Three Under-the-Radar Stock Picks
We talk about a lot of stocks on MarketFoolery, but there’s only so much time per episode, and there are tons of great stocks that have to get swept under the podcast rug to make room for news from big companies like Apple, Amazon (NASDAQ:AMZN), GM (NYSE:GM), and the like.
So, one listener asks, “You guys spend most of your day researching stocks. What are some companies that you like that don’t make it on the show?”
On today’s episode of the MarketFoolery podcast, host Chris Hill and Simon Erickson from Motley Fool Explorer answer that question and share three under-the-radar companies that don’t get the airtime they deserve. Also, they look at today’s market news, like GM’s new Marketplace, which offers food and beverage ordering through their vehicles, and Starbucks‘ (NASDAQ:SBUX) insanely huge new flagship roastery in China.
A full transcript follows the video.
This video was recorded on Dec. 5, 2017.
Chris Hill: It’s Tuesday, December 5th. Welcome to MarketFoolery. I’m Chris Hill. Joining me in studio, he’s been away for a while but he’s back at Fool HQ this week from his home state of Texas, from Motley Fool Explorer, Simon Erickson. Good to see you!
Simon Erickson: Chris, I cannot tell you what a pleasure it is to be here with you in the studio today!
Hill: It’s a pleasure to have you back in the studio, where you belong! [laughs]
Erickson: Glad to be back!
Hill: That’s my subtle way of saying, why did you move back to Texas? No, I understand why you moved back to Texas. It sounds like, we were catching up earlier, all is well with your family.
Erickson: Yes, it is. The Lone Star State called us, and we responded to that call. We’re very glad to be back home again.
Hill: Fantastic. We’re going to dip into The Fool mailbag. We have to start with General Motors, though. I’m intrigued by this, and I get the sense that you are as well. General Motors has launched GM Marketplace, which allows roughly two million owners of General Motors vehicles to press a button and order food or coffee that they can pick up in minutes from a drive-thru. How is this working? And what is the cut that they get of this? I like that they’re doing this, but I don’t completely understand it.
Erickson: When I originally saw the story, I thought it was kind of goofy. Like, you have one of the largest automakers out there that’s now doing transactional services in the car. Hey, you can buy a Starbucks coffee on your way to your morning routine. It’s kind of targeting drivers that are consumers. You get in the power of habit, you’re picking a Starbucks up on the way to work, you’re going the same routes all the time, and it’s kind of a way to marry them to the businesses that want to advertise to them. At first, I thought, OK kind of goofy, this is still an automaker that’s playing with this idea. But then I thought about it a little bit more, Chris, and it appeals to me because GM is also separately putting a lot of work in right now into autonomous vehicles. You keep hearing about them working with Cruise Automation to self-drive the car itself. They have now made an acquisition of a company called Strobe for lidar, and all of the sudden, by 2019 and 2020, you have somewhere between 30 minutes and two hours of what used to be drive time, where you had to be very captive and have all of your attention on the road, to other free time. And now, GM, I think, with this move, is planning a step ahead to get that free time that you have to buy things. You can also buy upgrades for your vehicle or things from local businesses. This is another platform to sell things, and it’ll be interesting to see if it moves the needle for this big automaker.
Hill: Like you, I sort of did a double-take when I first saw this story, because I couldn’t really wrap my head around it. But, from a business standpoint, I understand why they’re doing it. I also understand why retailers would want to do this. Earlier this year, HBO had a great documentary about Warren Buffett that begins with Buffett driving to work, driving from his home to his office in Omaha, and every single day, he goes to the drive thru at McDonald’s. And that was one of the things, once I started to figure out what this was, and just thinking, yeah, if you are McDonald’s, you absolutely want to work with GM to be part of that habit-forming transaction.
Erickson: And, I think more than anything, GM is not the company that a lot of investors think it is. You think of it as this slowly dying dinosaur of the old world of auto OEMs, but then you look at the acquisitions they’re making, their strategic plan going forward, I think GM isn’t getting a whole lot of credit with a P/E of less than 10. They still have some stuff on the balance sheet they need to get worked out, but I think at least they’re addressing the future opportunities in a way that makes a lot of sense.
Hill: And the stock is up about 24% year-to-date. So, this is not the time to be mocking GM, again, as you’ve hinted at, plenty of people have for perfectly valid reasons, but I don’t know, this seems like a much more interesting company with Mary Barra at the head.
