Of Black Mondays and Pink Slips

Markets Motley Fool

On this MarketFoolery podcast, host Mac Greer, Total Income's Ron Gross, and Million Dollar Portfolio's Matt Argersinger discuss the past, the present, and the future. Black Monday hit Wall Street 30 years ago Thursday, and some of the causes are still part of the market environment.

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E-commerce site eBay (NASDAQ: EBAY) delivered a quarterly result that looks pretty good, until you set it next to its rivals' performance. United Continental (NYSE: UAL) managed to beat on earnings, but it helped itself out by slicing its forecast last month. Also, much-troubled meal-kit service Blue Apron (NYSE: APRN) announced it's laying off 300 people -- or 6% of its workforce. So where do these companies go from here?

A full transcript follows the video.

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This video was recorded on Oct. 19, 2017.

Mac Greer: It's Thursday, October 19th, welcome to MarketFoolery. I'm Mac Greer, and joining me in studio, we've got Ron Gross from Motley Fool Total Income, and Matt Argersinger from Million Dollar Portfolio. Guys, happy 30th anniversary of Black Monday.

Ron Gross: "Happy," OK. That's one way to put it.

Matt Argersinger: Melancholy just sort of washed over me.

Greer: The single worst percentage day in stock market history, and I want to talk about that in a minute. But I also want to talk eBay, airlines, and Blue Apron. Woof.

Gross: It's a woof kind of day.

Greer: It is a woof kind of a day. Let's start with Black Monday. Today is the 30th anniversary. October 19th, 1987, the single worst percentage drop in stock market history. The Dow fell 508 points, more than 22%. If you put that in today's terms, that would be around a 5,200 point drop in the Dow. Ron. 

Gross: Yeah.

Greer: You were around.

Gross: I was. I was certainly around.

Greer: I was right out of college, waiting tables, $2.01 an hour plus tips.

Gross: [laughs] Nice.

Greer: But I remember Black Monday.

Gross: Of course.

Greer: What's the takeaway for investors.

Gross: The takeaway, I think, is that these corrections are certainly going to happen. We know it, it's for certain. Now, will they happen this severely? This is the most severe, it's pointing at something and saying, that's the worst that we've seen. Will something like that happen again? Perhaps, but I think it's much less likely. First of all, the markets are different, we have circuit breakers in place that halt the market when certain dips happen to give everyone a breather. But I would say, the thing that worries me the most is, most folks blame that crash on computer trading, program traders that kicked in and exacerbated the problem. I think today, more than ever, we're so dependent on computers running the markets, and the quant traders out there and the algorithms. So, that does worry me. It could happen again. But, I tend to not think we will see something so extreme like a 20% down day.

Argersinger: Yeah. Crashes are going to happen. We're going to have a market crash at some point. Whether it happens in a day like it did in 1987, or it happens over the course of several years, like we saw in 2000, 2002, or even in 2008, our recent experience. But the reasons for a crash are always different. There are a few lessons you can take from 1987. As Ron pointed out, the circumstances are so different, but I do agree with him, we are in a situation where, we had programmatic trading back then, but even today, the algorithms that are driving the market, the returns that you see in the stock market, are much more advanced and much more complex and much more prolific then we can ever imagine. We've never really had a test of that system. If all of the sudden, there was some kind of exogenous factor that hits the market, what happens to all these programs? Do they start kicking in? Do they start selling? All these ETFs, these dynamic ETFs that we have these days, are they going to start doing something and all go in unison and start selling the market? We don't know. All we know is, a crash is going to happen at some point.

Gross: I don't know what exogenous means, but if something from the outside were to occur -- no. I think something geopolitical could be the thing. It's always the thing you don't think of or you're not expecting. Something bad, from a terrorism perspective, a North Korean perspective, could be the shock we need, because valuations are stretched. Interest rates are going to rise. We're kind of ripe for something exogenous to come in and take a swipe at us. But, if we get a 5% correction, that would take us back to August 18th. Was everyone OK on August 18th?

Greer: I was pretty good. About to go to the beach.

Gross: It was my sister's birthday, it was fine. If we get a 15% correction, we're back to the beginning of the year. That was fine, too. We were pretty good.

Argersinger: Felt good.

