In this podcast, Motley Fool analyst Jim Gillies and host Dylan Lewis discuss:
- New York Community Bancorp's credit downgrade and current struggles.
- Stitch Fix's latest earnings, and whether the clothing company could be a turnaround play.
- Why Jim likes the prospects for beat-up fintech specialist PROG Holdings.
Plus, Motley Fool host Alison Southwick and personal finance expert Robert Brokamp talk about trends in travel and tips if you're trying to avoid the crowds and fees the next time you step on a plane.
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 March 5, 2024.
Dylan Lewis: We're taking a look at three beaten-up stocks. Do they have what it takes to turn it around? Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst Jim Gillies. Jim, thanks for joining me.
Jim Gillies: Thanks for the invite, Dylan.
Dylan Lewis: Today we're going to check in on a few companies that have a bit of a tough outlook and whether investors should have them on their watch list. The first two come to us by way of the news, Jim. The first one will discuss is New York Community Bancorp. Shares at their lowest level since 1996 after the regional bank disclosed something that investors never want to hear, and that's a material weakness in a filing. Jim, this is also a company that's had CEO changes, downgrades of its debt recently for Moody's and Fitch, seems like a lot of things swirling here against NYCB.
Jim Gillies: Well, you've left out the most important part, Dylan. This is a bank. I like to state the obvious. This is a bank, and banks depend on the confidence of investors and more importantly, the confidence of depositors. Now the good news is no one has ever had a mass run in a bank and pulled their deposits from a financial institution at a time when they need trust. Wait, that happens all the time. In fact, that happened a few times last year. The names Silicon Valley Bank or First Republic, I believe it was?
Dylan Lewis: We're coming up on the anniversary, Jim.
Jim Gillies: I didn't get you anything, I'm sorry. But happy anniversary to all who celebrate. I have many investing rules, but one of the investing rules that I have when dealing with financials, if something's starts to look like a bit of a contagion, or basically, once there's a more than a couple of pieces of bad news, all the bad news has come out about this bank. The downgrade, the debt problem material we got, I would have hit the sell button so fast, your head would spin. The reason is because they can't. Silicon Valley Bank gives a wonderful example. Silicon Valley Bank from a year ago, went from, hey, we're raising capital because we might be insolvent. We're going to raise capital and sell these securities to dead in under 48 hours. I'm not saying that's what New York Community Bank is, but I am saying.
Dylan Lewis: Things move very quickly in the financial sector.
Jim Gillies: Things move very quickly. Lowest level since 1996 sounds bad. My rule is with a financial, with inherent leveraged companies, leveraged 10-1 or 22- 1 or whatever, inherently leveraged financial institutions that require the confidence of depositors and shareholders, I'm out, I'm gone. Then I'll do the work to see if i overreacted and if I should get back in or not. But it's almost like it's the same principle as if you were to engage in such practice. I don't recommend it most of the time, but shorting a stock. Shorting a stock can be very profitable, it could be a very good thing. But the No. 1 rule of shorts I learned very early on 20-odd years ago, something starts moving against your position, close it immediately then go figure out why. Don't be a hero. You could always get back in if you need to but get out of the way, then ascertain and wait for the dust to settle, wait for the fire to die down, whatever metaphor you want to use.
I look at this company and I'm like, lowest level in almost three decades. I say, well, why would I chase this down? There's no shortage of banks I can go out and buy. I've even got a couple of small regional banks that had been taken down by some of the negative news has come out in the last few weeks. But one is a plain vanilla mortgage lender out of Ohio, hotbed of the housing bubble, I suppose. The other one is a tiny community bank in the Pacific Northwest that's being bought out by another somewhat larger community bank in the Pacific Northwest that probably has some price support below it. I think they're being bought around $23 stocks, about $21 that's why. If I was in the market for small regional banks or small community banks, I wouldn't be looking at NYCB, I'd be looking in areas where the banks there, they've long stuck to their knitting. They haven't done anything terribly controversial. Good capital ratios and just boring. Again, who doesn't get excited about plain vanilla home lending in Cleveland Ohio.
Dylan Lewis: Jim, it sounds like for you an NYCB is not even approaching watch-list consideration.
Jim Gillies: Nope.
Dylan Lewis: Our second beaten up name that we're going to talk about on today's show also comes by way of the news. That Stitch Fix shares down 18% after the company's second-quarter results missed revenue estimates, losses were wider than expected, and the company's guidance was revised down as well. Jim, this is a business that there's no secret that it's running into issues and has had issues for quite some time. We're about nine months into new CEO Matt Baer's time at Stitch Fix. He came over with the pedigree of working in customer relationships, digital officer over at Macy's. What do you want to be seeing from Baer and the team there to be interested in this company?
