In this episode of Motley Fool Money, host Chris Hill chats with analysts Jason Moser, Andy Cross, and Ron Gross about what 2020 holds for the market. Which trends are the analysts most excited about? Which CEOs are in the hot seat? Which companies/industries/trends are really poised for growth in 2020? Which companies should investors keep on a short leash?
In the wake of WeWork, what comes next for recently public, unprofitable growth players? How should CEOs be compensated? Will Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) instate a dividend? Will Bed Bath & Beyond (NASDAQ:BBBY) finally pull off its comeback? Will 5G ever actually hit the market? Tune in to hear more.
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 Jan. 3, 2020.
Chris Hill: It is our 2020 preview. We’ve got stocks to watch, stocks to avoid, CEOs on the hot seat, and, of course, as we do every year, we’re going to make a few reckless predictions.
But Ron Gross, let me start with you. We’re going to go wide to begin with. What’s an industry to watch in 2020?
Ron Gross: I’m going to go with telecommunications, specifically the 5G catalyst within that industry. It’s a data transmission rate that is about 10 to 100 times faster than the existing 4G networks. It will be the primary catalyst for the next-generation Internet of Things, whether that’s connected cars, augmented reality, virtual reality, smart cities. Companies sure to benefit — Ericsson, Nokia, Verizon, AT&T, even Apple (NASDAQ:AAPL) will come out with a 5G phone.
Hill: Are we getting it in 2020? I feel like 5G has been talked about for a couple of years.
Gross: [laughs] This is the year! Unless they do it again next year.
Hill: All right. Jason Moser, what about you?
Jason Moser: Yeah, Matt Frankel and I talk about this a lot on the Industry Focus: Financials show. With interest rates as low as they are, and really, we’re not seeing any signs that they will be on the rise anytime soon, banking is going to be an industry to watch closely because we do believe consolidation is going to continue in the space. We saw some signs last year with SunTrust and BB&T, for example.
Hill: I believe you mean Truist.
Moser: I was going to say, granted, they bungled that name. Talk about rebranding. But, even down to smaller banks like Ameris Bancorp and Fidelity in Atlanta. We’re seeing banks of all sizes looking at consolidation to really scale up and take advantage because they’re witnessing some pressure on that net interest margin, and that’s really how banks make their money. So, I think we will continue to see some consolidation in the space. There’s going to be some opportunities there, so we’ll be keeping an eye on it.
Hill: Andy Cross, what’s an industry you’re watching in 2020?
Andy Cross: I’m actually going to a part of the market, I’m going small caps, fellas. I think the small caps, it’s been a tough past three, five years for small caps. They’ve made money, but they’ve overall as a group have trailed the S&P 500. However, when rates are falling low and they get cut over time, history tells us that’s actually a pretty good sign for small-cap stocks. The valuations relative to large-cap stocks are the most attractive they’ve been in 10 or 15 years. And so I think that small caps might actually have a little bit of light this year. I’ve been saying this now for the past couple years, but hopefully this year, small caps will have a little bit of a boost above the large-cap brethren in the S&P 500.
Hill: So, Ron, in terms of trends that you’re excited about in 2020, I’m assuming 5G’s on that list, but what else is on that list?
Gross: [laughs] Well, if anything about me, you know I’m excited about the trend of convenience, whether it’s same-day or next-day delivery from retailers or immediate delivery from my favorite restaurants, or calling a car on demand, watching a TV show or movie whenever I want from a variety of platforms, companies are rapidly moving to meet the needs of me and other consumers.
Hill: I like to think that there are businesses out there that are asking themselves the question, “How can we make Ron’s life easier?”
Gross: Please, more of that!
Hill: “How can we get Ron on board with what we’re doing here?”
Moser: What are the chances of this guy setting up a home studio this year? Motley Fool Money from here on out is going to be Ron getting to us from Bethesda, Maryland.
Hill: Jason Moser, what trend are you watching?
Moser: Of course, if you know anything about me — and Ron, I think you do — it’s all about mixed reality. Really excited about where augmented and virtual and mixed reality are all headed. We saw over the course of the last several years, it’s easy to dismiss this technology as a fad, but we are really seeing a lot of money pouring into it. With a market that was valued at around $4 billion in 2017, expected to top $60 billion by 2023. We have a service devoted toward it. It’s been a lot of fun building it out. A lot of ideas out there. A lot of excitement in the space. I’ll be heading out to California in May to the Augmented World Expo. I know that sounds pretty big. It is big, Chris, and I’m very excited to see all these new ideas and great technology and bring back some ideas for our members.
