INDUSTRY FOCUS // 12-27-2018

In this special episode of Industry Focus, all the hosts get together and review the year in the market. In today's episode: 2018 comebacks, stories that flew under the radar, and stories we've forgotten, but should think back over. Remember Theranos? Remember Wells Fargo (NYSE: WFC)? Venezuela? MoviePass? Tune in to find out what those developments can teach long-term investors.

Also, the hosts talk about why the merger between CVS Health (NYSE: CVS) and Aetna should be getting more love from the market news circuit, why investors should keep an eye on the cobalt industry in 2019, how Twilio (NYSE: TWLO) managed to turn its bad streak around, Valeant Pharmaceutical's change of pace (and name), and more.

A full transcript follows the video.

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This video was recorded on Dec. 14, 2018.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Thursday, December 27th, and we've got the whole gang in the studio for part two of the never-ending podcast discussion. [Laughs.] I'm your host, Dylan Lewis, and I'm joined by Shannon Jones, Jason Moser, and Nick Sciple. What's up, guys?

Jason Moser: Not a whole lot. Feel like we were just here.

Lewis: It's like we maybe got up from our chairs, took a sip of water, and sat back down. Rather than running through our standard programming for the holidays, if you're just tuning into this episode, go back and check out the one before it. We are getting together to have a group discussion of 2018, some things to watch in 2019, just a fun way to round out the episodes for the 2018 year.

Shannon Jones: To make a quick plug, Dylan, if you want to check out that episode, you can actually check us out a number of different ways, one of which would be iTunes, if you've got Stitcher. But more importantly, Dylan over here has set up our very own YouTube channel. If you go to, you can pull up that episode and more.

Lewis: You know what my favorite part about the fact that our podcast's videos are now posted to YouTube is? The comments. I see at least one a week where it's like, "You guys don't look like what I thought you looked like."

[All laugh.]

And I never know! I'm not sure if that's a compliment or a dis.

Moser: I may be dating myself here, but that reminds me of, if you've ever seen the movie Smokey and the Bandit, where he says, "You sounded a lot taller on radio."

Lewis: [Laughs.] Actually, you know who gets that comment the most? Bill Barker and Chris Hill, the episodes that they do together.

Jones: When I first met Chris Hill, that was not who I was expecting at all.

Lewis: He surprises everyone. And if you want to see us in person, another plug, let us know. You can come by HQ. We love having people come by. If you're in the Washington, D.C., area and you want to check out a taping or just come say hi to the team, by all means.

We're going to pick up the discussion that we were having last episode talking about a couple of fun things from 2018, maybe some forgotten stories, as well as some good comeback stories. Why don't we start out with a category that we are calling "Hey, Remember?" This is stuff that maybe got lost in the flurry of all those macro headlines that we were talking about last episode. Anyone want to hop in here first?

Jones: I'll grab it first. In our last episode, we were talking a little bit about unicorns. So hey, guys, do you remember a unicorn called Theranos? [Laughs.]

Moser: Oh, yeah!

Jones: Yeah. When I went back and looked, I was amazed. Theranos was a blood testing company who finally shut their doors in September of this year. For those that have been following, this has been a multiyear saga. At one point, this company was valued at over $9 billion. Never went public, thankfully. It was valued over $9 billion, had huge investors, some of which were prior secretaries of state that were investing into this company, all on the premise that, with one or two drops of blood, you could actually go and diagnose a bunch of different diseases.

Elizabeth Holmes, who everyone knows had the black turtleneck look going on, she went around saying that this technology could do all of these things that it really couldn't. Even managed to garner a partnership with Walgreens. Walgreens started to set up clinics to actually house these machines.

But that all came tumbling down. I've heard it called a house of cards, and truly it was, because the machines did absolutely nothing. Also, I'm going to put a quick plug in for the book Bad Blood by John Carreyrou. That was a book that I purchased, finished it in like three days. I was amazed by the amount of fraud that was going on with this company.

As it turns out, none of it worked. The founder and her partner, I think they settled with the SEC, but are facing criminal charges. There will be more to come in 2019.

It's amazing just how quickly a lot of these unicorns can spring up. We talked about a frothy IPO market. This is a perfect example of one that went completely south.

