Some Motley Fool analysts get together to talk about the companies they've learned the most from and some of the stocks they've sold recently (and why).
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This video was recorded on Dec. 22, 2021.
Dylan Lewis: It's Wednesday, December 22nd, and we're bringing the year to end with all of our Industry Focus hosts. I'm your host Dylan Lewis and I'm joined by fellow host Jason Moser, Emily Flippen, and Nick Sciple. What's going on, people?
Jason Moser: Adi.
Emily Flippen: Hey Dylan.
Nick Sciple: Happy Christmas.
Dylan Lewis: Fools, this is our final show of 2021. It's also the final show in Industry Focus of this Industry Focus concept. We've mentioned it in episodes over the past week, but for anyone that may have missed it, come January, all of us will be moving over to a new daily concept of Motley Fool Money. We'll still be doing our S1 breakdowns, still covering earnings from our Fool favorite stocks, but we're going to be doing it as part of a podcast super group like if The Avengers were really into stocks or personal finance. We're excited for this new format and we feel like it's a good chance to do even more of what we do best. But before we all assemble in the Motley Fool Money feed, we've got our final show here on Industry Focus.
We thought it'd be fun to get all the host together to talk about companies that we have learned a lot from. Really some of them are in our portfolio, some of them no longer in our portfolio for better or worse, and just some of the lessons that we've been able to take from them. I think there are no shortage of businesses we could've talked about here. I was thinking about where I wanted to go with this show and had about five different companies that immediately came to mind, had to whittle it down to one. I asked all you guys to do the same. I'm curious, did anyone else have that same blending of where do I go with this one?
Emily Flippen: There were at least half a dozen different companies that I could have chosen from for this episode. I hope I chose the right one.
Dylan Lewis: There are no wrong answers. This is the fun of this construct. We're going to be mentioning a couple of names that I think a lot of listeners have in their own portfolios, and a lot of names that people are familiar with. Hopefully the lessons are a little bit more deeply insightful and a chance for us to dig a little bit deeper. Also we're going to be touching on a couple different sectors here. We have some software businesses, and we have some retailers. Emily, why don't you kick us off with one of those retailers.
Emily Flippen: I'd love to. This might be a pessimistic note to start on, but can I actually pose a question to the panel here? I would love to know what the most recently sold stock you've sold is in your own portfolios?
Jason Moser: Wow, that's a really good question. I honestly don't know. I'm going to have to [laughs] I'm going to have to get back to you.
Emily Flippen: This is just prove that we don't plan to things out beforehand.
Jason Moser: Well, it's also proof. I think we probably were more net buyers of stocks, I would guess, given our general philosophy that we as buyers, I know I've sold something at some point. I just can't remember what it was.
Nick Sciple: I can give you one for me. I sold Block formerly known as Square. Great business, that had lots of growth. I just felt like the evolution of the business and leaderships stated intention that's become more and more an explicit bet on the future of cryptocurrency. That's not part of my best vision for the future to use David Gardner's term, and so for that reason I sold the stock. Hopefully, it does very well going forward, but just wasn't in my circle of competence anymore.
Jason Moser: Now you triggered it Nick. I remember the ones that I sold. I sold these strictly from a needing to raise a little capital for a home renovation project. But I did sell a little bit not all, but I sold some of my position in MasterCard, Visa, PayPal, and Square. Again, I still hold positions in all four companies, but I trimmed some from those winners in order to wrap up a home renovation project. Technically, those were the last I sold, but I didn't sell them because I have a problem with the businesses. Though Nick, your concerns are appreciated. I wonder about that myself.
Emily Flippen: Well, I think those are all great reasons to sell. I will have to tell you the story about my most recently sold stock. It was a long time ago in my defense. The story of the stock that I learned the most from has to be Best Buy. It was a business that I sold back in 2018 after holding it, I believe since around 2013. It was as a lot of investors will be familiar with, a very bad decision to sell around 2018 because the stock has done wonderfully since then. But the reason why I learned a lot is because it taught me the importance of having a thesis when making that first investment, so you know what goes right and what goes wrong that can inform your selling decision. When I purchased Best Buy, I didn't really have a reason for doing so. I knew it as a consumer, I thought I was just getting into finance. I thought, hey, this is making some cash, and so I bought it.