Gross: So, I don't think it's something we should be worried about or losing sleep over.

Greer: As we wrap this up, if I'm an investor, to your point, Ron, what are some things I can be doing, maybe not prepare for the next crash, but, what are some questions I should be asking? Or, as I look at my portfolio, is there a way to stress test it? What can I do? It's one thing to say crashes happen, it's another thing to go through it and look at your portfolio and see what's happening.

Gross: For sure, make sure that the money you need over the next three years, or even five if you're conservative, is not invested in the stock market. That should help you sleep at night, and should make you portfolio battle-tested. Then, just look at your portfolio and say, is this what I want to be invested in? I'm a happy with the way I'm invested here? Most people don't necessarily have the time to do that on a weekly or monthly basis, occasionally, quarterly, even, take a look at your portfolio and make sure it fits your vision of the world, and make sure you stay safe and can sleep at night.

Argersinger: Yeah, agree with all that, and I would say, Mac, what we talked about before the show becomes even more relevant. Look at your portfolio. What companies are trading at high valuations that you look at and say, if something fundamentally happened, not just a market crash but maybe a recession or some kind of bad, more extended event, what companies are vulnerable? And what it comes down to is companies that are strong, companies that have great business models, great competitive advantages, those are companies that are not only going to survive a crash, but they're going to thrive and take market share from competitors coming out of it. When the tide goes out, though, a lot of the companies that have been swimming around in this glorious bull market we've had for going on nine years now, those are the ones that are very vulnerable. So, especially if you're worried about a crash, take a critical look at what companies you have and ask yourself, why do I own this? Do I own it because I believe it's a strong business? Do I own it because it's been this great momentum company that's doing all these great things, but I don't really understand it? That's when you might want to trim.

Gross: And do not panic. That's the one thing. Don't look at your brokerage statement every day, don't look at the Dow or the S&P, whatever your preferred index is, every day, if we get into some dark times. Just let it go, stay the course. If you have cash, put it back into the market at lower prices and don't panic.

Greer: Let it go. There should be a Disney song about that.

Gross: Do you want me to start singing?

Greer: I do.

Gross: I don't think anyone wants that.

Greer: [laughs] Let's move to eBay. Matt, shares of eBay down on earnings. Big story here is, eBay is spending a lot to compete with a little company named Amazon (NASDAQ: AMZN).

Argersinger: And probably not doing a great job of it. On the surface, things look great at eBay. Revenue, gross merchandise volume, up 9%. That's one of the better quarters in a while for eBay. The problem is, and their guidance for the fourth quarter, 68% growth, the problem is, e-commerce as a whole across the U.S. is growing at closer to 15%. So, I take those numbers and say, eBay, if you think about it, is actually potentially losing share. It's not growing as fast as the overall e-commerce market, whereas Amazon is, and of course, Wal-Mart and some other competitors who are investing heavily are as well. Disappointing, I would say, to see StubHub revenue up only 5%. This is another growth puller for the company. There's a lot of new competition out there with tickets and live events and resale. I was disappointed in that number. At the same time, eBay, this is a great business. If you think about it, they did $2.4 billion in revenue in the quarter. They generated $720 million in free cash flow from that number. That's a 30% free cash flow yield.

Greer: It seems like a lot.

Argersinger: Oh, yeah.

Gross: It's all relative. [laughs] 

Argersinger: There are a handful of companies in the world that can do those kind of free cash flow yields. But, taking the long-term view, what has eBay done for shareholders? I took a look at a five year chart of eBay, and this was adjusted for the PayPal spin-off. If you invested in eBay five years ago, you're up 75%. That's pretty respectable. Amazon over those five years, up 300%. At some point, Amazon took the vertical approach to e-commerce. They're the ones that invested in fulfillment, distribution, shipping, all those things that eBay said, we're going to stick with our light business model, we're not going to do that. And what happened is, Amazon captured a lot of those third-party sellers that used to love eBay, and may still use eBay to a certain extent, but they said, Amazon offers me so much more, and I can access so many more buyers, it just makes much more sense. So, I think eBay has lost that battle a little bit. It's still a great business, but I look at the growth, I look at the competition with Amazon, and I'm not sure what investors can expect buying today.

