In this Market Foolery podcast, host Chris Hill is joined by Motley Fool contributors Jason Moser from Million Dollar Portfolio and Taylor Muckerman from Stock Advisor Canada to weigh in on a trio of tidbits from the business world.
First, the U.S. Supreme Court struck down an old federal law that blocked most states from legalizing sports betting; several states are prepared to implement it virtually immediately. The question for investors is, how can you best bet on the house in this situation? Meanwhile, last week, general retailer Canadian Tire bought outdoor apparel maker Helly Hansen, and some are concerned it might have paid too much. The guys consider the deal, the price, and the synergies.
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Lastly, the Fools answer a classic question from a listener: "When should an investor start taking profits on a multibagger stock? Or should he just hold on forever?" Since the answer to this depends a lot on the company, they both talk generally and address the case of the listener's stock -- Sirius XM (NASDAQ: SIRI) -- which is up around 500% since he bought it.
A full transcript follows the video.
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This video was recorded on May 14, 2018.
Chris Hill: It's Monday, May 14th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, Jason Moser and Taylor Muckerman. Happy Monday, gents!
Jason Moser: Howdy!
Taylor Muckerman: You sound refreshed!
Hill: I'm highly caffeinated. I didn't sleep well, but I'm highly caffeinated.
Muckerman: There we go.
Moser: Was it a good Mother's Day in your house yesterday?
Hill: It was a good Mother's Day. In yours as well?
Moser: It was, it worked out well. I got out of there feeling like a good husband and a good father, and I think my wife was happy. I mean, she deserves all the credit that she gets, because she's a wonderful wife and a wonderful mother.
Hill: Belated shout-outs to all the moms out there!
Muckerman: That's right!
Hill: Big thank you to the U.S. Supreme Court, which showed up this morning with a phenomenal news fairy moment. We're going to dip into the Fool mailbag, but we have to start with the Supreme Court ruling that cleared the way for states to legalize sports betting. This strikes down a federal law from about 25 years ago that had prohibited most states from authorizing sports betting. Where do you want to start? We could start with the stocks, we could start with the states. Just in terms of the states, this was a suit brought by the state of New Jersey. If we're ranking winners and losers, I'd say New Jersey is a winner today.
Muckerman: Atlantic City might come back from.
Hill: Yeah, and right behind them, Pennsylvania, West Virginia and Mississippi, which already passed state laws basically saying, "If the Supreme Court rules in our favor, we're ready to go."
Muckerman: If this, then that, yeah.
Moser: I love that. That's great forward thinking.
Moser: That's something that really works for investors. That's what investing is all about, forward thinking. Just sitting here talking right now, it just struck me, I have the war on cash basket, the healthcare and wealthcare basket. I feel like we have a "gambling on your future" basket coming here. I mean, there's something we could put together, because I think this affects a lot of different areas for investors.
From the very beginning, I like the fact that this was not even close decision, six to three. I think it was a very clear decision there. And the beauty of the Supreme Court is, ultimately, not a whole lot of ways you can overturn that, unless they overturn themselves or unless states try to amend the Constitution. So, generally speaking, this decision should stick.
It gives states the choice. And I think that's really the point. We're not saying you have to do it, but if you want to do it, you can. I think it makes sense. I think consenting adults generally are going to get what they want. We've seen it over time. Prohibition, I think, from 1920 to 1933 or so, that kind of worked out well in the beginning but as time went on, the attitudes changed, and there were some economic reasons as well that pushed Prohibition out the door. I think this is a much different country today than even it was 25, 30 years ago. So, hey, I'm a fan. I like the decision. I think it'll have a big impact on a lot of different areas.
Hill: And anyone who thought, when we talk about baskets of stocks, thinking in terms of just, "I'll just buy a basket of casino stocks," not necessarily.
Muckerman: No, there's going to be other players in there.
Hill: Well, there will be other players in there, but also, some of the bigger casino companies that are publicly traded are not going to really benefit from this in the way that others are. Caesars Entertainment, Penn Gaming, those are two stocks that are up today. When you look at where their casinos are spread out, they stand to benefit from this.
Muckerman: Yeah. And I could see, even, maybe a wise movie theater operator getting in there and maybe opening a couple of screens to a sports book where you can go in there and have a split screen, maybe get some interactive gambling going on at a Sportsbook or an arena or something. Certainly, I think other industries outside of just casinos could benefit from this immensely.
Moser: Yeah, I think the casinos are a bit of a knee-jerk reaction. Matty Argersinger and I were talking about this earlier. Nevada, and Vegas in particular, those are the places where I think you need to start looking away from, because this basically spreads that competition out, now. There's going to be more competition in play, not less, which takes a little bit of the power away from these casinos and spreads it out into other places -- namely, really, I think the internet is going to figure out ways to disseminate these sorts of gambling opportunities.
