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In this podcast, Motley Fool senior analyst Bill Mann discusses:
Motley Fool senior analyst Ron Gross provides an overview of value investing, discusses why the current environment favors value stocks, and shares a few ideas for investors seeking to build up the value side of their portfolio.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Jan. 05, 2023.
Chris Hill: More tech layoffs and more stocks for your watch list. Motley Fool Money starts now.
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I’m Chris Hill. Joining me today: Motley Fool Senior Analyst Bill Mann. Thanks for being here.
Bill Mann: Happy New Year, Chris.
Chris Hill: Happy New Year, indeed. We get to say that the whole week, right?
Bill Mann: Yeah. I don’t know when the line of Happy New Year stops, but I’m going to say that at least for the next two weeks, the first time you see someone, specifically someone who you want to see, “Happy New Year” is a good intro.
Chris Hill: Let’s go with that.
Earlier in the week, it was Salesforce. Today, it is Amazon announcing layoffs of 18,000 employees, which is more than the 10,000 that was reported in November. I got a question on Twitter from a listener, who said, “Are layoffs a good sign or a bad sign? To me, it’s a sign that a company is being honest with themselves and taking responsibility.” I think it depends on the company and the situation. In the case of Amazon today, it does seem, unfortunate as it is for the 18,000 employees, this seems, from a corporate standpoint, the responsible move.
Bill Mann: I actually like that take from the listener. I think that there is something to be said for companies looking at what their needs are, looking at what the realities are, and making difficult choices. The 18,000, if you’ve read Andy Jassy’s letter, is a combined number from November’s announcement and yesterday’s announcement. I think it was meant to be today’s announcement, but the announcement was leaked, and so they’ve gotten ahead of what communications they needed to make as a result. I mean, it’s not great for the 18,000, for sure.
One thing that you need to remember is that with a lot of these companies, they are still adjusting in a huge way to the choices that they made and the new realities we thought we might see during COVID. In the case of Amazon, 18,000, while it’s a lot of people, and for those 18,000, it’s 100% bad news, it is less than 1% of the total employee-base at Amazon. Amazon has 1.5 million total employees.
This is, at the same time, a small adjustment and a huge one. Most of the layoffs seem to be coming from Amazon stores, which was a COVID initiative, and from what they call their PXT organization, which a huge amount of that is recruitment. In a time in which they’re not hiring as much, they just don’t need as many recruiters.
Chris Hill: I’m glad you touched on where we are in terms of the percentage, because while the Salesforce raw number is smaller, it’s 10% of Salesforce’s employee base, and that leads to this question. This isn’t going to be the end for Amazon in 2023 in terms of layoff announcements, is it? I would be surprised if they stopped here.
Bill Mann: I wouldn’t think it is, because what you are seeing from Andy Jassy, who said in the letter he’s been in his office now as the CEO of the company for a year and a half, and it was a year and a half in which the changes that were wrought upon companies between COVID and the supply chain disruptions and a real retrenchment away from China as the factory to the world, they’ve had to make a lot of choices. And some of those choices, and this is something that Amazon has embraced forever, will turn out to have been bad and wrong. They actually, as a culture, go out and make choices that turn out to be wrong, and they embrace them. The fact that they are where they are now at 18,000, which is 0.2% of the total employee base at Amazon.
Chris Hill: Sorry to correct the math. I think it’s just over 1%.
Bill Mann: Let me carry the one. I need to take my socks off and add it… One percent.
Chris Hill: Again, compared to Salesforce on a percentage basis, I think about Amazon and potentially more questions to come. I also think about other companies like Microsoft and Alphabet. If you work at those companies and you’re seeing the news this week, aren’t you looking around and saying, well, wait, when is our announcement coming?
Bill Mann: I also think that this does not bode well for the real estate in San Francisco, Silicon Valley, and in Seattle. I think that there are areas of the market in which we have seen an incredible amount of froth, where these types of announcements are much more fraught than they are actually within the employee community within these technology companies.
Chris Hill: Let’s stick with real estate, and I’ll get to the real estate in a second. But in a filing with the SEC this morning, Bed Bath & Beyond warned investors that the company is running out of cash and considering bankruptcy. Shares of Bed Bath & Beyond are down 24% and currently trading at its lowest level in 30 years. Bed Bath & Beyond has more than 700 locations across the United States, Bill.
Bill Mann: Yeah. You’re laughing a little bit, and I want to make sure that we’re not insensitive of this, because what you are expressing is disbelief.
Chris Hill: It is. Thank you for making this crystal clear to the dozens of listeners. It really is disbelief that even under Mark Tritton, the previous CEO, who worked to bring down the store count, this is a very troubled business that still has more than 700 physical locations. Among other things, I’m wondering what happens to those locations, and do other retailers with large footprints — and I’m thinking about Walmart, Target, Costco, Best Buy — do they step in and start to pick up some of these on the cheap? Where do you think this is going?