Hill: Are we going to get a field report from you?
Moser: There’s absolutely no question you will.
Hill: All right, Andy Cross?
Cross: Workforce is getting much more distributed, fellas. We all know this. We’re working from home and in different locations, more collaborative tools. I just think this area is going to continue to be an explosion for growth. The likes of the Zooms and the Atlassians, Slack, even. Even Microsoft. JMo, I know you’re a fan of Microsoft with Outlook 360. Getting more and more distributed as we are working in different locations. I just think this is going to be a place that investing dollars are going to go and that investing returns are going to be pretty high over the next five years.
Hill: In all seriousness, I’m not making a joke here, I’m assuming that when you are looking at the workforce, you’re not looking at the shared space industry. And it’s not just because of what happened with WeWork. It seems like that business is great for convenience, but not necessarily one to invest into.
Cross: Yeah, it’s just the opposite, Chris. I think it’s not so much the shared workspace, it’s actually becoming more shared and connected just remotely and through online systems. I think that’s going to be a place where we’re going to be doing a lot more work over the next decade.
Hill: I agree with that, but I still don’t want Ron getting the idea he can phone into the show from his home.
Gross: [laughs] Wouldn’t even think of it.
Hill: Jason, let me start with you. What is a stock or industry that you think is poised for upside in 2020?
Moser: Well, I’ll go stock-specific here. As an economics major, I love efficiency. Let’s just find the quickest way to get from point A to point B. And I think what we’re seeing more and more with companies in aerospace and defense and electronics and energy, healthcare, it’s really all about simulation software, and figuring out the best solutions without having to invest too much money and time. And a company that is really spearheading this movement, Ansys. The global market for simulation software is a big one. It’s going to reach $16 billion by 2023. Ansys is a company that brings in around $1.4 billion in revenue today. It is the market leader there. Customer base of around 45,000 worldwide. Renewal rates at 95%. Gross margins of 90%. It’s a very attractive business model.
But I think, also, something that’s really noteworthy is that Ansys supplies about 2,400 academic institutions in more than 79 countries. They’re training a lot of people on this software while they’re still in school, which means when they get out of school, they’re jumping into jobs with that knowledge base. A lot of those employers are investing a lot in that Ansys ecosystem to make sure they cannot waste any time getting them right there started.
Hill: Who is Ansys competing with? I have to believe there are bigger players in this space.
Moser: Actually, Ansys is one of the biggest, to be honest with you. Obviously, you’ve got companies out there like Autodesk, Dassault Systemes, and the like that are doing similar things. But honestly, Ansys is a bit unique in what they’re doing in simulation. They partner with companies like PTC to develop more offerings for more purposes there. But, Ansys really is the market leader.
Hill: Andy Cross, what about you?
Cross: My humble-pie stock from our Thanksgiving show was Arista Networks, and I’m going back to it, fellas. I think Arista Networks — which provides cloud-based networking gear for the big cloud titans and big data centers — it’s had a tough go. It’s had some challenges with some of its largest clients, Microsoft and Facebook, these cloud titans pulling back on some of their spending. But I think that trend is going to, if not next year, will reverse down the line. And they’re going into new markets, like campus networking, which is a big opportunity for Arista. They’re exceptionally profitable. Growth at the top line has slowed this year, but I don’t think that is gone for good. And the market is forward-looking. I think over the next 12 to 18 months, the stock will start to rebound. They’ll recognize that. Its founders are Andy Bechtolsheim, was one of the original investors into Google. He’s the largest shareholder. An exceptional amount of vision. I just like the way that they are positioning their company in a tough time right now.
Hill: Ron Gross, what about you?
Gross: I’ll give you one sector and one stock for extra credit. I think the gene therapy sector of the biotech industry is going to remain very exciting. Listeners know I’ve been a big fan of CRISPR Therapeutics. It’s part of my gene therapy basket, along with six other companies. I specifically created the basket because I think gene editing will eventually be the future of medicine. Now, shares of CRISPR in particular, they’re up 125% this year. But do not let that scare you. This is a long-term play. There’s going to be lots of volatility, ups and downs, before we’re done here years from now. But their balance sheet is very solid, which is essential for these early stage biotech companies.
Hill: Jason, this isn’t everybody gets a trophy day. There are stocks out there that are worth avoiding, or shorting, or, at a minimum, keeping on a short leash. What’s on your list for that category?
