Stock Offerings, Buybacks, Shorts, and Another Inexplicable Name Change

FAN Editor

On this Market Foolery podcast, host Chris Hill and Motley Fool Asset Management’s Bill Barker review the most interesting tidbits from the business world today: Delta (NYSE: DAL) beat on earnings for the third quarter, and performed well despite the impact of heavy weather, and chipmaker Micron (NASDAQ: MU) is preparing a secondary stock offering, which mildly irked its shareholders, while Wal-Mart (NYSE: WMT) is planning a major share buyback that pleased its own. But Coach (NYSE: COH) is doing something that annoys Chris pretty much every time a company does it: It’s changing its name. And finally, the Fools answer a listener question about a phenomenon that seems to bother quite a few people: How is it legal for an influential Wall Street big gun to trash a stock he’s shorting, when his comments are bound to make it fall, thus profiting him?

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A full transcript follows the video.

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This video was recorded on Oct. 11, 2017.

Chris Hill: It’s Wednesday, Oct. 11. Welcome to Market Foolery. I’m Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: Isn’t it great when the news fairy shows up? We had news stories that we were planning on doing, and then the news fairy just showed up right before we started taping.

Barker: The stories we were planning on doing were worthless compared to the news fairy delivery.

Hill: Well, I wouldn’t say they’re worthless —

Barker: Because we’re still doing them.

Hill: Because we’re still doing them.

Barker: Oops.

Hill: That’s the main reason I wouldn’t say they’re worthless. In fact, let’s start with one of the so-called worthless stories. Oh, we’re off to another great start. Earnings, third-quarter profit for Delta Airlines coming in higher than expected. Ed Bastian, the CEO, said it was a very good quarter, especially considering the impact of the recent hurricanes. I will note, however, he did stop short of parroting Doug Parker’s line — Doug Parker, the CEO of American Airlines, who recently came out and said, “We’re never going to lose money again.” So things are amazing at American Airlines. At Delta Airlines, they’re merely very good.

Barker: Yeah. And that sums up the whole thing right there. You’ve covered it.

Hill: Should we move on?

Barker: Yeah. As I said, the other stories are much more — no. So Delta had a pretty good quarter. Of course, the impact of the hurricanes was already known, so earnings were down, earnings per share down a bit year over year, but less than expected as they operated pretty efficiently other than the hurricane news. At this point it’s no longer news, because it’s priced in. But it’s been a pretty good run for airlines in general. Delta has been not moving as a stock the last couple of years compared to what it did in 2013-2014. But you don’t quadruple your price over a two-year period and then just get to keep doing that.

Hill: It would be nice if you did.

Barker: It would be nice. And simply to have maintained the $40 billion-ish market cap that it had, it bought back some shares, and it’s worked out. But it’s been sort of a flat stock over the last couple of years.

Hill: I don’t know about you, but I still find it a little weird and a little difficult to get used to the idea that airlines might actually be stocks worth owning.

Barker: OK. And I think the reason why you think it’s weird is because you have been raised on lines such as Buffett’s about killing the Wright brothers rather than letting them create airlines, as it was a place for people to lose money as investors for all of the decades that there were that had airline stock investment as a possibility, until about the last five or six years.

Hill: Except for Southwest

Barker: Except for Southwest.

Hill: For a very long time, that was the one airline worth owning.

Barker: And the reason can be summed up, I think, more or less entirely by, you used to be able to get on an airplane and expect to lay out in the seats. And this is a problem for me, because I have an international flight coming up, and there’s just no way that I’m going to be able to stretch out across three seats, or four, or five, as you could back in the day. Just take the middle, I don’t know, are there five, do they have that anymore? Five seats in the middle?

Hill: Five seats in the middle? Sure. Absolutely. Over the summer, when we flew over to London and back, we were on one of those planes. 

Barker: Who’d you put in that middle fifth seat?

Hill: Oh, I wasn’t actually in the middle.

Barker: One of your kids was?

Hill: One of my kids was, yeah. [laughs] It’s like, hey.

Barker: Hey, you’re a kid. You pay for the seats if you want an aisle seat.