Lewis: What I think is such a good takeaway from that story, I'm reminded a little bit of the Bernie Madoff story. You had not just retail investors, but supposedly sophisticated investors, getting wrapped up in a major fraud. It's a good reminder that the story can be great, but you need to kick the tires on what's actually going on with the business, whether it's the financial statements, which were proven to be made up in the Madoff case, or the actual technology underlying the supposed breakthrough in blood testing, there has be something there. In this case, it wasn't just people that were well known, or strong investors. These were major companies like Walgreens that were buying into this technology blindly.

Jones: Yeah, very blindly. It's the financials. If you're a healthcare investor, really go and look at published journals. Look at the trial data, see what's out there. If you can't interpret it, find somebody who can before you start investing.

One of the things I love about The Motley Fool, something that we always encourage is, invest in the things that you do know. A lot of these big-name investors knew nothing about this. Even the people that were on the board of Theranos had no sort of medical background, knew nothing about diagnostics, yet still were pouring billions of dollars into this company. Dylan, I think that's a perfect takeaway for investors.

Lewis: I'm wondering if this category is going to become the cautionary tale category.

[All laugh.]

Moser:​ Maybe!

Lewis: My "Hey, Remember?" is, hey, remember when Helios and Matheson was a $250 million company? Listeners, if you don't recognize the name Helios and Matheson, perhaps you will recognize the name MoviePass. This was the fund that decided to scoop them up and try to turn them into a serious business. I say cautionary tale, this was something that rose about as quickly as it fell. You look back at the first nine months of 2018, Helios and Matheson booked $205 million in revenue. On that, they had cost of goods sold of $420 million. Before even getting to their operating expenses, they had gross losses of over $200 million on revenue of about $200 million.

Yeah, there's no way to defend a business model like that, right? And I think to a certain extent, there were some hubris from the venture cap private equity world of, "We can take this business and turn it into something truly transformative." But the lesson for investors is, if the business model doesn't look sustainable, it doesn't matter what stage two is. You have to get through stage one.

Moser: Yep, that's exactly it. It seems like the simplest question in the world. But I pose it to everyone. When you're looking at a new idea, the first question: How do they make money? And it seems like a simple question, but sometimes people step back for a second and say, "Wait, I'm not actually quite sure how they make money, or if it's sustainable, or if they can grow it." Particularly today, with all these tech companies that are coming out, and they generate plenty of revenue, but their costs outweigh that revenue considerably. You have to be able to find that road to profitability at some point. And if you can't, then you really need to be taking the thing with a grain of salt.

Lewis: Yeah. The reason I mentioned this story, too, is that you look beyond the business model, once it had fallen pretty low and was deep in penny stock territory, there were a lot of other signs that this was something that investors should stay away from, if they weren't dissuaded by the fact that it was in penny stock territory. You see the financial engineering going into reverse stock splits so that they don't get delisted. No joke! And then they tried to do a 500:1 stock split. That to offset all of the dilution that they'd created selling shares to raise cash to fund the unsustainable business. If you see these types of things, these are red flags as an investor that you have to be aware of. I think Helios and Matheson is going to be something that is studied in business classes for decades.

Moser: Most likely. Most likely one of a few.

Lewis: Yeah. J-Mo, what do you have for "Hey, Remember?"

Moser: Everybody, remember when Wells Fargo used to be this upstanding citizen of the banking world? Not so much anymore, huh?

Lewis: So it is a cautionary tale.

Jones: Another cautionary tale!

Moser: Another cautionary tale. It's not been a good year for Wells Fargo. The stock is down somewhere around the 20% range today as they continue to struggle putting a number of scandals behind it. There was this period of time where it seemed like it was Bank of America that couldn't avoid stepping in something every day. They've passed that title on to Wells Fargo now. This is pretty phenomenal when you think about it. Wells Fargo is the biggest bank, in regard to mortgage lending. They have such a corner on the mortgage market here domestically, which is such a big part of our economy. And then, to see how mismanaged this company was down to the banking center level. I mean, having worked in that industry for a time, and working as a loan officer with Bank of America, seeing how those incentive programs are developed, those incentive programs promote bad behavior. It's phenomenal to me that leadership can't see that until it's too late.

Over the summer, Wells Fargo had to go back to the Fed with a plan. They needed a plan for regulators for improving their compliance and operational risk management within the company. They submitted their plan to the Fed. And guess what? The Fed sent it back.

They said, "Nope, try again!" So, until they're able to actually come up with something that appeases regulators, Wells Fargo's operating under this asset cap. They essentially can't grow until they make regulators happy and say, "We've come up with this plan, so we can ensure that this is not going to happen again."

