In this podcast, Motley Fool analysts Emily Flippen and Matt Argersinger and host Dylan Lewis discuss:
- The latest inflation numbers and whether the Fed will actually cut rates in 2024.
- The oddity of stocks, interest rates, and alternative hedges like commodities all being up at the same time.
- Amazon CEO Andy Jassy's annual letter, and why Amazon, Meta, and Microsoft are all doing what they can to reduce reliance on Nvidia in AI.
- Two stocks worth watching: Hershey and Coupang.
Motley Fool host Deidre Woollard talks with Barbara Kellerman – author of Leadership from Bad to Worse: What Happens When Bad Festers – about bad leaders, and bad followers, and lessons we can borrow from Volkswagon's emissions scandal.
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.
This video was recorded on April 12, 2024.
Dylan Lewis: We've got stocks, commodities, and crypto rolling. What should investors make of it? This week's Motley Fool Money radio show starts now.
It's the Motley Fool Money radio show. I'm Dylan Lewis joining me in the studio Motley Fool Senior Analysts Matt Argersinger and Emily Flippen, Fools great to have you both here.
Matt Argersinger: Hi, Dylan.
Emily Flippen: Good to be here.
Dylan Lewis: We've got a biotech company going buying, Big Tech at all-time highs and of course, stocks on our radar. But we're going to start with FedWatch 2024 Fresh CPI data out showing inflation up 3 1/2% over the last 12 months, up from last month, and the highest it has registered in six months. Matt, what's the culprit here?
Matt Argersinger: Well, Dylan, it came down to a couple of the key components, energy prices and shelter costs, ie rents or owner equivalent rents. Shelter costs were up 0.4% for the month and 5.7% from a year ago. I know there is considerable debate about the Fed's methodology and whether or not the data that they use really lags reality, I think it does, but let's not get into that. This is the methodology they've been using for decades, so it's important to stay consistent. Those were the two major expenses, what's interesting though, food prices, another big component they were up just 0.1% for the month and 2.2% year over year, so if you strip out energy and food to get that so-called core inflation number, that number was actually up more than the headline number of 3.8% year over year. I think you can only conclude and I think that's what the market has concluded this week, is that inflation is sticking around and is definitely stalling out in terms of its downward trajectory.
Dylan Lewis: We've talked a lot as we've been following the story about how the last percent or we'll call it 1 1/2% in this case might be the toughest percent when it comes to really moderating inflation. It seems like we've been able to successfully get it below 4%, but getting down to that 2%, the real target that the Fed is going after is actually quite difficult.
Matt Argersinger: It is, it has been quite difficult and I think the market is really hanging on what the Fed is going to do or what the Fed is thinking. I tell you what this week's numbers have really pushed out expectations for that Fed cut. If you look at where they stood, things stand in June, the chance of Fed rate cut is now down to 27%. July jumps up back up to 55%. But here's the thing. If they don't do July, Dylan, would they cut in September just less than two months out from the election?
Dylan Lewis: It seems unlikely.
Matt Argersinger: It seems unlikely. I think that's something Jay Powell is probably going to try to avoid. Inflation has been persistent, the economy has seemed to be resilient. I know we're going to talk about that in a moment. Is there a chance we just do not get a cut this year? I think that's a real possibility that we should talk about.
Dylan Lewis: Emily, I'm curious as you try to process the CPI data, try to put together a picture of what you're expecting for interest rates. Are you taking Matt side here where it's seeming unlikely for the rest of the year that we may see any rate declines?
Emily Flippen: I unfortunately am. I say unfortunately because I love a good debate and if I can be contrarian, I want to be contrarian. But in this case, I think all of our data is showing that inflation is still pretty sticky. Despite the fact that the easy gains have been won, they really don't want to fumble the ball here, especially as we get close to that final yard. I think the Fed is going to be extremely cautious with how they're handling rate cuts. They would rather cut too late, than cut too early, which I think is the right mentality to have when you're talking about the performance of the economy. I know there's these arguments like all as investors, we hate to hear that because the perception is OK, well, the value of our company's still going to be higher or lower as interest rates are higher. We want that rate cut because presumably the value of our companies as a result will go up. But I don't think the Fed is super concerned about that. Because if you look at the aggregate performance of the market by looking at the evaluation of the S&P 500, even with how much rates have increased, the value of the market is still significantly higher than it was even pre-pandemic when rates were much, much lower. I think they're saying to themselves, we don't really care that investors could get hurt if we did not cut rates we're more concerned about the economy.
