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When Wage Growth Attacks, and When Business Gets Personal

Chris Hill, The Motley Fool

In this Motley Fool Money podcast, host Chris Hill is joined by Fool senior analysts Andy Cross, Matt Argersinger, and Ron Gross to reflect on a week's worth of major business and economic news items, starting with word from the Labor Department that U.S. wages rose last month at their fastest rate since 2009.

On the earnings front, Wall Street rewarded Five Below (NASDAQ: FIVE) and Okta (NASDAQ: OKTA) for excellent quarters, but took a bite out of Tesla (NASDAQ: TSLA) over concerns about CEO Elon Musk and management turnover. Also, toymaker Mattel (NASDAQ: MAT) is starting its own movie studio, and the possibilities for brand expansion are vast. Finally, the analysts will answer the question: What stock is on your radar this week? One will reply with a ticker that doesn't belong to a stock.

A full transcript follows the video.

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This video was recorded on Sept. 7, 2018.

Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio: senior analysts Matt Argersinger, Andy Cross, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street. We'll talk with best-selling author Charles Duhigg. And, as always, we'll give you an inside look at the stocks on our radar.

But we begin this week with the big macro. The monthly jobs report featured better than expected numbers, including the fact that wages increased at their fastest pace since June 2009, Matty.

Matt Argersinger: Yeah, that's the headliner for me, Chris -- hourly earnings up 2.9%. We've been waiting for a while for wages to really start gaining momentum. And it looks like they finally are. The highest growth in about nine years. Wages are key determiner for inflation. This is why I think it's really important for investors. If you think about it, businesses have to pay workers more. That starts to typically happen in the later stages of an economic cycle. That means, generally, companies are going to offset that by raising the price of goods and services, which spreads inflation throughout the economy. 

It has a lot of consequences. One of the short-term consequences, usually, is that bond prices will sell off, yields will rise. We're seeing that, actually, on Friday. It sets the stage for more interest rates raises from the Fed, which can lead to lower stock prices, at least in the short term.

Ron Gross: Yeah, that's what I was going to say. You saw the market trade down on this great news. There's always a counter to every silver lining. Nothing can just be good. Right now, everyone's worried, including our Administration, I'm sure, about continuing to tighten monetary policy. Interest rates will rise. That could put a damper on stock prices. 

Interestingly, though, the job market is so strong that there are now more open jobs than there are people out of work looking for jobs. Changing demographics, more retiring people, a declining birth rate, is really setting us up for a problem. To get to that huge 3-4% GDP number without the proper workforce, I would have to say, that's almost impossible. 

Andy Cross: Yeah, the wage numbers, the growth is trending up, which is good, because it's been so low for so long. It's still below the pre-recession, pre-financial crisis days. We're not anywhere near back to where we maybe should be. 

But what's interesting, I think, from the investing side, for me, is, in a marketplace of rising costs and rising inflation, you really want to be a stock investor. You don't want to own bonds. I mean, that's not a place to really be. That's going to be a tough spot for bonds. As Matty mentioned, yields are going to go up. That negatively affects bond prices. And, you want to particularly own companies that have pricing power, the ability to handle these price increases, because they are coming. Inflation is creeping up. The ability for companies to manage the price increases for one of their highest cost inputs, their product, is going to be really important for investors. Stocks are the way to go in that market.

Argersinger: Yeah. I want to end this on the good news, because I do think, to Ron's point, Andy's point -- it is nice to see workers actually have choice now in this economy. In other words, I think for a long time, workers were feeling like they had to stay with their organization. They didn't take vacation, they didn't look for other jobs, because the economy was still relatively shaky. It's stronger today, and workers are actually going out there and finding jobs and having some bargaining power. 

Hill: Another interesting week for Tesla shareholders. On Thursday night, CEO Elon Musk went on comedian Joe Rogan's popular podcast for a two and a half hour interview. It was streamed live on YouTube, where viewers could see Musk at one point smoking marijuana. On Friday morning, chief accounting officer Dave Morton announced his resignation -- less than one month after he started. Shares of Tesla down 11% this week. Andy, is one of those two things worse than the other?