Bill Mann: Possibly. I like the real estate angle. Most of Bed Bath & Beyond’s sites are leasehold; they don’t own them. So I don’t know that there would actually be a big move. I guess you could suggest that Bed Bath & Beyond’s problem may actually also be its real estate problem, so I don’t know that a Walmart would necessarily want to trade down for a number of these properties. Again, I think it’s a real estate problem for the landlords as much as anything else.
I do want to say that Bed Bath & Beyond — and I want to say this to investors as we think about other companies. If you would like to know whether a company is distressed, one thing that you can do is listen to the bond market. The bonds for Bed Bath & Beyond are currently trading at 10. Now, par for the bonds are 100, which means that it has been very, very clear to bond investors for a very long time that Bed Bath & Beyond was having credit issues, was having financial distress. Should never ignore the bonds. The announcement that Bed Bath & Beyond is at risk of going bankrupt has been broadcast and anticipated for months from the bond market.
Chris Hill: If you had to bet on where this business is a year from now… I guess where I’m going is, do you think the brand is there enough to survive bankruptcy? We’ve seen other companies go bankrupt and come out the other side, smaller but more financially secure. Say what you want about Bed Bath & Beyond. It’s not a niche product that they’re selling. They sell the basic things that homeowners and home renters need and use, so there is a market there.
Bill Mann: True.
Chris Hill: It’s just a market they have not done well in.
Bill Mann: True. There’s a market for toys as well, and that didn’t prevent Toys R Us from disappearing from the United States of America. I guess the question is, can you name a retailer that has gone through bankruptcy and has come out on the other side and has turned out healthy? I can name companies in a bunch of different industries like the auto industry, airlines, technology companies. I have a hard time thinking of a retailer, and I’d be glad if any of the dozens can name one. I don’t know of any.
Because what happens when retailers go into financial distress, they stop getting credit from their lenders, they stop being able to stock their stores, and people make very quick decisions to go someplace else. Yes, Bed Bath & Beyond does offer products that are in high demand everywhere, but that doesn’t mean that they as a business aren’t ultimately replaceable, and — it will be as harsh to say it this way — that the market will notice and no longer have access to those products.
Chris Hill: Bill Mann, always great talking to you. Thanks so much for being here.
Bill Mann: Thanks, Chris.
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Chris Hill: Today, we are wrapping up our series on previewing the year for different categories of stocks with a look at value investing. Joining me now is Motley Fool Senior Analyst Ron Gross. Ron, thanks for being here.
Ron Gross: Always a pleasure, Chris.
Chris Hill: Some, not all, but some value investors were taking a victory lap last year. How should they be feeling this year?
Ron Gross: Well, relatively speaking, value did have a good year in 2022. I think that’s fair. I don’t know if I’d be running any victory laps, Chris, it might be a little premature. But I guess it’s important to understand that both growth and value lost money in 2022.
But growth dropped by significantly more. Approximately 20 percentage points more. Growth was down about 25%, value down about 5%. But context is important. Let’s not forget, growth, especially tech, had a major run for many, many, many years. Yes, growth got overextended, especially once interest rates begin to rise, but still growth has done very well.
Despite 2022 being tough, growth’s trailing three-year returns are still about 12 percentage points higher than value. If you go out to 100 years, most studies will tell you value is still outperforming growth. If you go in less than 100 years, growth is outperforming value. You pick your poison. It’s important to represent both kinds of companies in your portfolio.
But to your question, how should they be feeling this year? Let’s end. It’s no doubt that growth thrived in the zero-interest-rate environment we were in for many years. It was perfectly set up for growth to thrive there. In this rising-interest-rate environment, value will likely have its turn, as I think it started to in 2022.
Coming off a correction like the one we’ve just had and we’re still living through, it’s human nature to go the other way. Move away from things like innovative tech that are not yet solidly profitable and toward companies with sustainable cash flow, strong balance sheets, maybe a dividend. You remember all those good fun things? Especially if we fall into a recession.
But I do want to say, I think it’s important. There’s room for both value and growth. You don’t have to only have slower, more mature companies in your portfolio or faster, high-tech, innovative companies in your portfolio, you can have both. In fact, most investors should. Then the ratio, the balance just depends on your goals and your risk tolerance.
Chris Hill: You mentioned cash, and that’s something we’ve been talking about on the show lately. This idea that in an environment with higher interest rates, companies that don’t have to worry about raising money have at least one advantage over companies that are younger and do need to think about capital allocation. When you think about value investing, obviously, cash is an advantage.