Out of curiosity I also have to admit the share price was pretty low. I was a pretty poor college student at the time so I was intrigued. I held it for a number of years watching it go up 100 percent, 200 percent, nearly 300 percent, before in 2018, realizing I was still holding onto this company not knowing what to expect. Seeing such a large share price gain, I sold my shares thinking to myself well surely it's not going to go up any further from here, and it did as many investors as I said, no nowadays. To me it highlights, of course, as you mentioned Jason, the importance of being a net buyer of great businesses, but also just the importance of having a thesis for why you buy a business in the first place. If I had the thesis that played out for Best Buy, I would've known back in 2018 that Best Buy was executing on all of those wonderful initiatives that they had put in place, and I did need to sell my shares and I'd be up another 200 or 300 percent again today.
Dylan Lewis: Well, Emily, when I hear that, I think about the classic beginner investing advice of buy what you know. I feel like to incorporate that perspective we could say buy what you know, and maybe write down why you bought it as a way to guide people toward that because I think that's a good individual example, but you could back that out and look at a lot of companies. Particularly to some of the market moves we've seen recently, I know I'm always a lot more reassured of the businesses that I own, even if they've taken a 20, 30, 40 percent haircut. If I remember precisely why I've bought that business, and I can have that check of is anything disrupting that thesis or is this market noise? If I'm able to come back to that market noise then I know things are OK, and it can continue to stay in my portfolio, and then it doesn't join the ranks of the very few stocks that I've sold recently. Nick, I know you're investing less and also comes from a retail stock.
Nick Sciple: Yeah. The stock I want to talk about today is. It was way back in January when GameStop (GME -2.40%) had its real huge meme stock rally. But it really is one of the stories of 2021. But for me, the lesson from GameStop goes back all the way to 2019. The first time I ever got exposed to GameStop as maybe a potential investment, we did a podcast on June 4th, 2019 called Investing in Games and Toys where I had Dan Kline and Jim Gillies on the podcast to talk about GameStop and Funko at the time. Jim Gillies made the case that listen, I think GameStop is a value investment. At the time it was about $800 million market cap trading at about net cash. It actually went down significantly lower in the next couple of months, got down to around 350 million in July 2019, they cut their dividend. They were yielding about 15 percent coming into June 2019, cut their dividend to zero. Stock fell all the way to around 350 million market cap or so. That's when I actually first bought the stock at about $3.99 a share. The story with the stock is a big one. The efficient market hypothesis doesn't make any sense. You can have a stock go from four dollar a share to, I think it peaked out over 500 at sometime in January 2021.
That doesn't make sense in a world of rational markets. Number 2, and the lesson for me was, you saw this full cycle of the investor-based turnover in the company. Buying a company at $350 million at sub-net cash with a catalyst of the console cycle coming in late 2020, that's a value-investing thesis. The folks who were buying on WallStreetBets and whatever. January 2021, the thesis was short-squeeze and Citadel is conspiring against you, what have you? You see this whole shift of the investor base and the thesis around a stock. The narrative around the stock over the course of a year, and often you see that happen over a longer time period as opinions about a company shifts. But GameStop gave you that really in the course of less than a year, or the narrative really turned within. Lastly, one lesson you can take away from GameStop as well is, that you have reflexivity, it's George Soros idea, that kind of people's perceptions that they inject into the market actually impact what happens in the real world. In the case of GameStop, that really significantly impacted the business.
One of the questions around the company was it's ability to maintain its debt load and pay for whatever transition the business would have to make in the future. Well, with that stock price moving up the way it did, GameStop was really able to unlock a lot of cash from it's equity. I told you that back in July 2019, was trading in the $300 million range, April 2021, GameStop issued over $550 million in stock, at June 2021, issued another $1.12 billion in stock. Clearly, when you're able to get Forex your market cap, where it was a year-and-a-half, two years ago that you are able to raise in-stock, that really changes the future of the business, so you're able to see a little bit of that reflexivity from the stock market back to the real business in the real world. Those are a few lessons from GameStop for me.