Cross: Well, I think the headlines are coming from Elon on the podcast, holding a flame thrower, I saw a picture of him doing that, and smoking alleged marijuana and drinking some whiskey. But for me, just continuing to see some of the executive turnover. We also saw the head of human resources will not be returning after leave of absence. Dave Morton, who joined one day before Elon made his famous tweet --

Hill: Funding secured.

Cross: -- funding secured with a price of $420 for a Tesla buyout. I think just the public scrutiny of a company like this is just so much higher than what he realized. They said in the press release, this has nothing to do with the leadership, with the financial accounting, which is good to hear. I take him at his word. I think from the fact that we are seeing these executives at very high levels continue to have rapid turnover at Tesla, for shareholders, it's something we have to continue to watch.

Argersinger: Yeah. I guess I just wonder where the line was crossed here. We look at a lot of these CEOs. We ascribe the words brilliant, innovative, maybe a little eccentric. But at some point, I just feel like Musk might have stepped over the line into a little bit of crazy?

Gross: Off the rails? Yeah?

Argersinger: Yeah. I'm looking for the right adjective here. I just worry about the future. We know how difficult it is to run a car business. I know Tesla has a lot of irons out there in other fires. But this is a tough business. I think Elon's making it extra hard on himself and his company by doing some very weird things in the public, and it's causing a lot of turnover at his company. 

Gross: Yeah, and when it rains, it pours with Andrew Left of Citron Research filing a lawsuit against Tesla and Musk for violating federal securities laws when he did announce that funding was secured for a take-private transaction. Normally, I would take Citron with a little bit of a grain of salt. They're notorious short sellers, they talk up their own book quite a bit. But I think, maybe, he has a point here, because that does, on the face of it, appear to me as a federal security law violation.

Hill: Yeah. I'm not sure that Musk is helping shareholders. But, as someone who hosts a business new show, I certainly appreciate it.

Cross: It's almost like every week, you could talk about Tesla, at least recently. We have talked about this -- investors in Tesla, you have to understand, you are buying into Elon, into his vision. You have to understand, we are seeing a little bit more of the eccentricities of his coming out. Investors in Tesla are buying Elon Musk.

Hill: Last week in Minneapolis, JD.com (NASDAQ: JD) founder and CEO Richard Liu was arrested after an allegation of rape. He was later released and is back in China. The company has said Liu is willing to cooperate with authorities further if asked. Matt, this is an interesting story on several levels. What I'm struck by is the conflicting reports we're getting, both from U.S. media and from the media in China. As of this taping right now, the investigation is still ongoing.

Argersinger: It's still ongoing, and I think it's something that, the allegations have to be taken very seriously. I think, as Andy just pointed out about Tesla, an investment in JD.com is very much an investment in CEO and founder Richard Liu. He's the founder, he built the business basically from a small electronics store 20 years ago. He's built it into the largest direct-to-consumer retailer in China. He's a billionaire. He's also somewhat of a celebrity figure. He owns 16% of the stock, but also controls 80% of JD.com's voting power, to the point where the board of directors at JD really can't make decisions without Richard Liu involved. 

These allegations are serious. We don't know the facts. It sounds, from what JD has said, like there aren't any charges coming. If that is the case, and that does prove out, the stock is likely going to rally, because it's been hit pretty hard after this news. We'll have to see. I worry, if there's even a sliver of credibility to the allegations -- it's not just JD's reputation or Richard Liu's reputation. You have companies like Alphabet, Walmart, Tencent, who have taken major stakes in this business and have partnered with JD.com in a number of long-term initiatives. They're definitely not going to stake their reputation on what happens with JD.com.

Hill: Well, and on top of all that, he doesn't really have a second in command, does he?

Argersinger: No, he doesn't. 

Hill: Okta, the cloud security tech company, is not profitable, and Wall Street doesn't seem to mind at all. Shares of Okta up more than 20% on Friday after second quarter revenue came in higher than expected. No earnings, Andy, but the revenue was going in the right direction.

