How to Spot Opportunities in the Auto Sector

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and quarterly reports from Wall Street. They discuss the quarterly report of an auto parts company and about finding great opportunities in the auto sector. They talk about success and struggles in the video streaming space, the basket approach to investing, and much 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.

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This video was recorded on September 22, 2020.

Chris Hill: It’s Tuesday, September 22nd. Welcome to MarketFoolery. I’m Chris Hill, with me today, Mr. Jason Moser. Good to see you.

Jason Moser: Howdy.

Hill: We’ve got some video streaming news; we’re going to talk about basket investing, so folks are going to want to take some notes on that, but we’re going to start with the automotive world, specifically AutoZone (NYSE:AZO), which wrapped up its fiscal year in style.

Fourth quarter profits and revenue came in higher than expected for AutoZone. Do I have this number right, [laughs] same-store sales up nearly 22%? I think I have that right.

Moser: [laughs] Yes, you do have that right. And here’s another fun fact for you. Actually, AutoZone enjoyed its largest quarterly same-store sales performance since going public in 1991. That 22% was the greatest quarter they have recorded as a publicly traded company. So, all kidding aside, that is monumental, man! That’s a great achievement given the situation. It’s at least a little bit understandable, but, yeah, there you go, great quarter indeed.

Hill: You and I, whenever we talk about housing. At some point, I feel like, we get around to the idea of, for investors who are looking at the housing industry, which is a large industry, a lot of times you and I will sort of land on, hey, if you’re just starting out, one way to play the housing industry is not to go to the homebuilders, it’s to go to home improvement, that gives you exposure to the housing industry, it’s a little bit safer, a little bit more predictable in some ways. And let’s face it, Home Depot and Lowe’s are two very rock-steady performers, certainly have been over the past decade.

I kind of feel like [laughs] this is the automotive version of that. That AutoZone, when you step back and look at it, for people who look at the automotive industry and want some exposure, historically, AutoZone has been a phenomenal place to invest.

Moser: Yeah, I tend to agree. I think that when you look at all things together, you know, you go to an auto dealership and you buy a car once, but typically people are trying to hang on to that car for as long as they can, and there’s a lot of stuff that comes with that through the years. And that’s why companies like AutoZone and O’Reilly are great opportunities there. And when you look at the quarter here for AutoZone, it was really strong across the board. If you exclude sales from the additional week that was included in last year’s quarter, sales were up 21.2% for the quarter. And if you look at the profitability there, this was really impressive. Net income, up 41.2%; earnings per share, up 47.6%.

And so, what this all was from was ultimately traffic. I mean, much like restaurants, AutoZone is a store. There’s a lot of fixed costs involved in keeping that store open and staffed. So, then transactions and traffic become more and more important. I mean, that’s the way that you can really leverage that expense structure there. And expenses were up around 10% for the quarter due to COVID-19 and just the general pandemic economy that we’re dealing with. But clearly, traffic and transactions were very strong, helping them really bring a lot of that sales growth down to the bottom-line. Inventory in check, only up 3.6% for the quarter. So, they’re not loaded down with a bunch of stuff that’s not selling. Margins are keeping in check. I don’t know that I would call this an essential business, but it’s pretty darn close. And when you look at this space, AutoZone and O’Reilly are the clear leaders. And I think AutoZone just proved that again this quarter.

Hill: The Wall Street Journal is reporting that Quibi is already exploring strategic alternatives. Quibi is the short-form mobile focused video service, it launched in April, much ballyhooed due in no small part to the leaders of the company, Meg Whitman and Jeffrey Katzenberg. And I’ll just read directly from the Journal story, Jason, Quibi is also considering raising more money or going public through a merger with a Special-Purpose Acquisition Company or SPAC, essentially a blank-check company that helps fund deals. Quibi is working with advisors to review its options.

Holy cow! First of all, to paraphrase Ron Burgundy, this really escalated quickly. [laughs] I mean, this got worse for Quibi faster than I thought it was going to. Look, I’m trying to put myself in their shoes, and if you’re trying to raise money, of course, you would consider something like a SPAC or some sort of public option. For investors, I can’t think of a public company I would want to run away from faster than this.

Moser: Yeah, I think that this is one of those red flags that we talk about. And if you can hear my dog in the background; I apologize for that.

Hill: No, no, I feel like it’s your dog agreeing.

Moser: Well, excellent, well played, man! You’re a professional, man, that’s why. Listen, I do think, with Quibi, it’s one of those things where you have to actually look at — the very, very first thing I think about when I think of Quibi is the biggest problem, I don’t think anybody really knows what Quibi is, including Katzenberg. And I don’t mean that to be funny, I really wonder if they know what they are, what’s the identity? Is it social, is it streaming, is it social streaming? What void is it trying to fill? I mean, that’s not clear; much like the meaning of life. I don’t have any answer for you. And I think that really is the biggest problem. And much like investing, really, it’s a great quality to be able to just call it, admit the mistake and move on, or else you just keep on burning money. And it feels like in this case that would probably be the right call, it seems like to me there is no real light at the end of the tunnel here. I mean, does the world care if this shut down or doesn’t exist? I don’t think it does. And I think most people don’t really know fully what it is. And furthermore, I don’t think people are going to pay for it even if they do.

