On this episode ofMarket Foolery,Mac Greer, David Kretzmann, and Jason Moser discuss Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) latest moves moves and bets onApple, airline stocks, and more.
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The team goes on to discuss the latest disappointment from watchmaker Fossil(NASDAQ: FOSL)and upbeat reports from e-commerce player Shopify(NYSE: SHOP) and beverage companySodaStream(NASDAQ: SODA).
A full transcript follows the video.
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This podcast was recorded on Feb.15, 2017.
Mac Greer:It'sWednesday, February 15th. Welcome to Market Foolery. I'm Mac Greer, andjoining me in studio,we have Jason Moser from Million Dollar Portfolio andDavid Kretzmann from Supernova. Gentlemen, welcome.
Jason Moser: Hey, man!
David Kretzmann: Hey, Mac!
Greer: Howare you doing? Are you ready?
Kretzmann: We'reready to go here.
Moser: Always ready.
Greer: OK,let's begin with Warren Buffett. On Tuesday,Berkshire Hathawayreporting its latest portfolio news. Jason, some reallyinteresting moves here. Berkshire really loading up on shares ofApple andunloading most of itsWal-Martpositions. They'realso adding new stakes inMonsanto,Sirius XM, andSouthwest Airlines.
Moser: Yeah,a lot of fascinating moves there. We talk a lot aboutwatching the investors that we respectand the moves that they make. Wenever advocated just going andblindly following, but I think it's always interesting to seedifferent perspectives on things. Personally, what reallystood out to me was the dumping of the Wal-Mart shares. We've talkeda lot about this before, how general retail is beingdisrupted.Amazonis reallythe company out there doing it. It'sinteresting, what the market is telling us is basically all you need to know. Youlook at Wal-Mart today, the market values it, it'ssomewhere in the neighborhood of $200 billion, and it's bringing in over $400 billion in sales every year. Well, Amazon brings in maybe a quarter of the total sales that Wal-Mart brings in, yet Amazon's market cap is double that of Wal-Mart. So, it's clear to see that the market, being that it's forward-looking, islooking into the future and thinking,this is the direction that things are going.Amazon is really the one leading the way. Wal-Mart got caughtasleep at the wheel. AndI think that now Wal-Mart is paying the price.
Kretzmann: I wonder if Berkshire, in the next three years, adds Amazon to itsportfolio. They're warming up to tech with Apple.Maybe Amazon is next. To me, what really stuck out is, a couple weeks ago, Buffett, in aninterview, he mentioned that since the election,Berkshire has invested about $12 billion, which is roughly 8% of that $150 billion or so portfolio that they have investing in public stocks. That'sa lot to be investing as the market is hitting new highs. Obviously, we tend to think of Buffett andBerkshire as value investors. On the surface, youwouldn't expect those kind of investors to be investing quite a bit as the market is hitting new highs. So,I think that says a lot.
They also unloaded their stake inDeereandVerizon, andKinder Morganwas another that we follow at the Fool. So,interesting to see Berkshire dumping Kinder Morgan afterless than a year of holding it -- Kinder Morgan is aninfrastructure company, a natural gas and oil pipeline -- then,to be loading up on airlines, whichtend to benefit from lower energy prices. So, maybe they'reseeing something or expecting something withenergy prices to remain low, which would benefit airlines and could hurt someenergy infrastructure companies like Kinder Morgan.
Greer: So,if I am an investor and I'm consideringsome of these stocks, to what extentshould I try to mimic what Buffett andBerkshire are doing? Because obviously, he's had an incredible track record. Should I mimic some of these moves? Oris he playing a different game?
Kretzmann: I don't think you ever want to blindly follow any investor. I think what you want to mimic is the processand the strategy. Obviously, we do that at the Fool withDavid and Tom Gardner, they're great investors here.Peter Lynch, Warren Buffett. If you're justblindly following any investor, you'renot really going to learn a whole lot as an investor. Youreally want to understand the thought process that goes behind those decisions. I think that's what's key to be asuccessful investor.