I'm not convinced, actually, that Tim Sloan, the CEO of the company, should be CEO. Remember, he was hired internally when [John] Stumpf, the CEO who was heading the ship here stepped down because of all this stuff that started it, it seems like you're bringing someone in internally who was part of the problem to begin with. I think that's creating some trouble there. They're having challenges trying to get past all of this.

We've talked about Wells Fargo for a long time as being a great bank. Warren Buffett owns a big slug of it through Berkshire Hathaway. Matt Frankel was noting a couple of weeks ago that Berkshire did sell some of their Wells Fargo stake, but that wasn't because they were disgusted with Wells Fargo. It's just that they're trying to keep that ownership below 10%.

I don't own Wells Fargo shares. I don't think I'd want to buy Wells Fargo shares. That said, for investors who know their line, you probably have a stock here that, at some point or another, is going to appreciate considerably in value. You have to believe, at some point or another, they're going to get these regulatory issues straightened out. Once they do that, they're still going to have this massive share of the mortgage market.

But, yeah, you see mismanaged companies like this, no matter how big the competitive advantage is, poor leadership can really take things down. That's been the case here with Wells.

Lewis: What are the signs that the ship is being righted there?

Moser: You look for things like deposits. Are they able to bring more consumers in? Are they growing their deposits? Are they growing their loan book? If the Fed lifts this asset cap, that'll be a big sign right there. That'll give them permission essentially to grow again.

But once they get that permission, we have to take a little bit of a leap of faith that they're not going to go back in there and do this kind of stuff again. And I'm not actually sold that they wouldn't, because of bringing someone up internally as opposed to maybe hiring externally. I think hiring externally was a big opportunity that they missed.

Lewis: It's tough to shift the culture of a company that has thousands of employees, too.

Moser: That's it, it's so big. You're talking about something that covers so many different lines of business in our country that are all so important, whether it's wealth management or insurance or mortgages. Money is moving around in all sorts of ways in this country, and Wells Fargo has a lot to do with it.

Jones: Jason, in terms of red flags, as you see these banks growing, if you see a bank growing too fast, too soon, you have to start wondering, what is it that they're doing that's actually driving the revenue higher? That's one of the interplays with bank stocks. You want to grow, but that also means their loan portfolios potentially get riskier, now you have more people that aren't paying back loans. So, you want to see growth, but I think you really want to see growth that's strong and sustainable, and, in Wells's case, ethical.

Moser: Yeah. I think a lot of these banks suffer from a little bit of groupthink. They see one bank doing it, and they're like, "OK, we can do it, too." And then they all do it. We certainly saw that during the financial crisis. In the lending we were doing at Bank of America, I can remember a lot of days where I'd go to work and be like, "This doesn't make sense. How's this person taking out a million-dollar loan, yet they don't really have anything at all?" [Laughs.] Well, turned out, they didn't. And a lot of those loans went bad. It's a problem where you see they all get together and think, well, if one's doing it, we can all do it. Really, that puts a whole heck of a lot more people in a really tough spot.

Lewis: Nick, are we going to go four for four here with downer stories?

Nick Sciple: Yes.

[All laugh.]

Sticking with the theme of epic collapses once thought of as significant players, let's talk about Venezuela. Once upon a time, oil prices were over $100, and they were going to stay that way forever. And during that period of time, Venezuela really pumped up their national budget, really started making some significant social programs. As we all know, oil has fallen precipitously from that level, and Venezuela's economy along with it.

About half of their national budget is dependent on oil production. Based on some data from the IMF, they have a breakeven, based on their updates on their fiscal policies, of over $200 a barrel. With the levels that oil has fallen, their whole economy has fallen to shambles. They're now pumping oil at the lowest level since the 1940s. This is one of the nations with the most oil reserves of any country in the world.

They're having significant problems with their oil infrastructures. They have over 12,000 unattended, contaminated oil waste pits throughout the country that are not being maintained. They've had oil leak into some underground transportation pipes and into rivers that have contaminated water throughout the country.

They've had massive inflation as a result of their entire economy collapsing. You can see real dollars of their currency, they call it the Cafe Con Leche Index, how much a cup of coffee with milk costs in the country, that's up over 200X since the beginning of 2018. Their health system is really collapsing. They've seen massive increases in malaria cases and measles, things like that, across the country.

I guess the lesson here is, particularly in markets as cyclical as oil, don't assume the current regime will be that way over the long term. Have a plan for the way those cycles are going to play out.

