On this episode ofMarket Foolery, Chris Hill is joined by Million Dollar Portfolio's Matt Argersinger as they discuss the state of the market. Stocks are trending upward, which should have most investors feeling optimistic -- but what is driving this train?
And for the latest news, Caterpillar (NYSE: CAT) blew out expectations, while Netflix (NASDAQ: NFLX) has at last filled in the biggest remaining hole in its global reach with a deal that puts its content in front of Chinese audiences.
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A full transcript follows the video.
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This episode was recorded on April 25, 2017.
Chris Hill: It'sTuesday, April 25. Welcome to Market Foolery. I'm Chris Hill.Joining me in studio today, from Million Dollar Portfolio, Matt Argersinger. Thanks for being here. Matt Argersinger: Yeah,glad to be here. Hill: Jason mentioned this yesterday,how many companies there are on the Million Dollar Portfolio,either on the watch list or actually in the portfolio, that arereporting earnings.I always appreciate when you're in the studio, but Iparticularly appreciated this week,because I know how busy it is. Alot of companies reporting earnings today,but I think we have to startwith the market in general. You have the Nasdaq hitting 6,000, which is of course making headlines becauseit's a big round number. Buthow about this for a list of companies:Home Depot, Lowe's, McDonald's, John Deere, Honeywell, UnitedHealth, 3M, Mastercard, PayPal, Adobe, Electronic Arts, Activision Blizzard, Microsoft, Alphabet, andFacebook, they are all, all of them, hitting all-time highs today. Argersinger: That'spretty much everything, I think. Hill: Yeah. That'snot just tech,it's healthcare, it's home improvement, it'srestaurants. Argersinger: Across the board. Hill: It'sacross the board. And I'm wondering, how problematic is this forsomeone in your position, whose job is to go out and look for companies --we talk about upside, and yes,these companies are hitting all-time highs today. Let'sgo ahead and stipulate that all of them will go up from here, which means this is not the only all-time high they're going to have. Argersinger: It shouldn't be. Hill: But, forsomeone in your position,I don't know, this seems like a little bit of a problem. Argersinger: You feel two ways about it. One way,you're saying, this is great. You are an investor, you like equity -- Hill: This iswhy we invest. Argersinger: This is why we invest,we invest for companies to hit all-time highs, we investfor the stock market as a whole to hit an all-time high, we invest for theNasdaq 6,000 and 7,000 and 8,000 and beyond. Theother part of me is an analyst, an equity analyst,and I'm constantly looking for those excess returns. Andif everything is going on and hitting all-time highs, it gets really hard. Especiallyif you look at the overall market,we're using certain historical measures at really high valuations. Youdon't want to get excited when you look at companies -- and, we'lltalk about one that I think is overvalued -- welook at a lot of companies that aremaybe going to growrevenue in the single-digit range, which is fine. But they're trading at 20, 25, 30 times earnings multiples.It'shard to get excited about companies like that. The other thing, I think, that'sworking, and we've talked about this on the show, how the really bigsecular shift that we've seen towardpassive investing, ETFs, what that's done is sent a lot of money to verybroad indexes in the market that are essentially,because capital is coming in, they have to keep buying.I'm not surprised that a lot of the blue chip companies you named out are hitting all-time highs. That'ssometimes a function of the fact thatmoney is coming into the market, it'scoming into thesepassive strategies, it's coming in through people's 401(k)s, all various sources. Until that changes,until there's some kind of major dislocation in the market that changes that, or changes people's perception, it's very hard to keep up with all these companies. Hill: Some ofthe companies we just went through,particularly Facebook, Alphabet,Microsoft,those are three of the five or six biggest companies in the public markets. Do you think that, as these stocks rise, as the big get bigger,does that increase the likelihood of buyouts of smaller companies? If you'reFacebook orMastercard,are you taking your all-time high stock andputting it to use in the form of buying out smaller competition --not necessarily competition, but like, "We could use our all-time high stock to go out and buy that company over there." Argersinger: I thinkthat's a great point. If you're a capitalallocator -- that'swhat a CEO is, at his or her core, a good