And so, I mean, they’ve got problems on multiple fronts. And I do want to jump back to last week’s show, and an email that we got, that a listener sent, because we were talking about Paramount+, and I just have to read this, because it really does strike me as one of the challenges that Quibi is dealing with.

The email said, “Howdy! Quick note on today’s show and Jason’s comments on too many streaming platforms. When my teenage son saw Parks and Rec, which he watches religiously, moving from Netflix to Peacock. He just threw up his hands and said, he refuses to watch this on another app. So, when your teenage target demographic that already blindly uses dozens of apps for texting, social media, gaming and streaming is getting frustrated, you are in trouble. Thanks again. Love the show. Mike from Ohio.”

And Mike from Ohio, I hope you don’t have a problem with me reading your email [laughs] on the air, but it was so spot-on. And I think this is one of the primary challenges that Quibi is dealing with, and that will ultimately contribute to Quibi’s demise. Teenagers, adults, nobody needs this thing. It sounds like nobody wants this thing. So, it sounds like it might be time to go ahead and just put it out to pasture.

Hill: Yeah, I remember months ago talking to my oldest who’s in college, because I just thought, you know what, maybe this is just one of those things, it’s not aimed for me, it’s aimed at younger people. And I checked with her, [laughs] she was basically like, yeah, no, no, I’m not watching this, [laughs] none of my friends are watching this. And I just thought, OK, it’s pretty bad.

You know, the one thing, I think, to watch from here is, because part of the whole strategic alternative thing is going to other companies, and that’s part of this Journal story as well, going to Google, [Alphabet] going to Amazon, Apple, Comcast, going to Disney. I mean, just as a shareholder of Disney and Amazon, I don’t see the appeal. You know, even if it’s at a deep discount, I don’t see what you’re getting. There are other things we’ve talked about over the years where tech companies are in trouble, could someone buy them? And if so, what would they get for them? And in some cases, you can look at troubled tech companies and say, you know what, there’s some intellectual property there, there’s some patents there, there’s an audience there, they’ve got 40 million people on an email list or customers or subscribers. I don’t see any of that with Quibi.

Moser: I don’t either; I’m right there with you. I don’t see any of it. And frankly, you know, if a company decided to jump in there and make an acquisition, even if it’s just for pennies on the dollar, I would hold that against them, because it means either management is just trying to do him a favor [laughs] and throw them a bone or management really is just out of touch. I mean, like you, I’ve got a freshman and a sophomore high school here, they don’t watch it, they don’t know about it. I mean, no one knows anything about it. And so, I think that all things considered, I just don’t understand the future there, I don’t understand how even going public is a conversation, because I don’t understand who would want any piece of this. Maybe I’m wrong, maybe we’re wrong, I mean, maybe there is something there that will come to light at some point. I’m doubtful, though, personally. And I feel like, if this is an acquisition, that just immediately — like the entire thing is [laughs] goodwill and the entire thing gets written off in the course of a year or two. So, yeah, it would be something I would hold against a company if they decided to jump in there and try to save it.

Hill: Our email address is [email protected] Email from Steven McRae. Who writes, “I have been listening for a long time. Huge fan. I’ve learned a lot. And it’s not an understatement to say that my investing strategy and methodology has benefited greatly from listening to multiple Motley Fool podcasts and subscribing to your Stock Advisor service and your Rule Breaker service. I am familiar with the War on Cash basket, what are the other baskets Jason Moser has previously spoken about and what stocks are in those baskets?”

For those unfamiliar, the War on Cash basket started on this show about +3 years ago. Equal portions of Square, PayPal, Visa, and MasterCard. And, yeah, the market is just getting destroyed by that basket. I was trying to think earlier today, [laughs] you and I were going back-and-forth there. So, every Friday morning, before Motley Fool Money, we have a production meeting where we’re trying to figure out what stories we’re going to talk about on Motley Fool Money that week. And I was trying to remember a meeting, because you know the meeting, we get stuff done in the meeting, but we also sort of goof around as happens from time-to-time. And I just remember there was a meeting earlier this year where we just got on this tangent, and I think we were making fun of Ron Gross, because Ron was being, sort of, like lazy talking about, like I don’t want to lead by, you know. And we were trying to come up with a Ron Gross trapped in his home basket. It was like Domino’s Pizza

Moser: [laughs] Oh, yeah, the convenience basket —

Hill: Yeah, it was convenience, it wasn’t so much. Yeah, it was all about convenience for Ron’s life. And it was like, oh, Domino’s Pizza would go in that basket, Netflix would go in that basket. So, anyway, on a more serious note, you have talked about the Health and Wellness basket.