This has affected oil markets worldwide. As big of a producer as Venezuela has been, with that production coming off of the market, that's part of what pumped oil up to high prices earlier this year, and it's really contributed to some volatility. This is a story that people haven't really talked about. A country that really was on the up and up for decades on their oil wealth, and all those sorts of things have really collapsed, probably more than any country has in decades. A really significant story that's not getting a lot of play in the media.

Lewis: Yeah. And they're not the only country that is heavily reliant on oil. It seems, though, that they are one that has really taken a hit, more so than a lot of the other countries that are oil dependent.

Sciple: Correct. North African countries like Nigeria and Libya also have significantly high energy prices. They've been negatively affected by U.S. shale oil. The quality of the oil in those countries is very similar to what we're getting out of U.S. shale. That's really affected them. Saudi Arabia's oil breakeven is up over $80 a barrel, that's really hampered on their policies. They have the Saudi Arabia 2030 vision where they want to diversify their revenue streams. That's really put a damper on the ability to do that, with oil being levels that they're at.

There's been a lot of macroeconomic effects, particularly among major oil producers. These low oil prices are not just great for us getting cheap oil at the pump. It may cause some instability in some of these countries.

Lewis: So, learning my lesson from our last taping session, does anyone have anything to say about "Hey, Remember?" before we switch gears and talk "Comeback Player of the Year"? [Laughs.]

Jones: Is he good, Nick?

Moser: There could be a new section called "Hey, Wait A Minute." [Laughs.]

Lewis: Featuring Nick Sciple. All right, we're going to talk "Comeback Player of the Year." I'm so excited about mine that I'm just going to have to kick things off. I'm not going to pass the mic here. My company is Twilio.

Moser: Good one!

Lewis: This is a company that, at this point a year ago, the stock was down 63% from post-IPO highs. There was a lot punishing this company. You had post-IPO lockup period passing, hype wearing off. The company very famously lost some of its business from Uber. This was a relationship that led to like 10% of their top line, and Uber indicated that they were going to be slowly ratcheting that down. That was a big shock to this business. The revenue growth went from 60% year over year to 40% year over year in very short time. So a ton of stuff for a recent IPO and fledgling company to be dealing with.

But you go back to Q1 of 2018, the company has totally turned around everything. Their year-over-year growth was 48%, 54%, and now 68% for the quarters that they have reported so far in 2018, which is just unreal. You don't expect to see that kind of transformation so quickly. They've done it a couple of different ways, through some customer acquisition.

What has impressed me most is, they built out their services. The easiest way to see that is, this is a SaaS business, software-as-a-service. The key metric with these companies is the net revenue retention rate, or net dollar expansion rate. It's basically comps for the restaurant industry. In Q3 2017, that number was 122%. In the company's most recent quarter, it was 145%. These are relationships that they already had, and getting 145% of the revenue that they were getting a year ago from those customers.

On all of that, the stock is up over 250% in the past 12 months, which is just wild. This is a company that a lot of Fools follow, so I'm naturally very excited. I think CEO Jeff Lawson has done an incredible job over there. It's great to see this company flying. I think they're a really interesting business. They bring communication building blocks to a lot of apps. I could see them having a pretty long runway going forward.

That's my "Comeback Player of the Year." Nick, I know you have one, as well.

Sciple: Yeah. For this "Comeback Player of the Year," I have Chart Industries, ticker GTLS. I really struggled to find a company to check off this box here. I talked to Jason Hall, one of our guests on the Energy show, comes on all the time. And he mentioned Chart Industries.

Chart Industries is not a company that got knocked out, beat down to the mat, and popped right back up. But it is a case of a company that has really taken steps to strengthen its business over the long term, to put themselves in a position to be less affected by cyclicality, and to have a little bit more complementary synergies among their businesses.

What Chart Industries is, they're a global manufacturer of cryogenic gas processing and storage equipment. That sounds like a lot. The market where they have an application that more folks are probably familiar with is LNG. When you're liquefying natural gas to transport it internationally, you have to cool it down until it reaches its liquid state from gas, then maintain it at that temperature as you transport it.

