In this episode of Motley Fool Money, host Chris Hill is joined by Motley Fool senior analysts Jason Moser and Emily Flippen to discuss the latest earnings news. Some big banks come out with encouraging results, while others disappoint. Also, an online clothing reseller and a fintech company have their big Wall Street debuts. Zoom Video (NASDAQ:ZM) and Lemonade (NYSE:LMND) issue secondary offerings, and a technology company gets its third CEO in the last three years. In the consumer goods space, Beyond Meat (NASDAQ:BYND) rises on a deal with Taco Bell and there’s news about new frozen treats coming out for pets.
Plus, Motley Fool co-founder David Gardner and Motley Fool analyst Tim Beyers talk with Twilio (NYSE:TWLO) co-founder and CEO Jeff Lawson about his new book, Ask Your Developer: How to Harness the Power of Software Developers and Win in the 21st Century.
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 January 15, 2021.
Chris Hill: Twilio CEO, Jeff Lawson, is our guest this week. As always, we’ve got a couple of stocks on our radar. But we begin with the big banks, Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and JP Morgan Chase (NYSE:JPM), all out with earnings reports on Friday morning. Jason, you host the Financials episode of our Industry Focus podcast every Monday, am I wrong or was JP Morgan’s fourth quarter the most impressive of this group?
Jason Moser: No, you’re definitely not wrong. I would agree with that. I mean, to me, there are the big banks and then there is JP Morgan, and it’s the bank that stands out among the rest. I think that’s for a few reasons. I think when you look at the banks in total, JP Morgan, Citigroup, Wells Fargo, they were all pretty good reports, relatively speaking. I think JP Morgan is the bank that has performed the best throughout the past several years because of leadership primarily. I think that Jamie Dimon, he’s been the CEO of the company since 2006. He has always taken this philosophy of making sure that they are never caught essentially asleep at the wheel, so to speak.
There’s a section on their earnings report called fortress principles. I mean, that just goes back to the idea that they’re creating a balance sheet that will let them withstand any type of economic crisis. Clearly, they’ve been through a couple, at least. Wells Fargo, clearly a story of turnaround still. I think that going into this quarter, the thing that I was watching most was the status of all of the reserves that these banks have been putting aside here over the past several quarters based on the pandemic, the economic conditions that have come from what we’ve been going through. Going into this quarter, JP Morgan, for example, had set aside about $34 billion in reserves. So during this core, they were actually able to release close to $3 billion of those reserves and that’s good. That’s a sign that they believe things are getting better. I think they’ll continue to slowly but surely release those reserves. Citigroup, very similar story. They’re able to release $1.5 billion in reserves. Wells Fargo, this is still a turnaround story. I think they’re doing the right things, but Mr. Scharf there has certainly been dealt a tougher deck. Anytime you get a turnaround of a company, it’s difficult. Particularly when that turnaround is related to a relatively toxic culture. I think we could say that culture was toxic for a while. A lot of respect for what they’re doing at Wells Fargo. They’ve still got a little ways to go, but all in all, I think these results portend a pretty good year for these banks to come here in 2021.
Hill: On our year-end review show a few weeks ago, Ron Gross said that 2020 was the year that the blockbuster IPO returned to Wall Street. That trend appears to have spilled over into 2021. Because this week, we saw a bunch of splashy IPOs, including shares of Poshmark rising more than 130% on its opening day, and Petco shares up 60% on its opening day. Emily, there were other IPOs, I’m curious. Based on what you’ve seen so far, what stands out to you?
Emily Flippen: It’s funny because as an investor, I really didn’t have a lot of fear about frothy IPOs until this week. I’ve made it through the entirety of 2020, but what really instilled fear into me as an investor is looking at Petco’s IPO. Mostly because I looked at their S-1 when they filed it in late 2019, and it was amazing to me what a bad company this was. Sure. [laughs] Not to sugarcoat it, they are a turnaround story. [laughs] But even in fiscal year 2019, so pre-pandemic, this was a business that still produced more than $100 million in net losses. So, not a sustainably profitable business. It was a business that’s highly indebted, owned by a PE firm, and has margins that are worse than their peers. By no means was this a business that I was particularly excited about. When I heard that Petco is going public, I chuckled to myself as an investor in Chewy, which is partly owned by PetSmart, thinking this is a business that is trying to capitalize on the hype and excitement around pets during the pandemic. It’s smart of them to try to get some value out of the equity during this time, but I think investors are smart enough not to buy it. When I see shares up nearly 60% on opening day, it occurred to me, maybe not all investors. [laughs]
Hill: Jason, another IPO we saw was Affirm, which is a fintech company, looking to disrupt the credit card industry. Shares of Affirm doubled on its opening day. What do you make of that business?