Let’s go the other way. Are there red flags people should be on the lookout for when they are going value hunting? Because just from the standpoint of the financial media and the conversation around stocks, value is having its day in the sun. There’s just inherently more talk about value investing, and I’m curious what people should be a little cautious about.
Ron Gross: Yeah, good question. It’s also important on how you define value or value investing, because not everyone does it the same. For these purposes, I think of value as typically more mature companies, companies that are not growing as fast as perhaps they once were. They’re solidly cash flow positive, they have strong balance sheets. They’re not trading at extremely high multiples of earnings or cash flow. You’re not relying on extreme future growth, which may or may not materialize, to justify today’s price. It’s a little bit more of a conservative way to think about it.
To your question about red flags, stocks are not necessarily cheap right now relative to earnings. Especially if we go into a recession. S&P 500 is trading at about 20 times trailing earnings right now versus the historical average of around 16 times. When you get to 16 or 15, if we ever do, I’d be talking more about backing up the truck, but things are not necessarily that cheap, especially if the economy continues to weaken and earnings are more weak than we think or weaker.
We will need to see if we fall into recession, we’ll need to see how deep it is. Profitable companies with strong balance sheets will probably fare better in that type of an environment, especially if they’re not overvalued in the first place.
But one thing that’s interesting is right now, at least for the near term, you can make 4% on a two-year Treasury and take no risk. If you position your stock portfolio too conservatively, too much in the value camp, to say maybe try to earn yourself 6%. Well, is that extra 2% worth the risk that you will inherently get in the stock market?
The answer might be no. That means in order to meaningfully beat that risk-free 4%, you’re going to have to add some growth into your portfolio, as well you probably should. That’s where the balance comes in. It doesn’t have to be the nonprofitable, shaky companies. It can be profitable companies that have been around for a while that are still putting up strong growth numbers more so than the older, more mature companies.
But you will need to take some risk if you’re going to try to beat that risk-free 4%. There are some folks who are more than happy to take 4%, if we ever get to 5%, risk-free. That puts pressure on stocks too, because now the demand for stocks is no longer that important.
Specific to value stocks, red flags sometimes stocks are cheap for a reason. You want to be careful. Just because it has a low price-to-earnings ratio or a low cash flow ratio, doesn’t mean it’s a strong company. It could be selling on the cheap for a very good reason.
Do your homework, kick the tires. But if you see a strong company with a strong balance sheet and a growing dividend, you probably have a nice starting point.
Chris Hill: It’s a good reminder that sometimes a value play or what looks like a value play actually turns out to be a value trap. Are there specific areas of the market that you think are looking more attractive than others for value investors right now? Or for investors who aren’t value investors, they’re just seeking value stocks?
Ron Gross: I think so. There’s a few, I think investors are going to be more conservative for a while, as we’ve talked about with focus on cash flow and balance sheet. Admittedly, these aren’t always the most exciting companies. They’ve been around for a while. They might be in boring industries. They don’t have the growth rates that make headlines.
But making money is pretty good. I don’t need to make headlines. In this environment, maybe you’re willing to pay 15 or 20 times earnings for a slower-growth company, but it’s more consistent versus 40-50 times earnings or 20 or 30 times sales if a company is not profitable yet, and you have to count on future growth for that to make sense.
An example from my personal portfolio, in the last week of December, I added four new ETFs to my portfolio that are all infrastructure, industrial, and energy related. I think there’s some really good opportunities in those spaces. You’ll find companies in those ETFs like Caterpillar and Deere and NextEra Energy, Southern Company, Nucor Vulcan Materials. This should all benefit from badly needed investments in our infrastructure. A strong energy sector, government stimulus that has been put husband put in place that certainly will help.
You may have to pay up for some of these companies because other people recognize that they are good as well. The stocks have been bid up already, but you should also get the earnings to support the price you’re paying for most of those companies. Infrastructure, energy, industrial. You can buy them at 15 to 20 times earnings still get a nice growth out of it. Hopefully, that will be that 4% risk-free rate.
Chris Hill: Ron Gross, always great talking to you. Thanks for being here.
Ron Gross: Thanks, Chris.
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Chris Hill: As always, people on the program may have interest 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. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bill Mann has positions in Alphabet and Costco Wholesale. Chris Hill has positions in Alphabet, Amazon.com, Costco Wholesale, Microsoft, NextEra Energy, and Target. Ron Gross has positions in Amazon.com, Costco Wholesale, Microsoft, Nucor, and Target. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Best Buy, Costco Wholesale, Microsoft, NextEra Energy, Salesforce, Target, and Walmart. The Motley Fool recommends Deere. The Motley Fool has a disclosure policy.
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