Chart has been undergoing a reorganization over several years. What that's really done is brought down their operating expenses and created more synergies across their business. Most recently, they resegmented their business into three operating segments. That's passed down $2.5 million in SG&A reductions. They've been selling off some assets that didn't have as many synergies with their core business. Most recently, a good example of this is, they sold off a medical supplier. They really had no overlaps with their underlying business, and it had some operational issues. They had some warranty expense issues that they had not anticipated. They weren't equipped to handle that. So they divested that business, and they invested in a more complementary business, a European manufacturer of pressure equipment for these cryogenic facilities. That's added them some additional synergies and expanded their geographic footprint.

Really, what this company has done through this reorganization is brought their costs down, made the business have more synergies among its operations. They've really put themselves in a position to grow over the long term. They're expecting sales to be up 16-18% next year. They're having a backlog building up for their business. As I mentioned, LNG is really starting to emerge.

This is one of those cases of, not a company that was knocked out, but really a company that, over the past several years, has taken steps to change its business and reorganize it and put themselves on a stronger footing to go forward.

Lewis: I was wondering where you were going to go with that cryogenically frozen thing. That's like a Ted Williams company or something like that. That's wild. I didn't realize that played such a big role in the LNG space.

Sciple: As I mentioned, the natural state for natural gas is in a gaseous state. The limitation of that is, it can only be transported by pipeline. When you're trying to transport internationally -- the big emerging markets for LNG, of course, are in India and China. Where a lot of the supply has recently come to the market in the U.S. from fracking. We have, by many measures, over 100 years' worth of natural gas supply. We've really been looking for ways to export that overseas. Part of these cryogenic applications are going to be important to making that possible.

Lewis: Shannon, J-Mo, anything on the "Comeback Player of the Year"?

Jones: I debated this. I wouldn't even call it a comeback player. This is a stock that's maybe coming. It hasn't really come back, though. I'm sure you guys have heard of it. It's now called Bausch Health, ticker BCH, formerly known as Valeant Pharmaceuticals. Yeah. They even had a name change, because they're really trying to put away that old poster child of, "We charge ridiculously high prices for drugs and we do really debt-heavy acquisitions!" They're turning a corner, definitely not there. I will say, the stock is up about 15% year to date, which, honestly, I was surprised to see because they've had inconsistent quarters. Looking at the most recent quarter, their sales were actually down 3.7% year over year. They're still operating at a loss. In the third quarter, it was $350 million. So on the surface, it still looks like a company that is struggling. But they've got a new CEO. His name is Joe Papa. Papa's been good. [Laughs.] In particular, it's about new products and really solid organic growth. I think that's what you're starting to see. They also won a huge patent battle for a drug called Xifaxan, which I think will be key to the company's turnaround story as well.

But you're really starting to see, just going down the list here, some of that organic growth. Their biggest business segment, Bausch + Lomb, posted third-quarter sales of $1.15 billion. That was organic sales growth of 3%, its eighth consecutive quarter of organic growth. For its Salix segment, that was $460 million in the third quarter. This was year-over-year revenue growth of 2%. Again, nothing to write home about. But this was in spite of losing market exclusivity for that particular drug. Also, in irritable bowel syndrome, the diarrhea drug jumped 11% over the prior year period. So there's a number of different things where they are moving the needle.

The other side of this equation, and why you didn't see a huge Q3, was because they're still divesting of all of these assets they had acquired previously. They're still discontinuing some lines. You'll continue to see them struggle and not be as consistent quarter over quarter. But I think they're headed in the right direction. Not a true comeback, but they're coming.

Lewis: I don't know, I'd give that comeback status. That has to be one of the most defendable corporate rebrands of all time. I know that on Market Foolery, you guys spend a good amount of time throwing shade when companies decide for no reason --

Moser: Tronc!

Lewis: Tronc, IHOP is another one. [Laughs.]

Moser: Oath was another one.

Lewis: You can waste a lot of money on cups and mugs and things like that. But that sounds like it was money well spent to distance themselves from their shady past.

Jones: I think so. Yeah, I think with new management in place who's much more focused and really wants to grow the business organically, that's really the right direction for them. All in all, they're on the right path.

Lewis: We're going to wrap up the show with a discussion of some of the maybe more forgotten stories from 2018. Anyone want to kick us off there? Or things that were perhaps missed. Is that where we're going with this?

Moser: Flew under the radar?

Lewis: Flew under the radar, yeah. Sounds like you want to go first.

Moser: I'm suffering from a little bit of recency bias here, but we get a lot of questions about it. Markel insurance is a company that really does sneak by everybody, just keeps on doing what they're doing. We tout it as being a baby Berkshire Hathaway, more or less, and I think that's an apt comparison.