Moser: I look toward the food delivery service, and kind of jumping on Ron’s penchant for convenience here. I love convenience as much as the next guy — I don’t know that the economics of food delivery are necessarily as attractive as some investors maybe thought from the get-go. Now, I’m not saying, “Forget about Grubhub; it’s just game over.” But I do think we’re going to see, ultimately, consolidation in this space to where just one food delivery service is leading the way there. Maybe that is Grubhub. But you saw Square earlier last year unload their stake in Caviar. I think a lot of that was because, No. 1, it wasn’t very complementary to their overall business, and No. 2, the economics just didn’t work out for Square’s overall business model. So, I think that food delivery, along with, we’re talking about Uber and Lyft on the rideshare side, those are businesses where the economics aren’t as clear cut. They’re going to have to probably figure out some other things to do with those networks. Keep a very close eye on this one, don’t let it get too far away.
Hill: Longtime listeners know you like to put together baskets of stocks. The “war on cash” basket. Somewhere on your list, can you start to think around a Ron Gross convenience basket?
Moser: [laughs] That’s now the resolution for 2020, right? I hadn’t really figured it out now, but thank you, because you figured it out for me.
Cross: That’s so convenient.
Hill: Andy Cross?
Cross: I don’t own shares of Harley-Davidson, symbol HOG, but if I did, I would keep them on a short leash. They’ve had 11 straight quarters of sales declines, 19 out of the last 20. The stock has trailed Polaris, one that we do follow and like over the last three years. Had some real struggles with what’s called their LiveWire e-bike. That was supposed to try to lead the turnaround at Harley-Davidson as they try to go after a much younger audience. That struggled. They did not get that out the doors like they wanted to. So, questions around the LiveWire. This stock does yield a little, 4%. Has a relatively low payout ratio. So, it has some dividend potential there. But overall, the stock’s underperformed, and I think they have to get some things turned around there at Harley-Davidson.
Hill: It is one of the great iconic American brands, but when you think about the trends that they are working with, it is a real struggle.
Hill: What about you, Ron?
Gross: I think mall-based retail, specifically department stores, have to be kept on a very short leash, whether you’re talking about Macy’s or Kohl’s or J.C. Penney, Dillard’s, even — pains me to say — Nordstrom, my favorite one. The trends are just not in favor of these kinds of stores. UBS recently did a survey that shows the percentage of folks that are going to the mall specifically to shop at a department store are falling. It stands at about 20% now of folks going to a mall specifically to shop at a department store. Most are going for other reasons, including things like the food court. Right now, roughly one-fourth, a quarter of apparel shopping is done online. By 2023, that’s going to be closer to one-third. The trends are just not there.
Hill: We talked recently about the run that discount retailers have had over the past decade. Ross, Dollar General, TJX, etc. They’re obviously not dealing with malls in the same way that a Macy’s or a Nordstrom is. But I’m wondering if you think that there’s maybe even greater brand loyalty around a business like Dollar General than there is for something like Macy’s.
Gross: I think it’s more about the value proposition than the brand loyalty. You have to give consumers something. If you’re a Costco or a TJ Maxx, delivering that value and the assortment, in certain circumstances, are what people are looking for.
Hill: CEOs in 2019. We saw, essentially, a record number of CEOs saying, “You know what? I’m out of here.” And some of them, it was of their own volition. And some of them were shown the door by the board of directors, or just flat out for legal reasons. When you look around the CEO landscape, Jason, who do you think, if they’re not on the hot seat, it’s certainly getting warmer underneath them?
Moser: This one stood out to me immediately, and it’s Stephen Kaufer with TripAdvisor. This is a company that I’ve wanted to like. Over the last five years, you look at the stock’s performance, it’s just been abysmal. Honestly, that’s for a number of reasons, and a lot of it has been self-inflicted. A lot of it is also due to just competition in the space and the fact that you’re going up against companies like booking.com and Google. But the bottom line is that TripAdvisor has failed to be able to pivot and develop a business that can sustain any long-term success in really what is a massive market opportunity in travel. It’s a wonderful service as a traveler, but they were never able to really become that OTA like they wanted to become. And then they got stuck in this battle with Google and SEO. And now, you’ve got this business that, they don’t know what else to do. Last year, they declared that special dividend. They’re reassessing the business model and returning more value to shareholders in the form of repurchases. These are all signs to me of management waving a white flag and saying they don’t know what else to do. You add to that, he doesn’t really own much of a stake in the business. And there is a bit of a convoluted ownership structure there with Liberty TripAdvisor Holdings. To me, this all reeks of a business that needs to put itself up for sale to the most interested buyer. I just don’t understand how Kaufer continues being able to get away with this performance, because it’s been horrible.