Erickson: And during Black Friday sales and Cyber Monday sales, I was buying things in a frenzy online because they were going to show up two days later. But, if you’re in your car and you can pick something up in two minutes that’s right by you and you’re getting a deal, I think this just continues to show that transactions are worth more than advertising, and this is another platform to drive those transactions, literally.
Hill: You mentioned Starbucks. Earlier today, Starbucks opened its largest location, 30,000 square foot Starbucks Reserve Roastery in Shanghai. That is twice the size of their flagship location in Seattle. Among other things, this completely shines a light on their operations in China. We got the question last week, we did a Facebook (NASDAQ:FB) live, and one of the questions we got from one of the folks on Facebook after we had taped it was, are you still bullish on Starbucks? And I immediately said yes, I am, and this is probably No. 1 on my list of reasons why.
Erickson: Yeah and you nailed it, Chris. Starbucks knows where the money is. Comps globally 2%, in China it’s 8%. China has a 7% increase in traffic of that 8% comp. So, there’s just more people coming to the stores. It’s almost like they’re building new ones every day in the country, and they’re getting the traffic to support the numbers, too, so it makes a lot of sense. You also have Kevin Johnson, who’s the CEO that has a digital background, and he’s pushing this productivity, he’s pushing for the traffic and making it easier and easier for you to be able to order those drinks. I think there’s no doubt that China is a big opportunity. And this flagship store, half the size of a football field. It’s huge. I think it’ll be interesting to see how tea plays out for this. America, obviously a very heavy coffee drinking country. Tea is very big in China, I think that’ll be interesting. They have the Teavana Tea Bar.
Hill: Yeah. Andrew Ross Sorkin from CNBC was on location at the roastery and Kevin Johnson was there, Howard Schultz was there, Jack Ma from Alibaba was there. Jack Ma was very quick to say, I don’t really drink coffee. I like tea, I like that they have the tea here. Apparently, they’re also serving beer there.
Erickson: Oh, my!
Hill: I saw Sorkin and Howard Schultz each having a beer.
Erickson: Now we’re talking. [laughs]
Hill: Good move, yeah. Come for the roastery, stay for the beer.
Erickson: You know, on top of that, Chris, this recurring revenue model that Starbucks has created is really good for shareholders. You were asking about whether it’s still a good buy for investors, or what this looks like for shareholders going forward. The company had said they’re going to return $15 billion over the next three years to their shareholders in the form of dividends, they just increased their dividend by 20% from buying back shares. Keep in mind, too, that every time there’s less pieces of the pie, you get a larger piece of that, and that’s great as this company keeps paying more and more dividends and keeps growing in China.
Hill: Belinda Wong is the Starbucks CEO of Starbucks China, and one of the things she said, for those who are wondering how much growth opportunity they have, they’re opening a new location every 15 hours. That’s insane. But again, that’s the growth opportunity, for anybody who looks at the United States and says, I feel like they’ve maxed out. Maybe they have, but clearly, they haven’t in China.
How is your lovely bride feeling as baby Erickson is soon to arrive?
Erickson: January, Chris, is the estimated delivery date of our little girl. My bride is doing fantastic in Texas. She let me come up here to be on this trip back to Fool HQ. I’m glad to see you guys, but I’m also really looking forward to the next month or two.
Hill: It’s life’s greatest adventure! Marketfoolery@fool.com is our email address. Great email from Reverend Beau Underwood in Jefferson City, Missouri. I won’t read the entire thing, although he included a phenomenal PS. He’s basically asking about stocks that we don’t talk about all that often, and asking, because we do cover a lot of the same companies, particularly when it’s earnings season. So, four times a year, we’re absolutely going to be talking about Starbucks, Apple, Amazon, a lot of retail, a lot of restaurants, a lot of big tech, that sort of thing. But he asks, “What’s one or two companies that you invest time in following, analyzing, or even investing in that you don’t regularly discuss on the show? Basically, what stocks deserve more attention than you have the capacity to give them?” A great email, which includes the PS, “The author of this email may have interests in the stocks I wrote about. I also may have recommendations for or against, so don’t buy or sell stocks based solely on whatever thoughts this letter prompted.” Fantastic. I appreciate that he understands that, we only have so much time to cover so many stocks. To that question, I have one in mind for me personally. What’s one or two stocks that we don’t talk about all that much, but that you personally follow or are invested in?