Hill: You’re smaller than me, and I know that of the two of us, you’re much more likely to fall asleep than I am. I don’t have that superpower, to fall asleep on planes. Where are you going, by the way? Where’s your international flight?

Barker: I’m going to Dubai. This will be fun. I’ll be there for about 48 hours and then come back.

Hill: When we think about quick turnaround trips, Dubai is high on that list.

Barker: [laughs] That’s what you get when you spend $650 on a round-trip plane ticket to Dubai. It’s not a great seat experience. And, OK, the flight is going to be full. I know that. You know that. You don’t need to know anything more about the fact that the flight is going to be full than it’s a modern-day flight. Airlines are filling up all the seats, and that’s a lousy experience for travelers, especially in economy. The trade-off is, investors are now making money by owning efficiently run companies, whereas before it was a little bit more of a pleasure to get through security and get on a plane and have lots of room to stretch out. The experience is no longer pleasurable, but it makes more business sense.

Hill: Let’s move on to Micron Technology. Shares of the chipmaker down a little bit this morning, after the company announced plans for a $1 billion secondary stock offering. Micron says they’re going to use the money to pay down the company debt. No one really likes a secondary stock offering, except for, obviously, the company itself. But when you look at the stock selling off, it’s because it’s dilution, and we don’t like dilution.

Barker: Yeah, it’s a supply-and-demand equation, where there are more shares available, supply is greater, and therefore the demand is going to take a hit. On the price, it’s really only off about 1%. The stock is up 91% for the year, so this makes a world of sense, where you have not necessarily an excessive amount of debt — I think it’s about $9 billion that Micron is carrying on the balance sheet for long-term debt. Why not take advantage of a stock that’s up double over the year, and more than that over the last couple of years? It changes the capital allocation question a little bit, raises the floor. That is, if things go wrong and you’re holding a lot of debt, those are bad times to be. And these are good times. So take a well-enhanced stock price, convert that into some cash, and pay down some debt. I think it not only makes sense, but the market is not treating it with any great amount of panic.

Hill: Speaking of capital allocation, Wal-Mart yesterday announcing a $20 billion stock-buyback plan. And between yesterday and today, shares of Wal-Mart are up something like 6%, which, for a company of Wal-Mart’s size, that’s like shooting to the moon for Wal-Mart.

Barker: Yes, exactly. It’s the other side of the equation, where you’re taking shares out of the market by buyback, you’re increasing the earnings per share, because share is the denominator in that equation, so that helps support the future earnings-per-share numbers for the company. It’s priced at about 20 times trailing earnings at the moment, which is a little bit cheaper than the market multiple, which is more like 23. So they’re not going to buy back all these shares today, obviously, but they’ve got the cash to do it. The expansion of stores that are on the books doesn’t really call for a whole lot of that cash. They’re investing in the online operation, obviously, and that has been pretty well received. And I think that was also a big part of the move yesterday with the story of the online operation.

Hill: Doug McMillon is doing a really good job with that company. You look at shares of Wal-Mart, over the last 12 months, the stock is up about 26%. And if they keep that up, if that continues to tick up, not that this is anything that is in any way meaningful for investors necessarily, but I think you have to put Doug McMillon on the short list for CEO of the year. When you just think about where Wal-Mart has been for so long, both as a brand and as a stock, and the fact that he came in a couple of years ago and engineered that acquisition with, and, as you said, the guidance that they gave for online sales yesterday, along with the $20 billion stock buyback, that helped really boost the stock.

Barker: So, returning it to its glory days, in a sense, between 1974 and 2014, some data that I’m gleaning from an article that I’m going to recommend to people, Wal-Mart’s stock was up 23% a year. Those were the returns.

Hill: Per year?

Barker: Per year. For four decades.

Hill: That’s a hell of a ride.

Barker: That would turn a $10,000 initial investment in ’74 to $45 million 40 years later. That’s the power of compounding. Wal-Mart has taken a breather — had, at the very least, taken a breather. And I wouldn’t expect 23% annualized returns to appear again over a period of four decades, because the growth that Wal-Mart had available to it in the 1970s is clearly not the same today. Competition from Amazon is significant, and you don’t plug in top-line growth of double-digit numbers into Wal-Mart.

