This is the Value Investor podcast with Tracy Reinick. All things value all the time. Welcome back value investors. These are tricky times for us value investors.
A lot of stocks look cheap on a PE basis or even just because it's sold off for the year, for here in 2022. Some stocks are down 60 or 70%, some even more. And so you might start thinking, hey, maybe that's really a cheap stock, but could it also be a trap? I haven't covered the value trap scenario in a while on the podcast.
And I think it's time to cover it again and talk about what could look like a trap and what may look like a real value in this type of market. I've been getting asked a lot of questions about the growth stocks as well. And because those have sold off the biggest of them all, so maybe some of those have some value, even growthy value. One of the ones I've been getting asked a lot about recently is Roblox, ticker RBLX.
And for those of you who don't know Roblox, it's like an online entertainment platform. It appeals to a lot of kids and teens. There's games on there, but there's also things like a metaverse type world with concerts. I saw an interview with Paris Hilton just recently and she has a site on there and she does DJing on the Roblox.
She makes a lot of money about it on it. And so there's a lot going on over there. They just reported their second quarter results. And on the headline, it looks pretty good.
Revenue was up 30% year over year to 591 million. It has 52 million daily active users now. That's as of June 30th, 2022. That's up 21% year over year.
And then they provided the July data of the daily active users. And that was jumped up to 58.5 million. That's up 26% year over year. So all of these are things you want going in the right direction with this type of company, but earnings missed again.
And it can't seem to make any money. So it's expected to lose $1 to $1 2022, but that was before the earnings report came out. So it's probably going to drop even further. And another $1 14 loss in 2023 year to date.
Now the shares are down 55.7%. They are up off the recent lows. I think they were down at least around 70% at one point. So they have rallied a bit.
But this is why I get this question. Like, is it cheap? Because these headline numbers don't look that bad. But the earnings situation still does not look that good.
And as a value investor, I've said before, I will buy growth. I will look for value within the growthy names, even if I'm not looking at a PE, because Roblox has no PE here. But I want to get quality growth. And for me, that means that there's a light at the end of the tunnel if the company has negative earnings.
At some point, the company's got to have earnings, or they've got to have a plan to get there. That's why with a company like, say, Uber, the new CEO came in, and he immediately had a plan for getting to those positive earnings, where the company's actually making money. So another example of this is with another stack. So in 2018, I started watching Pinterest earnings.
I liked Pinterest, ticker, P-I-N-S. I use the app. I know that they were doing a lot with the shopping feature on the app, and that they were growing that part of the business. At the time, however, earnings were negative.
But the analysts had the company turning earnings positive by 2019, and certainly into 2020. And they did see some positive earnings quarters like in there. And so that was assigned to me that they were moving in the right direction. As the company, they weren't going to stay negative forever.
But then the pandemic hit, but that was actually good for their earnings. Their monthly active users jumped, their revenue jumped, and things were looking better. But now with the reopening, everybody's turning off their phones, or at least to some extent, using them less. And so they lost some of their monthly active users, and some of their revenue and the earnings is now taking a dive.
So they were, last year in 2021, they made $1.13. Now expected to make, no, yes. Now expected to make 53 cents this year, and then 69 cents in 2023. So this year, for now, the analysts are expecting to see the worst of the slowdown.
We don't know if these 2023 estimates are going to hold, but the analysts are not quite as bearish for 2023. Because they do have earnings, their PE is 42 times. So that's not cheap on a normal value metric, right? Shares are down 61% in the last year.
It traded as high as $89 during the pandemic, and the shares are now around 22. They're kind of oscillating right around $20 in the last couple of weeks. Is Pinterest cheap after the sell off? This is what I'm starting to take a look at it again.
I used to own it in Zax Value Investor. We did sell it as it started to decline. We had a stop on it, and it hit our stop. So we got out.
I ended in my own personal portfolio. I got out after the portfolio got out, because I was following the stop, too. But now I'm starting to maybe look around a little bit at it. Revenue expected to be up 8.2% in 2022, but up 18% in 2023.
That's if the economy doesn't soften further, maybe we don't get a recession. Consumer continues to shop, and advertising, and shopping patterns remain a little bit more elevated. So if it can grow that revenue like that in 2023, as a growth stock, maybe it's not a trap. And remember, the earnings are what determines whether or not it's a value or a trap.
