The new year is here, and it's time to look back on some of the biggest and weirdest stories from 2017. For the first time ever, Industry Focus is hosting the Industry Focus Awards, where the hosts from all five shows come together to pitch their contenders for various categories. Wrapping up this Foolish ceremony, we hand out a participation award, discuss our favorite listener email, and talk about which company is most likely to succeed in 2018.
A full transcript follows the video.
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This video was recorded on Dec. 29, 2017.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. This is the Friday, Dec. 29th show, the last Industry Focus of the year. If you've been with us all week, you know that we're releasing a four-part 2017 awards show this week, and this is the final episode. If you haven't caught the others yet, it's probably best if you go back and listen starting with Tuesday. We're in the home stretch now. The next award is not for a company or a person or a product. Well, it's kind of for a person. It's actually for a listener. No one loves the subject of this award more than Michael Douglass, so I would like to hand the mic over to him to introduce this one.
Michael Douglass: Thanks, Kristine! Listeners of the Financials show on Monday know that I tend to like to start a conversation with our listeners by offering them opportunities to dig in more to different trends that I discuss on the show. And you know what? It's something I'm going to keep doing. So we wanted to talk a little bit about some of the best listener emails we've gotten. We actually have a number of nominations here. But first, I thought we would pitch it over to our man behind the glass, Austin Morgan, for his nomination.
Austin Morgan: My nomination comes, because it's the only email I got this year.
Douglass: [laughs] So to be clear, folks, if you email us at email@example.com, you can absolutely address thanks to Austin, and he will reply to you.
Morgan: I will. I did reply to this email. I got this email, I don't remember which show it was, maybe the Tech show.
Dylan Lewis: I think it was.
Morgan: I can't remember why I was giving you these tips, but one of my tips was, never go to a Waffle House after midnight. And I got a response via email from a Fool who was traveling West Coast to East Coast who stopped at a Waffle House well after midnight.
Harjes: That's awesome. I do love when -- I don't know that we've had any other emails specifically addressed to you, but I do love when people will email us and comment on the sound quality, because it's pretty excellent. You do a great job.
Morgan: If the listeners have any questions or comments or anything that they want to hear differently, or if it sounds good, if it sounds bad, email us. Like Michael Douglass says.
Douglass: Industryfocus@fool.com. Like me, Austin loves receiving emails. Actually, like all of us. Everyone here loves talking through and answering listener emails. It's really one of the best parts of our job, especially when we get a chance to really dig in on something.
Harjes: Given that we love volume of emails, my nomination for the best email actually goes to a set of emails, more like an onslaught of emails, that we got in response to our puzzle theme week that we did back in May. For those of you who are newer listeners to the show, we give out one clue per day back in May, and we offered a prize to the first 10 people to write in with the complete set of answers from Monday through Friday's shows. Now, the clues were given out at the very end of our show, which is generally about 20 to 30 minutes. So if I had to pick just one email that's my favorite, it would be the very first email that we got with the complete set of answers. The show dropped at 3:21 PM --
Harjes: OK, 3:30 sharp. Austin, you're in charge of that, I take your word over mine there. So, it dropped at 3:30 PM on the dot. This guy emails us at 3:30. And we're all mind-blown, because we hadn't anticipated that someone would just fast forward to the part where Dylan doing the Friday show gives the final clue. And in fact, we had all 10 listeners, the ones that received the prize, email us the complete set before 20 minutes had gone by that the show was live.
Lewis: Which goes to show how bad we would be at winning our own puzzle contest.
Harjes: Yes, you all would have beaten us. Also, I'm going to pull a Vince here and actually pitch another thing. I have a runner-up email but I also really got a kick out of. Right after Halloween, Todd and I recorded a show, and we were just making idle chit-chat in the beginning of the show, and we mentioned the movie The Shining. I forget why. I think I was like, Todd, what was the best Halloween costume that you saw? And he mentioned this movie, and I don't watch movies, as I'm sure our regular listeners realize. So I was like, I don't really know what that is, but that's cool. So listeners sent in a picture of what I take to be him and his wife dressed up as the creepy twins from the movie. Meanwhile, nobody else that got that email on the cast of Industry Focus had any idea that I had talked about this on the show. So this email comes in, and the subject line is just, The Shining, and it's this gigantic, sideways-turned picture of these two adults dressed up as creepy children. Which I thought was just wonderful.
Douglass: And you could see us all gradually backing away from Kristine's desk pretty much as soon as we all got that email. And to be clear, at Fool HQ, we have rolling desks, so it's quite possible to remove yourself.