Hill: Andy Cross?
Cross: I’m going with a CEO who’s not even CEO yet officially, and that’s Patrik Frisk, who’s taking over from Kevin Plank from Under Armour. Kevin Plank decided to hand over the reins to the footwear and the athletic apparel company to Patrik Frisk and he starts in January. While he might not be on the hot seat, I think taking over from a founder-led CEO, especially one who has such a personality, Kevin Plank…The performance of Under Armour really has struggled over the last couple years. Sales have stagnated, profits have fallen, the stock’s underperformed. It’s a $9 billion business. He’s got some challenges ahead of him to really turn around that performance culture at Under Armour and make the sales growth and the profits come back.
Gross: When I first started thinking through this one a couple of weeks ago, I thought Dennis Muilenburg from Boeing was a no-brainer. And, Chris, guess what?
Hill: The board of directors agreed with you?
Gross: I was right, because he is out of there. I’ve been forced to go with plan B, and that is Warren Buffett of Berkshire Hathaway. Yes, you heard it, Warren Buffett. It’s certainly not because he’s in any danger of being fired. But it’s because he’s got to get two things right. First, he won’t be at the helm forever. He needs to get a solid succession plan in place, which he has begun to do. We’ve got Ajit Jain, who is now head of all insurance activities. Greg Abel has been given authority over basically everything else. We’ve got Ted and Todd, who we speak about quite often, each managing $4 billion. Interestingly, Todd Combs was just also named CEO of Geico. That’s a lot of work, $4 billion-plus, CEO of Geico. Let’s assume he can get that done. But Buffett really does need to get this right.
No. 2, Buffett has got to figure out what to do with $128 billion of uninvested cash. The stock has underperformed for five years. That’s partly because 23% of Berkshire’s market cap sits in cash. This is my largest personal stock position. Mr. Buffett needs to get this right.
Hill: So, 2020, obviously, we’re going to have a presidential election. CEO compensation is one of those issues that seems to get more attention in presidential election years than other years. All things being equal — Jason, I’ll start with you — how do you like to see a CEO being compensated? As an investor, obviously, part of that has got to be, you want them to have a stake in the company.
Moser: Yeah. I think having a stake in the company is nice. Now, I don’t look at that as a reason to invest. I think it’s just a nice thing to see. I’m a little bit torn here. I understand the argument against excessive compensation. But by the same token, let’s recognize these are CEOs that are taking care of a lot of employees, and in many cases are responsible for a lot of economic output. Generally speaking, I just like to see performance-based incentives that encourage CEOs to think more long-term as opposed to hitting quarterly, arbitrary Wall Street goals. We love to see those CEOs that don’t even focus on those goals. Honestly, if you see an executive team that doesn’t even set guidance on a quarterly basis, I love to see that.
Gross: Agreed. Bonus metrics that are aligned with the shareholder, and typically long-term, is what I prefer to see. Plus, I love to see CEOs that, with their own cash, purchase stock.
Cross: Yeah, I think just understanding how the culture of compensation, from the board level to the CEO, is designed and appreciate it, it’s something that’s really interesting to look at. I think everything that JMo and Ron said makes a lot of sense because if you are having a CEO at that level who is compensated in the right way, and building a culture that is sustainable and lasting, the ones that we want, there’s a lot of power there. And we’ve seen a lot of good, really successful CEOs.
Moser: Also, no funky metrics. Just base it on sales growth or operating income targets. Remember, the further to the bottom line you get there, the more they can manipulate those numbers.
Hill: Ron, a lot of questions going into 2020. What is your biggest question? It can be about a company or an industry. What do you got?
Gross: I’m going to go with a company. I’m going to make it Bed Bath & Beyond. New CEO Mark Tritton, Target‘s former chief merchandising officer, recently took the helm. Did great things for Target. It took him less than two months to clear out nearly the entire executive suite. Six members of the C-suite are leaving, including the chief merchandising officer, chief marketing officer, chief digital officer. CFO is the only remaining executive. Not an easy turnaround here, but I think it’s possible. If he can do what he did for Target, maybe moving into some private label brands, improving the in-store experience, speeding up deliveries, online pickups, I think there’s something to do here.
Hill: As investors, we like transparency. If nothing else is clear about Bed Bath & Beyond, we have total transparency about who is running this show and who’s going to get the credit, and, therefore, who’s going to get the blame.
Hill: Jason, what about you?