Dylan Lewis: Yeah, I think the GameStop story is probably going to be one that is studied by market historians, participants, basically anybody who touches the stock market for the next five decades. It's just one of those things that it was such a watershed moment in the way that retail investors interacted with the market, but also to your point, Nick, the way that some of the core fundamentals of our business be abstracted away based on sentiment and also some of the other market factors at play. Jason or Emily, I'm curious if you guys have any thoughts or reflections on GameStop.
Emily Flippen: Other than, I also had Jim Gillies on Industry Focus Consumer Goods. I believe, in late 2020 after the stock had risen from, I believe there was a short-squeeze, nearly 100 to 200 percent. Having the conversation with Jim about, is this ridiculous? Is this the top for GameStop? Then over the next subsequent months, as all investors are familiar with seeing that, no, that was not in fact, the top for GameStop.
Nick Sciple: Yeah. One other thing to mention too, is the valuation of the company was at net cash, and over 100 percent of the shares were sold short. Those two things together is really bananas and that's why you saw the crazy short-squeeze. One without the other and you don't get a share price over $100.
Dylan Lewis: Yeah. It will fundamentally change the way that people short stocks and the way that people tend to pay attention to short interest going forward. Jason, what about you? Any meditations on GameStop?
Jason Moser: It seems like there are a lot and, I don't know, it really just all boils back down to fundamentals for me. GameStop, you could see when they were running into some challenges, obviously making that shift from physical games through digital games, and it wasn't necessarily to say, it was a bad business, but it was a challenged business. Then to see what happened in the meme-stock madness, it goes to show you that there is a point where you have to be able to just throw up your hands and say, you know what? I don't want to have anything to do with this. Doesn't make any sense. Maybe I'm going to sit back and want to watch this, I'm going to learn from it. But when you're looking at a business trying to make a hard pivot, that's different than a business that set out to go in the direction that the pack is headed, so to speak. It's been one of the more fascinating stories. Frankly, I think it just goes to show you the power of the masses, the power of network effects and social media, and how this is a much different investing environment in the 21st century than the one that I grew up with.
Dylan Lewis: Jason, I like your point there about focusing on businesses where, it's relatively easy to see what the past success looks like. We often tend to focus on tailwinds and really things that are going to be pushing a business forward. You don't get points for difficulty when it comes to investing. The fair business here they're going to be talking about, I believe is one that's every single one of our portfolios and I imagine is probably in the portfolios of many of our listeners. Jason, you wanted to talk through Shopify (SHOP -1.62%) and some of your investing lessons from Shopify?
Jason Moser: Sure. Shopify, it's been a fascinating business to watch through the years. This one goes all the way back to our million-dollar portfolio days, MDP's service that we had here at the Fool for several years. It's real money portfolio service that I worked on with Matthew Argersinger and Brian White. We had a lot of fun with it because we were always bring the new ideas to the table and deliberating them, and the idea was to try to get ideas from all of our different services at the time. There was only about five services that we had, so it's a much different land and a different landscape than we have today. But Shopify was one of those companies that was just getting started. This is 2016 or so, the share price when we were really going through it was around $35 per share, $2.7 billion market cap or so; it's still relatively a small company. When I say small company, I mean that was what caused some of the trepidation when we were looking through it.
We could see the potential, but the same token, we could see it was a very small company in the context of the existing e-commerce landscape. There were just some questions that we all had at the time in regard to its competitive advantage. You look at the way that it makes its money, a lot of subscription income there, but it's very short-term subscriptions. It's very easy for people to come and go, subscription could have the potential to be relatively high. It was unclear at the time how much they could benefit from their payments platform. That was one of the questions that we had, was in regards to its third-party payment partners, exactly what bargaining power they had in that relationship? Being mid-2016, we hadn't even really come up with the war on cash basket yet then, but I have a feeling that a year later we'd have probably been looking at that a little bit differently.