Harjes: Yeah, I just sent a reply all to that, like, "Oh, I got this one. This is for me."
Douglass: That was the other thing, because we all looked at each other like, "Uh ... whose is this?"
Lewis: Yeah, we all get pinged with those emails. If there's something specific about one show that you're addressing, it will hit the inboxes of every single host. Something good to know, perhaps. I have a submission for best listener email, and this is kind of a category-bending submission, but I think it's the spirit, not quite the letter of the law here. And you're going to have to bear with me, because I'm going to have to speak another language that I don't speak to actually say it. This comes from a tweet.
[Dylan reads tweet in foreign language]
That is Swedish -- probably not the way I said it, but the way it was written -- and it translates to, "The average American has $16,000 in credit card debt, and on average pays an interest rate of 15%. Pooh." The reason that this Swede was tweeting about American credit card debt was that he heard it on the 10/30 episode of Industry Focus, and his friend hit him up on Twitter to ask how he learned it, and they got into this exchange about Industry Focus. The reason I think this is so amazing -- I love the puzzle one, I love the Waffle House one, this one is great too -- it just goes to show that we are not speaking solely to a U.S. audience. And for us as hosts, I think it's really incredible to see the reach of the show and all the different conversations that we are a part of.
Douglass: I feel like this is that moment of a Hallmark movie where everyone is like, this is the true meaning of Christmas.
Sarah Priestley: Well, leaning on from Dylan's far-afield, my best listener email is also somewhere close to my heart, a fellow Brit, so I think he gets extra credit. Cam Cain first wrote to us back in September when I first started on the Energy show, and asked if we could cover some oil companies that were foreign or not U.S. domestic, which led to the Oct. 12th episode about oil stocks with a foreign flair with Tyler Crowe. And he subsequently emailed in with some great ideas for the show. He has some really insightful opinions about the future of electric, and he's just an all-around nice guy. So that's my submission.
Harjes: That's lovely.
Lewis: I think they're all great. [laughs]
Harjes: I think they're all great, but I want to put my vote behind Austin's for a reason that I don't think him up in his pitch, and that was the subject line of this email. Which, if you recall, his advice was, don't go to Waffle House after midnight. And the subject line comes in, "Well, I did."
Lewis: I think that email also goes to show that you can write in with non-financial questions. You can write in with just life commentary. We think it's fun.
Douglass: Actually, one of the really cool things that's just outside the studio is, on the Motley Fool Answers podcast, at one point, they asked folks to write postcards from cool places they were traveling to. And there's this big bunch of postcards out there. Now, I'm not saying you need to write us postcards. E-mails will do just fine. But it's really cool to hear from listeners whenever we get the chance to. So, thank you!
Morgan: Where can they reach you at?
Lewis: Or, on Twitter, @MFIndustryFocus. And I will add to that -- on Twitter, we do get questions every now and then: Do we still do tours of HQ? The answer is yes. If you write in or shoot us a note on Twitter. We can coordinate that, and if you want, even just hang out for a taping while we do the show.
Harjes: We also have a Facebook group, it's called Motley Fool Podcasts. Request to join that, and we'll be sure to add you. There's a lot of insightful discussion and many various Oreo flavors that are posted pretty regularly. So if you're interested in either of those two things, hop on over there.
OK, do we have any more votes? Or are we just going to be like, those are all winners, because I'm kind of leaning toward the latter.
Vincent Shen: Same.
Harjes: Alright. It's now time for the big kahuna, the award you've all been waiting for. And this is Most Likely to Succeed. We have Michael and Dylan that are going to be contending here. Who wants to go first?
Douglass: This is going to end poorly for me, so I might as well lead off.
Lewis: If you pitch Bitcoin ...
Douglass: I'm actually going to pitch a stock that listeners to the Financials show will be somewhat familiar with, because I did a deep dive on it with Matt Frankel just a few weeks ago: BofI Holding (NASDAQ: BOFI). That's ticker BOFI. In banking, I believe that costs predict your future. A bank that keeps its costs down pockets more cents out of every dollar that it earns, meaning that it can achieve average or above-average profitability even while offering more attractive loan and deposit rates than its competitors. That, in turn, means that it can attract borrowers and customers with lower credit risk.