I think the leagues stand to benefit tremendously from it. They should get a scrape from this. I was watching something the other day on TV, the PGA Tour, not the commissioner, but someone with the PGA Tour said they've already been working with players on the Tour, saying, "Listen, this is probably something that's going to pass, and if it does, this is going to be the impact. So, as professionals, as players, you need to be aware of this," because it's going to be rife with possibilities of people coming in there and saying, "Hey, maybe I'll pay you a little money to throw a couple of extra shots," or something. So, players, I think, have to be aware of it, too.
But I think it goes anywhere from casinos to -- well, I mean, how is the money being moved here? PayPal seems like an obvious potential winner. Possibly Square, to an extent. But I think this is more a PayPal's alley. This is not going to be cash changing hands as much as it's going to be just electronic funds changing hands. Then, of course, the DraftKings, FanDuel future seems to be a bit more interesting now, as well.
Hill: I'm glad you mentioned the impact on the athletes themselves. I think, when we think about knee-jerk reactions, that is, understandably, I suppose, one of the knee-jerk reactions. "Well, this is going to increase the amount of approaching athletes to throw games," and all that sort of thing, even hearkening back to the Black Sox scandal of 1919. I think the important thing to keep in mind there is, that scandal -- and obviously, that was literally a hundred years ago -- was able to happen, and these types of scandals are able to happen, when there's very little money involved for the athletes themselves. When we're talking about the NBA, the NFL, when we're talking about the major pro sports, the financial incentive just doesn't really exist for those types of athletes.
Moser: I tend to agree. It seems like now, more than ever, these athletes are making a mint playing these sports.
Hill: And endorsements.
Muckerman: And if Pete Rose is any example, that's a stiff penalty for getting caught throwing a game or gambling on the same game.
Moser: Absolutely. I think the one league where perhaps this comes into play more than others would be the NFL, and that's just because of the nature of the game and how short an individual's career likely is in the NFL. It's easy to look at those guys and say, "Man, they just signed this $40 million contract, what in the world?" Well, half of that is going to Uncle Sam immediately anyway, and his career is probably around three or four years. There's another 40, 50 years he has to account for. So, they really actually don't get paid all that well when you think about it. So, I could see, in certain cases, where it becomes enticing, at least.
And that comes down to people. I mean, everything ultimately comes down to people, at the end of the day. But again, along that line, people want this. People want to be able to do this. It only makes sense to open this up. And, again, it doesn't mean every state is going to immediately sign up, but the ones who want to do it will, and I suspect they'll reap the benefits.
Muckerman: I also wonder the impact on state lotteries. Maybe better odds gambling on sports than simply buying a lottery ticket with a scratch-off.
Hill: Let's move on to a deal from up north. This was from a couple of days ago, but I'm curious, Taylor, to get your take on this. This is Canadian Tire, which, the name suggests that's an automotive business, and presumably Canadian Tire started out that way, but it's now much more of a general retailer. Canadian Tire buying Helly Hansen, which is a sportswear brand. Seems like it's more outdoor gear.
Hill: I'm curious what you thought of this deal. One of the things I read was that it seems like a good deal on the surface, although maybe Canadian Tire paid a little bit more than they could have. They paid close to $1 billion Canadian, that's somewhere in the neighborhood of just under $800 million U.S.
Muckerman: Yeah. The headlines say that they might have overpaid a little bit. You're looking at 18-20X EBITDA for Helly Hansen. But this is an apparel brand that has been growing nicely. You look at the last three years, growing about 12% on the top line year for year. Even higher as you flow down the income statement, so, there's some operating leverage there.
When you look at its target markets, Canada is its second-largest market, and it only sells about a quarter of its apparel in the Canadian market. You look at a company like Canadian Tire that already has some shelf space dedicated to Helly Hansen, maybe they can broaden shelf space, put some more product out there available. When you look at Helly Hansen, only about a quarter, maybe a little less than a quarter of its apparel is sold direct-to-consumer. This opens up some more lines for that. Obviously, if Canadian Tire owns it and is selling it, that's direct to the consumer for them, so a little higher margins, potentially. And, maybe pull back on the share buybacks, because this will increase debt. They already did have a decent debt load, so you maybe you pull back on those share buybacks.
But, a lot of folks think this is going to be immediately accretive, even just to a small degree, right away. But, I don't look for synergies in terms of them making their same clothes on same lines, that kind of synergy. But, a direct-to-consumer line, and then opening up more shelf space across the country. This is an international brand, so maybe a little bit more geographic exposure for Canadian Tire shareholders.
Hill: For the sake of argument, let's just say, maybe they overpaid a little bit for it. I mean, this is a company based in Norway. For that kind of international exposure, it seems like a smart move for them.
Muckerman: Yeah. You're looking at Sweden, Norway, the U.K and the U.S. all being the other top five countries that this brand sells into. Certainly, I think, a wise acquisition. The management team over the last decade or so has made two similar-sized acquisitions that have both worked out very well for shareholders. Small track record, but a positive one. We look for this deal to start making an impact almost right away.