Moser: Very similar to your business, I’m going with Wayfair, actually. If you look at the most recent quarter, revenue up 36%. Gross margin up 40 basis points. Active customers of 19.1 million. Orders delivered up 32%. I’m telling you, half of those showed up on my doorstep thanks to this master bath reno. But, all of these metrics tell the story of a business that’s doing really well. But there was a key point in the call from CFO Michael Fleisher. He said, I quote, “Since the beginning of the year, more than 90% of our suppliers were subject to China tariffs,” Ron, “have raised wholesale prices, which have resulted in higher retail prices. As retail prices on the site fluctuate, we observe that our customer’s consideration cycle gets disrupted and is effectively lengthened.” The stock sold off 20% after that earnings call. And I feel like if we can see some certainty here on the China tariff side, the business itself is really performing well. If we can see that China situation resolved, I think 2020 stands to be a very good year for a business that really is firing on all cylinders otherwise.
Cross: Overall, profitability of so many of these software-as-a-service companies, the cloud-based companies has been in question. And for a while, it was like, “Hey, just grow as fast as you can. Continue to plow money back into the business. We don’t care about profits,” or, in this case, mostly losses. I think that’s starting to shift now. We saw that this year a little bit. I think in 2020, there’s going to be more and more demand for closer scrutiny on the profitability of some of these SaaS-based, high-growth companies. I talked about in our review episode, the situation at PagerDuty.
I think in general, companies are going to be under more scrutiny and under the hot seat to drive up the profitability curve. So, I’m paying a lot of attention to the profits of some of these high-growth SaaS companies.
Hill: Well, and that ties a little bit into our next topic, which is the IPO that you want to see in 2020. Because it seems like, when you think about 2019, and the failed IPO of WeWork, in a way, that brought an end, in some respects, to the excitement around IPOs. I think, when I look back on 2019, Andy, it seems like more was — just as you’re saying about SaaS companies, and we’re going to be looking for a little bit more on the profitability side — it seems like we had this 10-year bull market, and at some point, investors started to say, “You know what? We’re not just buying any hot IPO that comes down the pike. We actually want more of a promise of profitability, regardless of the industry.”
Cross: What’s really interesting is, if you look at the first half of the 2010 period, for those big unicorns that came public that IPO’d, they’re almost all profitable. Think about Facebook when it came public, very profitable. In the second half, very few of them were actually profitable. And some of them, Uber and Lyft, for example, just getting worse. So, I think the market is definitely going to start looking for and appreciating the profit picture much more.
Hill: You agree with that?
Gross: I do agree with that. I think in general in this market, profitability will become more and more important as the bull market gets older and older. Top-line growth is wonderful, but I think cash flow is going to become king once again.
Hill: All right, Jason, let me start with you. What is a private company that you would love to see come public in 2020?
Moser: Two of my favorite markets in healthcare and mixed reality, there’s a little company out there called MetaVis. It’s a medical software maker. I tweeted out a little while back the Verizon keynote from CES 2019, Dr. Christopher Morley, who is one of the co-founders of MetaVis, gave a talk and showed some examples of how we’re using augmented and virtual and mixed reality in the medical profession now. And it’s just staggering to see the potential that exists there. And they’re raising a lot of money based on the software that they’re producing, building stuff for Microsoft, for that Microsoft HoloLens 2 that’s coming out. I hope they have a chance to go it on their own. I think that the work that they’re doing is very important. I wouldn’t be surprised to see them acquired before they had a chance to go public. But if they do go public, I’ll have a very close eye on it.
Hill: I was just going to say, earlier in the show, you were talking about the banking industry and consolidation. Everything you just said about MetaVis makes me think they might not make it to the public markets.
Hill: Andy, what about you?
Cross: This one has a lot of political ramifications. I’m not quite sure in the election season whether it’ll actually go IPO or not. But, Palantir Technologies, which is the massive data analytics firm that was founded by Peter Thiel and Alex Karp. Did a lot of business with government agencies, including the Defense Department, the intelligence community, and even the Immigration and Customs Enforcement group. The last raise was at $26 billion. It’s a massively large company. Does a lot of complex data analytics. They are in the market right now looking to raise — the public market — another $1 billion to $3 billion. I’m really interested because it’s such a large company and it’s so fascinating because it touches on so much of the data analytics that we deal with every day.
Gross: I would love to see family-owned Chick-fil-A go public. Probably, in my opinion, the best-run fast-food chain with the best food. A very powerful combination. Controversy surrounding some of their political and moral stances notwithstanding, I think it is the best-positioned fast-food chain for the next five to 10 years, and that’s regardless of the so-called chicken sandwich battle that is currently being waged. I think they’ve got the staying power here.