Moser: Yeah,I think a very good example of that --because I think David is spot on there -- if welook at a business likeMarkel, which we talk about often here, and we refer to it as a baby Berkshire in many ways,because the business is set up very much inthe same way. It's an insurance business that owns aportfolio of stocks, and now holding businesses as well.Tom Gayner, the co-CEO, generally, he's known for the investing success there at the company. If you look at the holdings in Markel's portfolio, they own Apple. They also own Amazon. They don't own Wal-Mart. They ownFacebook.
So,there's a business where they do a lot of things thatBerkshire does as well, buteven they aren't mimicking those moves,despite the fact that Gayner and company are professedBerkshire fans, they have a wonderful brunch they're out there theday after the Berkshire Hathaway meeting. There's a lot of similaritiesin the business there. It's very small comparatively speaking, but you can see there as an example in Markel'sportfolio. Sure, they follow some of Buffett's leads there, but they also do their own thinking andcome to their own conclusions. We encourage investors out there to do the same.
Greer: Guys,let's talkShopify. Shares of the e-commerce platform up big onWednesday after the company reported better thanexpected earnings.David, I think for a lot of investors,Shopify is not exactly a household name. The stock hasreally been on a tear, though.
Kretzmann: Yeah,Shopify is a company that'sin the background, but you've probably interacted with itsplatform in some shape or form. Thecompany serves almost 400,000 merchants, mainly small and mid-size businesses. So,if you're a small business looking to get online andhave an online shopping cart,Shopify is one of the platforms to go to if you're looking to set up a shopping cart, set up that online platform to offer goods and services online. A lot of smaller businesses are among Shopify'scustomer base. This was a great quarter. The company is having no problemgrowing quickly right now. Sales were up86%, they added 50,000 merchants, bringing that total to 375,000 merchantsunder their umbrella. That's up more than 50% from where they were at the end of 2015.
So, a lot of growth here. Andthe market opportunity hereis still pretty big, andI think that's why, even though the stock is trading at a premium valuation, this level of growththeoretically could continue for a while. If you look at the key geographies where Shopify operates today, there are about 10 million merchants with less than 500 employees in those markets. That's really thekey demographic that Shopify is going after. And every time, the averagerevenue per merchant on Shopify'splatform is above $1,200 now. That wouldsuggest a market size of about $10 billion. So, still a lot of room to run here, but the stock is still pricey.
Moser: Yeah. We've looked at Shopify for MDP, it'sobviously a recommendation in a number of our services here. A veryfascinating business from a number of different perspectives. There are a couple of things,questions I still need answers to here. No. 1 isjust from the profitability perspective. They are growing,still not profitable, notcash flow positive. I wonder when isall of that going to change? BecauseI think if it does change,when it does change, it could be atremendous catalyst, butI also wonder how much the market is pricing into there today.
Butthe other question I have is just in regard to third-party relationships. With everything that Shopify does well, there is a provider that's helping them along the way. And I'll use payments as an example. They contract withStripe,I believe, as a provider on the payment side. At some point, Stripe isgoing to look to become profitable, and they'regoing to try to exercise a little pricing power, which, in turn, is going to flow through Shopify's financials, unless they figure out a way to diversify from that provider as well. So, I just wonder, from the perspective of those third-party providers, how that plays out on this business down the road, and its profitability.
Greer: Andalong those lines, they've also got one of thosefrenemy dynamics with Amazon. Theycompete with Amazon, but they're obviously apartner of Amazon's. So,David, when you think about that frenemydynamic, as a potential investor in Shopify,how much should that concern you?