Jim Gillies: I've been unenthused. I'm sorry. I want to talk about something that's where I'm happy, I don't want to be the guy that craps that everything.
Dylan Lewis: I'll give you that chance later.
Jim Gillies: Thank you. I feel that that's what we go here. Sorry, Fools, stay for the third ticker, I suppose. I am reminded of the Buffett-ism of when a business with a reputation of mediocrity meets a manager with a reputation for brilliance, it is usually the reputation of the business that persists. I think this is a failed business. I think it was a shameless cash grab by the people who brought it public. I don't know that Matt Baer can do anything frankly that will make me excited here. When you see things like revenues falling 18%, they're calling for the next quarter to be down 20% plus-minus the full fiscal year. They're calling for 20% plus-minus, adjusted EBITDA.
Remember, EBITDA is an adjusted accounting measure, not a real accounting measure. Now apparently in the last few years we've all decided to do adjusted numbers. I thought that was the analyst's job anyway, but adjusted EBITDA was translation as we're going to remove everything that can be perceived as bad. We can try to show some positive numbers. An adjusted EBITDA margin of 1%-2% for fiscal 2024, they're halfway through the fiscal year. There's no cash generation. People have abandoned their services. I don't know that there's anything that would get me interested here.
If you can show me a path to real and sustained free cash flow generation, and then CEO Matt Baer starts intelligently deploying the cash that they generate. By that, I mean, I don't think they have any debt. I think they have a bunch of cash, so that's fine. But a CEO's job is to do capital allocation. That's literally on the resume. There's not really much you can do actually, with capital allocation, it's really only five choices. You can reinvest the business for growth, while this thing, thing's dropping 20% a year. I'm not too sure about the utility of that. You can pay off debt.
They don't have any debt. Thank goodness. Financial risk at least is not a thing here yet. You can pay dividends and or special dividends. You can buy back stock, but providing buying back stock to be reasonable, you should be buying it at a perceived discount to intrinsic value. I know there's a lot of companies that ignore that last part, but play with me here. Then I suppose you can make acquisitions. But I just call this a failed business. Failed business goes out and I don't know that there's anything here that would get me excited. I'm going to point out the stock is down what, 95% in the past a couple of years.
Dylan Lewis: It's been an absolute massive sell-off.
Jim Gillies: Boy, I want to be sunnier than I am right now, but I'm not, I'm sorry. I would have no interest in this thing and I don't know how you'd get me to a position of interest.
Dylan Lewis: Well, I'm going to give you the opportunity to be a little sunny here as we wrap up, Jim, the news fairy brought us those two as an opportunity to check in on businesses that were struggling. I'm going to get outside the new cycle a bit here. I want to get a sense from you on a business that you're excited about that maybe doesn't have the narrative running its way, or maybe is more of a turnaround play in a lot of investors' eyes but you think has a great path forward out of that.
Jim Gillies: I'm going to give you a bit of an oddball, one that's probably not very high up in most Foolish investors' thinking. A company called PROG Holdings. Very weird. P-R-O-G, all capital, of course, ticker symbol PRG on the New York Stock Exchange. This is the home of Progressive Leasing, not to be confused with Progressive insurance, which provides, and I quote, ''web-based lease zone financing programs to credit-challenged customers in order to facilitate the purchase of big ticket items.''
Dylan Lewis: I'm going to need you to unpack that a bit, Jim.
Jim Gillies: imagine you're you want to buy a new living room set couch and chairs, but you don't have the coin. You go to a store, you say, I'll buy it by rental and what have you. Progressive leasing, aka PROG Holdings, they provide the financing for those types of leasing that you're going to get at these various places where Progressive allows the business to take hold. This is an interesting company. It's spun out or rather actually, so there's a company called the Aaron's company.
And about three, three-and-a-half years ago, Aaron's, which is basically like the showroom for the rent-to-own furniture, Progressive and Aaron's were together and Aaron's spun off the Aaron's group and then changed their name to PROG Holdings, retained PROG. PROG Holdings again as the leasing thing, they promptly went out and they said, we make a lot of cash, we've got a lot of cash we can deploy. We have no debt at the time. They went out and bought with somebody and they bought a bunch of stock back. They bought like $600 million worth of stock back or what have you, and they've continued to by about $30 million a quarter, and put it into perspective, $30 million a quarter, PROG Holdings is a $1.4 billion company, so $30 million is actually a real thing.
Dylan Lewis: It's material.
