Jason Moser: Welcome to Industry Focus,
the podcast that dives into a different sector of the stock market each day. It’s Monday,
December 31st. I’m your host, Jason Moser. On today’s show, we’re going to jump right
in with some bold predictions for 2019 courtesy of my main man here, certified financial planner
Matt Frankel, who happens to be joining me today on Skype. Matt, are you recovering
from this busy holiday season? Matt Frankel: I am. I still
have family in town, actually. Moser: That’s the blessing and the curse,
right? Certainly, it’s always nice to have family in town, but there are expectations
that you have to live up to. You cannot miss expectations when it comes to family in town.
Frankel: That’s true. It makes for a hectic time. Moser: It does. But a good time, and one you always remember. So, it’s the last day
of the year. Before we ring in 2019, we thought it would be a great idea today to go back
to a piece here that you wrote recently for fool.com, Matt. This was something you published
on December 17th. It’s called Five Bold Predictions for the Stock Market in 2019. I thought it
would be fun to go ahead and run through each of these five. Give us a take on why you think
these bold predictions will come to fruition. Let’s jump right in here. Bold prediction
No. 1. Matt, you’re saying the trade war will come to an end.
Frankel: I feel like the fears of an ongoing trade war have been a little overblown.
Not only that, but China stands to lose just as much if not more than we do by this dragging
on past the recently extended deadline, which is actually coming up in not that long from now.
Our President, more than any that I can remember, views the stock market as a barometer
of his success. All presidents in my lifetime have cared about what the market’s doing,
cared about the economy, but I don’t remember any bragging about the stock market as a barometer
of success. The President knows that the trade war is putting a damper on the stock market.
So, I think the two sides will come to some sort of agreement, especially on agreements
on IP theft and things like that, pretty early on in the year. And I think that’ll be a big
boost for the market and the overall economic climate, the volatility of the market in 2019.
Moser: I’m with you there. I hope that is the case. I hope they do come to a deal here.
In that perspective, that’s a positive catalyst for the market in 2019.
But we go to bold prediction No. 2 here, Matt, and I feel like if prediction No. 1 is a catalyst
to the upside, your bold prediction No. 2 might not be quite the same. You think that
the Fed will raise interest rates, not a surprise there, but you’re saying you think the Fed
will raise interest rates not just once or twice, but even more.
Frankel: Yeah. I get this is not a very popular prediction. Moser: Yeah, especially with what’s going on right now. The back and forth here,
it seems like the market over these past couple of weeks has been moving on not only this
call from the Fed that they’re going to bump rates twice, but the sentiment behind how
they’re saying what they’re saying. I mean, wow, you think more than twice.
That could be a problem, right? Frankel: You have to understand,
based on the latest dot plot released at the end of the last Fed meeting, six of the FOMC
directors still think that we’re going to have three rate hikes. So I’m not alone in this prediction.
Having said that, I get that this is not popular, especially with the President. But the numbers
justify this. Other than the trade war, which is causing some uncertainty — remember,
I’m predicting that the trade war ends pretty soon — unemployment is still extremely low, inflation’s
right at the Fed’s target, the economy is strong. I have a feeling this holiday’s shopping
season is going to be a monster for retail and pretty much anyone selling something.
I think the economy is doing better than most people are giving it credit for. If the trade
war ends like I’m predicting it will, I think the Fed will justifiably raise interest rates
a few times in 2019. I’m saying a minimum of two, I’m guessing three. I get that that’s
a bold prediction. Bold predictions mean that they’re not certain.
Moser: You’re going against the grain. Frankel: I’m definitely going against the
grain on this one. But, like I said, I think the economy is better than
the market seems to be giving it credit for. Moser: I tend to agree, actually. One of
the things I’ve been noting here, and I’ve said it a few times, with all of the volatility
that’s coming from this interest rate talk and whatnot, there are a lot of good businesses
out there. They’re really good businesses regardless of the interest rate policy that
is making the headline on any given day. I think it’s always worth remembering,
while the reality is that some of this Fed talk will certainly move markets on any given day,
and we can’t really predict how or when, but that really does play into why we invest the
way we do, business-focused investing. These good businesses transcend headlines like these.
They’re going to be good businesses next year and the year after. This volatility, if anything,
may be an opportunity to add some of those really good businesses.
