In this MarketFoolery podcast, host Chris Hill is joined by a special guest, Scott Phillips of Share Advisor and Million Dollar Portfolio Australia. They consider the latest bad news from meal-kit company and ongoing disaster Blue Apron (APRN +0.00%), then discuss the unusual ways that Australian ETFs differ from U.S. ones, and skim the cases of a restaurant company and a niche industry that are growing by leaps and bounds down under.
A full transcript follows the video.
This video was recorded on Nov. 7, 2017.
Chris Hill: It's Tuesday, November 7th. Welcome to MarketFoolery. I'm Chris Hill. Joining me in studio today, from Share Advisor and from Million Dollar Portfolio, not the U.S. one, the one in Australia, it's Scott Phillips. How are you?
Scott Phillips: Chris Hill, good day! I'm very well. How are you?
Hill: It's always good to see you.
Phillips: It's good to see you too, mate.
Hill: Thanks for being here.
Phillips: It's a pleasure to be here.
Hill: Scott is welcome any time, but it's Foolapalooza this week, it's our annual meeting, which is Thursday and Friday, which is my way of leading up to letting listeners know it's going to be a short week on Market Foolery. There will be no Thursday episode. But you know what? You're going to get twice the episode today because it's Scott Phillips.
Phillips: No pressure, Chris. Thank you.
Hill: [laughs] No, none whatsoever. We're going to get into investing in Australia, but I wanted to start with yet another bad day for Blue Apron. Shares of Blue Apron down 15% after the CEO came out and said, "Hey, that new fulfillment center we have a New Jersey? Boy, does that thing cost a lot of money." And that combined with layoffs combined with ... we were talking about this before we started taping, back in July, I asked the question, what's the shortest amount of time a company has gone from their IPO to being taken private, and I wasn't being 100% snarky in asking that question, I'm genuinely curious about that because I really do think Blue Apron might be the most woefully unprepared public company, certainly in the last decade.
Phillips: This has been awful, right, Chris? Your listeners know, I know you guys cover this regularly, it's fallen about two-thirds since listing, and that is just an absolutely awful performance for a company that should have had so much promise. What the company does, think about the home meal replacement stuff, think about the food delivery stuff, this is supposed to be the sweet spot of the new economy. And Blue Apron just keeps falling over itself time after time after time.
Hill: And back in July, Blue Apron had one of those days, they're not alone in this regard, but Blue Apron had a sudden drop in mid-July when the news came out that Amazon (AMZN +0.63%) had registered a trademark for their own meal kit. And Blue Apron is not the first nor the last company that will suffer a sudden drop just based on Amazon delving into their news. But, I didn't realize that Amazon essentially doesn't operate in Australia, although it is coming soon, right?
Phillips: Right, not yet. It has a website for Kindle books and Audible, but the physical distribution center, the physical products -- Australians use Amazon a lot, but we all order it from Amazon U.S. or U.K. It's coming to Australia probably by Christmas, and retail stocks have absolutely been hammered this year, because investors are just clearing the decks trying to get out of the way, a la Blue Apron, a la everything else. The carnage that Amazon has caused in the U.S. and around the world is coming to Australia, and it's coming pretty soon. And investors are notably, and frankly, realistically, worried.
Hill: Is there any sort of significant e-commerce player in Australia, home grown, right now?
Phillips: There's one called Kogan. It's an entrepreneur who basically took the model and said, "I can do this myself." He started from selling TVs that he got made for him under the Kogan brand in China. He got them made for him, brought over here, cut out the middleman, that kind of model. So, think about Amazon Basics, for example. It's kind of that broad idea. But, he's built an e-commerce platform business that's now worth over $300-400 million, which is not much in U.S. terms but pretty big in Australia. He's doing a really good job of taking share from the incumbents. I think he'll be OK. It's the incumbents I'm really worried about. So, the likes of our versions of Circuit City and Best Buy, JB Hi-Fi and Harvey Norman, those are two businesses that own the market. So, if you own the market and someone else comes along and says, "I'll have a slice of that, thank you very much," they're the ones who are most likely to lose. And as we know, operating leverage when it comes to investing is a really powerful force when it's growing. When it's going backwards, it can be really painful. So, if you have a lot of stores, if you have a lot of products, if you have a lot of costs, à la, as I said, Circuit City and Best Buy, to a lesser extent, you're really in the [...] They're the two businesses people are most worried about. But, everything from auto parts through to groceries, anything Amazon could touch investors are panicked about, saying, "We're getting out of this and waiting to see what happens, waiting to see how bad the carnage is before diving back in."