capital allocator. As a capital allocator, if I saw my stock trading at what I thought was a very lofty valuation, I wouldn't be buying back my stock, I wouldabsolutely be either issuing stock,if that was the cheapest form of capital,or like you said, I would be looking at competitors out there and saying, "Wow,if I could use my equity as a cheap form of capital and buying power,I'm going to go buy a competitor." The biggetting bigger is a great point as well. I think,if you look at Facebook, Alphabet too, the amount of capital that thesecompanies can put to work,it makes it very hard. As big asSnapis already, Facebook cango in there and pour $1 billion.Amazonisanother example of a company that's pouringsomething like $3 billion in India, whereasFlipkart is a company that's beenoperating in India for a long time,over a decade now. Amazon can go in there in a few years and probablyknock them out of the market,just because of their sheer size andaccess to capital. The big getting bigger is apretty interesting thing to watch. Hill: Let'stalk about one company that's helping topush the market up today, certainlypushing up the Dow,becauseCaterpillaris one of the Dow 30 stocks.Caterpillar's first-quarter report wasfantastic. This is not a beat-by-a-penny situation. Their profits came in more than double what Wall Street was expecting, their overall revenue was solidly higher, they raised guidance for the full fiscal year. And the stock, this isone of those tried-and-true, steady blue chipperformers, their stock is up nearly 7% this morning. I get that this was a great quarter,but I'm assuming this is what you were referring to when you were like, wow, 7%? That seems lofty for a company like Caterpillar. Argersinger: It does. Theearnings picture looks great for them. Butthat's because Caterpillar, like a lot of companies,has been doing a lot of restructuring lately. If you look at Caterpillar,for example, they'vehad restructuring charges every quarter going back to the end of 2012. Just last year, they had about $700 million ofrestructuring costs. This is just them shuttering old facilities, moving a plant somewhere else, or shifting capitalfrom one segment to another, and shutting down operations. Hill: And that wholeproblem they had in China. Argersinger: That whole problem they had in China. Theproblem with me, though, is that when I see a company that restructures this often, I don't believemanagement when management comes out and says, "These are one-timeexpenses that we're taking out of our earnings. Here's our real earnings." Thatmakes me very uncomfortable. With acompany like Caterpillar that's doing that, I tend to count those charges. Andif you do, the earnings per share don't look nearly as good. Then,if you just look at revenue growth overall, it's up 4%. I know they saw somestrength in the resource business and the energy transportation business. Thosesegments have really struggledover the past few years with commodity prices and oil prices. But the fact that those are bouncing back is a good part of the story. I would just say, be very careful of Caterpillar. Wetalked about lofty valuations. You have a company growing revenue 4%, gave greatguidance for this coming year, butis this a company that should trade at 32 times earnings? Those earnings,by the way, are the adjusted earnings. They'realreadyrestructuring more this year, and they'retaking those out of their guidance. Hill: Ididn't realize the multiple was that high. Argersinger: 32 times! That, to me,I think Caterpillar is a great company. It's an industry bellwether, it'svery diversified, butI'm not paying that multiple for a company like this. Hill: Andyou hit on a key word there, which I think is part of a small sliver of theenthusiasm that we're seeing today, and that's bellwether. I think any time --Caterpillar is on that shortlist of large companies that,when they do well,it's like a Rorschach test, but aRorschach test where every institutional investor seessomething positive. When Caterpillar puts upa really good quarter, I think you have a lot of people on Wall Street saying, "Oh, this meansgreat things for housing,this means great things for infrastructure." Argersinger: "Energy is great,mining is coming back," yeah,all those things, you're right. Hill: I know we talked about Netflix yesterday raising $1 billion in financing, but they'reback in the news today. Netflix has struck a dealin China withiQiyi,which is one of the leading video-streaming platforms,it is a subsidiary ofBaidu. We see the stock up 2%. This is going to be interesting, to see where this deal goes from here.Netflix has been trying for a long time to get into China. They're not the first U.S.company that's tried to do business in China.