And even though they're down here in 2022, expect it to rebound in 2023. So it's not looking quite as as trappy as you might think with Pinterest, at least. Roblox still expects to see a bigger decline there in 2023, and that's even before the analysts do their thing and cut some more. So Roblox still looking like a trap here.
But with these uncertain economic conditions, we really don't know about 2023. Heck, we don't even know about 2022, really, because things are changing quickly. So take a look at Signet, Jewelers, Ticker, S.I.G. I just featured it on this podcast maybe a week ago or two weeks ago.
It was just recently. And it was at the time, I talked about it, a basic high ranked value stack. But then now here in August 2022, it announced it was buying Blue Nile. That's a good announcement.
And that's a good addition to its business. They're the online jewelry store, right? But now it's seeing slowing sales. So it also cut its full year guidance.
So they said they saw further deterioration in consumer spending, including at the higher price points in July. And so that's a sudden shift from what they were seeing when they gave their earnings out. And so that's how quickly things are slowing on the consumer side. Those gasoline and food prices really spiked.
The restaurant prices really spiked. If you're going somewhere on vacation, the hotel rooms, airfares, all that spiked. So you're cutting back in other places. And one place you could cut back, you don't necessarily need this, what they're selling, is in jewelry, right?
Unless it's like your marital bans or an engagement ring, that kind of thing. But even then, the consumers will cut back on even those items. But you know, necklaces, earrings, just your everyday rings, all of that, you could hold off while you're filling up your gas tank, right? So that's what they saw.
That is what's happening. So they lowered full year guidance. This is fiscal 2023 on the revenue side to 7.6 to 7.7 billion. That's down from 8.03 to 8.25 billion.
So that's pretty considerable slowdown that they're already seeing. But that's still up 25% from their pre-pandemic numbers. So their business is still remaining robust from the pre-pandemic, but not as robust now that inflation is hitting the consumer. So they did have to cut.
And usually with retail, it's not really just one month slowdown, right? They pulled back in July. Odds are you could continue to see a slowdown, especially if you see more erosion in the job market. And that is key.
So far, the job market is holding up and is actually quite, quite strong. But if we start to see further layoffs and people out of work, then discretionary spending, for sure, like Signic Jewelers, ticker SIG will slow further. So don't be surprised if, you know, in the next earnings report, things don't even look as good as what they're saying here. So I'm expecting further cuts to the earnings estimates.
And so while just on my last podcast, I said Signic was cheap. And I did give a caveat on that podcast that it is retail and anything could happen. And here we are. Anything is happening.
It is still cheap with a 4.8 PE. But and your dates, shares are down 26%. It still has the trap going on here because the earnings are being cut. And I expect them to continue to probably fall here.
Two year stack, the shares are up 407%. So really up big off of those coronavirus lows when the virus first kind of hit. And that first summer and weddings were canceled and whatnot. But now, you know, pressures here.
Now it did fall on the guidance morning. Shares were down like 13%. But it's still up 15% in the last month. So still off those recent lows for the year.
So people are somewhat negative on the retail and the consumer side, but not as negative as you might think. But we are in the early innings. So that's what I mean about all the uncertainty about 2023 and why it's so tricky for us value investors if we're looking for these trap kind of scenarios. Because a lot of things are going to be cut here going forward.
So the economy is slowing quickly and you have to be careful with the retailers. They may look cheap and even post good results. They, you know, have good results just, you know, a couple of weeks ago. And then they're getting this weakness suddenly show up and a lot of them are not waiting around.
They're just going to, you know, pre-nounce, put out that press release saying, we're saying things even worse than we thought quickly. And so we're lowering ahead of time ahead of our next earnings. So what is a true value and not a trap? I just kind of alluded to the fact that there might not be that much true value right now.
That isn't trappy looking forward to next year. Remember what the trap means is that it's a cheap stock. On a PE basis, but you need or with the trap, you're seeing a decline in the earnings going forward. So it may look dirt cheap, but those earnings are on a decline.
So it's not really that cheap and preferably we look year over year. And but the way things are going, maybe even, you know, some of those that I would think might look okay for next year might might not look okay either. And one of those I decided to look at. And so you might have heard that Warren Buffett continues to buy accidental petroleum.
He's added again to his position. I've lost track kind of on how much he's spending here. It's not big amounts whenever he dives in for that week. It's usually I think the last one was 390 million.