Now, by the way, the 1974 to 2014 was also, large chunks of that period were supported by high rates of inflation. So when we say the stock was up 23%, in an era when inflation was above 10% for part of that time, those are not the same as today’s returns, which are supported by 1%-2% inflation. But this is an article from Philosophical Economics, which is a phenomenal space online, and it’s about this 1974 annual report, and what you could take from not just looking at what the returns were, but how you would have gone about trying to value Wal-Mart in 1974, and the price you should have been willing to pay for it, which was significantly higher, obviously, than the price that it did go for, even though, in 1974, it was an above-market-multiple stock.

Hill: Send me the link, and we’ll put that out on the Market Foolery Twitter feed, share it with the folks.

The news fairy, as mentioned at the top of the show, showed up this morning with the news that Coach is changing the name of the company to Tapestry. Let’s go over that again, shall we? Coach, known for middle- to high-end handbags, mainly that, is changing the name of the company to Tapestry. I’m guessing, because I haven’t read the company’s statements — you and I were actually in a conference room together talking about, well, what are we going to talk about on the show today, and this news came over the Twitter feed, and you said, “Let’s not actually do any research. Let’s not read what the company says. Let’s not read about their justification.” And I think longtime listeners would expect nothing less from us than to do absolutely no prep whatsoever on a story like this.

Barker: I think the thing they would be most surprised by is the implication that we have done research for some other stories. You do research.

Hill: I do some research, yeah. And clearly you did with that Wal-Mart article you read.

Barker: Three years ago. I just have a phenomenal memory. Like Trump. He has an amazing memory, or so he says.

Hill: I’m not even going to go there.

Barker: You’re smart. [laughs]

Hill: Coach has, over the last couple of years, branched out and made some acquisitions. They bought Kate Spade, they bought Stuart Weitzman, and I’m assuming that Tapestry is the parent name that they’re going with, and they’re going to keep the Coach stores. They’re not going to rebrand the Coach stores or Coach handbags as Tapestry. I don’t know. My gut instinct in situations like these, and certainly with Tronc, with Tribune Media announcing that they’re changing to Tronc, my batting average is actually pretty bad when it comes to making fun of companies who have name changes. Putting aside Tronc — I’m standing by that one. I feel good about that one.

Barker: That’s a long-term play.

Hill: That’s a long-term play I feel good about. But in the past, when Philip Morris changed their name to Altria, when Arthur Andersen changed to Accenture, when Google changed to Alphabet, I was like, what, are you kidding me?

Barker: Oath.

Hill: Yahoo! is no longer really a standalone public company.

Barker: Yeah, but Verizon putting AOL and Yahoo! under the exciting Oath brand.

Hill: I’m saying, you could look at those other occasions and say, that was a good time to buy those stocks, when Chris was totally mocking the name change. Because you would have done well if you had bought Philip Morris when it changed to Altria, Arthur Andersen when it changed to Accenture, and Google pretty much at any point.

Barker: That’s not to imply that you’re not going to mock this name change. It’s just the mocking may not mean “Don’t buy the stock.”

Hill: Exactly.

Barker: So, Tapestry. I think, as this was mocked downstairs momentarily before I came up here, and Nate Weisshaar pointed out intelligently, so I’ll steal it, this seems to imply a reach out to royalty with the tapestry. Because what do you think of when you think of tapestries?

Hill: Honestly, when I just saw they’re changing their name to Tapestry, I am of a certain age where my mind went immediately to Carole King’s album.

Barker: Oh.

Hill: Great album by Carole King, with a ton of great songs on it. Tapestry.

Barker: Can you sing any? Can you hum a few?

Hill: Nope, not going to do that. Not going to punish the listeners. Maybe we’ll throw something on to the end of the show. Anyway.

Barker: Dan Boyd, he’s got a better voice.

Hill: Yeah, he actually has musical talent. So Nate was going, they’re going after royalty?

Barker: Because don’t you picture a castle? How are you decorating the castle?

Hill: Put some tapestries up.

Barker: I think it’s a Game of Thrones play. Now that all that 16th century, or whenever that might have occurred, imagery is in people’s minds.

Hill: You think they’re going to offer some sort of tie-in with Game of Thrones? Something dragon related?