Dylan Lewis: Emily, you called inflation sticky there we heard from the nation's leading bank around the issue this week. He wound up calling it persistent. Jamie Dimon, releasing his annual letter and providing some commentary. Matt, you dug in to the bank's earnings release and some of the comments from Dimon, what stuck out to you?
Matt Argersinger: He mentioned the persistent deflationary pressures. I think that was one of his key primary risks, I should say that he thinks there is for the economy. He also talks about the terrible wars that we're seeing in the Middle East, Ukraine and we've got some more troubling news this past week on that. Here's what I think one of his most more interesting points though, in his letter, which is we're obsessed with the whole interest rate Fed cut. Whether they cut whether they don't cut and the overall Fed funds rate. But the Fed has been every month also tightening because they've been letting almost $100 billion of bonds on their balance sheet mature and roll off without replacing them. This quantitative tightening has been going on since roughly June 2022. The balance sheet for the Fed is shrunk by about $1.5 trillion. That's quite a bit of tightening. We've never seen tightening on that scale. Of course, we never saw easing on the scale that we saw in the previous decade. But I just think that's a really good point by Dimon, that even though we're hanging on this idea that the Fed needs to cut rates. It is getting tired, the credit situation in the economy is getting tighter and I think of course, he as the CEO of the leading bank in the country, is worried about that.
Dylan Lewis: Emily, Matt just mentioned some of the geopolitical issues that I think are weighing on people as they're looking out. Typically, we see stocks move in one direction and a lot of the hedges against instability move in the other direction. I think what is confounding for me as I look at the macro picture is that's not what we're seeing as we look at stocks knows we look at things like gold and metals.
Emily Flippen: Also, great example of when theory doesn't always match reality. Earlier I was talking about the value of the market. I want to go back to that because the Fed fund rate back in January 2020 was 1 1/2%. Today it is 5 1/2%, but yet the aggregate price earnings ratio of the S&P 500 is higher than it was in 2020, even pre-pandemic 2020 and earnings are lower. Stock valuations have increased even though interest rates have increased. The same is true for what we're seeing right now in the commodity market, which you just mentioned, which is typically when equities are expected to perform poorly, people will flood into things like commodities and commodity prices will go up, equity prices will go down well as equity prices have continued to rise, so as commodity prices. If you look at things like tin, copper, gold, things that are traditionally counter to the performance of traditional equities. Those are all increasing. I think some of that, as you mentioned, is because we're seeing geopolitical concerns that have people thinking to themselves, where is my money the safest, and whether that's logical, illogical, it has led to the price of these commodities increasing as well.
Dylan Lewis: We typically see an opportunity costs when we look at things like interest-bearing accounts, equities, and the hedges against instability. Matt, pretty much all of those categories are humming along at least at a high level, as an investor, usually, when we make money decisions, there's a mutual exclusivity to it, but that doesn't seem to be happening here.
Matt Argersinger: No, everything is loved by everyone right now. I think there are good reasons for this. I'll be optimistic here and say all this hemming and hawing about the Fed, what the Fed is going to do, monetary policy, the economy, uncertainty and you look at the jobs report we had last month, 300,000 plus jobs. Look at the unemployment rate below 4%. Look at wages rising faster than inflation, that's something else we got this week. You got record household wealth, big consumer spending. Look at US GDP growth. We have the fastest strongest economy of all developed nations right now. Should I be confused that valuations in the stock market are at all-time highs? I don't know if I really believe in the economy, but the interest rate picture, certainly it flies in the face of that.
Emily Flippen: What just goes to show that you can't use theory to drive your investment portfolio loan, right?
Matt Argersinger: Right.
Emily Flippen: I think you have to develop a strategy that works to meet your long-term goals and what happens around you, happens around you. I can really only speak for myself and I know everybody is managing their portfolio and their strategies differently, but as somebody who's coming up on 30 now, hopefully still have many decades of investing ahead of me, fingers crossed. This isn't really changed in the way that I'm continuing to manage my portfolio. I am virtually 100% in equities right now. I'm not looking to flood into bonds even though I think the yield on bonds is not bad. But regardless of the fact that I've just talked about how the P/E ratio S&P 500 is high and how we're all worried that aren't going to be rate cuts and there's geopolitical concerns, I still try to back my view out. Have that Foolish take on, what does it mean to be a long-term investor? Equity markets tend to go up over time. I expect a big pullback in my portfolio at some point, I don't know what it's going to be. It could be in a week. It could be in a year, could be in three years, but long-term, I believe that strategy will work to my portfolio as benefit.