So when the credit cycle turns and people start defaulting on their loans, and it always does, and folks always do, eventually, such a bank is insulated from the worst of the downturn. BofI used to go by the name of Bank of Internet, which is probably what most people tend to know it as. It's an online-only bank, as you can kind of imagine, so its costs are incredibly low. You can see that with its efficiency ratio, which is basically a measure of profitability. The lower the percentage, the better. The gold standard among banks is under 60%. BofI's last quarter, 40.49%. That extra 20% of cost saved means it can offer attractive terms to its customers and get very creditworthy borrowers as a result. During the depths of the financial crisis, when banks were going out of business because their loan books were collapsing, and the big banks were posting 4% to 5% or more of loans non-performing, BofI topped out at 1.5%, only a fraction of which they ever ended up writing off, because they were able to retrieve most of it. Oh, and add to the fact that this company has been growing like a weed. Over the past four years, it's almost tripled net revenue and earnings per share. You have a business that thrives when times are good, and does just fine when times are bad. And now that they have come out on the other side of a lot of allegations that popped up in 2016 regarding some issues with auditors, none of which were ever proven, I think it's a company that's incredibly undervalued compared to its growth opportunity and its fundamental creditworthiness.
Lewis: Something that's kind of curious to me with that, Michael, I only know BofI because a lot of Fools follow BofI, and I don't have a good feel for the banking space as a consumer. Do you find that they are easy to find for consumers, and they have that presence? Because I would think, as someone looking to set up a checking account, take out a loan, something like that, driving around town, you would realize, there's the Bank of America branch there. Do you find that people struggle to find BofI? Or is their customer acquisition pretty seamless?
Douglass: I think because they aren't there and you're not driving past them, it's a little bit harder to find them. In a lot of ways, what that means is, people who are really looking for a deal and people who are really financially savvy, are the folks who tend to find them. Which, when you think about it from a credit worthiness prospective, as a bank, you want people who are financially savvy, because those are the people who, they're going to demand more, but they're also probably going to be a safer risk when you're loaning them money. So I think that's very attractive. To put things in tech speak, it's a feature, not a bug.
Lewis: Ooh, look at that. When you said you were going to be pitching for Most Likely to Succeed, I was a little worried that you were going to pitch something in the payments space. That's a space I've been following quite a bit, it's something that straddles tech and financials, and that's actually a space I was thinking about pitching myself. Square and PayPal have been two great companies to own. Ultimately, I decided not to, though I do think that space is great, and really ripe for great returns. I'm pitching the gaming space, specifically gaming companies.
I talked about this a little bit on a recent show with Dan Kline. As somebody that wasn't a hardcore gamer, it took me a little while to come around to the idea of e-sports and really, what that market might look like. But you look back at the last couple of years, the traditional game publishers have performed incredibly well. They have multibagger returns over the last five years. This year, in 2017, Activision Blizzard (NASDAQ: ATVI) up 75%, Take-Two Interactive up 120%, Electronic Arts up 33%. All three of them have crushed the market's return of 18% this year. You look forward at some of the forecasts for what e-sports might turn into. There are thoughts that the audience could grow by 50% between now and 2020, and that the market will double in revenue to roughly $1.5 billion in that year.
Activision Blizzard in particular has been a really incredible stock to own over the last three to five years. I don't see that changing any time soon. I think, frankly, these stocks and this space benefits from a lot of people doubting it, and not really being able to wrap their head around the fact that people who like to game, which is an increasing population, are happy to sit in front of a computer and watch other people on Twitch, or maybe watch tutorials or how to get through certain levels. There's a very big market there, and the nature of entertainment in people's willingness to not play traditional sports and go toward digital sports, that appetite is just getting bigger and bigger.
Douglass: It's interesting, because it took me a long time to come around to this idea as well, that people were willing to watch other people play games. I'm a gamer. I played Blizzard games back before it was acquired by Activision, so we're talking original Warcraft, Warcraft 2, Starcraft, some of these really old games. The idea of watching somebody else do it, it's like, why would I do that? Why wouldn't I play it myself? But it's a real thing, I've seen it.
Lewis: Yeah, I mentioned, I was talking to Dan Kline, he said his son watches tutorials all the time for how to play certain levels. And as we get this more fragmented understanding of entertainment, I think streaming cable is one of those things, I think it gives rise to all these traditionally niche interests. I think gaming is one of the perfect examples, where you give people more options, they're going to self-select into things that they really enjoy, now that there's a platform for it.