Generally speaking, we had enough questions at the time to think, Okay, you know what, this is an interesting idea. It's not when we had a high conviction on, so we're going to put it on that radar or stock list and it's going to be when we continue to follow up with. You know the story from there. The stock has just taken off, it's just never looked back, and I think that's for a lot of reasons. Obviously they continue to grow their users. They provide a real and valuable service in this day and age as e-commerce takes off. We've seen with Shopify, as with a few other businesses in this space. They developed really a platform that provided many different services. It wasn't just one service. They'd incorporate the marketing and the payments and running your own site. It goes back to that word optionality. When you have a business like that, that is pursuing such a massive market opportunity in consumer retail, and then really from a global perspective, this is a global business at this point.
The market is going to give those types of businesses a little bit more wiggle room in the early days because it's seize that potential that it's pursuing. You fast forward to today, obviously, it's been a very winning investment. You could be forgiven if at the time you said, well, it was $35 and then you fast forward just a couple of years, few years later and you've got a $300 stock and you'd be forgiven if you just said, well, I must have missed this one. I decided to look at that and say, you know what, I missed it back then, but I'm not going to keep on missing it so I ended up buying shares of Shopify around $250 per share. Which sounds high when I compare it to the $35 per share figure when we actually started really digging into the business. But $250 per share in the context of today's share price, still doesn't seem so bad. It's one of my bigger winners in my portfolio because I've held onto that position religiously since I bought it several years back.
To me that's the biggest lesson from a business like Shopify is for investors to remember that you may not have missed it. Even if the share price is a little bit higher, or a lot higher than when you may have been looking at the business, that doesn't mean you missed it. There still can be some meaningful gains to be had, particularly if it's a good business and it's continuing to chalk up good results. I think that's what it boils down to a Shopify is when you look at those numbers quarter in and quarter out, the key performance indicators all tell the tale of a business that is just winning. I mean gross merchandise volume, monthly recurring revenue, billings, retention rate, merchants, subscriptions and payments, I mean, all of these key performance metrics continue to trend in the right direction. I guess that goes back to that David Gardner adding to your winners mentality and it's just worth remembering that even though you may have missed it early on, that doesn't mean you missed it entirely.
Dylan Lewis: Yeah. I don't know about Nick or Emily, but I will say I was someone who did not get in on the first boat when it came to Shopify and I think got my first position after certainly some of our services and I think many of our colleagues already saw three figures in percent return on their shares. Even with that, I'm still looking at it being one of my biggest winners, I have bought into it multiple times and I'm enjoying some pretty solid returns. Nick, Emily, what about you guys with that one.
Emily Flippen: Exactly the same story for me, Dylan, I think my cost basis on Shopify is somewhere in the 300s, if memory serves, which I remember thinking at the time I've missed the boat here, but everybody loves it, lets buys some. It goes back that thesis. Not quite as thesis again for Shopify so maybe I should learn by owned lesson, but it's paid out well.
Dylan Lewis: Nick, what about you?
Nick Sciple: My mistake with Shopify is just trimming some of that as I thought it got a little bit too big. When you're at a $100 billion plus business at 20X sales that got me a little shaky and I left some gains on the table. Certainly still own a meaningful position in Shopify, but like Jason, underestimated the extent to which these businesses can keep growing.
Dylan Lewis: Actually, the company that I'd like to focus on, it's a similar narrative. It's MercadoLibre (MELI -0.42%) and you could pull from a lot of what Jason just dropped there and apply it to MercadoLibre. Both with companies that have gone on to put up incredible returns for shareholders. People feeling like, hey, maybe I missed the boat on this one and they just continue to put up incredible results for shareholders. The power of a platform and just what you're able to do once you establish a relationship with the customer. I think the thing that really stuck out to me with MercadoLibre is optionality like what Jason talked about and what really good businesses can do when they solve customer problems. The thing that sticks out to me most with MercadoLibre is, the shorthand way to talk about it is e-commerce player, you go there and you can buy things.