Barker: What’s the adjective that comes to mind when you think of Tapestry? You’ve got it, rich. A rich tapestry. That’s what always modifies tapestry, right? A rich tapestry is a metaphor for life or experiences or something like that. So you’ve got the rich play there as well.

Hill: Do you think some version of this conversation we’re having right now played out in a board room at Coach?

Barker: Well, an intelligent version of this conversation.

Hill: That’s what I meant.

Barker: Rather than a mocking one. “Let’s come up with the name we can mock!”

Hill: That’s the thing. Someone said, “Here’s the name. It’s Tapestry. Here’s why.”

Barker: Yeah, because “Umbrella” is taken. What it implies is, here’s the intelligent part of it — Coach, for a long time, standalone company, running the Coach stores, and then it makes a play to diversify for Stuart Weitzman and Kate Spade. So at this point, what I believe management is saying and has been saying to the employees of the acquisitions is, “You’re not the smaller side-project, that Coach is the big thing that we care about in this company, and that’s the namesake.” Now they changed their name, it’s like, “Hey, we’re a tapestry of many different companies,” and a rich tapestry, I think they would be so bold as to say, “and you’re a part of it. And everybody is playing an equal part.”

Now, that may or may not be taken by everybody, or they may want to hold on to their independence to the degree that they can within this rich tapestry of companies that is being woven by the management of Coach, or, formerly known as Coach. I think the communication is probably more both within the company and to investors as, “Hey, don’t look at what’s going on with Coach. Look at what’s going on in the luxury-brand conglomeration that we’re building.”

Hill: So on the surface, you’re leaning more toward Alphabet than Tronc, on the spectrum of rebrands.

Barker: Yes. You really hate Tronc.

Hill: What’s not to hate? [laughs] Our email address is From Mike Booth in Petawawa, Ontario: “I wanted to take a minute and thank you for what you do and show some appreciation. I listened to the entire bonus episode recently, although I did ask myself why I was still listening around the 40-minute mark, when you yourselves posed that question.” Again, if nothing else from the hour-plus long bonus episode that we did with our colleague Roger Friedman, if nothing else, we really tried to emphasize, there are better ways to spend your time than to listen.

Barker: Oh, yes. And we’ll do that again. However, what I will say, for my money, and I don’t have any money on this, but the 40-minute mark is when it actually started to get modestly decent. So I could certainly see getting to the 40-minute mark and saying, “[sighs], when is there going to be something worth listening to here?”

Hill: And then it picks up. “Right now.”

Barker: Because we got into the comedy influences.

Hill: Exactly. Mike goes on to ask — because, when you email, you can ask stock questions. Mike asks, “With the recent Citron short of Shopify (NYSE: SHOP), your commentaries got me thinking. Since Andrew Left,” who heads up Citron, “is apparently known for making sensationalized reports about companies he’s shorting, is there no such law that prohibits people of influence from commenting on companies in which the outcome of those comments will invariably make them money? It seems like this ought to be illegal.”

That’s a great question. And several people have emailed me some version of that question. Since you’re a lawyer, or you were, once upon a time, I think part of why we get this question has to do with the fact that it’s shorting. Therefore, particularly in the case of this report about Shopify, the hyperbole was pretty damn high, when you come out and say that Shopify is a scheme worse than Herbalife. It’s not just calling into question, “We think this stock is overvalued,” or, “Hey, we think there might be some sort of shenanigans going on at Company X.” They really brought the heat with this report.

So to Mike’s question, and the question we’ve gotten from others, it kind of does seem like there should be, if not some law, some sort of regulation about people with skin in the game being able to short like this.

Barker: Yeah, it does come into question more often from a reaction to a publication by a short seller. To start up with what the business is here, and then to address problems there might be with it, Citron and others look for companies that are overvalued, stocks which are overvalued, maybe just because they’re in a bubble, maybe because there’s an accounting question, which will turn into an accusation in the published research, typically, or that it’s a pyramid scheme. Then you go through the research — say, the market is misunderstanding this company; I’m going to short it, because the value of the stock is way too high. Sell the shares, and then cover later and make money as the stock goes down. Having done the research and made that bet, it is in your interest to publicize the reasons why you feel that, so that the market can see your research and react to it.