Dylan Lewis: One of the places that we have seen a little bit of pain with the news on inflation data and the presumption that interest rates will not be coming down anytime soon is some of the more lending dependent businesses. We saw some of the real estate companies get hit hard this week. We saw some of the auto businesses also get hit hard this week. How are you factoring in the macro picture for some of those companies where the lending environment matters a little bit more, Emily?
Emily Flippen: What's wild is that as interest rates have increased, yes, the amount of lending has gone down, but a lot of that is not being driven by consumer spending. It's being driven by the appetite of banks to take on additional debt. Because again, it goes back to the theory where they're pulling back. They're worried about this. They're reducing their own risk profiles. Whereas if you look at the actual spending of consumers, things like car purchases and mortgages, despite the fact that interest rates are so high, people are still spending on it. They're still trying to grab that there's still an appetite for big purchases. It's counter-intuitive again to what you'd expect to see. Despite the fact that valuations for some of these companies have come down and sure that could be warranted again, we talked about lagging indicators. Perhaps some of these are lagging indicators and we're still going to see that pullback continue in the future, I still think it's interesting that consumers themselves are indicating to the market we're still healthy.
Dylan Lewis: Coming up after the break, we've got an update on big texts, AI Arms Race. Stay right here. This is Motley Fool Money.
Welcome back to Motley Fool Money. I'm Dylan Lewis, joined in studio by Emily Flippen and Matt Argersinger. This is a big week for Big Tech. Amazon CEO Andy Jassy's annual letter out this week. Emily, this is the third annual letter that we've gotten from Andy Jassy. I think if by now you haven't gotten used to it, you ought to get used to it. It has a slightly different, maybe more technical tone than the letters we used to get from our old friend, Jeff Bezos.
Emily Flippen: It does make you miss Bezos a little bit because you have to ask yourself if you read through this letter, as you mentioned, very technical, it begs the question of who is this written for? Because as an investor, somebody who's somewhat familiar with Amazon's business, I go through the letter and a lot of the technical jargon just strikes me as unnecessary fodder. It almost felt like AI wrote it. I wanted to upload it to ChatGPT, and just give me the summary, because Jassy's words were superfluous in the way that they were talking about the investments that they're making, especially in things like AWS. But when you take out all those silly jargon and all.
Dylan Lewis: Wait, you don't like primitives?
Emily Flippen: The primitives conversation is better. I encourage everybody, download the letter, control-find primitive, and you will see how many times this completely made-up, and I don't really mean when I say that, but effectively made-up term is used, which we spent a long time this morning trying to digest. We take to mean just modules that people can implement in their tech stacks. The building blocks of their tech stacks. It's not anything revolutionary. But reading through this letter, it's like Jassy is trying to make you feel like Amazon is really on the cutting edge of upgrading its tech. The truth is, they don't need to be, or they are. They just need to continue to do what they're doing. The letter felt a little silly to me, but also very focused on their e-commerce business, which I actually found interesting given the fact that AWS is their largest profit driver.
Dylan Lewis: Matt, as you were looking, obviously, we're doing the primitive count and making sure that we've got all of them down and get better. But we also saw some details on the company's next pillar. Jassy talking about marketplace, talking about Prime, AWS. What's next? Generative AI in focus for this company, probably as it should be.
Matt Argersinger: Absolutely. If you look at, for example, I think it's interesting that he spent some time talking about the fact that they're still regionalizing the business, still getting to the point where they have enough facilities to give everyone in the country, or at least enable same-day deliveries across the country. It just seems like Amazon is already been there for years, but now they're still trying to get there. They're still trying to accelerate deliveries to customers and that's amazing. But Generative AI was a big topic. Prime Video as a stand-alone, profitable business, in the landscape of this awful streaming environment industry that we've been talking about for a couple of years now, the fact that Prime could be this profitable entity is interesting. It speaks to the fact that Amazon, unlike any of the other streaming companies, it's not a streaming company, but it has the Prime service. There's so much downstream profits for Amazon that the other streaming companies just don't have. If you're subscribing to Prime Video, of course you're probably using Amazon for a lot of different things in their ecosystem. I also thought Project Kuiper was interesting. I've heard about this but I hadn't really dug into it. But this is Amazon's effort to compete with Elon Musk's Starlink. They're in the process of launching 3,000 plus low orbit satellites to extend broadband across the world. I just think, imagine that's a part of Prime at some point, another portal into the Amazon ecosystem that they can do with these satellites.