Moser: Fintech and SaaS, I mean, if you want to really garner some support from the market, just classify yourself as a fintech or SaaS. Hey, you put those two together, the possibilities are limitless. I think in Affirm’s case, this is a company that’s focused now on this burgeoning “buy now, pay later” market. It’s this market that is just really starting to come into the consumer’s mindset here and that you could buy something now and you can pay for it incrementally over time. That really is what Affirm is all about. They make their money a couple of different ways. From merchant customers, they earn a fee when they help them actually convert that sale. Then from consumers, they earn a little bit of interest income on those loans essentially when they’re doing those “buy now, pay later” deals. You believe that in today’s environment, that’s not the most attractive line of business in that interest income, given where rates are today. But part of the enthusiasm behind this company is something that, I think I noted this on Monday’s MarketFoolery, there’s this notion now that consumers are really happy to turn to technology companies they trust in order for financial services.
There was a survey conducted by the Harris Poll back in 2020, where 64% of Americans would consider purchasing or applying for financial products through a technology company’s platform instead of a traditional financial services provider. Then that sentiment actually rises to 81% for Americans aged between 18 and 34 years, and that really is the target demographic for Affirm’s customers. I’m not saying the valuation makes sense, but I do understand the enthusiasm. Something to keep an eye on, their top merchant partner is Peloton, responsible for about 30% of the company’s revenue right now. I would rather see them diversify away and not be so levered at one particular company. I suspect that’ll come in time.
Hill: In addition to IPOs, it was also a week of notable secondary offerings. Zoom Video announced it’s going to raise $1.5 billion through a secondary stock offering. Lemonade announced a three million share secondary stock offering that they are planning. Emily, are you buying?
Flippen: Neither of these companies were particularly punished by the market for these secondary offerings. While I have my own reservations about Lemonade, I think it’s fair to say both Lemonade and Zoom investors are not investing in these businesses because they expect for them to buy back shares or issue dividends, they’re expecting growth. So, when you look at these businesses, Lemonade, unprofitable. But looking to raise money, you have to ask yourself, OK, what is the business going to do with this money? In the case of Zoom, they’re profitable, but raising more than $1.5 billion, investors ask themselves, man, that’s a lot of cash. What do I think Zoom is going to do with $1.5 billion? Growth investors are definitely expecting Zoom to maybe reach out to acquire, expand their product suite. I’m looking forward to potentially some exciting acquisitions coming from Zoom. In the case of Lemonade, raising more than $500 million from their three million shares additionally issued, they’re looking at expanding their insurance suite. Getting into things like life insurance, that’s what investors in these businesses want to happen. They want for them to continue to expand growth, even if it is at the cost of further dilution. So, neither is particularly bad, expect for the stocks to be under a little bit of pressure, that’s understandable. But long-term, if they reinvest this money to support growth, all fine and dandy.
Hill: Like you, Emily, I was struck by the fact that on the day that both of these were announced and they were announced on the same day, shares at both companies were up. Typically, when the average company comes out, announces a secondary stock offering, we see a little bit of a sell-off. Is that more unsettling to you than what we saw from Petco’s IPO, or is Petco’s IPO still number one on your fear-inducing list?
Flippen: Petco IPO definitely wins for No. 1 on my fear-inducing list. I think if I was an investor in businesses like Lemonade or Zoom, I would ask myself, what are they going to do with that money? If you are raising equity, but you do not create value from whatever you reinvest it into, and that eventually does need to turn into cash value, cash creation. If they’re not able to do that, then it would concern me more. But I believe, especially in the case of Zoom, that they’ll be able to do something really smart with that money.
Hill: One of the big stories in the financial industry was Visa‘s (NYSE:V) acquisition of Plaid, a fintech start-up company in a deal worth more than $5 billion. This week, Visa said the deal is off due to antitrust concerns raised by the U.S. Department of Justice. Shares of Visa are down 6% this week. What do you think, Jason? Should Visa have fought Uncle Sam to push this one through?