Kretzmann: I think it'ssomething to be aware of. I think some peoplegave Shopify a little bit more credit than it deserves for thetransition Amazon made from its web store business. In 2010, Amazon launched asimilar business to what Shopify has done. It was a few years after Shopify had started, and Amazon essentially said, "We havea lot of third-party sellers on Amazonand we want to build a web store for those sellersto have their own independent website," which isessentially what Shopify did.Amazon shut that down in 2016 and basically made it easy for thoseAmazon webstore sellers totransition or migrate toShopify's platform. So,Shopify called itself the preferred migration partner. Butwhat a lot of people don't say is that there were only about 1,000 merchants on Amazon's platform last year. So, it's a win for Shopify, but it's not a huge catalyst, I don't think.
Youwant to be aware of all those dynamics. To a similar point,it's not just with Amazon, it'salso with those third-party merchants, the payments providers, the shipping solutions,because you have a lot of different companiesproviding those services. You haveother online marketplaces likeEtsy, which are branching more and more into Shopify's territory. So,I can see why people are excited about the business,because on the surface,this is a potentially very attractive business,because it's recurring revenue, it's a subscription fee,Shopify is bringing in monthly subscription revenue. If they can retain those enterprises over time, that could be very profitable. But up to this point, the company's losses are expanding, still burning cash. It's a riskier stock, still.
Greer: OK, guys, shares ofFossil down big onWednesday. When I think Fossil ...OK, I don't really think Fossil. But if I were to think Fossil, I think watches.
Moser: Youdidn't get your wife something from Fossil for Valentine's Day, Mac?
Greer: What's the story here with Fossil, Jason?
Moser: Listen,leather accessories and watches andtchotchke, if that doesn't screamhuge market opportunity, Mac,I don't know what does. This is a business that has been in a lot of trouble here for a while. This isnothing new. I was looking at this back in May of 2016 because of some revised guidance to the downside that really took its toll on the stock. I think we're seeingmore of the same here. The bottom line is, retail is tough, but when you're in fashion retail andtchotchke fashion retail,I think it's even more difficult. There's certainly no real pricing power in that market.
And Fossil is not known for thataspirational brand that people will pay up for. So,I respect the fact that management isattempting to diversify the revenue streamssomewhat. They made an acquisitiona little while back to get someexposure to the connected fitness realm. I don't know that I necessarily look at that as the biggestopportunity, either. I mean, it wasMisfit,I believe, is the name of the company they acquired. If youlook in the release they just put out this morning, they say, "We'lldouble our efforts and wearables bylaunching over 300 SKUs,introducing newbrands to the platform and enhancing engineering toenable additional functionality and morestylish and slimmer cases."
Greer: You soundskeptical.
Moser: Well, I think there's reason to be skeptical. We've seenwhat happened withFitbit. We've seen aless than stellar response toother smartwatch products. I think it's fair to question this strategy. And I don't know that it's necessarily thesolution for this company. If youlook at the top line, it's going in the wrong direction. Margins,going in the wrong direction. This is not something that just happened overnight. It's been happening over the past seven years. I think investors would be very wise to avoid this one.
Greer: Andyou're not wearing a watch. David ...
Moser: I am wearing a watch. Not a smartwatch, though.
Greer: Oh, you are wearing a watch, sorry.
Moser: This is agift from my lovely wife when I turned 40.
Greer: You're old school, though. People aren't wearing watches as much, right?
Moser: Maybe not, yeah.I think that's the challenge. You either have your watch aficionados,people who like watches,who probably aren't really going to want to wear something like that,and you have people who don't wear watches at alland you have to convince them to put something on their wristand they're probably not going to, a la Mac Greer. Or,you have people who are looking for, maybe, adedicated fitness device,and I think there are more compelling options out there. So,these guys are fighting an uphill battle.
Kretzmann: Apple Watch can get a bad rap,but since it came onto the scene a couple years ago, itstill captures over 50% market sharein the smartwatch category. And I think the Apple Watch Series 2 is really the crown jewelas far as smartwatches go.Anecdotally, it's interesting seeing Fitbit,Under Armour, and Fossil all getting crushed this quarter. Obviously, they're all inconnected fitness in a different way. But, yeah, I was out at CES earlyJanuary and Fossil wasone of the many connected fitness wearable device companies out there. Andthat's just a category that's getting very crowded,and it's hard to distinguish what's differentbetween what Fitbit, Under Armour, or Fossil are doing.