Certainly something worth keeping in mind. Speaking of adding to good businesses, I like
your bold prediction No. 3 here. You think that bank stocks will stage a big comeback.
Frankel: Right. This is actually building on my first two predictions. To be
perfectly clear, I’m not predicting that the market will necessarily have a great year in 2019.
The bear market could continue for a little while. But if I’m right that the Fed goes ahead and
pulls the trigger on some more interest rates, I see that translating into higher
profits on banks. I think the long end of the yield curve is well overdue for a move.
And a lot of banks are trading at fire sale valuations right now. Goldman Sachs, as everyone
knows, is one of my favorites. That’s trading for less than 80% of its book value.
That’s where it was trading during the financial crisis. There are some absurdly
low valuations right here. Bank of America is another one that’s
trading for less than book value now, even after all of its improvements over the past
few years. And, there’s the earnings boots that all these banks have gotten from tax
reform. They’re still trading at these low, low valuations right now. Even some of our
favorite small-caps. Axos Financial, formerly Bank of Internet, is another one that’s
trading for an extremely low price relative to where it’s been over the past couple of years.
I think the correction in banks has been way overdone. If we get interest rates, there’s a ton
of upside potential. But even without that, the banks are pricing
in way too much economic weakness. Moser: I tend to agree with you there.
We talked about this a lot throughout the year. These higher interest rate environments ultimately
are opportunities for banks to make more on the profit side of the business. That can
help their profitability. It does seem like a lot of these banks at this point are trading
with some pretty pessimistic outlooks. I guess I understand that in the near-term, but really,
over the long haul, these are financial institutions. They’re facilitating the movement of that
money all over the country, all over the world. I think you made a really good point about
the valuations there. You need to be keeping an eye on these banks when they hit those
valuations. They don’t quite make a lot of sense. Even if that interest rate policy carries
on through 2020 and 2021, you’re still looking at the long-term case making sense for a lot
of these banks. We’ll get to One To Watch later on in the show, I think you’ll
like what I’m calling out for 2019. Alright, bold prediction No. 4: Apple will
become the largest U.S. company once again. Frankel: Apple’s a great business
that’s been absolutely clobbered lately. It’s down more than 30% from its highs right now.
Remember, Warren Buffett’s been loading up on Apple. He’s been doing that for a reason. It’s because
the business is great, not because this next quarter or holiday iPhone sales
or whatever going to be great. First of all, holiday iPhone sales are going
to come in ahead of expectations. Moser: You think?
Frankel: I do. The third quarter numbers — whatever Apple’s fiscal quarter was — the calendar
third quarter numbers weren’t great. The new iPhone is at a much higher price point than
previous models. My thesis is that this is more of a Christmas gift item than just a
run out and buy because it just came out item. So, I have a feeling that the holiday numbers
are going to be a little better than expected for Apple. Regardless of what
the holiday numbers come out to be, I think with Apple’s cash flow,
they’re buying back tons of stock right now, they’re attracting the attention of some big
investors, notably Warren Buffett, who was said he would love to own the entire company
if he could afford it. Even after the recent correction, that’s not going to happen.
Moser: Yeah, it’s still a big one. Frankel: I wouldn’t be surprised if Buffett’s
buying billions and billions of dollars’ worth of Apple this quarter to add to his
already enormous position. It’s a great business. I can’t name any other business whose
customers are as loyal as they are to Apple. That’s without the big growth
in the Services business, which is going to make the
whole ecosystem even stickier. This drop was triggered
by one quarters’ worth of guidance and the decision to stop reporting
product-level sales figures. It’s crazy to me, especially since the business is generally
doing great. So, I think it’s going to catapult back to the trillion-dollar
market cap pretty quickly. Moser: Yeah, I think you’re right. It’s amazing
how quickly that move down came. In August of this year, it hit that $1 trillion market cap,
surpassed it. In short order, along with everything else, it pulled back. Now, it’s around
a $750 billion company. That’s a tremendous move in a short period of time for a business
that really is doing well in virtually every regard. To your point about
the iPhones and Christmas items, our girls got their first iPhones this Christmas.