Argersinger: And it won't be the last. Hill: Itwon't be the last. And they've decided to go this route, whichI think is a smart deal. It's a licensing deal, it'sone of the biggest platforms. As of late last year, iQiyi had 480 millionmonthly active users. In terms ofgetting Netflix original content in front of a very large and new audience ... we don't know what the terms of the deal are but justin terms of the audience, it seems like a win. Argersinger: I agree. I think it's a win for both. Netflix, as you hinted at, it's been anenormous challenge to get into China directly. In fact,I think in October, they gave up. Reed Hastings, on the conference call, said, "We'verun into a buzzsaw trying to getinto China, so we're going to pursue some deals, some joint ventures andlicensing deals," andthis is the first major one. I like the deal because for iQiyi, they were called the YouTube of China for a long time, and they havea lot of free content, but they did shift to a subscription model last year or the year before, and they'veslowly grown that business. Butwhat they've struggled with is content, they'vehad to pay a lot for content. With the deal with Netflix, you bring in a lot of curated content --because I'm sure the Chinese government is going to have a lot to sayabout what kind of content Netflix is able to get into iQiyi's platform, but at least for iQiyi,it gives them great content. For Netflix,it gets them that foothold in China. If Chineseconsumers like a lot of the Netflix content, itopens the path for them to get more and more content in. I think,eventually, you could see Netflix saying, "If this is working, maybe we'll do a joint venture with iQiyi, where we're supplying a lot of the content, they'rehandling all the distribution, and we'resplitting the subscription revenue 50-50 orsomething like that." It'sa bit of a long game that Netflix is playing, butif you are shareholder,I think it's a positive move.It's the foothold you've been looking for.I don't think it will be that accretive to revenue. I think Netflix has said theselicensing deals aren't going to be a big uptick to revenue. But,down the road, lead to big things. Hill: I want to hit on a couple points there. One,before I forget, you hadmentioned the content in China, andwhat's going to be allowed and what's not. I think it certainly works in Netflix's favor that they have apretty large portfolio of original content. This is not four or five years ago, where theybasically had a couple of shows, and that's it. They have a lot oforiginal content. And we'llfind out in the coming weeks and monthswhat exactly is the content that's going to beavailable in China, becauseit's not going to be everything. We know there are movies that are made in the U.S. that are altered to be shown in China, they are edited in some ways. We also know there aredirectors in Hollywood --Quentin Tarantino is one who comes to mind --I don't think any of his movies have ever been shown in China,because he said, "I'mnot changing my movies,I'm not going to edit themfor the Chinese government or any government." You're right,it's not going to be accretive to revenue.I think it does probably help them down the linewhen they are making a pitch tocontent creators. Robert Roy, who'sthe VP of content acquisition, he's the guy atNetflix that's in charge of going out to content creators. We've talked before how,if you're a content creator right now, it's your market. It's a seller's market. You have Amazon, you haveHulu -- Argersinger: You've got bidders. Hill: You have bidders. You haveYouTube, andobviously Netflix. I think if you're Robert Royat Netflix, now, you get to go to content creators and say, "Oh, andby the way,we can get you in front of an audience in China in a way that some of these others can't." Argersinger: Right. Andit's an audience that's about 1.4 billion people large. Very compelling. I think, yeah, you'reexactly right. They now have theaccess. Now, we can make movies that we're 95% sure will get into China, as opposed to saying, "What do we have that we can alter or edit?" It's a great point. Hill: One of the things we were talking about earlier this morning, you read these stories about this deal, and youstart to gain some insight into just how competitive the video-streamingindustry is in China. iQiyi is aBaidu subsidiary.Alibabahas their subsidiary.Tencent has theirsubsidiary. Just like we havethe clash of the titans here in the U.S., that'sabsolutely playing out in China. Argersinger: It is. China is aninteresting case, too, because unlike the U.S., therereally wasn't this linear TV market that we've had in the U.S. for decades. In China,they were so quick to move directly to streaming on mycomputer or my mobile phone on my tablet. It'samazing to see, unlike us,where we hadthe cable networks and things like that, no, these are the players in China, and they've already grabbed significant turf. It'sgoing to be a clash of the titans. I think iQiyi, Netflix deal,it's a bit of a leg up for them today.