Moser: AndI'll tell you, just from my experiencein the golf business years ago,because part of what I did as a golf professional was run the golf shops,that's a retail businessand you have to basically stock it withthe stuff that people want. And there was a dynamic to it for thistype of stuff. It wasBrighton,most of the demand there on the club side was for Brighton keychains,watches, purses, things like that. There just is no pricing in this. I mean,inevitably, it all stayed on theshelves until Christmas time when we put everything on sale. So,it's just a really difficult market,and it's not terribly shocking to see Fossil having a tough time.
Kretzmann: I wouldn't rush to see it as a buying opportunity, either. The company is still producing agood amount of free cash flow. So, on the surface, you might be inclined to see this. Maybe it'll bounce back at some point. But revenue has dropped each year since 2014, and expenses have continued to go up, so you've seen margins get crushed. What really highlights it is, the earnings per share was$7.10 in 2014, and for 2017,management is guiding for earnings per share of ($0.50) to $0.20.
Greer: [whistles] That'squite a range.
Kretzmann: Things aregoing to get a lot worsebefore they get better, if ever.
Greer:Guys, let'sconclude here withSodaStream. This is a stockthat has been incredibly volatileover the last couple years. Andwe have some good news, and the stock up big onWednesday after reporting better-than-expected earnings. Jason,forget soda,it seems like the story here is sparkling water.
Moser: Well,I liked our conversation earlier this morning: maybe this company, really, it all just boils down to the wrong name, right?
Greer: Terrible name.
Moser: We'resitting here ragging on soda,it seems like, quarter in and quarter out. Maybe it needs to besomething like SeltzerStream or whatever. But, I think the real beauty to this business, inthe beginning, it's one that we've covered here in the Foolish universe for a while ...
Greer: Andwhat do they do, for people who don't know the company?
Moser: SodaStream basically sells you these machinesso that you can make seltzer or soda at home. You can carbonate your own water andmake your own sodas at home. Andon the surface, it sounds like a pretty neat idea,you don't have to go lugging around 12 packs of Diet Coke anymore, you can justdo it all right there at home.
Greer: I hate that idea. I'm sorry, I don't find that appealing at all on the surface.
Moser: [laughs] What,having the machine there?
Greer: Yeah!I don't drink soda, but I wouldn't want to make my own soda if I drank soda. That's like making your own toothpaste. Why? Why?
Moser: I don't disagree.
Greer: So,no, not on the surface,take it back.[laughs]
Moser:Being aDiet Coke guy,SodaStream, as a product, never attracted me from the beginning. Now,I will also say I made a big shift intrying to drink more seltzer. Buteven as that has occurred,I still have zero interest inhaving one of these SodaStreams on my counter at homebecause of the fact that you have to keep on replacing that CO2cartridge. It's just constant maintenance. Andthat's the crux of the question here. The beauty of the model has always been the razorblade nature -- the razorbeing the machine and the blades being the consumables that you use for the machine, the CO2cartridges, the flavors that you use for whatever you're wanting to drink. And for a long time,it seemed like maybe this had promise. Certainly has gained a lot of traction overseas. U.S.,I think, the U.S.market was viewed as a potential opportunityand that never really played out so much,and the stock got pummeled over the past few years because of that.