Moser: They’re just so many great spaceballs jokes that came from this deal. I’m sorry to see it die, but I do think with Visa, they saw the writing on the wall. When [laughs] regulators are already referring to you as a monopoly, it’s going to be an uphill battle. Though it’s worth noting in November that MasterCard was allowed to buy Finicity, which is a very similar style of fintech business. I think a lot of that has to do with the fact that MasterCard is a smaller business with a smaller share in the debit market. I think that regulators’ concerns were the potential for Visa’s monopoly status in the debit market. That really would have been difficult to overcome with the Plaid acquisition because Plaid doesn’t really have a status in the debit market today, it’s a fintech company. It is working on building these types of tools that enable money to get from point A to point B more quickly and more cheaply. I think on the flip side, this certainly opens up another opportunity for an IPO to triple on its first day of trading, because I would imagine Plaid eventually is going to go public. But I do understand regulators’ concerns there. Now with that said, this is really all about the evolution of how we move money around. Technology is changing it and bringing costs down considerably, that’s nothing new. Visa and MasterCard’s toll booth models, they work well today. They’ve worked well for a long time, but they’re not undisruptive, nothing really is. This is a situation where you get a couple of companies’ massive market capitalizations closing. I think combined, $1 trillion dollar market capitalization with the two of them. They have a ton of resources and the ability to compete. I don’t think this is something that is devastating Visa’s business, it definitely has to send it back to the drawing board to see how they want to pursue this idea going forward in regard to fintech and the way technology is changing the space.
Hill: Shares of Beyond Meat up more than 15% this week on the news of an unlikely new partner, Taco Bell. That’s right, Taco Bell is looking to bring in vegetarian customers and says it will be testing a new menu item later this year with a Beyond Meat product. Emily, why not?
Flippen: Chris, I don’t appreciate your sarcasm [laughs] if I might be honest with you. The tone of your voice, the way you say, “Taco Bell,” I feel personally a little bit attacked. I think that the people who are Taco Bell lifestyle enthusiasts may also feel a little bit attacked. [laughs] But this is actually a great deal for Beyond Meat. The reason is because food service elsewhere Beyond Meat over the past few quarters have been extremely tough and the stock has been under a lot of pressure because of the fall off from restaurants sales as a result of the pandemic. Getting deals with fast food and fast casual restaurants is critical for bringing Beyond Meat back to growth. The reason why this is so big and the reason why it’s up 15% on a simple deal with Taco Bell, which is great, by the way, is because they actually won this out over competitors. Back in 2019, Taco Bell met with a Beyond Meat competitor that’s Impossible Foods, to potentially roll something out, and they decided not to take that partnership. This year, going with Taco Bell, because they’re going with Beyond Meat, says something about its product. I look forward to both investing in Beyond Meat, seeing where that brings the company, but also consuming whatever delicious creation these two companies come up with.
Hill: Taco Bell lifestyle enthusiasts can send their angry emails to me at [email protected] Intel (NASDAQ:INTC) is getting its third CEO in the past three years. Bob Swan is stepping down next month, VMware CEO Pat Gelsinger will take over at Intel. The immediate reaction from Wall Street was clear, shares of Intel up 15% this week, VMware shares down 5%, Jason.
Moser: Well, remember we were talking about JPMorgan and that advantage of having focused leadership for so long there and Jamie Dimon. Intel, that’s the opposite. [laughs] Three CEOs in three years, that’s not what you really are aiming for. I think Intel’s problem is transcend leadership. I think it could be argued their troubles are a direct result of wanting to have their cake and eat it too as a designer and the manufacturer, and it’s really slowed them down. I think for Intel, they really need to choose a lane. To that point, they’ve been transitioning away from a PC based company more to a data-centric company. That certainly is a very big universe data-centric. You’d go a lot of different ways with that. I think that Mr. Swan, he doesn’t have the tech background, that doesn’t really seem ideal. That could have been a problem. Conversely, if you look at a company like Qualcomm for example, and even outgoing CEO, Mr. Mollenkopf, incoming CEO Cristiano Amon, they both have electrical engineering backgrounds. I think that’s really helped Qualcomm’s calls through the years.