Recently, Markel had to announce that they are being investigated by U.S. and Bermuda authorities into loss reserves recorded with their CATCo business, the catastrophic insurance business. This essentially goes back to an acquisition they made back in 2015 of a company, CATCo. They rolled this reinsurance business into their business model. Ultimately, reinsurance and things like retrocession insurance, which is essentially reinsurance for the reinsurers, just spreading that risk all the way around, it's difficult sometimes to actually calculate the reserves for businesses like that because you're making a lot of forecasts, a lot of guesses. You run into some years where there's some natural disasters that take you out of the running there. I think we've seen that, certainly with the California wildfires here. Those are going to be a little bit of a problem.

Ultimately, this investigation centers around the fact that they didn't reserve correctly the loss reserves for this CAT business. It sounds bad, but let's put it into context here. If you look at the total revenue attributed to this catastrophic business to Markel's entire business, the CAT business generated $28.7 million in revenue in 2017. Markel's business overall generated $7.5 billion in revenue. This is a drop in the bucket.

With that said, any time you hear "investigation," I think shareholders often flee. Maybe it's a knee-jerk reaction. But I think in this case, it's the wrong reaction. When you look at Markel on the whole, they do a very good job of writing that specialty insurance. That's gotten them to where they are today. It's allowed them to build this Markel Venture side of the business, which is where they invest in small businesses all over the country, things that range from bakeries to dredging equipment and everywhere in between. We know Markel. We've spoken with Tom Gayner a number of times here on the investing team. It's a very well-run business.

I think this little investigation headline probably snuck under the radar for a lot of people. It didn't sneak under ours, of course, because we cover it. It resulted in Markel dropping 10% in one day, which you never see. Now, full disclosure, I actually bought that dip and added a few more shares of Markel to my portfolio. After reading about this investigation, what it's centering around, I can tell that it's not really that big of a deal at all. My litmus test here is, if that CAT business went away, would these guys be OK? And it really wouldn't affect them much at all. So it probably snuck past a few people, but the diehards probably saw it. For anyone who's interested in the business, it's worth knowing. It's also worth knowing that this is probably something that's not going to affect this business in the long run.

Lewis: That's always reassuring if you're an investor. Shannon, on the healthcare side, what do you think flew under the radar this year?

Jones: This particular story, the stock actually came to mind from a conversation that I had with Chris Hill. Chris came to my desk one day, like he normally does, it's very random. He said, "Why is nobody talking about CVS and Aetna?" And I thought, "What do you mean, nobody's talking about it?" And he's like, "Nobody really cares." I think really got the wheels going for me. Like, OK, what is it that nobody cares about? Is there actually something there? So, this is my "You Kind of Missed This."

To just to catch our listeners up, CVS announced that they're going to be acquiring Aetna in December of last year. It finally closed at a $69 billion deal in cash and stock. One of the reasons why I think this has floated under the radar is because people don't appreciate what this actually means. You've got CVS, a retail pharmacy, that just acquired a major health insurance company. Now, where you've seen CVS position itself, it's really on the verge of disrupting the healthcare delivery model. Think about it. I can go to a retail pharmacy, I can go there, pick up my healthcare needs if I have some sort of medical condition. Now, they've got those clinics that are already in sight there. I can use my Aetna insurance, probably get some sort of discount for going into the CVS to begin with. And now I've got this entire ecosystem built up within CVS.

I think this is huge. I think you're going to see cost savings, I think you're going to see margin improvement, even for Aetna. Even in terms of cost comparisons, it'll be much more transparent with the CVS-Aetna model. I would not be surprised if you saw some of the other retail pharmacies and health insurance companies do this, too.

Lewis: When I hear that kind of vertical integration, I think a little bit about Luxottica. I don't know how much you guys follow the sunglasses space. The conglomerate that owns most of the major sunglasses brands. They own Ray-Ban and a lot of the other big stylish sunglasses. They also do all of the private label stuff for most luxury businesses. Oh, by the way, they own Sunglass Hut and all these retail locations where those are sold. As you might imagine, things work out pretty well when you own that many elements of the value chain. It sounds like that, maybe a different margin profile, but something that might be happening over in the healthcare space.

Jones: Yeah. And really, when you look at CVS's stock, right now, it's trading at about 11X forward earnings, and it pays a decent 2.7% dividend. In terms of the growth opportunities that they have in the space, especially as so many tech companies and healthcare companies are trying to solve the healthcare pricing problem, you've got a company in CVS that could be positioned to lead this space moving forward.