Dylan Lewis: Emily, I'm with you. I was similarly a little drowning in the technical jargon of some Jassy's letter. One thing that I did pull out and I wanted to emphasize because it cut right through for me and got to this other narrative that we're seeing in Big Tech across. I'm going to quote him here directly. ''To date, virtually all the leading foundation models have been trained on NVIDIA chips." He's talking about AI. "We continue to offer the broadest collection of NVIDIA instances of any provider. That said, supply has been scarce and costs remain an issue as customers scale their models and applications. Customers have asked us to push the envelope on price for AI chips. As a result, we're building our own AI training chips and interference chips.''
Matt Argersinger: Shots fired.
Dylan Lewis: Shots fired, absolutely. I think that we're starting to see a little bit of the narrative turn on a company like NVIDIA where they were a darling, a clear supplier to everybody, but there are limitations to that supply. Now we see updates from the likes of Meta and Alphabet this week. It seems like there's this awakening in Big Tech that we need to be a little bit less reliant on NVIDIA.
Emily Flippen: There's a combination of two things. One is the cost of buying chips from NVIDIA. Investors will look at this and say, oh, well, this is them attempting to produce their own chips so they can control their costs, which they see as this pretty pervasive CapEx expense that they're going to experience as they build out AWS and all of these different AI initiatives for the foreseeable future. But there's also this element of timeliness. NVIDIA cannot produce these chips fast enough. They're bottlenecked by Taiwan Semi, which is also having months-long lead times on the chips that they're producing. The fact that the entire industry is so bottlenecked, it's holding back development, it's holding back production. This is Amazon alongside a lot of other Big Tech players coming in and saying, we got to move faster. We had to do it now. We think that we can internally, some through partnership with NVIDIA, but there's some element that we can contribute internally to help speed up the process, make the process more efficient, better for our customers, and hopefully, as a result, drive profits as well.
Dylan Lewis: Looking over at some updates from Meta this week, we saw them focusing on their MTIA chips which I believe are more purpose-built, maybe not as versatile, maybe not as powerful as the GPUs that they would get from NVIDIA. But Meta noting, because we control the whole stack, we can achieve greater efficiency compared to the commercially available GPUs out there. Matt, I see a lot of these companies saying, you know what? If we do it ourselves, we customize it for the exact applications that we're working for, we'll accept some of these trade-offs and maybe not have these more powerful chips from NVIDIA.
Matt Argersinger: I think it raises serious questions. I think if we look at NVIDIA's business over the last 18 months, it is an absolute rocket ship, but how much of it has been pulled forward by just the companies like these Big Tech companies trying to catch up to this AI race. Maybe it's the idea that, wait, we just had to make these investments right now because we want to start learning on these models. We want to try to build these capabilities. But gosh, a year from now, two years from now, if all of these companies have their own chips granted, even if they're a generation or two behind NVIDIA's chips, are they going to be spending with NVIDIA as much as they have been? I don't know. NVIDIA to me, I followed the company well before it became this AI darling. It was always a very cyclical business. Is that still true? I think it might be. We're going to see that play out, I think over the next year or two.
Dylan Lewis: Emily, last segment, we were talking about just overall market valuations. The S&P is looking incredibly strong. A big part of that is the fact that Big Tech companies and I'm going to name check Meta, Microsoft, NVIDIA, and Alphabet here, are at all-time highs, have been incredibly strong performers. It seems like when I look out at the companies that have AI exposure or AI that is catapulting them forward, NVIDIA is in a league of its own right now, and the other ones are almost catching up and benefiting. What do you make of these businesses at their current valuations?