Shen: I would just like to add, I think the e-sports push and this popularity among gamers to interact and see people on Twitch, for example, play their favorite games, it also speaks to the change in the competitive levels of gaming. If you think back to the original consoles, PlayStation, PlayStation 2, you're not hooked up to the internet, you're not playing against other people unless they're sitting on the couch with you. But now, you can play against people all over the world. I feel like the competition levels in these video games rises up, because you have so many opportunities to get better, compete against all these other players, and it really adds to that element of, I want to see how the best players are doing this, how they're playing this certain strategy, for example, so that I can be that good and be better when I play, too. And it all kind of adds together into this tailwind for the industry.
Lewis: Yeah. And there are a bunch of different ways that e-sports can be a tailwind. I think, when you look at these publishers, they all look pretty good. They all offer people slightly different things. Activision Blizzard is kind of your titan, fairly more diversified. Electronic Arts has their franchise staples, they're in all of the sports games, so they have these releases coming out every year that are updates, pretty reliable and predictable, so the growth is a little bit lower there. And Take-Two is this upstart. If I had to pick one, Activision Blizzard, I think, is the play there, but I certainly think all three are particularly interesting because they have a ton of exposure to this very quickly growing space.
Priestley: I would go with Dylan. I think e-sports, even if you take the gaming companies aside from e-sports, if you look at what they're doing with digital revenue, in-game purchases, it's just going to open up a new world for them. And I think it's a really great source of revenue, because once you've created that game and you've invested all the time in making all the characters and creating the universe, to actually make additional content doesn't cost you that much. But the amount that they're receiving for it, they don't have to pay any third party to hold the game for them, they don't have to do any shipping or anything like that, it's all digital, so it's all basically going straight to the bottom line.
Lewis: Yeah, digital sales are incredibly high margin for them. This model changing, where people are online, it lends itself to microtransactions. So you see a lot of additional revenue coming in that way.
Harjes: As an Activision Blizzard shareholder, I have to also go with Dylan. I'm sorry, Michael.
Douglass: No, that's OK!
Harjes: But, I will say, fortunately, in your portfolios, you don't have to buy just one. So this is a category where you could choose them all.
There have inevitably been some companies that we missed, and we would hate to slight them. So for our final award, in the millennial spirit, we have the Participation Award. We don't have a whole lot to say about you, but you were there. It was 2017, and you participated. Who has a nominee?
Douglass: I'm going to go with a slightly different take on it, which is, I think this company needs a participation award, because they ought to have an award for something. And that's Wells Fargo (NYSE: WFC).
Douglass: Here's the thing. You're probably thinking, Wells Fargo, they had that whole issue with making a bunch of accounts for people who didn't need them or want them or know that they had them.
Lewis: [laughs] Keep digging.
Douglass: Fair enough. But there was some interesting news that also happened in 2017 for Wells Fargo. For example, they had originally said that it was about 2 million accounts. In mid to late 2017, they disclosed that it was actually closer to 3.5 million, so that's an extra 1.5 million or so tacked on. Oh, also, it came out in July -- this was a New York Times report -- that Wells Fargo had charged over 800,000 people with auto loans for auto insurance that they didn't need or want, leading to 25,000 wrongful car repossessions. Yes, exactly. And while we're on the topic, frankly, earnings at this company haven't been great. When you look at the efficiency ratio, which is something we were talking about earlier, 60% or lower is what you want, they've climbed up to 66%, which is a lot higher than where they've historically been, mostly in the upper 50s. Revenue is down year over year. Earnings per share is down year over year, largely due to legal expenses. Basically, it's been a rough year for them. So I think in the spirit of the participation award, Wells Fargo should get one.
Lewis: As someone that is slightly out of the loop with financials, what has that done for their stock over 2017?
Douglass: It's interesting. Wells Fargo's stock is actually up year to date, but by a lot less than the other big banks.
Lewis: And is that because of the anticipated reduction in regulation?
Douglass: It's in part because of reduction in regulation, it's also in part interest rate increases. Actually, the Fed just announced another interest rate increase, and they have indicated that there are three more incoming next year. So as interest rates increase, the way that works with banks is, let's say you have a savings account with a bank, and you're getting 0.25%. If the interest rates increase, they will probably increase that a little bit. So if interest rates increase by 0.25%, then they might boost yours by maybe 0.10% or something like that. But then, they'll boost their loans on the other side by even more. And that difference is the arbitrage, which is basically their profitability. So underlying profitability for the big banks and most banks should improve over time because of rising interest rates.
Harjes: OK, great. Who else participated this year?
Priestley: My participation award nomination is probably for somebody I think genuinely deserves a pat on the back for still being around in 2017.