I actually think that in this case for Intel, they may be thinking they need to find a meaningful acquisition as soon as possible in order to get things moving. Because turning things around at this stage of the game for a tech company like this, when things are already moving so quickly, it’s going to be really difficult. Then you look at the overall environment here, Qualcomm just making an acquisition of NUVIA for $1.4 billion, you get Nvidia and Arm merging, Marvell acquiring Inphi, AMD acquiring Xilinx. There’s consolidation going on in space. Intel, it’s a big company with a lot of resources, but they’re getting left in the dust here. If you look at just Qualcomm’s performance compared to Intel over the last several years, Qualcomm is just leaving them in the dust. I think it’s going to be a big challenge for Intel. Maybe new leadership is the answer, because it doesn’t seem like they’ve really found the right mind yet to take this company to the next level.
Hill: Real quick, Pat Gelsinger does have a tech background. He was the first ever Chief Technology Officer at Intel, so he’s going back to Intel. How long before we know if he’s the right person for the job, a year?
Moser: Well, I think a year is a fair number to at least start assessing, because you’ve given them a full four quarters to report and demonstrate what the strategy is. Much more than that though, like I said, this space moves really fast, so they got to really get things going.
Hill: Exciting news this week from Unilever, the consumer product parent company of Ben & Jerry’s. This week, the ice cream maker is launching Doggie Desserts, a line of frozen treats available online and in grocery stores. Emily, I saw this news and I thought, “Well, that’s cute.” Then I realized, [laughs] “No, this isn’t just cute, this is really smart business.”
Flippen: This is playing off of a longer term trend that we’ve seen in the pet space. It’s the same thing that’s catalyzing Chewy and this crazy Petco IPO. It’s that people love their pets and that really shouldn’t be a surprise. These are people who treat their pets like kids, and as a result, are willing to do anything and in this case, pay anything to make their pets’ lives as wonderful as possible. It’s actually amazing to me that we didn’t think about things like pet, or dog in this case, ice cream earlier. But this is where Ben & Jerry’s is going to expand their product line into pets. The issue here isn’t pet ice cream, is the fact that this dog ice cream looks so good. I think I might eat it. [laughs]
Hill: One of the best-performing stocks over the past five years is Twilio, a cloud communications platform that adds messaging, voice, and video to mobile apps and the apps on the web. Twilio shares have risen more than 1,300% since 2016. Jeff Lawson is a software developer who also happens to be a Co-Founder and the CEO of Twilio. He just published his first book, Ask Your Developer: How to Harness the Power of Software Developers and Win in the 21st Century. He recently talked with Motley Fool Co-Founder, David Gardner, and Tech Analyst, Tim Beyers, about how Twilio is organized, the values that guide the company, and of course, software.[…]
Jeff Lawson: The amazing thing about software is that you can continually iterate on it. You’re never done. You can always listen to your customers and hear something better that you could be doing, get a new feature request, or even if it’s something simple like making it faster or whatever. There’s always ways in which you can improve the software, and that creates a cycle of continuous improvement. But in the market there is also competition between companies who aren’t your business. That pace of software, you hear like, ”Oh, the business world is getting faster and faster.” A lot of that is because of software. Because software invites you to continually iterate and make it better and better. Think about all those apps on your phone. They’re downloading updates now silently, you don’t even know it. You’re getting new versions of those apps pretty much every week. They’re fixing bugs, they are getting better, and they’re adding new features and functionality that are going to make your use of that app even better. That’s really the superpower of the world of software, and that’s one of the reasons why it’s so important for companies to really embrace that. Because if your competitors are really embracing that and iterating quickly in running a lot of experiments to figure out what customers want and they don’t want, and you are not, you’re relatively static. You wrote the software a few years ago and let it sit there. Well, guess who customers are going to actually find to be a better option? The company that’s always testing and iterating and getting better and better. That’s why it becomes a little self-fulfilling.
You mentioned that Twilio provides the infrastructure for developers and companies to be able to do that, and you’re right. We arose because software developers and the companies who employ them saw the need to work more iteratively and to move faster, and therefore, infrastructure like Twilio or Amazon Web Services or Stripe arose to serve those customers, to enable them to then meet the cadence of software and to serve their customers at Internet scale and Internet speed. But then, because we exist, now more companies can get on that bandwagon and more companies can execute with that iterative spirit, and then that makes the importance of it even more for every company. It really is folding into this whole build versus die thing. Because just the nature of business and the speed of iteration and the speed of competition has just accelerated in recent years because of that power of software, it’s just built-in.