Jim Gillies: Yeah, it's $120 million a year, and they're using it good but they did that right before the credit cycle turned against them. As interest rates went up, people got more tentative about the type of borrowing they wanted to do. Basically, the borrowing goes through cycles, so that initial $600 billion of stock purchases probably wasn't the best use of time or money. But since then, they have continued to repurchase. Since being separated from Aaron's, they've taken down 36% of their stock. They, in their most recent quarter, initiated a dividend, $0.12 per quarter, but 1.7% yield, I think today. In the most recent quarter, they were dour and said, here's our guidance. But then they said our outlook and I'm quoting here, ''Assumes a difficult operating environment with continued soft demand for consumer durable goods.'' They gave a bit of a dour picture, like Stitch Fix.
The thing about their dour picture that I think is different from Stitch Fix's dour outlook is again, credit moves in cycles, and you want to see a company, first of all, that's swimming in cash and capital, that's not a big deal. In 2023, the way I calculate my estimate, they made about $167 million of free cash flow. Again, $1.4 billion company, that's good. I think they're going to do about another $160 million this year. The dividend is going to consume about $21 million, leaving the rest of it $30 [million], $35 million a quarter for buybacks, which management is all but proclaiming from the rooftops, that's what they're going to do. Stock's trading at around 10 times free cash flow.
Again, the funny thing about cyclical companies or companies exposed to a cycle, in this case, the credit cycle, eventually things turn. When it turns and results actually jump up, they might have only 50% of the shares outstanding from the time they came public or rather separated from the Aaron's core. You're playing a long game here. When will the credit cycle turn? I don't know. It'll probably be a Tuesday, but is that Tuesday next week or is that Tuesday at a year-and-a-half from now? You can't know, and that's OK. The point is, is the company making a lot of cash, deploying that cash in the service of shareholders, trading for a more-than-reasonable bottom-of-cycle price. That I find very interesting.
Dylan Lewis: I think that's a perfectly sunshine-y type take to wrap us up here, Jim.
Jim Gillies: I do try.
Dylan Lewis: Thank you for bringing that stock and for bringing the methodology behind it to listeners today.
Jim Gillies: No problem.
Dylan Lewis: Coming up, Motley Fool Money's travel week continues. Allison Southwick and Robert Brokamp talk about trends in travel and tips if you're trying to avoid the crowds and fees next time you step on a plane.
Allison Southwick: It's travel week here on the show and while we do love us some travel-related stocks here at The Motley Fool, why bother investing if you don't get to see the world with the returns you generated? So let's talk about travel trends for 2024, what's in and what's out.
Robert Brokamp: Let's start with one trend, that's in music tourism.
Allison Southwick: Yeah, this is another trend you can thank Taylor Swift for: musical tourism or called gig tripping. As fans of Taylor Swift discovered, it's cheaper to just take whatever Eras tour tickets you can get and then fly there even if it's in another country. The New York Times shared one specific story of a woman and her daughter from San Diego who instead of driving three hours to Los Angeles and paying $1,900 for tickets. They just got tickets to the Mexico City show and paid less all-in for hotels and flights, and they got to see a cool city. In the meantime, I personally have a friend who is taking her family to Paris and Germany to see Taylor Swift because those are the tickets they were able to get. Bro, you're shaking your head in disbelief.
Robert Brokamp: I can't believe it, but I know it happens, but I can't believe it.
Allison Southwick: Yeah. Of course Swifties didn't invent the idea of traveling to see a band, I see you, Phish fans and Deadheads, but there is something a bit unique here about the travel roulette of saying I'll get tickets where I can and worry about the rest later. So is this just a flash-in-the-pan, Swift economics trend? We should probably do a whole episode on Taylor Swift economics by the way [laughs]. Or is this one trend sticking around a bit longer on like watching football? I mean, who even talks about that anymore? Am I right?
Robert Brokamp: [laughs] Yeah, well, let's move on to a trend that's out: overcrowded destinations.
Allison Southwick: Every year Fodor's makes a list of destinations you should skip. Venice tops the list in 2024, but it also includes Athens, Mount Fuji, and Lake Superior, among many others. Fodor's isn't saying they hate these places, they actually love them, but overtourism not only makes them crowded, it's also taking a huge toll on the environment. So it's truly a case of nobody goes there anymore because it's too crowded and you can find that complete go and no-go list on their site. Which of course brings us to our next trend.
Robert Brokamp: Well, I'll tell you what's in: fees for entry.
Allison Southwick: That's right, in that maybe we wish was out. Venice, which was on the verge of being considered an endangered city by UNESCO, will begin charging visitors 5 euros for an entry fee starting in April. Berlin just started charging visitors about $10 a day to help pay for cultural programs and cleanup costs and Amsterdam will be imposing the largest tourist tax in Europe in 2024, upping the tax on hotel rooms from 7% to 12.25%. Iceland is also pondering a tax in 2024 for visitors, but has yet to set a price. So all of these places are getting so overtouristed and you're paying more to visit them, which brings us to our next trend.