We gave them — or, Santa gave them — a couple of iPhone 6s, which were
a great entry-level phone for them, reasonable cost. I think it’s good that they’re keeping
a lot of those older models out there in the market. My wife and I upgraded to that new
XR recently, and I don’t know, it’s OK. There are some things I’m not that big of
a fan of. But, by far and away, the biggest point for me with this new phone is that I’ve now
got a phone where the battery can last all day again. If they’re able to keep on making
the battery better, I think they’ll keep people coming back for more. You’re right,
that’s a very loyal user base. I would not be surprised to see Apple pick back up
a lot of those losses in no time at all. Alright, No. 5, final bold prediction for
2019: Warren Buffett will buy something big. I don’t think there’s any problem. Everybody
probably agrees, yep, he’s going to buy something. But you think he’s going to buy
something big. Tell us a little bit about that. Frankel: I’ll make this a very bold prediction.
I think he’s going to make his biggest acquisition to date in 2019. The biggest one so far was
Precision Castparts, a little over $20 billion. He’s got over $100 billion sitting in cash,
not including whatever cash flow is coming in during the fourth quarter. He likes
to have about $20 billion in reserves. So, he has about $80 billion to spend, a market that’s
gotten a whole lot cheaper. Buying something big could mean he puts $50 billion into Apple.
I would consider that a big quote-unquote “acquisition” for Warren Buffett.
To give you an idea, and I mentioned this in the article, Berkshire has enough cash,
not including the $20 billion Buffett wants to keep, to buy a company like Lowe’s or
Caterpillar, with just the cash that it already has. That’s not to mention Berkshire’s sky-high credit
rating that allows it to borrow money at virtually nothing. Charlie Munger estimated that Berkshire
could make a $150 billion acquisition with no problem if it wanted to. Now that
valuations have come back down to earth a bit, I could really see that happening in 2019.
It’s been a while since they’ve made a big acquisition. Buffett has mentioned that he would love to
make a big acquisition more so than buying back stock or buying common stock. He wants
to own a whole company. So, I think 2019 is the year that this is finally going to happen.
You’re going to see a big acquisition of some sort from Berkshire.
Moser: Man, I’d love to see that. You’re right, he’s got the resources. Between the
cash on the balance sheet, the credit rating of the company, and, listen, he can issue
stock whenever he wants, too. They’ve got a lot of different ways to do whatever they
want to do. I’m sure he’s probably looking at that and thinking, maybe time is a little
bit on the shorter end for him and Charlie, unfortunately, so maybe they’re looking to
really make something happen in here in 2019. Alright, I like those five. I’m going to come
up with one bold prediction for you, Matt. This is going to relate to our finance world
that we cover here on Industry Focus: Financials. It’s also going to tie in to your bold prediction
No. 4 about Apple. I’m going to make the bold prediction here that in 2019,
Apple is going to acquire — are you ready, Matt? Frankel: Go for it.
Moser: Square. Frankel: Really?
Moser: Apple is going to acquire Square in 2019. Now, let’s be clear, like we said, bold
prediction means you’re not going to consensus. You’re saying something that’s kind of nutty.
Do I really think this is going to happen? Maybe not. But hey, let’s throw caution to
the wind here and think about why that might happen. Think about some of the similarities there with Apple and Square. Square, much like Apple,
has a reputation for making very slick hardware that’s easy to use that people really like
and are loyal to. That’s not to mention the fact that Square, like Apple, has done a very
good job in developing a software ecosystem built around what customers want, what their
merchant customers want, whether it’s in restaurants or retail or whatever. They’ve got everything
from payroll to taxes to inventory management. One of the things missing from Apple’s business
model, particularly as they make this move over to the Services side of the world, is
they’re missing that really nice, sticky, consistent revenue stream that payments offer.
And man, I bet you they think there would be an interesting opportunity out there with
a company like Square that today… Today, with the market pulling back the way it has, as of
this taping, Square is around a $22-23 billion company. Apple could easily acquire it, buy the
company, let Jack keep doing what he’s doing. Listen, it wouldn’t shock me at
all to see it happen. I think Apple’s looking for new ways to put their money to work.
You and I both agree that payments is a great space. Frankel: It’s true, Apple’s been trying to get into payments. They have the Apple Pay Cash
person to person app. They could integrate that with Square Cash pretty easily.
Wasn’t some of Square’s original hardware developed to work with the iPad?
Moser: Yeah. That’s the other thing — you see everywhere you go merchants using Square,
they flip over that thing where you can confirm the purchase and add a tip and whatever, their hardware,
it seems like, was built for Apple equipment. There’s so many similarities there,
it seems like they would be two companies that would work very well
together. I guess we’ll see. Selfishly, I hope it doesn’t happen.