Hill: It’s not so-called battle. It’s an actual battle.
Gross: It’s an actual battle.
Hill: It was one of the more interesting things going on in 2019. In 2020, presumably, this test that McDonald’s is doing in Knoxville and Houston, if that goes well at all, they’re going to be rolling that out. And yeah, it’s more competition.
Gross: Right, more competition. I don’t disagree, it could take a bite — no pun intended — out of the company’s traffic and business. That would be reflected in whatever an IPO valuation is. But the way they get the customer in and out, the throughput, the operations of that company is very impressive.
Moser: Any chance they open on Sundays?
Gross: I think not.
Moser: Yeah, I agree.
Hill: Before we get to the reckless predictions, a quick round of fill in the blank. Andy Cross, you’re up first. “In 2020, _____ is going to surprise a lot of investors.” A lot of ways you can go there. You can go companies, CEOs, whatever you want.
Cross: In honor of Herb Kelleher, who died about a year ago at this time, I’m going with Southwest (NYSE:LUV). I think it’s had a little bit of a tough run, tied into a lot of the Boeing MAX issues that have really hurt their earnings. Last quarter, they knocked 20% off their earnings. But when you look at the stock, the market cap’s $28 billion. Cash and debt are about neutral at $4 billion. Stock is cheap at 12 times earnings. They’re now aggressively going into Hawaii. From four different cities in California, they offer flights to Hawaii. EPS growth north of 10% a year. I think, not just over the next year, but the next three to five years, Southwest is a winner.
Hill: Ron, what’s going to surprise investors in 2020?
Gross: Chris, in 2020 value investing is going to surprise a lot of investors. Now, I get it. value has been crushed by growth for the last 11 or 12 years, and even more recently, crushed even worse. But that will not last forever. Value will make its comeback, and it will regain its lead over growth over long periods of time.
Hill: Any chance you can team up with Jason on a value/convenience basket?
Gross: [laughs] Now you’re talking!
Hill: Jason Moser?
Moser: Well, I have a pretty well-established track record of ripping on this company during my tenure here at The Motley Fool, but I do think that in 2020, Bed Bath & Beyond — new CEO Mark Tritton — I think this is going to surprise people.
I think that if these guys have a chance, it’s going to happen this year. I think we’re going to see some glass-half-full results here this year from Bed Bath & Beyond. I’m not counting them out just yet.
Cross: A shot glass half full.
Hill: Given the fact that the glass has been like, five-eighths full — half full is going to be a step up.
Moser: There’s too much math involved for me here now. I’m confused.
Hill: Andy Cross, this time next year, “I think I’m going to regret not owning _____.”
Cross: I’m going to regret not owning Stitch Fix, and I’m hoping to buy it at some point here. I look at this business, founded by Katrina Lake. They provide personalized shopping online through their algorithms. I think what they are doing and how we are changing our shopping behavior, considering a lot of people now are going online to shop. They’re tailored experiences. I look at Stitch Fix, symbol SFIX, as a relatively small company in a very large market. I think that’s going to be a winner.
Hill: Ron, what about you?
Gross: I think I’m going to regret not owning Target. I’ve spoken before about the great job that Brian Cornell has done to turn this business. I think there’s plenty of room for it to continue. The stock’s not cheap, certainly, compared to other folks like Costco or Walmart. I think there’s plenty of room to run here. I think it’s a great stock to own.
Hill: All kidding aside about convenience, have you tried the Target order online and then pick up system? I’ve done that a couple of times and it works out very smoothly. Jason, what about you?
Moser: I’m going to remedy this I don’t regret it, but it’s owning shares of Adobe (NASDAQ:ADBE). I’ve talked about this company before. Tremendous business on the creative software alone, but big investments they’re making into their document cloud business, giving companies like DocuSign a little bit more competition out there. A lot of different ways for this company to win. It’s amazing to think that it’s a $150 billion company now. I see plenty more upside. Recent recommendation in our augmented reality service. I will be using this as a no-brainer reminder, as you put it, Chris, to buy shares once our trading guidelines allow.
Hill: We often talk about food and beverage innovations on Motley Fool Money. Let’s face it, sometimes it is at the expense of the company involved. This can be helpful if you want, or it can be not helpful. You can continue that trend. Andy, “In 2020, I think _____ should test _____.”