Gross: Sometimes I look at these things from the consumer's perspective. In fact, I try to do that as much as I can. I never got it, personally. In the early days, when it was auction related, it didn't appeal to me. Today, if I want to buy something, I'm much more likely to go to Amazon. 100 times more likely. It looks and feels different. "Fulfilled by Amazon" is a big deal to me, it gives you the sense that Amazon is there taking care of you, watching the transaction, even if they're not. Amazon Prime is a big deal. So, I can't say, as a consumer, unless it's some really difficult to find item, ever choosing eBay over Amazon.

Greer: As an investor, what would be the best single argument for investing in eBay instead of Amazon?

Argersinger: On a profitability basis, eBay crushes Amazon. You look at that free cash flow, I talked about Amazon, it's comfortable not reporting any profits. eBay works as a business that can grow in the single digits, generate a ton of cash. They've been buying back stock, buy back more stock, maybe pay a dividend at some point. But this to me is more of a steady income play. They're still operating in the e-commerce space, which, of course, is a secular growth market to be in. I just don't think you're going to get amazing returns. You can get decent returns by buying eBay today.

Greer: Matt, this next story is for you, because you have been bullish on the airlines. So, I need you to sort this one out for me. We have United Continental reporting better-than-expected earnings despite all the hurricane-related events. So, that sounds good, right? But they lowered guidance back in September, so they kind of got a lowered bar, and shares down big on Thursday. What does it all mean for investors?

Argersinger: I think there's definitely some short-term turbulence in the airlines markets.

Greer: Nice.

Argersinger: Especially for United Continental. You have to remember, one of their big hubs was Houston, which was devastated in September.

Greer: Home of the Astros. Go Astros.

Argersinger: I know.

Greer: Don't get me started.

Argersinger: But fuel prices are a little bit higher. I mentioned Houston, the hurricanes have hurt United more than the other airlines. So, you have some turbulence. They saw a 4% drop in passenger revenue per available seat mile, PRASM, that great airline metric.

Greer: What was that acronym?

Argersinger: PRASM, it's passenger revenue per available seat mile.

Greer: Oh my gosh. I'm going to just mix that into my after-dinner conversation tonight.

Argersinger: So, earlier in the year, they were guiding for growth in that metric over the full year. They've had negative numbers now, they're guiding for a negative number in the fourth quarter, so that has investors a little worried. I like United a lot. I like the airlines in general. I think United has some things going for it. It has Oscar Munoz, who came over from CSX a couple of years ago. It has some activist investors involved. They've done a lot. Their goal is essentially to try to catch Delta. Delta has superior margins in the industry. United, for years, has been about 5% below Delta in terms of operating margin, so that's their big goal, to catch up with that. And I think they're doing it. And you have a stock price here at United that's 8X earnings. And that goes for most of the airlines. They're in the single digit P/E multiples. And I just think, with the consolidation that's happening in the industry, you have four airlines controlling 80% of the seats, you have lower fuel prices over time, more efficient airplanes, I think there's going to be value here with these airlines. We know Warren Buffett has made a big investment with Berkshire Hathaway. So, if these companies can turn it around, if the margins keep going up, if you believe what American Airlines CEO recently said, that they're never going to lose money again, which I disagree with but could happen, then there's no reason why in a few years, United Continental and other airlines can't deserve at least a market multiple, vs. the really discounted market multiple they've been getting for years, rightfully so. If that's the case, you're looking at a double at most of these stock prices.

Gross: This is more of a question. Southwest (NYSE: LUV) seems to have pulled away in terms of stock price lately. And certainly, it's valued higher, it's approaching 20X, vs. the others that are more like 10X. What are they doing? What accounts for that?

Argersinger: There's a cultural thing with Southwest, and that's ingrained in the market. Investors have always been willing to pay a higher multiple, but that's because Southwest has always been more efficient, operating margins have always been higher. They haven't had that huge expenses in terms of labor and fuel that the other airlines have had. They've been better at managing those things.

Gross: And they have a ticker symbol of LUV.

Greer: It's such a great ticker.

Argersinger: It is. So, to me, it's a matter of, can Delta, United, American Airlines, can the multiples of those companies catch up with something like Southwest and the market? I think so.