Robert Brokamp: This one I think is funny and it's an in-trend of dupe travel.
Allison Southwick: 2024 is the year of dupe travel. That's according to Expedia. Instead of visiting the overtouristed and likely more expensive locales, you can find recommendations online for places that are similar, just less crowded, and less expensive. For example, Expedia says, instead of Santorini, go to Paris, Greece, instead of Seoul, go to Taipei, instead of Geneva, go to Quebec City, Canada. These recommendations and more can be found on Expedia's dupe travel 2024 report, and then also all over social media like TikTok and Instagram. Now some of the recommendations are a little laughable like The New York Times saying, instead of going to Paris for the Olympics, you can go to Cleveland or Indianapolis, these cities are hosting the Olympic swim team trials and the Pan American masters games. So yeah, Indianapolis, the Paris of Indiana. You'll hardly notice the difference.
Robert Brokamp: Let's talk about the ins and outs of fees and fares.
Allison Southwick: Yes, fees and fares. United, American, Alaska, and JetBlue all raised their prices to check a bag by about $5 to $10 more. Why? Because they can, and it's a huge moneymaker for them. Airlines pull in over 5 billion-with-a-b dollars annually from checked bags, according to the Department of Transportation. Southwest, however, is the outlier according to CNBC. They allow customers to check two bags for free and their COO says that's the way it's going to stay. When it comes to bookings flights, Kayak says domestic airfare will be down 16%, international airfare will be up 10%, and Kayak recommends booking international travel eight months out for the lowest fares. You can also try to save money by traveling during shoulder season months, which are March to early May and September to early November. If you must travel during peak times such as spring break, may the travel gods have mercy on your wallets.
Robert Brokamp: That's the truth, let's move on to our final trend and it's one that's in whatever's on your TV.
Allison Southwick: It's another trend spotted by Expedia, its people wanting to visit a place after watching a TV show or movie. For example, the first two seasons of HBO's White Lotus drove a 300% increase in travel demand for Hawaii and then Sicily. FX's The Bear even spurred a 45% gain in searches for travel to Chicago and it's not like they even show a really glamorous side of Chicago. So what TV shows and movies are going to get people off their couches or at least looking up flights on their phones. Well, White Lotus is back and based in Thailand. Season 8 of Outlander will send people running for the Scottish islands and Gladiator 2 will be set in Malta, which I can attest to is a lovely place with phenomenal food. So if you want to avoid the crowds, save those places for another year. Well, before we go, let's leave you all with our own travel recommendations. Bro, what is your hidden gem that you would like to recommend to listeners?
Robert Brokamp: I have a few thoughts about this. First of all, second Quebec, great place to visit and if you were like us driving up the East Coast like I do with my family, stayed at a fun family-resort type place in Vermont and then went on to Quebec. So that was a great visit. It's been a while since I've been there, but i think Central and Eastern Europe are still, if you're looking for a lower prices and smaller crowds, that's the place to go to. Places that I've been to, that I really liked, one is Carlo Valley which is a spa town about two hours east of Prague. Then Krakow in Poland, which is a lovely old town.
A little harder to get to, but a lot of World War II history there and then the final thing I'll point out is that my daughter got married in Rome last summer and I'll just second, that boy, if you go to the big places in the middle of summer, it's just crowded, but what she and her husband now do is basically they're digital nomads all over that area of the country. So they have worked from Spain, Turkey, Cypress, they'll eventually be going to Africa. They've been able to live on a smaller budget than what it cost them to live in the states through all travel hacks. So for example, right now they're living rent-free on a London suburb, house sitting and pet sitting for an older couple going on vacation, which is just an arrangement they found through a website. So definitely lots of possibilities to travel a little cheaper if you can find them.
Allison Southwick: My recommendation is a little island in the inland sea of Japan called Naoshima. This is an island that I believe the story is and I'm probably going to mess this up. So everyone write me if I -- who knows better. Essentially, this gentleman was born on this small fishing island in Japan. He later left and became a bajillionaire and he decided to return to the island and turn the whole place into a destination for art. There's architecture by Tadao Ono. There are a few very big galleries like the Chichi Museum. You can see a couple of Kusama pumpkins and go up and hug them and get your super trendy pictures taken with them. They have a room full of Monets, which is really cool and one of my favorite parts about this island is that they took in the village, thankfully, like seven different houses and they gave each house to a different artist. So you can walk around the town and then just pop into a house and the whole house is an art installation. So it's just a very cool island dedicated to great art. It's not necessarily super easy to get to, but I highly recommend that.
Dylan Lewis: As always, people on the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