Cross: It’s the holiday season and I’m an Anglophile and I like mincemeat pie. I actually make a good mincemeat, vegetarian-style, Ron. Vegetarian. I think, for the holiday season, McDonald’s should bring a mincemeat pie to their menu. They have the apple pie, it’s quite delicious, but I think mincemeat would do them very well.
Hill: They’ve certainly had success in the past, usually in December with the McRib rollout. You’re saying go mincemeat —
Cross: Go the whole holiday season. Embrace it all and go the mincemeat side.
Hill: Wow, OK. Ron?
Gross: Well, because I like to cook, and I know, Jason, you do as well, I tried to really give this some thought and come up with a real suggestion. I think Wendy’s should test a stuffed sweet potato. They have a stuffed baked potato, so this is just augmenting the menu here. We’re going to stuff it with things like chili, which they already have. I would suggest an avocado bacon cheese stuffed sweet potato. For those like Andy, a black bean and quinoa sweet potato, or perhaps a feta, tomato, and olive sweet potato. My phone is open if you’d like to discuss this, Wendy’s.
Cross: Are you saying my mincemeat pie wasn’t a real recommendation?
Moser: That’s what I gathered from what he was just saying. It seems it’s fighting words.
Cross: He’s not an Anglophile.
Hill: I just liked it he prefaced it by, “I put a lot of thought into this.”
Gross: [laughs] I came up with choices!
Hill: Unlike all the stock information that Ron was talking about earlier in the show. Jason Moser, what about you?
Moser: I will say, I gave this as much thought as all of our other segments for the show. I think Mac, you probably will like this. I’m going back to my Southern roots here. I love chicken and waffles. I love making chicken and waffles for dinner at home. The kids love it. My wife loves it. It is a lot of work, I’m not going to lie. You can cheat and buy the frozen chicken fingers or whatnot. Listen, Bojangles, I know you had a tough time of it as a publicly traded company, but how about you introduce a chicken and waffles burrito, where the actual wrap is a waffle, and then your chicken is going inside that? So, a chicken and waffles burrito. And we can experiment with the things that go in there other than the chicken. Maybe it’s just chicken and syrup. Hey, maybe it’s chicken and syrup and some bacon or something like that. But a chicken and waffles burrito from a restaurant like Bojangles, I think, would resonate.
Gross: And you eat this with your hands?
Gross: Sounds very sticky.
Moser: Oh, man, I mean, if you have the foil wrapping it, you can at least keep it somewhat clean. But the mess is part of it.
Hill: A few months ago in this show, our guest was David Henkes, who’s spent his career studying the restaurant industry. And one of the things we talked about was Applebee’s, which is something we’ve talked about from time to time on this show, Applebee’s and their drink specials. And at first, it was kind of funny that Applebee’s was coming out with the $1 Long Island iced teas and appletinis and all this sort of thing. Applebee’s, which is part of Dine Brands, publicly traded company, once you started to say, “Hey, wait, that thing that they’re doing with the $1 drink specials is working, it’s driving traffic, it’s paying off for shareholders.” So, I think, to our man behind the glass, Steve Broido, big fan of Darden Restaurants, parent company of Olive Garden, I think Darden Restaurants has to start looking at their portfolio of restaurants, what are the drink specials they can start offering? Because it is working for Applebee’s. It’s working for Dine Brands. I think it could work for Darden.
Gross: $1 glasses of Chianti. I’m in. Let’s go right now.
Moser: Stopping in for a little Chianti and salad and breadsticks? Man.
Hill: I like that that’s much more palatable to Ron than something sticky. Let’s get to the reckless predictions, which is what the listeners have been waiting for the entire show. We’ll bring in our man behind the glass, Steve Broido. He can make his own reckless prediction for 2020. Ron, what do you got?
Gross: Last year, I talked about finding life on Mars, a form of proof of life on Mars. That was pretty reckless. I still believe we’re going in that direction. But for this year, I’m going to come a little more down to Earth. And it’s an actual prediction, not necessarily so reckless, even though that’s the name of the segment. Sorry. I say Berkshire Hathaway is going to buy back 15% of their outstanding shares for $80 billion to $90 billion and initiate an annual cash dividend equal to 1.5% yield for the B shares. That would equate to a $3.50 cents per year dividend. I think that’s going to set Berkshire up really nicely. They have plenty of cash, $128 billion the balance sheet right now. It’s going to be great for the stock.
Hill: I mean, it’s not life on Mars, but in the context of Berkshire Hathaway and the way that they allocate capital, yeah, that qualifies as reckless.