Greer: And my favorite stat, you mentioned United Continental CEO Oscar Munoz, Matt, he said, in this last quarter, there were 28 days in which United did not bump a passenger. And their previous record was 0 days. 

Argersinger: That's a great quote.

Greer: So, they are changing.

Argersinger: Yeah. Again, airlines are never going to be, maybe except for Southwest, they don't have a lot of brand recognition. Passengers like us, we don't care, we just want the lowest price in general. But what's happened with the consolidation is, now, for example, Mac, if you want to fly back to Houston to see your family, you're pretty limited in the choices you can make. United is one of the few that goes direct.

Greer: Or for the World Series. Less of an issue.

Argersinger: Hopefully that happens, I don't know. Damn Yankees. But, this is just --

Gross: [laughs] Send your emails to Matt Argersinger --

Argersinger: I know, I know. But, the industry has changed a lot, and I think for the better. And I think at some point -- Warren Buffett has been early on this -- there's going to be some love back to the airlines.

Greer: Now, here's what I don't get, and I know they've done the math here. If you fly Frontier, they nickel and dime you and everything. They have a carry-on item, which is different from a personal item, and you pay and pay and pay -- why don't you just bake that in? Southwest takes more of the bake that in. Because, even if I end up paying Southwest a little bit more, there's something about the psychology of feeling like you're charging me to go to the bathroom.

Gross: I agree. But then they're just copying Southwest. They're trying to differentiate themselves.

Greer: Copy Southwest. I would copy Southwest.

Gross: How about Spirit Airlines? The website ... I'm not smart enough to figure out the website.

Greer: Is that right? They're always so much cheaper, but I don't trust it.

Gross: I just don't get it.

Greer: They basically pay me to fly to Houston. I'm like, this can't be right, there has to be a catch. OK, our final story, Blue Apron, the meal kit delivery company, laying off 6% of its workforce. Ron, it's been, in addition to delivering meals, it's delivered a lot of bad news to investors since going public back in June.

Gross: Tough road to hoe.

Greer: This is a new public company, and the stock is now trading at around half of its IPO price.

Gross: It's tough. It was a bad month to go public, right when Amazon said they were going to be acquiring Whole Foods, so everyone got nervous. Valuations started moving around for the competition. Speaking of competition, there's just too much of it. Whether you're HelloFresh or Blue Apron or Sun Basket or Green Chef, Plated, too many players trying to go after the same demographic. And that's not going to work. So, not everyone is going to make it. I don't know if consolidation makes sense, or if we're just going to see folks go out of business. At the heart, this is a subscription business. It's all about cost of customer acquisition and retention, and how much you can charge for the subscription. And those things are tough. And they have to get it right, and there are too many players chasing the same dollar.

Greer: Matt, what do you see?

Argersinger: My wife and I love HelloFresh, we get it almost every week. I like the idea behind a meal kit. I just think, as Ron pointed out, there's just so many competitors, they're having to pay so much to acquire new subscribers. There has to be at least some consolidation or something that's going to happen in the marketplace, or maybe a Whole Foods or an Amazon or a bigger grocery chain will acquire one and maybe be able to do it in a cost-effective way. But right now, for investors, there's not a lot there.

Greer: Ron, what's more likely out of these two scenarios: either Blue Apron goes private, or Blue Apron gets acquired?

Gross: That's a toughie. I'm not sure why a private equity investor would want them, and what they think they could do to them to make them more profitable and then take them public again down the road. So, perhaps an acquisition or consolidation, I think I would bet on that more so than private.

Greer: OK. We will keep an eye on it. Guys, thanks for joining me today.

Argersinger: Thanks, Mac.

Gross: Thanks.

Greer: 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 it for this edition of Market Foolery. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!

Mac Greer owns shares of Amazon and Walt Disney. Matthew Argersinger owns shares of Amazon, Berkshire Hathaway (B shares), and Walt Disney and has the following options: short December 2017 $900 puts on Amazon. Ron Gross owns shares of Amazon, Berkshire Hathaway (B shares), and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), eBay, PayPal Holdings, and Walt Disney. The Motley Fool recommends CSX and Spirit Airlines. The Motley Fool has a disclosure policy.