As a Square owner, I’d like to see this company grow on its own. I think there’s a multi-bagger
opportunity there. But, it wouldn’t shock me if Apple wasn’t at least kicking the tires
on that thing and trying to figure out a way to bring them into their family. 2019 will
tell us all we need to know in regard to our bold predictions, Matt.
Let’s jump into a couple of questions from Twitter here to wrap up the year. We had one
question, speaking of Square, a question from Twitter @TheAnimal23 tweeted us and wanted
to see if we could elaborate on the benefits and our thoughts on Square reapplying for
the bank charter. Square applied for a bank charter a while back. They withdrew that
application for procedural reasons, they didn’t feel like they were quite ready for it. They have reapplied
for this bank charter. Matt, what did you see here? What do you think about that?
Frankel: I like the move. A lot of investors in the market seem to feel this way.
There’s a mixed bag here. One, a lot of people see this as increased unnecessary risk. Kind of the way
when they announced the Square Installments platform, or they were getting into consumer
lending for the first time, getting into being an actual bank, a lot of people see as opening
the door to a lot of unnecessary risk. On the other hand, it also opens the door
to a lot of growth potential. Initially, I know they just want to make small
business loans, just like they’ve been doing through Square Capital, just cutting out the
middleman, which will save them some money. But, this is also the avenue to get into the personal
lending space and to do the Square Installments without a middleman.
It does add a little bit of an element of risk, but it also adds a lot of reward potential. I’m all for
cutting a company’s costs, especially when they’re still trying to become profitable.
This is a way to increase Square Capital’s margins and open the door to a whole lot more
growth in the future. So, I’m for it. It definitely does add a bit of risk.
But, I think it’s well justified. Moser: I think you’re right. It gives them
more opportunities in the future. Certainly in line with the Square Capital side
of the business. It’s not unheard of for this to happen. American Express, during the days
of the financial crisis, became a bank holding company, as well. That was a little bit of
a different situation, but still, ultimately, they pulled it off quite nicely.
So, yeah, I agree with you. I’m for it, too. One other tweet here we got the other day,
and instead of replying on Twitter, I thought this would be a great one to bring over to
the show here. It’s from @AndyWolfarth. Andy asks, “Berkshire Hathaway A and B
shares are the largest holdings of Markel. If I want to pick just up one of these at this
opportune time, does it make sense to just get Markel?” You and I both have a couple of thoughts on
this one, Matt. What’s your first impression here? Berkshire Hathaway,
Markel, own one, the other, or both? Frankel: It just depends on your risk tolerance
and what you’re looking for. I don’t think you would go wrong with either of them.
Berkshire is by far the bigger, more established business, and is designed to steadily increase its intrinsic
value over time and produce market-beating returns over long periods of time. Markel is
the younger of the two, definitely more specialized, much more of an insurance play
than Berkshire is at this point, and has a lot more growth potential. Markel would be
the one for investors with long time horizons. I’m planning on holding my shares for a few
more decades to let the growth story play out. I’d be comfortable holding Berkshire
for five years, whereas Markel, I’d want to hold for 20, 30 years. So, depending on your
time horizon and risk tolerance, I’d say that’s what dictates your decision. Lately,
I’ve bought more Markel than Berkshire. There you have it.
Moser: I’m glad you mentioned that time horizon there, the five years vs. a few decades. Speaking
from personal experience, earlier this year, I had a modest Berkshire Hathaway position,
the B shares, that I’d held for a number of years. And the stock had done very well for me.
It was one of those that I could just ignore, I knew it was going to be OK. But
earlier in the year, I actually liquidated that entire Berkshire position and I put those
proceeds into more Markel. You really hit the nail on the head there when you talked
about the difference between the two companies from a timeline perspective.
You look at Berkshire Hathaway, it’s around a $500 billion company today. Markel is like
a $13-14 billion market cap. Much, much smaller. As you noted, obviously a lot of room to run there.
Still more of a specialty insurance business. But, they’re growing and expanding
and offering more things beyond that. They’ve rolled in some acquisitions
that are working out well. The one thing I’ve always enjoyed about Markel
is that Tom Gayner, the Chief Investment Officer there, he’s the co-CEO now, he’s had a little
bit more of a propensity to invest in tech. You look at their holdings, and yes,
Berkshire Hathaway is a big holding in the portfolio, but they also own Apple, they own Alphabet,
they own Amazon, some of those companies that Buffett has steered away from for a while
because he felt like he didn’t have an edge there, Activision Blizzard, these are all
companies that are in Markel’s portfolio today. Markel is one that I’m planning on holding
for probably the next 30 years. I’m really happy to continue owning those shares.