Emily Flippen: I love that acknowledgment, which is that Big Tech is often driving the valuations. When I talk about the performance of the S&P 500, I'm usually talking about the performance of a handful of companies that drive the overall market performance. But as you mentioned, Big Tech is a big part of that. If you look at things like CapEx spend, R&D spend, it's been incredibly high for a lot of these companies. R&D is like engineering salaries. There's repetitive expenses that are hard to get off the balance sheet. CapEx is physically buying more GPUs, putting more infrastructure in place. Actually, out of all of those companies, Meta is the company that is spending the most. Around 20% of their revenue over the trailing 12 months was spent in CapEx spend. Just to give you an idea about the billions and billions of dollars that are going into these investments.
Dylan Lewis: As we try to put a bow on this one, I'm curious. We have a lot of folks who follow the company NVIDIA. I want a quick take on this. If you're holding shares, how are you looking at the business, Matt?
Matt Argersinger: I do not hold shares. But as I said just a moment ago, and some of the things that Emily said, I just think it's been wonderful. They've pulled so much, tens of billions, hundreds of billions revenue forward. How much of that has been pulled forward too much?
Dylan Lewis: Matt Argersinger, Emily Flippen, Fools, we're going to see you guys a little bit later in the show. Up next, we've got a look at bad leadership and bad followership. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money, I'm Dylan Lewis. There's no shortage of high-profile leadership issues in the market right now. From Boeing's fall from grace to Disney's troubles with succession planning. To better understand bad leadership, this week, my colleague, Deidre Woollard caught up with Barbara Kellerman, Professor at the Harvard Kennedy School, and author of several books on leadership, including Leadership from Bad to Worse: What happens When Bad Festers, out last month. They talked about bad leaders and bad followers, and the lessons we can borrow from Volkswagen's emission scandal.
Deidre Woollard: Bad leadership, it's a little complicated, as you point out in the book, it comes in a few forms.
Barbara Kellerman: It comes in lots of different forms, and actually, I did a book years ago simply called Bad Leadership: What It Is, How It Happens and Why It Matters. In that book, I delineated seven different types of bad leadership. To simplify it, I will simply say that I think of it bad at leadership, and I might add followership, as being along two axes. One is from ethical to unethical, obviously it's bad to be unethical, and the other is from effective to ineffective. So a bad leader, broadly defined, can be either unethical or ineffective, but a bad leader more precisely defined, comes in seven different types, ranging from, for example, intemperate and effective, all the way down or up depending on how you look at it, to evil.
Deidre Woollard: I also wanted to talk a little bit about CEO pay and how that impacts leadership and ethics, because you point out in the book some of the disparity, it's incredible. The ratio between a CEO's pay and the workers, almost 400:1, it's the highest on record. What are some of the implications of this wide disparity and just how much CEOs are making these days?
Barbara Kellerman: It's a great question, Deidre, and I think one could really say the extreme income inequity is one of the reasons this country has become quite fractured in recent years. I'm not saying it's the only reason, but it is one of the reasons and it's a phenomenon that did not always exist. If you go back to the '60s and '70s, you will see that the gap between the income of those at the top and the income of those in the middle, and even at the bottom, is much, much, much smaller than it used to be. What's interesting, I think, is that there's some gradual, very gradual, painfully gradual recognition that this is a problem. There's a guy, for example, you may know the name, Deidre, the name Brad Gerstner, who's got this idea. He's a tech investor, very well-known and prominent, he's got this idea that the government should allocate to every baby born $1,000 of seed money, which would then overtime compound, thereby narrowing the gap between the haves and have-nots. I do think there's increasing recognition that this is a problem, that is the gap between those at the top and those at the bottom and then the middle for that matter. But of course, as is always with these things, the devil is in the details, so what to do about it remains obviously a matter of contention.
Deidre Woollard: In the book you've got the four phases, really, of bad leadership and how it compounds on itself. I want to go through the example you have in the book of Martin Winterkorn, CEO of Volkswagen, during the Emissionsgate, I guess we'll call it, or Dieselgate, it gets a lot of different names. But take us through the four phases and how they played out in that problem.