Douglass: Is it Sears?
Priestley: [laughs] It's not. I'm not going to get into Vince's turf. So Transocean is the world's the largest offshore drilling service provider with a market cap of $3.5 billion. You may recognize the name from the Deepwater Horizon disaster of 2010. Since 2014, as we all probably know, there's been a very large drop in the price of oil, and that has led to many people avoiding offshore oil drilling, because the costs are so much higher than Middle East crude or shale. The stock is down 35% year to date, but it is still here. And the same can't be said for other offshore drillers that have declared bankruptcy this year. So congrats, Transocean. Seadrill has filed for bankruptcy protection after working out a debt deal. Pacific Drilling filed chapter 11 with aim of restructuring its debt. I think Transocean deserves the participation award because A) they're still around, B) they're surviving on recurring contracts previously agreed, as well as an acquisition that has given them a backlog of new rig deals, and they've actually won some new contracts, which seems crazy in this industry right now.
Douglass: So voters, you have an interesting decision to make now. Are you going to go with the participation award for, legitimately, congratulations. Or are you going to go with the participation award for, wow, that's the only positive thing you can think of.
Harjes: "We wish you hadn't participated."
Shen: I think, for this category, in the spirit of a participation award, you guys both win.
Harjes: You know what? Dylan, Vince, we didn't pitch for this one. We didn't participate. Sarah, Michael, way to participate in nominating some participant award nominees.
Priestley: So you did get one award, Michael.
Douglass: I did. I'm glad that I didn't even win on points. [laughs]
Priestley: Yeah, it's just, the worst award to have. Like Most Improved in Soccer, which I did actually win one time.
Douglass: I want you to know, I once won the Sportsmanship trophy in tennis. And let me tell you, that was not because of my excellent serve.
Priestley: It's not even a team sport.
Douglass: Yeah, exactly. I was very good at shaking people's hands and gracefully acknowledging my defeat.
Morgan: I think that's how participation awards work. Everyone gets one.
Lewis: Everyone that participates.
Shen: We were on the show, we get them too!
Lewis: So what's the final tally here?
Harjes: I think my participation award might be my only win here.
Lewis: You didn't pitch a company, though.
Morgan: Well, no, but Austin just gave me one. [laughs]
Douglass: You get Host Award.
Harjes: Ah. Best Host of Four-Part Series.
Douglass: Best Host, Category of One. You win.
Douglass: To be fair, I got one as well, which was an actual Participation Award, so there's that.
Lewis: Can't stack up to Vince.
Shen: I don't remember how many I got.
Douglass: Oh, wow! Must be nice to have so many that you can't even remember!
Lewis: Don't worry, I was counting, it was three.
Douglass: It's like, "I was stacking $100 bills, and I just can't remember how many I had."
Harjes: It's like, "Man, I just keep running out of trophy cleaner."
Lewis: Well, we did talk about a lot of companies. And while you said before you didn't want to snub any, I'm sure we still did in this conversation. So I want to leave the door open. We talked about the email and the Twitter account. If you feel like we made a large error in either our voting or the candidates for any of these categories, feel free to write in. We'd love some perspective on who you think, maybe, the Participation trophy should have gone to.
Douglass: And Dylan, one more time, what's that Twitter handle?
Lewis: @MFIndustryFocus. Or ...
Harjes: Alright, folks. That wraps up today's show, our four-part awards series, and for that matter, that wraps up 2017. To all our listeners out there, thank you so much for tuning in each and every day. Thank you for all the emails and the tweets and the reviews. Especially the reviews.
Lewis: Especially the reviews.
Douglass: Emphasis on the reviews.
Harjes: We'll be back in the new year with more industry deep dive every single weekday. Until then, you know what comes next. As always, people in the program may have interests in the stocks that 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. This show is produced by Austin Morgan. For Michael Douglass, Vincent Shen, Sarah Priestley and Dylan Lewis. I'm Kristine Harjes. Thanks for listening and Fool on!
Dylan Lewis owns shares of Facebook. Kristine Harjes owns shares of Activision Blizzard. Michael Douglass owns shares of BofI Holding and Facebook. Sarah Priestley owns shares of Square. Vincent Shen owns shares of Wells Fargo. The Motley Fool owns shares of and recommends Activision Blizzard, BofI Holding, Facebook, PayPal Holdings, Take-Two Interactive, and Twitter. The Motley Fool owns shares of Square. The Motley Fool recommends Electronic Arts and The New York Times. The Motley Fool has a disclosure policy.