Gross: Thank you.
Hill: Jason Moser?
Moser: I’m sticking with what I threw out there a couple of episodes ago. I do think, given all of the signs we’ve seen from Adobe investing in their document cloud business, they covet, I think, DocuSign’s small and medium-sized business clientele. I think that with where the stock price is today, with the balance sheet that Adobe has, I think that 2020, Adobe acquires DocuSign at a nice premium because they can afford to do it and it would pay off for many, many years to come.
Hill: Excuse me, I’m going to call my broker and buy some shares from DocuSign because I think you’re right about that. Andy Cross, what do you got?
Cross: It’d be more reckless if Berkshire paid a dividend. Similar to Jason’s, last year we saw Salesforce buy Tableau for $16 billion. Google bought Looker. I talked about Palantir Technology. This data analytics space is going to be really interesting and continue to evolve. I think there will be another big acquisition. Maybe it’s Datadog, which is a really fabulous company. Some big player, maybe it’s Microsoft, will continue to buy out and consolidate the data analytics space for the software space. I’m really interested to see which one buys whom in that space.
Hill: If we look back on 2019 and the IPOs and the sobering thought among the Wall Street community when it came to IPOs, it sounds like we feel pretty bullish about acquisitions, whether it’s the banking industry, or more individual cases with software, that sort of thing. We’re feeling like investors are going to be on board with all these acquisitions?
Cross: Yeah, well, I think so. Certainly from the competitive space, when you look at the continued growth of the large players, Amazon, Microsoft, Apple, Facebook, as they continue to look for ways to growth, and the other companies that they’re going to acquire have to compete against that growth. And that’s hard to do in a world that the big dogs continue to generate more and more of the revenue growth. So, I think some of those investors from the smaller companies recognize that’s the way to go, is to get bought out.
Gross: And more importantly, investment bankers need something to do. If the IPO market dries up a little bit, they’re going to have to start consolidating industries, breaking up bigger companies, because the investment bankers have to eat, also.
Hill: That’s true. Let’s go to our man behind the glass. Steve Broido, listeners have been waiting the entire show. Do you have a reckless prediction for 2020?
Steve Broido: You bet. I believe there will be a national ban on the electric scooter market in cities, and that all those companies that are jumping in to rent you scooters will go away.
Gross: That’s a good one.
Hill: As someone who’s never actually gotten on an electric scooter, but has walked around them when people just leave them on sidewalks, is it safe to assume you’re the same as me in that regard, Steve?
Broido: I’m just not a fan. It’s not going to end well, it’s just not.
Gross: They’re in college towns all over the place, which is a dangerous mix. The kids come out of the bars, jump on a scooter, what could go wrong?
Cross: Steve, you’ll save private equity a lot of money if they stop investing today.
Hill: All right, Andy Cross, Jason Moser, Ron Gross, guys, thanks for being here! That’s going to do it for this week’s edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I’m Chris Hill. Thanks for listening! We’ll see you next week.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Andy Cross owns shares of Berkshire Hathaway (B shares), Booking Holdings, Facebook, Under Armour (A Shares), and Under Armour (C Shares). Chris Hill owns shares of Amazon, Under Armour (A Shares), and Under Armour (C Shares). Jason Moser owns shares of Amazon, Ameris Bancorp, ANSYS, Apple, Autodesk, Booking Holdings, DocuSign, Square, TripAdvisor, Under Armour (A Shares), and Under Armour (C Shares). Ron Gross owns shares of Amazon, Apple, Berkshire Hathaway (B shares), Costco Wholesale, CRISPR Therapeutics, Facebook, Microsoft, Square, The TJX Companies, and Verizon Communications. The Motley Fool owns shares of and recommends Amazon, Apple, Arista Networks, Atlassian, Berkshire Hathaway (B shares), Booking Holdings, CRISPR Therapeutics, Datadog, DocuSign, Facebook, Microsoft, PagerDuty, Polaris Industries, Salesforce.com, Slack Technologies, Southwest Airlines, Square, TripAdvisor, Under Armour (A Shares), Under Armour (C Shares), Wayfair, and Zoom Video Communications. The Motley Fool recommends Adobe Systems, Ameris Bancorp, ANSYS, Autodesk, Costco Wholesale, Dassault Systemes, Grubhub, Nordstrom, The TJX Companies, Uber Technologies, and Verizon Communications and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $85 calls on Microsoft, short January 2020 $70 puts on Square, short January 2020 $220 calls on Berkshire Hathaway (B shares), and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.
By Chris Hill