David Gardner: Really well put, Jeff. I used to say around the halls of Fool HQ, whoever has the most techies wins, and so I’m very much, I guess, sympatical with you on this. That’s been part of how I think about every industry when I pick stocks. So, ask the developer, who has the developers? Many of our viewers who have not yet gotten to see your wonderful book, don’t know that the title comes directly from, well, basically, a billboard that you put outside Silicon Valley for everybody to drive by and you were working with your marketing team and nobody came up with a good idea and you finally just said, ”Let’s go with ‘Ask the Developer’.” Which is a brilliant stroke, and so this has to be one of the few books that I could think of that started with a billboard as the title eventually of the book. I wanted just to shift briefly to Amazon. You speak highly of Amazon, Jeff, both of your time there and where it is today, of course, that’s been another long-term hold for us, a great company. Specifically though, Jeff, you credit Amazon for the inspiration for organizing in small teams. I’m curious if you’d like to just lay that out a little bit for our members so they can hear and understand what that means. Then maybe was there another best practice that you’ve learned from Amazon?
Lawson: Absolutely. Most companies, there’s a tendency as they get bigger and bigger, they slow down, they get more bureaucratic, and decision-making gets obfuscated and the employee base just loses its energy that it might have had when it was a start-up. That’s the natural tendency of companies, and here’s the interesting thing about Amazon. I got hired there in 2004. My friend Dave Schappell hired me. HTe had started at Amazon when there were about 100 people. I got hired, the company was about 5,000 people. Dave promptly quit, he was like, ”Okay, I’ve been here long enough.” He left shortly after I got there, he went and started a start-up, and that start-up later got acquired back by Amazon. When Dave landed back at Amazon, the company was 75,000 people. [laughs] Okay, so here’s this guy, my friend Dave, who’s like, ”You’ve been at this company. You saw it at 100 people, you saw it at 5,000 people, and now you see it at 75,000 thousand people.” I called him up one day, this about 2011, and because I was starting to scale Twilio and I’m like, ”How do I make some good decisions here?” I said, “Dave, can you compare and contrast those three versions of Amazon? 100 people, 5,000 people, 75,000 people, because it must be totally different.” He thought about it for a minute and he said, ”Do you know what? It’s exactly the same.” The same energy, the same drive, the same bounce, and people staff, the same intellect of the employee base, It’s the same company. It just, I work with the 100 people who are closest to me. I would just have no idea that there’s 75,000 other groups of those people all around the company. Because it feels like that same start-up I joined in 1997. I thought, ”That is astounding.” The secret to that is keeping it small, small teams.
When you build a company, when you’re growing the company, the goal is to try to keep that energy, that intrinsic drive that every employee has in the early days of a start-up, and replicate it many times over as you get bigger. The way to do that is to continually divide the company and divide the mission of the company into small teams. Teams of no more than say, 10 people, and organize those teams around three things. No. 1, a customer. No. 2, the mission for what they’re trying to solve for that customer, and three, the metrics of success that tell you if they’re actually succeeding in that endeavor. With those three things, now what you’ve done is you’ve unleashed that team’s ability to go sprint for that customer every day and to go innovate and try to be as autonomous and independent as possible, and in that small group setting, every member is really connected to the customer and really connected to the mission because it’s small again, and you think about a small team of say, 10 people, if there’s a low performer on that team or someone who’s checked out, you’re not going to get by for long in that type of environment. Whereas if you are one of 500 people on a team, you’re like, ”Yeah, it’s easy to get lost in the shuffle, but when you’re on one with 10 people, with a strong sense of ownership over what you’re trying to accomplish, somebody who’s checked out won’t make it very long, and everybody is very close to the decision-making and very close to the customer they’re serving. I think that’s the magic of how you scale a company while keeping everybody really motivated, really driven, and coming from a position of really understanding why they’re there and what success looks like at the local level, at their team level.
Gardner: Jeff, have you just described how Twilio is organized?
Lawson: Yes. That’s how we’ve done it as well, and I talk in the book, it sounds easier said than done because if you’re a small company, you’re a start-up, “Okay, I’ve got 10 people” or if you’re a big company, you have a new initiative, maybe it’s got the 10 people, but then it’s succeeding and it starts growing, so it becomes 20 people or 30 people, you are like, ”Oh, what do I do now? My team that was nice and small just got big.” Well, the answer is it’s like a mitosis process. You keep dividing the team and you divide the missions and you divide actually the technology, like the code behind it, so that you can continually divide back into small teams that tackle various parts of the business. But every team in that story is connected to a mission and has a lot of drive to do that thing really well. I talk in the book about how you can scale something, whether it’s a start-up or whether it’s an initiative inside of a bigger company, and continually divide it to keep that entrepreneurial spirit even as the company or the initiative continues to grow.