Barbara Kellerman: It was for a while a very big story even in the United States, but I think most Americans are not really familiar with it, the scandal broke in around 2015. But Volkswagen, for a very long time, for years, cheated on emissions. Again, a small number of people at the company knew that there was a so-called defeat device or cheat device being installed on these vehicles, which deceived the general public, deceived regulators, deceived governments as to how many pollutants were really being admitted by these vehicles. How did this happen? Well, first of all, the possibility even of a defeat device was discovered by accident. But once it was discovered, the decision was obviously made to continue installing these defeat or cheat devices for years, until it was discovered what Volkswagen was doing. How does it happen? Bad leadership does not unfold overnight, whether in the political realm, the corporate realm, religion, education. There are similarities in leadership across the board, is it the same to be a political leader as a corporate one? Absolutely not. But are there universals to leading in every sector and indeed in every country and culture? Absolutely. The four phases, and by the way, Martin Winterkorn is a perfect example, begin with a leader who is promising the moon and the stars, and I'll say he, we're talking about Martin Winterkorn here, who's the CEO in question, more than he can reasonably deliver. I call that onward and upward, again, to the moon and the stars. Second phase is followers join in. These leaders are able through whatever mechanism. Winterkorn by the way was, a bit of a throwback, quite authoritarian leader in Volkswagen, a company that was, may I say, started under Hitler, a company that was used to authoritarian leadership beginning in the 1930s all the way to the early 2000s, so followers end up following. Obediently going along, not opening their mouths to protest, and then bad really sets in. It becomes a habit, it is perpetuated, it becomes more insidious, it becomes worse, so that in the end, you have a situation where nobody talks about it. Sometimes, it's an internal whistleblower, obviously, often it is not. In the case of Volkswagen, it was kept quiet, as I said, for years, from about 2008-2015, until some outsider discovered it and revealed it, and then all hell broke loose.
Deidre Woollard: You've used a phrase a couple of times, bad follow-ship. And I'm wondering, bad follow-ship, what is it and does that also have different types of bad follow-ship? The same way you have different types of bad leadership.
Barbara Kellerman: Of all the questions you've asked, Deidre, I'm most pleased about that one, because people tend to simplify the notion of the leader. In other words, anything good that happens, it's because of the wonderful leader, anything bad that happens, it's because of a bad leader. You cannot have any single leader, ever, without at least one follower, so you cannot have bad leaders without bad followers, it's just not possible. At Volkswagen, Martin Winterkorn had a very few people, top executives in the main handful of them, and a handful of engineers, who knew exactly what was going on and for how long. They are bad followers as I define them because they knew the company was corrupt and they didn't speak up. My simple definition of a bad follower is a follower who does not support a good leader for whatever personal reasons, and/or a follower who does support a bad leader. Sometimes by the way, for good reasons; we're too scared to speak up, we think we're better off going along, it's too much time and energy to speak up. There is often a risk involved entailing speaking up against a bad leader, so I'm sympathetic. You have the bad boss, you're nervous about doing anything about it. You don't want to lose your job, you don't want to run into trouble. I'm sympathetic to it, but I do think it's incredibly important to understand the imperative. You cannot have a bad leader without at least some bad followers.
Dylan Lewis: Motley Fool Money listeners, we want to hear from you. Who do you want to hear on the show and what questions do you have for analysts for a future Mailbag episode? Write in at [email protected], and let us know. Coming up next, Emily Flippen and Matt Argersinger return with a couple of stocks on their radar. Stay right here. You're listening to Motley Fool Money. 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 anything based solely on what you hear. I'm Dylan Lewis joined again by Emily Flippen and Matt Argersinger. You've got a couple of stories to round out the week before we head over to stocks on our radar. First up, Emily, Vertex Pharmaceuticals inking a five-billion-dollar deal to acquire Alpine Immune Sciences. Emily, this is Vertex's largest acquisition to date. What's the underlying thinking here?
Emily Flippen: The underlying thinking is that Vertex by acquiring this business which has some interesting drugs in development to treat kidney auto-immune disease, that they're going to build a more robust pipeline. The language that management actually used in this acquisition was, yes, it's expensive, yes, we're spending nearly five billion dollars to acquire this other biopharmaceutical company, but we're not acquiring their product, we're acquiring, "a pipeline in a product," meaning that the drug that they have in development, which is, I'm going to mess up the pronunciation for, Povetacicept I apologize if I mispronounced it, that kidney auto-immune disease treatment. They believe that the technology that underlies that drug in development can potentially applied to many other things as well. This is not super surprising given the amount of acquisitions that have been happening in the space, there's been a ton of interests to treat kidney disease, but I'm a little bit surprised at Vertex investors responded so positively to the news. Vertex is a business that has a pretty robust pipeline already. The most exciting drug they have in development includes a pain medication that many investors hope it can be on alternative treatment to opioids and met at first primary endpoint earlier this year didn't meet its secondary end points. Not quite all the way there to replace opioids, but I think this has management saying we're still investing in our pipeline but five billion dollars is an extreme amount of money to make with this acquisition. If the technology that underlies this kidney treatment doesn't pan out in phase 3 trials later this year, this could be money effectively thrown away.