Erickson: I love this question, Beau, and thanks for asking it, because it’s kind of asking what’s under the radar? What’s a team of investors at The Motley Fool looking at that we don’t hear about all the time? One that I’m really excited about is Illumina (NASDAQ:ILMN), the ticker is ILMN. This is the world’s largest maker of genomic sequencing machines. They’re looking at your DNA and they’re reading it. This has come down in cost so significantly. The Human Genome Project back in the 90s cost basically $3 billion and took 15 years to sequence an entire human being’s DNA, and now you can do it in a couple of hours, less than a day, for less than $1,000. And they’re already talking about a $100 DNA sequence. And now you’re starting to see all of these neat applications, Chris. I’m starting to call this the Facebook of your genome, where you’re starting to see DNA wall art, or you’re starting to see wines that you should drink based on your genome, all of these applications that are truly personalized to you, and all of that is possible because companies know what your genome is if you want them to, made possible by Illumina’s sequencing machines.
Hill: Can we go back to the wine that I should be drinking based on my genome? What is that? Drink this wine because this will be healthier for you? I mean, wine is nothing but healthy for you, but in excess, I can see, maybe not so much. But, is that how that works?
Erickson: Yes, it’s tailored to you based on what you should be drinking. For me, I think it’s for any wine, that’s an acceptable answer. But, they do have truly personalized products. Then, there’s another one that’s not as flashy but I still think is a great company, and that’s Tractor Supply (NASDAQ:TSCO). TSCO is the ticker for that one. This is a bricks-and-mortar retailer, which a lot of people have shied away from in the last couple of years because of that small company called Amazon. But, this is a company that works in rural locations. They’re giving livestock feed and these consumable products and feed products to people who live a little bit outside of the city, there’s not a whole lot of competition in that area. Big retailers like Lowe’s don’t want to build in those locations because they’re not profitable enough on their investment, and Amazon doesn’t want to be serving that business either, because it’s going to cost so much to ship out in that area. So, it’s really insulated from a lot of big competitors. Great margins. I like a company like that, because the entire retail business has been having trouble in the last couple of years.
Hill: For me, it is Melco Resorts & Entertainment (NASDAQ:MLCO), the ticker is MLCO. This is a gaming company, and by gaming, I mean casinos, not video games, although they probably dabble in that as well. I’ve never actually been to their casinos because they’re based in Macau. It was essentially a way for me to take a portion of my portfolio and dedicate it to a pure-play international, and pure-play in terms of casinos. So, that’s one that has worked out pretty well for me. It’s also one of those companies, and Jeff Fischer has talked about this, this concept that you can have parts of your portfolio that are small enough that, whether it takes off or the stock starts heading toward zero, it’s a small enough part of your portfolio that you don’t get too excited about it if it goes up and you don’t get too down if it starts to drop. And have had both those experiences with Melco. There have been times that it dropped, and I was just like, alright. But, over the long haul, it has done well. But, again, it’s a small portion of the portfolio. Can’t get too excited. But, that’s one, I don’t know that we’ve ever really talked about Melco before.
Reminder that this Friday, for listeners in the D.C. area, we’ll be taping Motley Fool Money, our weekly radio show, we’ll be taping that at Chatter, a restaurant in northwest D.C. on the corner of Wisconsin Avenue and Jennifer Street, 5247 Wisconsin Avenue, Northwest D.C. Come out to Chatter. We’re going to start taping around 11:30 in the morning. We’ll tape the show, and then we’re going to hang out and have a bite to eat. Myself, Ron Gross is going to be there, Dan Boyd will be there and Mac Greer, Steve Broido, I’m trying to remember who else is on the show this week, I think Jeff Fischer is going to be there, and David Kretzmann. So, a bunch of Fools, would love to see you if you can come out and join us at Chatter this Friday. Simon Erickson, it’s always great to see you. Thanks so much for being here!
Erickson: It was a pleasure! Thanks, Chris!
Hill: 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, 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 is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening! We’ll see you tomorrow!
[It Must’ve Been Ol’ Santa Claus by Harry Connick Jr. plays]
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Chris Hill owns shares of Amazon, Melco Resorts & Entertainment, and Starbucks. Simon Erickson owns shares of Amazon, Apple, Facebook, Illumina, Lowe’s, Starbucks, and Tractor Supply. The Motley Fool owns shares of and recommends Amazon, Apple, Facebook, Illumina, and Starbucks. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Lowe’s and Tractor Supply. The Motley Fool has a disclosure policy.