It was less a knock on Berkshire and more about the opportunity that Markel — and as Andy
noted in his tweet, you own Markel shares, you are getting some good Berkshire Hathaway
exposure through their investment portfolio, as well. Andy, hope that was helpful.
Matt, let’s wrap this thing up here. We’ve got One To Watch. As always, we’re talking
about One To Watch for the coming week. We thought it’d be fun this week because of the
date here, we’re getting ready to roll into 2019, let’s see if we have One To Watch for
our members and listeners in 2019, a stock that you feel like is poised to have a good 2019.
What’s your One To Watch for the coming year? Frankel: Mine is Square,
and not just because you said that Apple’s going to buy it. [laughs]
I think Square could have a great year. If you remember, Square hit $100 a share this year,
which is about double where it is right now. The reason is because not only has Square
been growing at a crazy rate, but the growth has been actually accelerating, which is really
great with how big the company’s getting. If Square’s revenue continues to accelerate
over the year, regardless of whether or not the company’s profitable, we could see it
easily double from the current levels and regain a three-figure price tag.
Moser: I think that’s a reasonable prediction there. I’m going to hang onto my shares.
A lot of good thoughts there. I’m going to go with a company that listeners
have probably heard on this show a couple of times before, Ameris Bancorp. Ameris is
a little bank down in southwest Georgia, headquartered technically out of Jacksonville,
Florida now, but its roots are in Moultrie, Georgia. It’s a bank I’ve covered for the better part of
eight or so years now. It flew under the radar recently, but Ameris announced a big acquisition.
This is such a big acquisition, it’s more like a merger. They’re going to be acquiring
Fidelity Bank of Atlanta and bringing this Fidelity Bank into the Ameris family.
It’s about a $750 million deal. When you put that in context of Ameris’ $1.5 billion
market cap, you can see, it’s a big acquisition. They made the announcement, and of course,
as it’s often the case, the market sold off shares of Ameris, basically saying,
“The burden of proof is on you now to justify this acquisition and prove that this makes sense.”
Now, I think that it does make sense. Ameris Bancorp has a good track record of acquiring
and bringing in smaller banks to their family and growing that business, all the way back
to the financial crisis, when the FDIC saw them as a healthy partner to help them wrap
up some of those failed institutions. Consequently, Ameris has grown considerably since then,
not just the market cap of the company but its total asset base, deposit base. This deal
is going to give them an attractive total asset base of over $16 billion. They’re going
to grow their deposit base to over $13 million. It’s also worth noting that the additional
deposits they’re bringing in from this Fidelity acquisition are a lower cost deposit base,
about 25% lower cost deposit base. And really, that’s what banks do. They take that deposit
base and they invest it in a lot of different ways. Ameris has a good
track record of doing that. So, I think the sell-off in shares,
while understandable, it’s short-sighted. If you can look at this bank and think about
owning it for the next five years, this is going to be a really attractive risk-reward
scenario here. To be clear, I own shares. I did buy a few more shares after the
announcement of this acquisition. I really think there’s a lot to like here.
The ticker for Square is SQ. The ticker for Ameris Bancorp is ABCB. Keep an eye on
these for 2019. Matt, we’ll revisit them periodically throughout 2019 to let our listeners
know exactly how they’re doing, right? Frankel: Absolutely. I’m sure you’ll hear
us talk about both of those several times. Moser: Alright. Matt, listen, I tell you,
I’ve had a great year here with you on the show. I appreciate everything that you’ve
done for me and for our listeners. It’s been a lot of fun! I’m looking forward to
what the new year has to bring us! Frankel: Absolutely! 2019
is going to be our best year yet! Moser: Alright, folks. As always, people on
the program may have interest in the stocks they talk about, and The Motley Fool may have
formal recommendations for or against, so don’t buy or sell stocks based solely on what
you hear. This final show of 2018 is produced by our guy Dan Boyd behind the glass. Dan,
thanks for coming in today! Have a great 2019! For Matt Frankel, I’m Jason Moser.
Thanks for listening, we’ll see you next year!