Hill: So, let's go back to Blue Apron for a second. Your day job is working on services -- Share Advisor, Million Dollar Portfolio. We'll use Blue Apron as an example here. When you, as an investor, see a company getting hit like this, what has to happen in your mind to make you say, "I'm going to buy this thing?" Because, absolutely, tomorrow, when the market opens, there will be people buying shares of Blue Apron, thinking to themselves, among other things, "There's no way this thing can go even lower," or, "Come on, this is being oversold," and various things like that. What makes you pulled buy lever on a stock that has fallen 50%, or in this case, upwards of 70%?
Phillips: There's two types of people who see these things. Half of them say, "This price has fallen, it's a bargain." The other half say, "The price has fallen, I'm not going anywhere near it." And that's, as you say, the eternal question. Warren Buffett talks about buying great businesses on the operating table, and I think the clue is in the first half of that phrase. It's great businesses. And I don't think Blue Apron has proven that it's one of those businesses. It has a fantastic tailwind in terms of how consumers are shopping, how we're eating. But frankly, we're all time poor. The ability to get something delivered at home that tastes good, it's fresh, it's easy to eat, you want that, conceptually. But you've got that, and you still can't make this work? As an outsider, looking at this, I'm thinking, you want to see some sense that this is working. I mean, the sales are up a little bit, but the costs are up even more. The distribution center isn't working, cost of goods were up, it feels like an idea without a functional business model just yet, or at least not one I feel like going there. So, I want to see either a really strong brand that can survive this, and I don't think Blue Apron has that, or I want to see an operational business that seems to have some benefit of growth that's falling to the bottom line. The top line isn't going anywhere near fast enough, and the bottom line is going backwards. Unless you believe in the story and you're happy to buy this as a story stock kind of idea, which is really rarely a great idea unless you believe there's a market it can capture -- so, if you're buying the story, you want a great quality business, or you want something that's actually delivering, even if the quality isn't great. And it's neither of those two things. Maybe Blue Apron goes well from here, but if it does, it'll be despite itself, not because of anything you can see on the numbers or the operating business just yet.
Hill: A starting point for a lot of investors in the U.S., when they're looking at other countries and thinking, "I don't know that I want to go into stocks there, because I'm not living there, I'm just going to look for some sort of exposure," for a lot of people, a basic ETF is a starting point, at least in terms of thinking. If you're buying an ETF in Australia, I'm assuming you're getting a lot of exposure to banks and commodities.
Phillips: Yeah, you really are, Chris. Look, we love index funds at The Fool. We're the same in Australia. We would love to think you can simply buy a diversified index and get started investing that way, and that's normally our advice. But, as you said, almost half of the Australian market by market capitalization is banks and insurers. So, the idea of an index is, you're getting a diversified basket. You're really, in Australia, getting a concentrated basket, 45% is in banks, another 15% in commodities, in mining companies. So, almost $2 in $3 is in two industries, and that's the exact opposite of being diversified. For most investors in Australia, there are a couple of ways, I would say, people go about it. The first is, you can buy what we call our Small Ordinaries index. The All Ordinaries is the big market. The Small Ordinaries, a little bit of a play on words, are the smaller companies. And that gives you, yes, a bit more volatility on a company level, but a much broader diversification of industries. So, that's one way to look at it. The other way, quite frankly, is to think about, as we do, is stock picking. When I say to investors in Australia, diversify, I'm actually telling them to buy some U.S. indices to get that exposure. So, yes, buy the ASX 200 or the All Ordinaries index, but also buy the S&P. Buy something that's global or U.S.-based, because you get that diversification that we can't get it home. But, if you're going to be an international investor looking at Australia, if you want banks and miners, then great, make sure it's a small portion of your portfolio. If you don't, look at some of the other parts of the market, the smaller end of the market. The Small Ordinaries is the 101st-300th largest companies in Australia. So, you're avoiding that big, overweight banks and miners, and you're getting a really nice breadth of high quality, fast-growing but a bit more volatile companies in Australia.
Hill: I think it was either last year or the year before that your colleague in Australia, Matt Joss, was here in the studio, and one of the companies we talked about was Domino's (DPZ +0.87%), and how popular Domino's is in Australia, and how well that business is doing. What I didn't realize is that it's actually a different Domino's.
Phillips: [laughs] That's right.
Hill: I mean, it's related to the one in the U.S., and they may have started that way, but it's actually Domino's Pizza Enterprises. It's a separate company, and therefore a separate stock.