Now, Citron has a good record, so in doing so, the market typically does sell off a stock. Now, people may believe, think, that Citron then quickly covers its position. Having generated a headline, make a quick buck and get out off of the sensational headlines. I don’t understand that to be their business. They stay in it for the long term. They publicize the results of what the stocks have done from the time of their publication so people can see and judge for themselves what their record amounts to, and they don’t get everything right. So it’s not — I’ll take issue with the word “invariably” as being one of the outcomes here.

Now, are they or anybody else honest or dishonest as they go about this? I have no reason to believe that Citron is dishonest in the way they’ve done their business. So if it’s, as some people might think — I’m not saying the writer here believes this, but certainly many people think that short sellers are just trying to manipulate stock prices. And the positive phrasing of that is, they’re trying to reveal the true value. Just as, if you buy a stock after due diligence and like it and like its story and think it’s undervalued, and say, “These are the reasons this company’s worth investing in,” as The Motley Fool does with research, it publishes evaluations of companies as being worth investing in for the long term, you publicize the research, you’re putting your words behind your money. So there’s nothing intrinsically illegal about doing that as a short-seller. There is something intrinsically illegal about manipulating stock prices with falsehoods.

Hill: As there should be.

Barker: Right. Although it’s very hard to actually catch somebody in a knowing falsehood, because there’s always a rich tapestry to the story behind every stock and its valuation.

Hill: We’re going to end on a slightly lighter note, and that is, of course, coffee. Tyler Crowe, who’s one of our contributors here at The Motley Fool, brought me some coffee from Malawi. This might be the greatest — I haven’t drunk it yet; it’s still in the package — but, it might be the greatest package of coffee I’ve ever seen, because the tag line on the front of the package is “placing your health first.’ As we’ve talked about numerous times, coffee, increasingly, as research shows, might be the healthiest drink on the planet.

Barker: Might be the tag line for this show — placing your health first.

Hill: Placing your health first? [laughs] I don’t see how that’s at all what this show is about.

Barker: It is when we talk about coffee. Because, whereas we could go on and on and on about the delicious taste of coffee, that’s a couple of hours right there.

Hill: It is.

Barker: Speaking of long shows that no one wants to listen to.

Hill: Exactly.

Barker: However, we always, as a public service, highlight the important health benefits of drinking a lot of coffee.

Hill: Yeah. The more you drink, the healthier you get. That’s just science. On the back of the package, underneath the standard information about here’s where this was made and here’s the story of our company, there’s a little note that says, “Dear customer, through research, it was discovered that coffee offers you more health benefits than pleasure.” Let me read that again. “Dear customer, through research, it was discovered that coffee offers you more health benefits than pleasure.” I think my favorite part of that sentence is the opening phrase, “through research.”

Barker: Science.

Hill: Yeah. It basically says, “Look, whatever comes after the phrase ‘through research,’ don’t you dare dispute what we’re about to say here. Because do you know what we have on our side?”

Barker: Research.

Hill: “Research. We’ve got research.”

Barker: Science.

Hill: So, yeah. God Bless the people at Mzuzu Specialty Coffee from Malawi. Placing your health first.

Barker: And thank you. Thank you for sending that in and being part of our drive to educate people about the importance of coffee as really one of the, I don’t know, how many essential food groups are there? Three? Two?

Hill: What are the others?

Barker: Red meat. You need a lot of coffee if you’re going to have red meat as the other food group in your diet.

Hill: I think that’s probably true.

Barker: But coffee, it’s going to be, when they redo the food pyramid, coffee is going to be the bottom layer, the widest one.

Hill: So you’re saying, let’s dispense with the classification of food versus beverage. Everything competes with everything else. So when it comes to the Mount Rushmore of foods, one is coffee, and another one is red meat.

Barker: Yeah. And supposedly, fruits and vegetables are in there.

Hill: I think that’s for another show.

Barker: It’s allegedly.

Hill: That’s for another show. Bill Barker from Motley Fool Asset Management. Thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interests 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. That’s going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bill Barker owns shares of Alphabet (C shares). Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Coach, Shopify, Twitter, and Verizon Communications. The Motley Fool recommends Accenture. The Motley Fool has a disclosure policy.

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