Moser: I have, yeah. And the fun thing about these baskets is you can come up with baskets for pretty much anything. And the entire concept is just to come up with something where you’re chasing what looks to be a large and growing market opportunity. And in case of the War on Cash, it was very clear well before the pandemic, I mean, this basket was established back in July of 2017, so. You know, it was just based on this idea that people are using less cash and using their cards and electronic payments more. And that’s not an opinion, that’s just a fact. So, I put the basket together with MasterCard, Visa, PayPal, Square. As you said, it’s destroyed the market. Since inception, it’s up 235%, to the market’s, like, 33%. And so that’s worked out very well. All four companies are outperforming the market. I own all four companies personally, intend on holding them for long, long after we stop talking about it.

And the Healthcare & Wealthcare basket was one that I put together — I think I actually might have put that together initially for an event that we had at one point, but it just became so clear to me, that I mean, healthcare was this market opportunity where it’s so massive and there’s so much opportunity, and yet, oftentimes we try to focus on picking the winner in the space. And many times, more often than not, really, there’s more than one winner, right? And so, I mean, healthcare was one of the ways to look at.

And so, in February of 2018, I put together the Healthcare & Wealthcare basket. And that consists of UnitedHealth Group, Teladoc Health, Masimo, and then a little bit of a different kind of healthcare company, IDEXX Laboratories, and IDEXX focuses on pets, right? And as you heard my dog barking earlier, I think that’s just because he was so happy, he came back from the vet’s office with a clean bill of health, let’s just say that. And my vet uses IDEXX stuff all the time, they love it. So, I put all four of those together. Very much like the War on Cash, that basket is also performing very well, up 205% versus the market’s 26%. All four components are outperforming the market as well. I actually own three of the four. I don’t own UnitedHealth, but I do own the others. And so that basket has performed very well too.

And then another one that I put together earlier this year, and I really put this basket together because I was so interested in finally starting a position in Adobe at the time. In March when the bear market hit, that was the top stock on my list, that was the one I wanted to buy and get a position set. And once those things started getting peppered during the bear market, you know, I started building that position out. But this is the Triple A basket. And this is based on software companies, but it’s with a twist, Chris, software companies that actually make money. I mean, I know it sounds — I know, I know. Step back for a second, think about that, let it process — [laughs]

Hill: So, you’re saying, these are companies that are actually turning what we like to call “a profit?”

Moser: [laughs] Yes. GAAP and non-GAAP. I mean, you get the total package here. [laughs] So, the Triple A basket I put together back in early March. And that is Adobe; another name that probably a lot of folks aren’t very familiar with, Ansys; and another one, Autodesk. And these are companies that I follow and I’ve recommended in services here at work, but these are all software companies that have a very specific focus in their digital niche, so to speak. And they’re really just well-performing names that just, kind of, keep on chugging along.

And since March that basket has performed very well, it’s up 35% to the market’s 10.5%. Again, all three companies outperform the market, and I do own all three of those as well. But you know, at the end of the day, the fun part about the basket strategy is that anybody can do it. You can put together your own basket pursuing whatever market opportunity you believe in. And it’s really just about finding that great market opportunity and then not worrying about picking one winner, finding a few, because it’s very possible that some of these ideas don’t work out, but that’s the idea behind the basket, you get a little diversification, it helps protect you against any of those losers that inevitably will come. And it’s a lot of fun to follow, it gives us stuff to talk about all the time on these shows, and people seem to enjoy them. And I’ve certainly enjoyed talking about them, and I’ve enjoyed watching my portfolio grow because of them.

Hill: Well, and I know from talking to you over the years that — and this gets to the mindset, your mindset is about the basket. Like, yes, of course, you would love it if all four within the basket were beating the market, but every time we talk — whether we’re talking to each other on MarketFoolery or just passing each other in the hallway, back when we actually were working in the same building, you would always talk about it in terms of, well, this is what the basket is doing, not so much in terms of the individual stocks. So, one more reason to like that approach. So, Steven, thank you for the email.

Moser: And to your point there, it is very easy to get focused on one company, whether it’s winning by a large margin or losing by a large margin. I’ll use the Healthcare basket as an example, Teladoc Health, since inception, the stock in the basket is up 516%. I mean, that’s tremendous. And then you look at Masimo that is up only 158%, and IDEXX which is only up 110%. I mean, really, you start to realize, man! those companies have performed very well, Teladoc has been a little bit of an outlier, but that’s OK, you’re going to have outliers to the upside, you’re going to have outliers to the downside. And again, like you said, the point of the basket is the basket. You know, you love to see all of the success, but it also protects you from those potential losses as well.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and pets may too, for all we know, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear.

That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I’m Chris Hill, thanks for listening, we’ll see you tomorrow.

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