Phillips: Yeah, entirely different business, but it started in the same place. It paid a royalty to the U.S. business. I think that's done now, so it's an individual business. But, this is such a stunning company. People talk about it as a tech company that happens to sell food. I think that's a bit much of a stretch. But, Domino's has pushed down the price of pizzas. It sped up the pace of delivery. It has absolutely destroyed Pizza Hut in Australia. When I was a kid, it was all about Pizza Hut, and Domino's was a small challenger brand. Over the last 15-20 years -- I mean, it's been a little bit longer than that since I was a kid -- they've absolutely destroyed the rest of the competitors by being cheaper, by being faster, by being hotter, all those things that ... they say retail is detail, and I kind of feel like for food delivery, it's kind of the same thing. And they've driven prices down, they've improve the quality of the food. They're just giving a much better experience. Their social media stuff is brilliant, their app stuff is brilliant. They've learnt all of those lessons and said, "Yes, we're a food company, but winning is not just about a pizza, it's about all the stuff that goes with it. It's fast delivery, it's cheap, it's easy, it's quick, it's online." They've absolutely put the other guys to shame in a very, very big way. Unfortunately for me, I was very clever. I bought Domino's at $6. It's now $45, which is brilliant. Except I sold it at $13. [laughs] Any Motley Fool Australia Share Advisor members listening to this are throwing things at their phone, they're feeling my pain. We thought we were really clever. We saw same-store sales grow nicely, shares doubled, and then same-stores sales started to decline, the growth rate started to decline just a little bit. And I thought, "I'm clever. I can see this coming. I'll sell." And you know what the key lesson is here? I massively undervalued the quality of management. And it's a lesson that has paid, often, in spades since then, because we've had a lot of multi-baggers since then where I've gone, "You know what? I'm not being scared out of this by some growth or a P/E that might look a little bit too expensive. This is high quality business, high quality management team." Sure, sales will ebb and flow, but if you're onto a good thing, you want to stick to it, you want to stay with the great businesses, the great companies. Domino's isn't quite Amazon. It's not quite Tesla or Facebook. But it's a really high quality Australian business that I kick myself every second day for having sold.
Hill: What did you do with the money? Because that's always the thing. One of the things we say is, sell a stock when you feel like you have a better place for the money. Did you take the money and put it into something better? Or --
Phillips: Look, I will --
Hill: I'm not trying to rake you over the coals. I'm genuinely curious when that happens.
Phillips: [laughs] Listeners, Chris is getting me back first having a go at him before the program started. Just for the record. Chris is taking the opportunity to slowly drag me across the coals -- no. Look, I don't know specifically what I did with that cash. I will say, without bragging too much, Share Advisor in Australia is doing very well. Members have been well served despite my stupidity on that one. Corporate Travel Management, one of our better picks, is up, it's a ten-bagger for us, which is kind of cool. So, we've had some good successes, I'm happy to say. I don't know exactly what I did with that particular money, but fair to say it would have been harder to offset the four-bagger since I sold, so I'm probably still behind just a bit.
Hill: One of the industries, obviously not as big as banks or miners, that you were telling me about this morning that's really taken off -- and just to close the books on Domino's Pizza Enterprises --
Phillips: [laughs] Thank you.
Hill: -- that's a stock that's done quite well.
Phillips: Oh, yeah, it's been fantastic.
Hill: But, infant formula.
Phillips: Yeah.
Hill: The infant formula business has taken off in Australia, and as a result, infant formula stocks as well.
Phillips: If The Graduate was made today in Australia, Chris, it would be, "Buy infant formula." Not plastic, it's all about infant formula.
Hill: "Ben, I have two words for you. Infant formula."
Phillips: There, see? You've got it right there. The big trend here is China. And we all know that China's story has been going for a long time. And most people think China, they think iron ore or copper or the industrial commodities that power China's economy. One of the big stories, I think, over the next 10 or 20 years, will be the growth of the middle class there. And that's not new news. But it's playing out in Australia with infant formula. The Chinese, who have had their own challenge with the tainted infant formula in the past with Chinese-made formula are looking somewhere else. And for better or worse, Australia is seen as clean, green, high food standards, regulatory authority and testing that's really second to none. So, China is looking at that and saying, "I'll have some of your infant formula, thanks very much." So, the companies that have made a run in China was infant formula -- Bellamy's is one, a2 Milk is another in Australia, and a couple of little guys that are trying, Bub's Australia is a third, they're trying to tap that market. And we all know, if you make it big in China, you'll do very well. But, for small Australian companies who have found a beachhead there, that's really been a big part of the story. And they've done spectacularly well over three or four years.
Hill: So, when I introduced you, I mentioned that you work on Share Advisor, Million Dollar Portfolio, those services. I left out, for me, one of the most fun things, which is that you host Motley Fool Money. For those who don't know, Motley Fool Money exists here in the U.S., but it also exists in Australia as a weekly podcast you and Andrew Page do.