Tim Beyers: Jeff, you talk a little bit in the book about how you try to make the values very actionable. Twilio has, if you look at it and I encourage anybody, if you’re an investor or thinking about investing in Twilio, definitely take a look at the site and the list of values that Twilio has, one of them is, “Wear the customer’s shoes,” you talk about this in the book, and it seems like what you’re talking about just there, about dividing into small teams is a way to actionably wear the customer’s shoes, because if you have a huge team, most of the people can’t be near the customer. But how do you make it where, say, like the accountants are near to the customer? There’s only so many people that can be near to the customer. But can you talk a little bit about this value, and how you get everybody a little bit closer to the customer?
Lawson: Well, it’s interesting when you think about it, companies, in the early days of a company, like, I’ll talk about the early days of Twilio.
Lawson: On any given day, I might be writing some code, talking to a customer who’s a sales prospect, supporting a customer with customer support and paying some bills, like you’re doing everything. As companies grow, the tendency, of course, is for there to be silos, because people get more functional. You hire experts to do each of those things. There’s a lot of great things about hiring an amazing customer support team, so that the developers who are building the product don’t have to answer every support ticket. Obviously, that is beneficial, but the problem is if you let it go too far, you end up putting these walls up that separate all the functions. You can have a sales team who’s doing sales and their job would be to not have to bring the developers in every conversation with a customer. You’ve got sales engineers to do that or the customer support team; their job is to answer the support tickets as opposed to having the engineers have to do it all. If you do it perfectly, what you’ve done is with all good intentions, you’ve accidentally siloed the people building your product from the very customers they’re building it for.
Again, it all came from good intentions, including product managers. Many product managers see their job as protecting their team from the distraction of customers. I think the best product managers are those who see their job as facilitating interactions between their team and their customers. It’s not every interaction, but if you don’t poke holes in those walled silos that arise in the company, then yes, you will isolate your team from the very customers they’re trying to serve. I love the story of one of the product leaders at Twilio; his name is Ben. He started his career, his first job out of college was he was a developer at Bloomberg writing software for the terminals. He got there bright-eyed and bushy-tailed and he said to his manager, “Hey, when do we get to go to a trading floor to talk to your traders who are using our software?” The manager laughed and said, “Oh, yeah. That’s a funny idea. We’ve never actually done that.” Ben was a little dumbfounded. He’s like, “You mean you’ve never met a customer that uses the software that you do every day yourself?” [laughs] He’s like, “Well, not really.” Ben actually just found his own path. He went and found a friend of his who was a trader and he said, “Do you mind if I stop by?” Ben showed up at the trading floor and they had always assumed that their widget that they were building, like they spent every day building this widget, they assumed it was the full 27-inch screen was their beautiful widget. Well, it turns out that the trader had it in some tiny little, 16×16 box in the corner of their screen. It wasn’t even legible. You couldn’t read the fonts and it was completely different than how they imagined their software was used. It wasn’t until they actually went and interacted with a customer that they actually found out. Then that changed their roadmap entirely. Like, “We got to make fonts that work at small scale,” and all these things happened.
I shared that example in the book because it’s a really good example of what happens when those walls between you and the customer are so tall that you actually have no idea how your customers are actually using your product. As leaders, I think it’s our job to intentionally poke holes in those walls that separate our teams from the customers they’re serving.
Hill: Let’s dive into the Fool Mailbag before we get to the stocks on our radar, our email address is [email protected] I know the Taco Bell lifestyle enthusiasts are already typing out their emails but we also take stock questions like this one from Kyle Neuberger, who writes, “Love the show, keep it coming. This question may seem simple, but in your experience, when should you sell a stock, if ever?” A great question, Kyle. Thank you for that, and Jason, this is one we get often from people, because it’s one of those things particularly in the wake of where are we now? Year 11, year 12 of, by and large, a bull market? People who are sitting on some gains are trying to figure out whether or not they should sell at least some of their stocks.