Dylan Lewis: Emily, this is a space and a company that I'm not quite as familiar with. Getting up to speed, just trying to contextualize it for myself, I was like, OK, five-billion-dollar acquisition, Vertex is roughly a $100 billion company. That doesn't seem too wild, but it almost sounds like you're saying this is a bigger bet than the market cap numbers would imply.
Emily Flippen: I think so. Vertex, part of the reason why it is where it is is because they already have commercialized treatments in cystic fibrosis, the business they're acquiring doesn't have that to treat kidney disease yet. They really are acquiring this product, this pipeline, these drugs in development but Vertex Pharmaceuticals seems like it can do no wrong right now and it's been a big favor for investors. We actually just recently added it as a foundational stock in stock advisor. The conviction behind Vertex has risen a lot over the course of the past year, so my pessimistic reading of this would be that management is attempting to cash in on a lot of that excitement to try to continue to build interests in the development of their own pipeline as many of their drugs enter later-stage trials. But ultimately we won't have a good sense for whether or not this was five billion dollars well-spent until we start to see those phase 3 trials for this kidney disease, auto-immune disease later in the second half of this year. The presumption is those will be good. If they are not good, expect for the valuation of Vertex to be hit as a result.
Dylan Lewis: Earlier on the show, Matt, we were talking about metal prices surging. I have an unlikely beneficiary of that, Costco. Analysts estimating the company is generating 100-200 million a month in sales of their gold bars, which reportedly sell for a small markup on spot price of gold. Are you surprised to see Costco in the gold business?
Matt Argersinger: No, because Costco sells some really weird stuff now and then, like caskets. I think one year they were selling like medical records software at $1,000 a pop to doctors, it was weird. But my question is, how big are these gold bars? Because I don't know anything about really about gold, but I just googled a gold bar that typically weighs roughly 32 troy ounces or about one kilogram, which right now cost approximately $75,000. Are people walking into Costco with suitcases of money to buy, because you really can't put that on a credit card, generally. How are people buying these gold bars, and they must be smaller than that?
Dylan Lewis: I should have clarified, we are talking about one ounce bars, which is really, I think more of a tab of gold. It's a little bit less of a bar.
Matt Argersinger: That's still $2,500 a pop. That's impressive.
Dylan Lewis: Actually, Costco limiting customers to five ounces. You can't buy more than five ounces of the bar. I'm not even sure what to make of that.
Matt Argersinger: Is that per day or is that a lifetime I got five ounces?
Dylan Lewis: I need to look at terms and conditions.
Matt Argersinger: Because I'm coming the next day, buy five ounces more.
Dylan Lewis: But five ounces I could see fitting easily in a cart. I have not seen these for sale, but I have to imagine they're next to the Kirkland trail mix or something like that, Emily?
Emily Flippen: The only gold I own is now attached to my left hand. But maybe I need to go over to Costco and really up my anti here. Although I will say, I have no commodities in my portfolio, gold included, whether that is a physical tab from Costco or an ETF otherwise, but I'm just curious about the doomsday prep or that this is advertising too. I think Costco understands its market pretty well.
Dylan Lewis: We're laughing about this a lot, but what I think it reminds me of is that if Costco sees the opportunity to add something that they think people will enjoy, even if it's a little bit more of a cult type thing or kind of a meme type thing, they will do it and they're happy to do it. It's up there for me with the dollar and soda combo where it's just, we're going to do it because it's fun and people are going to lean into.
Matt Argersinger: You walk out with your $2,000 gold bar and a $1.50 hotdog, you had a good day, Costco.
Emily Flippen: Rotisserie chicken.
Dylan Lewis: These are the two ends of the Costco spectrum. Let's get over to stocks on our radar. Our man behind the glass, Dan Boyd is going to hit you with a question. Emily, you're up first. What are you looking at this week?
