [laughs] From the point where you and I started talking on Slack this morning to an hour before we were coming into the studio, I felt like an entire day had gone by in those couple of hours. And yet here we are.
Hill: Tariffs! The market's up, everything's fine because the tariffs are being pushed off to December. [laughs] We're trying not to be exhausted. We're trying not to get worn down by the --
Moser: Trying not to be super skeptical.
Moser: I feel like history is going to look back at this point in time years from now, and there is going to be one of the most egregious massive insider trading scandals that dates back to this current time and place. It does almost look illegal, when you see how this news cycle resets every day. It's just crazy.
Hill: And this is in response -- and by "this," I mean this conversation you and I are having -- this is partly in response to questions that we are getting from listeners asking, basically, "Is this market manipulation?"
Moser: "What do I do now?"
Hill: Although, I will say, you referenced years from now, looking back on this time, right before you came in the studio, I taped an interview with David Gardner that's going to air on Motley Fool Money this weekend. And one of the things he mentioned was, he thinks we're going to look back years from now at this point in time, specifically with respect to the trade war with China, and we will look back as investors and say, "Oh, that was a thing that happened back then, but that's not meaningful now." It all goes under the umbrella of, this is why we do what we do. This is why we focus on businesses. We have so much more control as investors when we focus on businesses, because we can't control the news cycle, we can't control trade policy.
Moser: That's precisely it. I'm glad you said that. I totally agree. I think years from now, and as more time goes by, you look back, and there will be little things that happened throughout history within those windows of time that maybe we examine, but we'll look back at this, and, yeah -- ultimately, there's nothing you can do about it anyway. And I think it lends itself perfectly to why we invest the way we invest.
I know sometimes it sounds a little bit like a broken record coming on this show, or you hear it all over financial media. But the fact of the matter is, it's happening every day. We have a whole world out there of people who are either trying to get into investing or want to learn more about it. And there are a lot of different ways to do that. Obviously, we feel very strongly about the way we do things. A lot of that comes down to the stuff that's going on right now.
If you look at this from a big picture view, it makes perfect sense -- why wouldn't you put the tariffs on hold? We're getting ready to come into a big holiday season. You want these companies to be able to get their products out there for shoppers to buy, whether it's Hasbro and Mattel toys or Apple iPhones. You're not going to cut your nose off to spite your face. It's been a very crazy headline time here over the past week, with China trade war, with Hong Kong protests, with Goldman Sachs ratcheting back growth expectations, more talk about recession concerns, all of that stuff coming together. And then, you see a headline like we did here before the market opened. It really does make you feel like this is just a lot of political posturing leading into the 2020 election. Perhaps there are some parties on the other side of it who are trying to use a little reverse psychology. Maybe Goldman saying, "Hey, we don't anticipate a solution to this trade war before the election," maybe they're trying to use a little reverse psychology to prompt some sort of a solution before the 2020 election. Nobody ultimately knows.
And we could sit here and examine it all day long, or we could just find good businesses, invest in them, and just come in the studio and hang out and talk every day. I like that. It's a lot of fun for me.
Hill: As do I. Let's move to some specific companies. We'll start with Advance Auto Parts. Let me preface this by saying I don't own shares of Advance Auto Parts and I have no feelings one way or the other about the business. That's my preface.
Second quarter profits for Advance Auto Parts work solidly below expectations. Their revenue was light. The company cut the high end of their sales gains for the full fiscal year. And the stock is only down about 1.5%. I look at all of that and think, "Wow." This was not a good quarter. This is not good guidance. The management of the company is talking about how challenging the environment is. Why is the stock not being punished more?
Moser: It does feel like it probably should be. I will say, I don't own shares, either. It's very difficult for me to come away from looking at a business like this with its performance over the last few years and feel like it's any kind of a business you want to own. We've talked a lot about the auto parts market and how attractive it can be from its resilience, this huge installed base of cars out there on the road, and those cars, as they age, you need little auto part fixes here and there. But it's not the only business in this market. And when you look at Advance Auto Parts' results, it is just a litany of mediocrity, really.
If you if you look at the stock performance over the last five years, it's been a volatile stock. Now, there was a point, probably around July of 2017, where it would have been a good bet to buy shares. They were really in the basement back then. And going back through those earnings releases and those calls, I saw a lot of what I'm still seeing now -- this hope of some light at the end of the tunnel of perhaps turning the corner. But every quarter, it's like, flat sales, flat comps, challenges.
And then you look at the competition in the space. I think O'Reilly probably is the most obvious suspect there. They're basically, for all intents and purposes, the same size footprint-wise. O'Reilly is a much larger company market cap wise. They're essentially doing the same in top line sales. O'Reilly is making basically 3X the net income that Advance Auto Parts is making. Consequently, that trickles all down to the bottom line, and investors in O'Reilly have been much happier with their holding than investors in Advance Auto Parts.