Moser: Yeah. I mean, it’s something that I think we all think about. It may seem like a simple question, but really I think it’s far more nuanced. When we look at insiders, for example, that own stakes in the companies that they lead, we talk about those insider transactions. We say, and Peter Lynch really popularized this, it’s one reason to buy, but you’ve got many reasons to sell. That really is the bottom line, is there are many reasons to sell and it does depend on the individual, where they are in their life. I think just a general rule of thumb though, if you’re a younger investor with a lot of time in front of you, you’d look at selling a stock, No. 1, have the reasons that you bought it changed? Are the reasons you purchased that stock in the first place, have those reasons changed? If they have, then you do a little bit more of an assessment there. Do you feel like it still offers opportunity? If it doesn’t, there could be some reasons to sell there if the thesis is broken and the reasons have changed, but clearly, there are going to be many more reasons. Someone needs to consider it and it really depends on where you are in your life and what you need to do with that money, what your investing goals really are.
Hill: Emily, obviously some people, if they’ve been investing for a while, maybe they look at the stocks that aren’t doing as well in their portfolio and look to sell those off sometimes for tax reasons. What do you think about selling?
Flippen: Yes, well, there are two biggest mistakes that investors can make. One is not buying companies that end up being disruptors and game-changers that become the next Amazons and Netflix. The second one is selling those companies too early. If you’re an investor looking at their portfolio and feeling the need to sell for issues of valuation, just remember that good companies that are disruptors are hard to value for a reason and they end up growing longer and faster than many people expect. That alone, in my opinion, isn’t a good reason to sell, but what is a good reason to sell is when the thesis for owning the company has changed. Maybe that means that it’s been a bad performer and you think to yourself this money could better be invested in a disruptor, in a company that I have higher conviction in. That’s a perfectly fine reason. Or another perfectly fine reason is if you find yourself staying up at night worrying about companies because they’ve become such a large part of your portfolio. If you find yourself constantly afraid of the fact that you have maybe 20% of your portfolio in Shopify, just to name one. Even though you believe in Shopify, I think selling that to get it to the point where you’re not losing sleep, when you’re not feeling stressed over your allocation, is also a perfectly fine reason.
Hill: We’ve got just a couple of minutes left. Let’s get to the stocks on our radar, Jason, you are up first. Dan Boyd is going to hit you with a question, what are you looking at this week?
Moser: Yeah, I’ve been digging into a company called Penumbra (NYSE:PEN); ticker is PEN and this is a global healthcare company that designs, develops, manufactures, and markets medical devices and technology focused on neurovascular and cardiovascular applications. The numbers are pretty astounding actually on a global basis. Stroke is the second leading cause of death, the third leading cause of serious long-term disability, and that really is the problem that Penumbra is trying to tackle. Founder-led business, co-founders still own a little bit of a stake in the company. I think it’s really neat, but what really has my attention is this real immersive system that they developed. It’s an advanced rehabilitation technology that uses virtual reality for therapeutic activities. You talk about folks who have strokes and that need rehabilitation, well, they’re trying to tackle that using immersive technology. It has definitely got my attention. The management said it represents by far the largest total market opportunity that Penumbra has ever taken on. So, it got my attention.
Hill: Dan, question about Penumbra?
Dan Boyd: Yeah, sure. Jason, it looks like late last year Penumbra had some recall issues. Is that anything to worry about going forward?
Moser: Well, it is something always to keep an eye on with medical device makers. Recalls are part and parcel of the business. It does look like something that they have accounted for, but it’s always something to keep in mind. It’s a risk that comes with these types of companies for sure.
Hill: Emily Flippen, what are you looking at?
Flippen: If I was smart, I would’ve talked about BarkBox today with all the pet news, but the company that’s on my radar this week is actually Pinterest. With all the excitement that Poshmark is getting in the news, it’s reminding me about Pinterest, which is a social-media-meets-e-commerce business that I like a lot more than Poshmark. Pinterest has over 400 million monthly active users and it’s just at the precipice of effectively monetizing that audience.
Boyd: Not really a question, Chris, more of a comment. Pinterest terrifies me [laughs] because I know whenever my wife is on it, it means that an impending large purchase is going to happen. Maybe that means it’s a good business.
Flippen: It does.
Hill: Dan, I’m assuming you never make large purchases of any kind. What do you want to add to your watchlist this week?
Boyd: Listen, man. I’ve seen it happen so many times. I’m going with Pinterest. I think they’re onto something over there.
Hill: All right, Jason Moser, Emily Flippen, thanks for being here.
Moser: Thank you.
Flippen: Thanks for having me.
Hill: That’s going to do it for this week’s show. The show is mixed by Dan Boyd. Our producer is Mac Greer. I’m Chris Hill. Thanks for listening. We’ll see you next week.
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