Cross: Right. When you're growing 50% on the billing subscriptions and 57% on the revenue line ... I mean, Okta continues to show why this company that provides software solutions for companies and for enterprises, to help them manage their employee login credentials and security credentials, continues to win. The fact that stood out for me was that clients that generate more than $100,000 in annual recurring revenue was up more than 55% this quarter. That was a record.

They continue to show why they are more meaningful, why this interest in security management, simple logins, scalable solutions, continues to really resonate with the clients they're serving, clients like 20th Century Fox, CiscoAllergan --

Gross: The Motley Fool.

Cross: -- The Motley Fool, right, Ron. Their retention rates continue to be north of 120% on a dollar basis. Their headcount was up only 27% when revenues were up more than 50%. Continuing good news coming out of Okta, and it's showing in the stock price that it was up about 20% today. 

Hill: Shares of discount retailer Five Below up 15% on Friday after second quarter profits came in higher than expected. Ron, same-store sales looked pretty good, too. 

Gross: It's a firing-on-all-cylinders moment. This company is really getting it done. Stock's up 95% year to date on incredible growth numbers. Sales of 23%, as you said, comp sales up 2.7%. We saw a great operating income increase of almost 16%. And then, when you layer on the tax benefits that all companies are benefiting from, you have a 50% increase in earnings per share. Really incredible numbers.

Now, do you want to pay 53X for a discount retailer when you could buy Dollar General or Dollar Tree at 14-15X? Well, maybe you do, because these guys are growing much, much faster than those and there's a pretty long runway of growth ahead, with only 700 stores. They think they can get to 2,500.

Hill: Are the stores concentrated in any particular part of the country?

Gross: They're in 33 states now and expanding. California has probably the most, off the top of my head, but they're slowly getting into more and more states. 

Hill: This week, Mattel announced it is launching its own movie studio, Mattel Films. Among the toys that Mattel can leverage from its portfolio, we've got Barbie, Hot Wheels, Monster High, Thomas and Friends, as well as other brands, Matty, that I really have a hard time imagining on the big screen.

Argersinger: Yes, that's right. But there's some good ones in there. I mean, I personally was a big Hot Wheels fan growing up. I had so many. I was one of those kids that had a chest.

Gross: Oh, I had a little suitcase, with the slots.

Argersinger: Oh, yeah! The chest was, like, 50% Legos and 50% Hot Wheels. Maybe a sequel to Cars, but not really Cars, it would be its own thing. I think that'd be pretty cool. 

Hill: First movie out of the gate, if you're running the movie studio, is a Hot Wheels themed movie?

Argersinger: Right, especially if there's an all-electric Model S in it. [laughs] 

Hill: Andy, what about you?

Cross: Well, I think the most successful one will be Minecraft. But the one that I would want to see is Rock'em Sock'em Robots. I don't know how they would make it. Just take The Rock, maybe, vs. some other wrestler, and turn that into a whole movie franchise. Rock'em Sock'em Robots.

Hill: Ron?

Gross: The correct answer is Masters of the Universe with He-Man and Skeletor, Now, I'm not naive or ignorant. I know that this was attempted in 1987 with Dolph Lundgren as the star, and it was a disaster. 

Argersinger: I liked it! I was seven years old.

Gross: In the right hands, you have a He-Man franchise on your hands. Come on!

Hill: We have to go to our man behind the glass, Steve Broido. Steve, I'm guessing you might have a thought or two on what the first movie out of the gates should be from Mattel Films.

Steve Broido: I do, indeed. American Girl's 2018 Girl of the Year. Meet Luciana Vega, a creative, confident 11-year-old girl and aspiring astronaut who dreams of being the first person to go to Mars. I read that directly from Mattel's website. That is the first movie, you can bet on it.

Hill: Well, I mean, American Girl, they got a lot of options there, in terms of backstory, and that sort of thing. All right, let's get to the stocks on our radar. Our man behind the glass is going to hit you with a question. Ron, you're up first. What are you looking at this week?