But Mercado Pago is becoming this increasingly large part of the thesis for this company, their payments business. It really began as a solution to a problem that the company had. It's creating ways for offline payments to come online with a customer base that's largely unbanked. They solved that pain point by basically creating their own PayPal. Similar to PayPal, once they create that solution, it blossoms into something that is far bigger than what they originally thought it might be. Just to put some numbers to it, in Q4 of 2015 1.5 billion in total payment transaction volume, it was almost 21 billion in the most recent quarter.
It's been incredible growth for them and a big part of that is actually off platform payments. People using this service not to transact with MercadoLibre, but as a digital payment solution. Meeting people that maybe don't have access to a lot of traditional financial products and one of the other big lessons for me, MercadoLibre, is that big winners can take huge hits and still put up really great returns for investors. If you look back to 2015, the company has had near 30 percent drops eight different times and it is a 9X since then. Actually Jason, while we were recording the show looked, you could tell a very similar story with Shopify. If you look at the number of times it was 30 percent, 20 percent off of highs, and just continue to move up into the right over time.
Jason Moser: It's a good reminder that the stock price in the near-term isn't necessarily indicative of what the businesses is doing at the time and when you pan further out and look over those five and 10 year stretches, I mean, the stock price tends to follow the performance of the business. When you have a business that is performing very well over long periods of time, overtime the stock price will reflect that.
Dylan Lewis: Nick, Emily, I'm curious any thoughts on melee or any of the optionality points or dealing with those big winners that can occasionally take big hits because they are growth stocks.
Emily Flippen: I think part of it's giving companies that benefit of the doubt. I have really struggled here some times is you see a lofty value business, as I think many people could say, MercadoLibre at various points in time. But giving MercadoLibre the benefit of the doubt of the optionality of their platform. Also the size of their addressable market has really paid off for investors and actually the most recent pullback in MercadoLibre, if I was looking to add to my already pretty large position, would be an interesting time to do so.
Dylan Lewis: Yeah, I've wanted to add to the position, even though it's an already very big one for me, I just got to stop talking about so that I can be in a position to do so. Nick, what about you? Any final thoughts with that one?
Nick Sciple: Yeah. I mean, final thoughts, pay attention to the individual business. Macro can lead you astray, I think in particular with MercadoLibre as some of the issues in Latin America have clouded the actual, what's going on with the business itself for a lot of investors over time and it's really important to focus on what the actual business is delivering. The other thing, I think it's a point to the good for PayPal, folks that are backed by PayPal good. Also in general and you can probably say this for Shopify too companies that Amazon has had a tough time competing with tend to be good investments.
Dylan Lewis: Yes. If you can stave off that competition and that's a big part of the Shopify story. Is Amazon basically decided we can't do it, so we're just going to let them do it, that tends to be a pretty good competitive moat.
Nick Sciple: If Amazon sees a way where they can take your market share from you and make money they will do it. If they say they're not going to do it, that tells you something about the moat around that particular business.
Dylan Lewis: Well, these were for companies that we've all learned a lot from. I know this is our final show in this Industry Focus format and I want to say, beyond the companies we've talked about, I've learned a ton from you guys as hosts and so many of the other contributors that work on the show. It is so awesome to be all right, I want to start doing my research on this company and realize one of you guys have done the show already. Because I started the tech sector and you've already done that shorthand for us. Thank you guys for all you've done to make this program what it is, I'm really excited for what it will become as we move over to that daily format with Motley Fool Money, and excited to bring some more lessons to our listeners, members, etc., in 2022.
Jason Moser: Absolutely.
Emily Flippen: Yeah, thanks Dylan.
Nick Sciple: Looking forward to.
Dylan Lewis: Listeners, that's going to do it for this final episode of Industry Focus, if you have any questions or you want to reach out and say, hey, shoot us an email at [email protected]. Or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show, and the Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy stocks I think based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today, and thank you for listening. Until next time, Fool on.