To me, Advance looks like one of those perfect value investment type situations. Today specifically, I feel like it's a value trap, not a value play. I would steer clear of it, no pun intended -- well, maybe a little pun intended.
Hill: A little intention.
Moser: I came away with a lot of what you're feeling.
Hill: I would just add AutoZone in there as another company. Roughly the same size market cap size as O'Reilly, and has certainly done a better job of rewarding shareholders.
Hill: Let's get to a couple of sales that are happening. We can take them one at a time, but let me mention them together. Constellation Brands, which is the parent company of mainly a portfolio of wine, beer, and spirits, they are selling their Canadian whiskey portfolio for about a quarter billion dollars to Heaven Hill Brands. Verizon is selling Tumblr.
Moser: [laughs] Selling what?
Hill: Tumblr, which was bought by Yahoo back in 2013. Yahoo paid $1.1 billion for Tumblr, which is this social media platform. Verizon is selling Tumblr for an amount of money that is so small that the price, and I'm quoting here, "is not material to Verizon." It's basically a ham sandwich.
Moser: It's not going to do anything for their financial position.
Hill: I'm not sure which one I'm more curious/ puzzled about. I understand Heaven Hill Brands, which is another spirits company, they're better known for some of the brands under their portfolio -- Evan Williams, Elijah Craig, two of the better-known bourbons out there. So, I get why Heaven Hills is making this acquisition. Constellation Brands, they say, "We're selling this because we want to focus on premium brands." The last time they went out and spent a lot of money investing in a brand, it was a marijuana company. And they invested about $4 billion. So, I think, if I were a Constellation Brands shareholder, I'm not too thrilled with how the recent past has gone in terms of how the company is allocating capital.
Moser: No. We were talking before taping -- the concern, more than anything, is like, OK, pick a strategy and stick with it. Pick a lane. It is worth noting, they do have a new CEO in the executive suite there, Bill Newlands. He started up as CEO this year in March. He's relatively new to that position. He didn't have a lot to do with strategy there before, at least not to the CEO level. Maybe he's decided this is the direction he would rather take things. We've always looked at those investments in the marijuana space as, the more attractive way to play the marijuana space is to invest in companies like Constellation because they have financial resources and ability to make those investments without having to be that pure play. And I think we're still so early in that game. I'm not going to hold that against them yet because I think there's a lot more to come as states change their laws and it becomes a more widespread thing.
But I do think, with Constellation, it's imperative that they pick a lane and stick with it. And I'm OK if they want to do that, focusing just on premium brands. It's worth noting, they have a decent slug of goodwill on the balance sheet. Represents about a quarter of total assets. They've got a history of buying. And that's what these businesses do; they buy new brands, and they plug them into their business model. Constellation, it's distribution. They are pursuing that premium style beer catalog, Corona, Modelo, Pacífico, things like that. The liquor line would stay in line with that as well. But, yeah, that ultimately, pick a lane, stick with it, and let's keep an eye on those acquisitions because it does matter.
Hill: I'm glad you said pick a lane and stick with it because that's what I've always thought about Constellation Brands as a business. It's the same thing I think about a company like Diageo. I just think, there is money to be made in this business as long as you run it well. And it seems like Constellation Brands... I don't know if there's confusion, or -- I'm not knocking them for the attempt to diversify into marijuana. I'm knocking them for the way in which they did it and the amount of money that they spent.
Moser: It feels like thus far, it's been a bit of a scattered strategy. I would say that for investors in the business, one thing to keep an eye on, one metric or measure able to hold management accountable to is, going forward, this new CEO, Mr. Newlands, is he sticking to a clear strategy? Just do what you're telling me you're going to do. If you're going to change your mind, make sure you give me some good reasons why you're doing it. I think paying a good amount of attention to his verbiage on the call here in the coming quarters is going to be a good thing for investors to focus on.
Hill: So, Verizon buys Yahoo for $4.4 billion.
Moser: That really still feels like a lot. Let's be clear, man, Yahoo today is not what it was.
Hill: That's true, although, I was thinking about this -- I know that there are great CEOs that we talk a lot about, and maybe for some of the listeners, we talk a little bit too much about them. But if we do, it's partly because, and I think this deal in particular illustrates what I'm about to say, when we talk about great CEOs who have led businesses that over time have succeeded year after year, maybe they have the occasional stumble, but in general, over decades, they are doing well, and above average, it's a reminder that's hard to do. It's incredibly hard to do.
To go back to the conversation I had with David Gardner, one of the things we talked about was AOL, and how AOL is a brand that largely doesn't exist anymore. And if you're a young enough person, you're totally forgiven for not knowing that, in the 1990s, America Online was not only one of the best stocks to own, it was one of the best companies out there. It was the clear leader in the internet revolution.
Moser: It helped get us to where we are today.