Hill: Are youwatching anything on Netflix right now? Are you bingeing anything? Argersinger: Mywife and I just finished watching thetwo seasons of Daredevil. AndI have to say, I'm a Marvel Comics fan,the movies have been great,Netflix has done a great job witha lot of those Marvel propertieslikeDaredevil, Luke Cage,Jessica Jones.I'm liking that universe right now. Hill: I'm about halfway throughLuke Cageandvery much enjoying it. Although our man behind the glass, Dan Boyd,he's a fan of the Marvel series on Netflix. Dan, can you jump on mic and share a word or two? For thoseunfamiliar, there's the Marvel Universein the theaters --Iron Man, Thor, Hulk, etc. Then, on Netflix, you haveDaredevil, Luke Cage, Jessica Jones. The mostrecent one is Iron Fist. Argersinger: Yeah.I haven't watched that one yet. Hill: I haven't watched it. Dan, you've watched Iron First. You watched the others.I know you're a big fan of Luke Cage and Jessica Jones.Iron Fist,I'm getting the sense, not quite up to snuff. Dan Boyd: Iunfortunately have had the extreme displeasure of watching all 12episodes of that pile of dreck. Hill: At any point,maybe episode three, did you think, "I don't think this is getting any better and I'm going to stop?" Why did you keep going? Boyd: Probably the sunk-cost fallacy. I gave it about four or five episodes to see if I was enjoying it,and I wasn't, but I'm kind of the completionist, so I was like, "We'rejust going to get this doneas quick as I can." Hill: Did youswitch over into hate-watch mode? Have you ever hate-watched a show? Boyd: No,I don't think that's a good idea for anybody's psyche. But,listeners, real quick,never watch the show. It's bad. Finn Jones is terrible. He'slaughably awful in the role.I don't know what they were thinking about whyyou would make this show in 2017, but they went ahead and did, and it's garbage. Hot, hot garbage. Hill: You heard it here, from Dan Boyd. Netflix, when it comes to theMarvel series, is batting .750, three out of four. They got three out of four. Argersinger: Let'shope the next one is good. Boyd: I don't want to count the first season of Daredevil as a hit there. Argersinger: Really? The second season was better, but ... Boyd: I like Vincent D'Onofrio a whole lot in that,but that was really the only good part. Hill: At least there was that good part. Boyd:Yeah, that's fair. Argersinger: I get the sense that Dan likes bad guys,like the Kingpin. Whatdid you think of Punisher? Punisher was good,I thought the guy who played Punisher was pretty good. Boyd: Jon Bernthal is aWashington D.C. native, and a big fan of D.C. sports teams,so he's pretty much my best friend. Argersinger: [laughs] There you go. Hill: All right, Matt Argersinger,thanks so much for being here. I'lllet you get back to work. Argersinger: All right, thanks Chris! Hill: As always,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 going to do it for this edition ofMarket Foolery, the show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fools board of directors. LinkedIn is owned by Microsoft. Chris Hill owns shares of Amazon. Matthew Argersinger owns shares of Activision Blizzard, Amazon, Baidu, and Netflix. Matthew Argersinger has the following options: short December 2017 $800 puts on Amazon. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Amazon, Baidu, Facebook, Mastercard, Netflix, and PayPal Holdings. The Motley Fool recommends Adobe Systems, Electronic Arts, Home Depot, Lowe's, and UnitedHealth Group. The Motley Fool has a disclosure policy.