Emily Flippen: The stock on my radar is Coupang. This is the South Korean e-commerce giant that many people relate to the Amazon of South Korea. As part of that comparison, they actually have a version of a Prime membership club. They're making news today this week because they raised the price of their WOW membership, 58%. Naturally, if you are a South Korean user and payer of Coupang in their WOW membership, you have your pants in a little bit of a wad today, but the interesting thing about this is that part of the investment thesis on my end for Coupang was the belief that they are really under-pricing this premium service. To really exemplify, 58% sounds like a lot, but it's really not a lot when you look at the value that they're providing. Compare it to Amazon Prime in the United States, which costs around $15 a month. That is around 0.26% of the average American income with the price of the Rocket Wow membership inserting somewhere around $5.5. That's around 0.2% of the average income in South Korea. This is still affordable, presumably affordable for the people who are using the service, but naturally one that maybe rubbed users the wrong way.
Dylan Lewis: Dan, a question about Coupang?
Dan Boyd: I first want to highlight the pants in a wad comment. Just hilarious, Emily, thank you for that imagery.
Emily Flippen: I love getting my foot in my mouth.
Dan Boyd: There are so many Amazons of X country out there, like Mercado Libre and others. When is Amazon just going to buy these things?
Emily Flippen: I think the good thing about Amazon is the build-out fulfillment and logistics and understand a market. That's an extremely expensive endeavor and one that they haven't necessarily had the same commercial success in the countries in which they've attempted to expand into, the way that domestic enterprises have. The same reason Mercado Libre has really crafted a niche in South America. I think Coupang on the other end has crafted a niche in South Korea. The same with the Chinese e-commerce companies. There's a market for everyone.
Dylan Lewis: Matt, what do you have on your radar this week?
Matt Argersinger: The Hershey Company, HSY is the ticker. I know since I've pitched this last fall that Dan hates Hershey's chocolate, but man, I think he should really liked the stock here. For one, cocoa prices, obviously a huge input for Hershey, they're in almost 50-year high at $10,000 a metric ton, that is roughly 20% higher than the price of copper. Cocoa prices in fact are up almost 200% in, year-to-date, 2024. You can imagine what that's doing to Hershey's gross margins. Not to mention Hershey's stock price which has been absolutely crushed lately. In fact, the P/E multiple Hershey stock is trading below the market multiple for what I think is the third time in the past 25 years, it's a company that's always gotten a premium and I think deserves it. Management is doing everything they can, they're trying to control costs, make things more efficient, expand internationally, imagine they can do all that, and cocoa prices eventually, inevitably fall, probably starting next year. I think Hershey's profits are going to soar. I think the stock trades above $250 in under two years, I'm making that stand.
Dylan Lewis: Wow, strong prediction. Dan, a question about the Amazon of chocolate, Hershey.
Dan Boyd: Mattie, come on man, the chocolate is terrible. Garbage tier. It's over sweet, it's waxy, it's got terrible mouthfeel.
Matt Argersinger: Oh, my God.
Dan Boyd: What are you doing with this company? Cocoa prices, whatever, they still make trash chocolate.
Dylan Lewis: Dan, you're such a connoisseur on chocolate, I had no idea. Do you like Starbucks Coffee, Dan?
Dan Boyd: Yeah.
Dylan Lewis: Darn, it ruins my point. A lot of people don't.
Emily Flippen: I don't.
Dylan Lewis: See that Emily and Starbucks has been one of her company. First of all, how can you hate Reese's Peanut Butter Cups, Dan? I know you don't like the chocolate, but they're so good. Anyway, I think there's a lot to like, even if you don't like the chocolate.
Dan Boyd: I want to go on record. I do like Reese's Peanut Butter Cups, those things are great, but it's not because of the chocolate. I don't think anybody out there is eating Reese's Peanut Butter Cups for chocolate.
Dylan Lewis: Man, it's just a wad of peanut butter if there's no chocolate, Dan. They compliment each other so well.
Dan Boyd: We're back to wads, Emily, look at this.
Dylan Lewis: I had to do it. Dan, I think I know, but which one's going on your watchlist?
Dan Boyd: I'm going to go to Coupang because I would never buy Hershey's, I'm sorry, Pennsylvania, that's terrible.
Dylan Lewis: Emily Flippen, Matt Argersinger, I appreciate you guys being here and bringing your radar stocks. Dan, as always appreciate you weighing in. That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll see you next time.