Interesting to see, they'remaking a little bit of a comeback here. Ifyou look at the numbers, there was about22.4%unit growth for the quarter, which translated into37% growth in revenue for those machines. So,they're actually selling machines,and they're getting some decent pricing on them. The growth in the consumables, which is the higher-margin, was less impressive, up 5%. This kind of getsback to the initial question that we always had with these things --it's one thing to give this thing as a gift to someone, where it's like, "Oh,that's a neat machine," orwhatever. But ultimately,at some point, does it not justend up collecting dust on your kitchen counter? And I think that's the hurdle that they still have to clear. This was a decent quarter,I'm not sure it necessarily indicates thatthey have cleared this hurdle and everything is better again.
Greer: David, looking at the stock chart for the last few years, it's gone from $40 up to around $70all the way down to $13,and now it's back around $50.
Kretzmann: Yeah, across $50s. I think SodaStream,it's a great time to take a step back and see a lesson there, thatyou don't want to cut the future winner too early. SodaStream,I think the verdict is still outwhether or not it is a winner, butI would much rather hold a loser too long than sell a winner too early. In Rule Breakers, we sold SodaStreamright around $13 a year or two ago. Since then, the stock has comeroaring back almost four timesover the past year. So, I think there is something to be said forthe strategy of just buying and forgetting. Even if you have a loser,if it's a small percentage of yourportfolio, there is something to be said forjust letting that ride.
With SodaStream,it's interesting to see what has enabled this company to come back. I thinkpart of that is therepositioning of the product, focusing less on a soda alternative and more a soda replacement, or that sparkling wateraspect of the product. But the company always had apretty stable business in Europe. Europe,right now, the Western Europe business is still double the business thatSodaStream generates in the Americas. Right now, inAmerica, the household penetration -- so,the number of households with a SodaStream in it --is about 1.5%. In Europe,that number is over 10%. So, there is still a runway, if SodaStream can somehow crack that code here in the U.S. There is still a runway for growth there. Butin the meantime, that European business is still growing. I think there's still a lot to like here. The margins are really increasing. But I agree with J-Mo that you really want to see thoseconsumables, those repeat purchases, increasebecause I think that's really whatmatters most for long-term shareholders.
Greer: OK, youmentioned the reposition. I want to come up with a better name. Let's go around the horn. Right now,SodaStream, I think soda,for too many people, has a negative connotation now. So,what are you changing the name to?
Moser: FizzBot,I like that.
Kretzmann: 21st century.
Greer: I like it. Jason?
Moser: I'll go with SeltzerStream,honestly. I feel like soda conveys this unhealthy vibe that we're seeing in the soda market. Soda is either a bad drink,or it's what George Costanza wants to name his baby onSeinfeld. So,skate where the puck is going, as they say. SeltzerStream.
Greer: I've got two, ready? WellStream, like, I'm feeling well.
Moser: Itsounds like you just got bought byWells Fargo. That's not in a good way.
Kretzmann: You have a backup.
Greer: Here's the winner: FunStream.
Kretzmann: It'slike a party or something.
Moser: That'slike a super squirter that your kids shoot each other with in the backyard.
Greer: Whodoesn't like fun?
Kretzmann: I feel like you would see that at Chuck E. Cheese or something.
Greer: Hey,it's brainstorming. There are no wrong ideas at this point. OK, David, Jason,thanks for joining us today.
Kretzmann: Thanks, Mac!
Greer: Asalways, people on the program may have interestsin the stocks they talk about,and The Motley Fool may have formal recommendationsfor or against,so don't buy or sell stocks based solely on what you hear. That's itfor this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer, thanks for listening and we will see you tomorrow!
Mac Greer owns shares of Apple.David Kretzmann owns shares of Amazon, Berkshire Hathaway (B shares), Etsy, Facebook, Kinder Morgan, Sirius XM Radio, SodaStream, Under Armour (A Shares), and Under Armour (C Shares). Jason Moser owns shares of Apple, Berkshire Hathaway (B shares), Markel, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, Berkshire Hathaway (B shares), Etsy, Facebook, Fitbit, Kinder Morgan, Markel, Shopify, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of SodaStream and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Fossil Group, Inc. and Verizon Communications. The Motley Fool has a disclosure policy.