Hill: Our email address is firstname.lastname@example.org. From someone who didn't include his or her name, it was just an alphanumeric email address, so, no name attached to this email. "I purchased shares of Sirius XM starting in the early 2000s with the intention of hopefully making it my get-rich stock. Long story short, I'm up nearly 500%. The average share price for me is $1.17. Do I continue to ride it and hopefully get rich, or do I take some profit?" For context, this person's cost basis is just over $1, right now, Sirius XM trades for about $6.80 a share, somewhere in that neighborhood.
We always give the caveat, we can't give individual advice. But, I love this question because it's a question that, I think anyone who's been investing for a while hopefully gets to the point where they're asking this question. In this person's case, it's Sirius XM. Just, whatever your individual situation is, I think we all have probably gotten to that point at some point, where we're like, "OK, I've owned this thing for a while. I'm up well ahead of the market. What do I do here?"
Jason, there are certainly times when there are stocks that, the best thing you can do is just hold on to them forever. Then, there are others that you think, whether I sell out of it completely because I've found a better place for my money, or I "take a little money off the table" and use some of the earnings I've gotten and diversify into something else -- it's always a relevant question.
Moser: Yeah, and I think with Sirius XM, it's even more relevant. Congratulations on the gains, it sounds like you really hit them with a high in there with over 400%. This is they hey-now thesis. This is the Howard Stern thesis, because that is really why you would buy into Sirius XM, I think, at this point in time, or if you did back in the day. There was a lot of skepticism as to whether people would actually subscribe to satellite radio. And lo and behold, there are over 30 million subscribers today.
Now, the problem is, a lot of those subscribers are there because of Howard Stern. And I understand. I'm a subscriber as well, and I mean, I really love it. The thing is, you have to be aware, at least, that in the next three years, I think, his contract comes up. He just renewed a deal for five years, and it's sounding like he's kind of wanting to ride off into the sunset after this is all said and done. So, if, in fact, that is the case, in three years he decides to call it quits, now, Sirius XM was very clever in sealing an additional seven years of all of his content in that contract. Even if he quits after three years, they get an additional seven years where they can really monetize his library of content, which is a big library. And that's great, and I think a lot of the diehards will continue to subscribe. But I know a lot of people who probably will go ahead and quit after he quits, as well. I mean, certainly, I probably will. I know some of my friends who will, too.
So, then, it's a matter of, what will Sirius XM be in three years' time, or four or five years' time? There's a lot of competition out there trying to get our ears, whether it's Spotify (NYSE: SPOT) -- obviously, Spotify is building out their universe and adding podcasts and new shows and whatnot. So then, you look to the fundamentals of the business, and Sirius XM has done a lot, but the top line is slowing down, margins are going to continue to be pressured. It's got a big ownership there in Liberty Media, which is John Malone. I think that's probably a net win at the end of the day.
Probably one that I would lighten up on, though, a little bit. I think the market is pricing a lot of this immediate future of Howard Stern into it today, and the big unknown is what happens to that subscriber base once he takes off. I have a feeling it probably goes down, and if it does, the stock is surely to go with it.
Muckerman: Yeah, I'm of the same mind. Potential for high volatility, high debt load, and three years and then Howard Stern's gone. Definitely an unclear future for a company that's in a very competitive market.
Moser: They did just upgrade their app, though, I will say. Over the weekend, I got the new upgraded version, which throws a lot of video content into it, which is really cool. It's a really wonderful app. They've done tremendous things with it. And they have so much stuff on it! I'd probably stay on as a subscriber, but maybe not at the same price point. I think they're going to have to grapple with that a little bit in order to keep that subscriber base up and growing.
Hill: Two quick things I'll add. One is, John Malone's track record in media. John Malone is someone who sticks to his knitting. He doesn't really take the tack of, "Well, I have a good track record when it comes to managing media businesses, therefore I'm going to try restaurants." He sticks to media. The other thing is, I was just thinking as you were talking, Jason, in a way, SiriusXM was Netflix before Netflix. If you think about Netflix having all this other content that they're essentially licensing, and then they get into original content, same thing with satellite radio. Sirius XM, a lot of their stuff -- not just on the music side, but just on the talk programming side -- is licensed from other entities. But they also have the original programming with Howard Stern, and that's sort of the differentiator.
Moser: Yeah. I think we were arguing the same thing with Spotify. In order for Spotify to really be able to separate itself, they're going to have to figure out a way to grow that exclusive catalog of content. And, wow, man, there's just so much stuff out there. Just like video, there's only so much time in the day. It's difficult to attract such a wide audience.
Muckerman: Far too easy to make video and audio now.
Moser: Yeah, it really is.
Hill: Jason Moser, Taylor Muckerman, thanks for being here, guys!
Moser: Thank you!
Muckerman: Appreciate it!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Chris Hill owns shares of PayPal Holdings. Jason Moser owns shares of PayPal Holdings and Square. Taylor Muckerman owns shares of PayPal Holdings and Square. The Motley Fool owns shares of and recommends Netflix and PayPal Holdings. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.