Moser: I like that. You said something there in delivering healthcare and tech. I know you know Teladoc (NYSE: TDOC). Since Mac isn't in here, he can't run into the studio and tell me to shut up.

[All laugh.]

I seem to bring this company up every show.

Lewis: You're never going to be able to buy shares. [laughs]

Moser: Thankfully, I think my position is established. Teladoc is the exclusive provider of CVS's virtual healthcare offering. I really was interested in that from the perspective of the Aetna deal, as well. You saw CVS make that rebrand to CVS Health, being more comprehensive, offering more things. Teladoc did the same thing, now they're Teladoc Health. It's all about being comprehensive and having a way to get to consumers, wherever they may be.

I liken that to retail and that word omnichannel that we hear all the time now. They're figuring out, how do we reach our consumers wherever they are, and wherever we need to get them? There are a lot of cases where it takes a little while for someone to get to the doctor. Having a real-life example with using Teladoc myself, it's easy to see the potential there, for sure. Having that Aetna tie-up now with CVS Health, it's really exciting. You understand, now, you've got this huge demographic, and healthcare is one of the biggest expenditures in our country on an annual basis by far. So, I'm excited about it.

Lewis: All right, Nick, take us home. What do you have for "Under the Radar" in energy and industrials?

Sciple: "Under the Radar" in energy and industrials, I want to talk about cobalt a little bit. The Democratic Republic of the Congo is where 60% of the global supply of cobalt is located. Cobalt has a significant input in lithium-ion batteries, particularly as we look at EVs emerging over the next five to 10 years, it's a significant portion. It makes up about a third of most batteries, 20% in most cases. There have been some efforts to reduce the amount of cobalt that goes into these batteries. It is pretty expensive. Metals account for about 25% of the cost of a lithium-ion battery, with cobalt being the highest portion of that. It's pretty important to keep your battery stable, so you can repeat charges and it doesn't break down every time.

What's significant about this is, the Congo, which as I mentioned has 60% of the global supply, has tripled its royalties about a month ago. Again, we're seeing them exercising a little bit of autonomy, taking some control over that supply. As cobalt demand increases over time, as EVs come to market, that royalty is going to become more significant.

We mentioned wanting to reduce the amount of cobalt in these batteries. Even under the most ambitious scenarios of reducing the content, we're still going to need to double to meet demand for EVs coming forward in the future. So this is an important resource today, but it will only become more important going into the future. As royalties rise on these types of resources, it's going to create strain in the ability to grow into what the market is going to want out of these battery makers and EV folks.

Lewis: That sounds like something that's just prime for an episode of Industry Focus in 2019. [Laughs.]

Sciple: I think we may hit that one. Maybe hit some other inputs, as well.

Lewis: Those spaces are so tough for people to sift through. You're working through supply chains at that point. You're not even really working through end consumer use, where a company might actually interact with the sales. I'd love to see that episode!

Sciple: We've seen several big players move to try to lock up some supply. Both Apple and Samsung have done that. There have been some talks about Tesla trying to make some moves to lock up supply. It's something to watch going forward for a lot of these tech players, anybody that's in the battery space, do they have that supply locked up, particularly as demand is going to increase. When you're in something like mining, the ability to bring new supplies on really quickly is difficult. It's really the Wild Wild West there. There's still significant issues with child miners and things like that, which have caused some folks to worry about supplying the resources from there. Really, something to follow, particularly as all of these battery-intensive industries evolve over the coming years.

Lewis: That forward look is the perfect way to key up our third episode. It should be dropping tomorrow. That's our "Stocks To Watch in 2019." Just some reckless predictions and things like that. We're going to wrap the discussion for this episode here.

Listeners, that does it for this episode of Industry Focus. If you have any questions or if you want to reach out and say hey, shoot us an email over at, or you can tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work. For the hosts, I'm Dylan Lewis. Thanks for listening and Fool on!

Dylan Lewis owns shares of Apple. Jason Moser owns shares of Apple, Markel, and Teladoc Health. Nick Sciple owns shares of Apple, Berkshire Hathaway (B shares), and Teladoc Health. Shannon Jones owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Bausch Health Companies, Berkshire Hathaway (B shares), Chart Industries, Markel, Teladoc Health, Tesla, and Twilio. 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 CVS Health. The Motley Fool has a disclosure policy.