Gross: I got CME Group (NASDAQ: CME), ticker CME. Operates the world's largest futures and options exchange. They're in a great position to either innovate or acquire assets to grow. They take a little toll for every transaction that goes across their platform. Institutions managing risk, derivatives are more important than ever, which is good for their business. They pay a 3.6% yield, including a special dividend that they typically pay on an annual basis. Trading volumes are skyrocketing. The business is strong.

Hill: Steve, question about CME Group?

Broido: Your biggest options fail whale and your biggest win, Ron?

Gross: Wow! I haven't traded options in a long time, but I have, in the old days, rode options all the way to zero and lost a ton of money on some healthcare stocks. And then, I believe, back in the day, I made my most money on Pepsi Cola call options.

Hill: Andy Cross, what are you looking at this week?

Cross: Adobe (NASDAQ: ADBE) reports earnings next week. The stock's been on fire. It's up almost 50% this year. The maker of software solutions for really creative types -- writers, artists, illustrators, photographers. They make Photoshop and Acrobat, Illustrator. They're really doing really well across all their businesses, especially as they've pushed aggressively to the cloud. It's been a massive win for them. I want to see if they can continue to grow all of their businesses north of 20%, or at least close to it.

Hill: And the ticker symbol?

Cross: ADBE.

Hill: Steve, question about Adobe?

Broido: Who's their biggest competitor currently?

Cross: You think about different software providers they may have, they compete against the big ones, Google and the likes. But as far as owning that space, when you think about who they are serving with the creators, there's not very many. They've done a really good job locking up that space.

Hill: Matt Argersinger, what are you looking at?

Argersinger: I'm going with not a stock but an ETF. 

Gross: Is that allowed?

Argersinger: Ron. This is the iShares MSCI China (NASDAQ: MCHI) ETF. Ticker MCHI. We talked about JD.com earlier in the show. I know there's some very specific problems for that company. But really, across the board, Chinese stocks have just been clobbered. If you look at the main Chinese stock indexes, like the Shanghai and the Shenzhen, they're down more than 25%. Definitely in a bear market. 

I like this ETF. It's a simple way, I think, to play a rebound in China. You've got Tencent, Alibaba, and Baidu actually make up 30% the ETF, which is high. But I look at all three of those companies, and I think they're very cheap, given the growth in the platform. But also, the rest of the 70% is nicely diversified across China. An easy, diversified way to play a rebound in China. 

Hill: MCHI, Steve.

Broido: When I look at ETFs, how many stocks need to be in a basket that is an ETF? Roughly.

Argersinger: It really varies, Steve. You can have an ETF that can have as little as 15 stocks in it, or some ETFs have hundreds. I think, once you get to 15 or 20, you're pretty well diversified, and that should be just fine for investing in a basket. 

Hill: Steve, three tickers. Do you have one you want to add to your watch list?

Broido: We use a ton of Adobe products here. I'm a shareholder, as well. I go with Adobe.

Hill: By the way, am I the only one who thinks that if the first Mattel movie is based on American Girl, Steve gets an associate producer credit on that, doesn't he?

Cross: He has to!

Broido: [laughs] Thank you!

Hill: Ron Gross, Andy Cross, Matt Argersinger. Guys, thanks for being here! Earlier this week, Silicon Valley executives were in the spotlight on Capitol Hill. We will dig into that topic and more with Pulitzer Prize winner Charles Duhigg. Don't go anywhere. You're listening to Motley Fool Money!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andy Cross owns shares of PepsiCo. Chris Hill has no position in any of the stocks mentioned. Matthew Argersinger owns shares of Alphabet (C shares), Baidu, JD.com, and Tesla and has the following options: long January 2020 $50 calls on JD.com and short January 2020 $50 puts on JD.com. Ron Gross owns shares of Alphabet (C shares) and Baidu. The Motley Fool owns shares of and recommends Adobe Systems, Alphabet (A shares), Alphabet (C shares), Baidu, CME Group, JD.com, and Tesla. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.