Phillips: They say good artists copy and great artists steal, Chris. I have taken a leaf straight out of that book, and I've said, Chris and the team run a fantastic podcast called Motley Fool Money. What will we call ours in Australia? And we were very inventive and we came up with Motley Fool Money. We do it in concert with Triple M, one of big radio networks down in Australia. We do Motley Fool Money as a weekly podcast. Not quite as good as your version, but we do OK, we reckon.
Hill: It's one of the podcast that I subscribe to, and it's available here in the U.S. and all over the world. Anywhere you find podcasts, you can find Motley Fool Money, the U.S. version and the Australian version. I think you and Andrew just do a great job of capturing the news of the week and having some fun along the way. And you actually get to do it in a grown-up radio studio. We have a nice studio here at The Fool. It's just, I don't know, every time I hear your show, I just think, what does that studio look like? They're in a grown-up operation down in Australia, down in Sydney.
Phillips: I will co-opt your Twitter feed, Chris, and I will send you a photo that you can tweet out to your followers, a photo of the studio with Andrew Page holding a coffee mug, because I have one of those on my phone. Look, it's good fun. It's a great podcast. Nowhere near as polished as yours, and we certainly don't hold a candle to Motley Fool Money U.S., but we do our best. It's good fun. We try and bring some Foolishness to Australian listeners who maybe don't find The Motley Fool any other way. We have a really important purpose, as your listeners will know. So, that's our way to spread a bit of the Foolish word to the masses.
Hill: And for listeners in the U.S. and elsewhere, one of the things that you and Andrew do is, you guys do a great job of providing insight on the Australian economy, talking about, among other things, housing and how big and important that is to the overall economy.
Phillips: The Australian economy is doing really well across almost any measure you can think of. It's not knocking it out of the park, but if you think about being through, what you guys call the Great Recession, we call the Global Financial Crisis, we went through a mining bust. And the Australian economy is still reasonably low unemployment, reasonably good growth, low inflation. It's in a pretty good spot. The risk in Australia is what you guys went through in the Great Recession, which is that we have very inflated house prices. So, if there is a big watch-out on the horizon, it is house price. And if we see a particular spike in unemployment or a massive slowdown in resources to China, for example, that could precipitate that. And if there's any worries -- my biggest worry is that there's not a lot to worry about, everything's looking really good right now, but that's exactly when you want to be, as a kind of slightly contrarian looking for the risk, the risk might just be that everyone's positive. And that's often a sign of peak, not euphoria, but peak optimism. And that's when you want to be a little bit careful to see what's coming down the pike, and it might just be house prices.
Hill: Two quick things before we wrap up. First, I want to say thanks to one of our members, Matt Benner, and his daughter Emily, who are visiting here today. Thanks so much for coming to hang out with us at Fool HQ. Secondly, once again, The Motley Fool, this is a shout out for D.C. area Fools, on Saturday, November 18th, The Motley Fool is one of the main sponsors for the annual Run for Shelter. This is a 5K race and a fun run for kids, and a 10K race as well, that benefits The Carpenter's Shelter here in Alexandria. I'm going to be running it. Kristine Harjes from Industry Focus is going to be running it. So far, we have about 20 people from the company who have signed up for this. You're not still going to be in town?
Phillips: Thankfully for all of us, I'm not going to be in town. Your listeners can come along knowing they won't run into me. I hear you're going to set a personal best, though, Chris.
Hill: That's absolutely not true. No. I'm still recovering from the Marine Corps Marathon.
Phillips: Oh, but that's so impressive.
Hill: So, I'll be going at a nice, leisurely pace. But if you want to join us, please do. It's a great event, it's a lot of fun. There are going to be a lot of Fools out there. It's a great charity. You can go to carpentersshelter.org, all one word. It's Saturday, November 18th. Come on our and join us. You can also, if you want to learn more about investing in Australia, go to fool.com.au, which is The Motley Fool's website in Australia. And absolutely check out Motley Fool Money, the Australian version. It's a weekly podcast that comes out every Friday. Right?
Phillips: Correct.
Hill: I had to think, because for you it's Friday, I think technically we get it on Thursday.
Phillips: It's probably on Thursday night, I suppose, yeah.
Hill: Yeah, Thursday night, it loads on my phone. So, yeah, definitely check out Motley Fool Money to hear more from Scott Phillips and Andrew Page. Thanks so much for being here. I know how busy you are when you are here, because everyone wants some of your time. So, I appreciate you coming in the studio.
Phillips: Chris, MarketFoolery is one of the highlights of my day, so it's more than welcome. I very much appreciate the opportunity.
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 MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