Hill: Absolutely, it did. Steve Case did an amazing job leading that company. There was a point in time when Yahoo was an amazing stock to own. It was a leader in its category. Staying a leader for a long time is really hard to do. Marissa Meyer -- when this deal went through, that Verizon was selling Tumblr for a bag full of nickels, there were people on Twitter who were resurrecting the story from 2013 when Marissa Meyer, the CEO of Yahoo at the time, announced the acquisition, "We're paying $1.1 billion for Tumblr." She was, rightfully, getting questions about the valuation. "Are you sure?" And maybe it's easy in hindsight to knock her for that. And I'm not trying to do it without any regard whatsoever. But, among other things, it's a reminder that when you go out and make an acquisition, that only works if you can make it work. There's an alternate universe where Yahoo pays $1.1 billion for Tumblr and they actually have a strategy to make that work.
Moser: Well, there was no "what next," right? We always held Marissa Meyer to the benchmark that organic growth was going to be the sign that she was getting this thing moving in the right direction. Even if you're going to make some acquisitions, you can then look at the company and start seeing, is there going to be organic growth that comes from this? If you have big networks and you plug other big networks into those big networks -- network effects can be extremely powerful. It does feel like Tumblr acquisition was one that was made a little bit in haste. Maybe they underestimated the power of the businesses out there like Facebook, Instagram, even Twitter to a degree. When you look at Tumblr as a social media type of account, it is one of the least used in the context of all of those other names. It's not really relevant. You're paying up a lot for that user base, and thinking that you might be able to actually do something with that user base. And in a very short period of time, the way that we access our information, the content that we're getting from those phones, that's changed quickly. Yahoo was at this point where they weren't able to execute some strategy that they'd been thinking out over the past four, five, six years or longer. They had a new CEO who was trying to figure out some sort of a magic bullet, and she basically had a bottomless pit of money to try to do it. And it didn't work. It's not surprising it didn't work. I think it's a shame. She certainly made a lot of money evaporate in the process. Not from her account, mind you. I'm sure she's doing just fine, Chris. But, yeah. For me, it's a good example to look back to and think, when you see these types of things happening, I hope for the best, but I look at them with extreme skepticism. And I think that skepticism is probably the better default in most cases.
Hill: On the flip side, Automattic, which is the company that bought Tumblr -- and I've never heard of Automattic. I just learned this morning that it's the parent company of WordPress.
Moser: And this is right in line with that business.
Hill: This is one of those things where I'm like, "Oh, this actually seems like a brilliant move for Automattic." It's right in their wheelhouse. They clearly paid very little money to get Tumblr and whatever accounts are associated with it. Well done, Automattic!
Moser: Absolutely. You're picking up shares of something on the cheap, and you're bringing something into your wheelhouse. It's like Chick-fil-A throwing mac and cheese on the menu. I don't think we're ever going to see Chick-fil-A ever throw a burger on their menu in my lifetime. Right, Chris? You just stick to what you know, and you do it really well. You can do a lot of powerful things with that. Maybe there's hope there for Tumblr and WordPress coming together like that. Maybe that's the Chick-fil-A and mac and cheese combo that we're looking for in the blog world. Time will tell.
Hill: E-mail from longtime listener, Brent Thompson. Subject line: Chick-fil-A Mac And Cheese. Brent writes, "I work with a woman whose family runs a couple of Chick-fil-A's in Utah."
Moser: Well done! That's a hard job to get.
Hill: "She said they sold out of mac and cheese on Monday. Just one data point, but a promising one."
Moser: [laughs] I can believe that. Listen, I was going through, I was digging through McDonald's recent numbers, looking back at what we were talking about on the show here. A little bit before McDonald's numbers came out, we were talking about that chicken sandwich deal, and how franchisees were like, "We really need a sandwich to compete with Chick-fil-A." Listen, that was the chicken in the room, and McDonald's management laid a big, fat turkey. They didn't bring it up on the call at all! And now, we look at this, and Chick-fil-A continues to control the conversation. It's not going to happen overnight. But again, you let a company like Chick-fil-A go in there and keep on doing what they do well -- and they don't have to worry about doing this in the context of being a publicly traded company -- this is something that is going to challenge McDonald's growth domestically here in the coming years. They have a good product. McDonald's would be wise to get on this and figure something out.
Hill: You've got to figure, the margins on mac and cheese have got to be really good.
Moser: And when you make mac and cheese at home, you throw that stuff in the fridge, you take it back out, then fry it up with some butter in the skillet, fried mac and cheese -- ever had that?
Hill: Not yet, but that's coming soon, to my house.
Moser: Leverage that work that's already been done. One of our favorite properties in the businesses that we cover, right?
Hill: Fried mac and cheese.
Moser: Yeah, it's real.
Hill: Well, whatever I have for lunch today is going to be a total disappointment now. Thanks, Jason Moser!
Moser: [laughs] I try to help when I can!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of Apple and Hasbro. The Motley Fool owns shares of and recommends Apple, Facebook, and Hasbro. The Motley Fool owns shares of Slack Technologies. The Motley Fool is short shares of Hasbro and has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Constellation Brands, Diageo, and Verizon Communications. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com