He bought it's usually between like 300 million and 500 million in like one lump sum. So that's what he's done again. And but he does own over 20% now. And I didn't realize this, but I heard someone talking about this on one of the investing, you know, channels that once you get over the 20%, he can now declare those, their financials within Berkshire Berkshire Hathaway's financials.
So the free cash flows and things that accidental petroleum is generating can now move into Berkshire Hathaways as well. So he's got to like that because in the last quarter, they generated 4.2 billion in free cash flow in the second quarter. They reduced their debt by 19%. They started a big share repurchase program because they had a goal to reduce the debt by a certain percentage.
And then they would start moving some of the free cash flow into the share repurchase. So they have repurchased 1.1 billion worth of shares through August 1st. So they're going down that direction now of giving more back to the shareholders. The dividend is yielding just 0.8%.
So this is one of the energies that you're not in for the big dividend, at least not yet. But eventually you can only reduce the debt by so much, right? You get rid of most of the debt. That's what we've seen with other of the producers, the oil producers that had better balance sheets than accidental debt.
Occidental always had a lot of debt and it had a lot, especially as it added in a darco, to, you know, when they got in that bidding war and then Buffett had a help on beat Chevron to buy out in a darco, they took on a ton of debt. So they are still working through that, but other companies don't have that same kind of balance sheet issue. So that's why they are just paying it out in dividends, special dividends, and the share buyback. They don't have to pay off the debt.
So I never liked accidental petroleum for this debt reason. Like there are other companies that are just better balance sheets. So why not go with them? But Buffett already had given him the loan to buy in a darco.
So he was already kind of in with them. He knows the management and obviously he's trusting it because he's buying more. But that being said, I do like any of the oil producers here, not necessarily on the service side, though I do like most of them as well. But if you don't own anything by one of the producers and, you know, rising tide lifts all boats.
So that's what happens when oil and natural gas both rise, it raises all of their boats. But that being said, accidental petroleum is very cheap here. It has a forward P of just five, almost eight, almost six times, but that's cheap and a peg of 0.4. Over the last three months, these shares are up 9.4%.
But they kind of stalled out in June. And then as oil prices started to decline, a lot of these stocks have declined. Some have been down 10 to 20%, but then have seen a little bit of a rally, still very attractive valuations. But what is happening with the earnings on these?
So we all know because of the spike in energy prices here in 2022, that earnings have soared for all of these producers. Earnings for accidental expected to be up 316% in 2022 to $10.61 from $2.55. So that is massive, right? That's where you're getting these huge free cash flows and all of that going on.
But next year, 2023, expected to make just 873 down 17.8%. Obviously, analysts have no idea what commodity prices are going to be doing, but they're expecting them to be a bit lower and not see these huge free cash flow and earnings jumps like we saw in 2022. So with that, that would indicate that Occidental is a bit of a value trap here with it declining. But as I warned, as we don't know with the retailers, we don't know with the commodity stocks as well.
But most of the commodities have now come down off of their recent highs, even on grains, wheat, corn, cotton, lumber, all these things have come down. And so it's going to impact the earnings on all of the commodity companies. And so a lot of them will seem like value traps here. But even if their value traps for a couple months may not last for very long, so we'll see.
But right now, Occidental Petroleum, ticker, O-X-Y, is a bit of a value trap here. And then I wanted to take a look at another area that we haven't talked about for a long time. And I used to talk about it all the time on the value or value trap podcast. And it is Micron, ticker, MU.
Remember them? They seem to be on almost every one of my podcasts a couple of years ago. The shares got dirt cheap when it was the bottom of that cycle. And then they soared.
And then we were looking to see whether or not it was going to become a value trap because it is a cyclical stock. The semiconductors are cyclical. People don't like to believe that they are, but they are. And now we're starting to see part of that cycle in these stocks.
So Micron warned when it reported earnings about five weeks ago, so at the end of June, 2022, they said they were seeing slowing and building inventories. And so the shares kind of got hit then. And now they've come out and warned again just five weeks later that things are still slowing and they guided lower again. So this is common in the cycle for the semiconductors.
We also had a warning in from NVIDIA, which we haven't had since 2018, 2019 was the last time we had any warnings from them. And so the cycle is on the downward side, right? Where the earnings now are likely going to get cut and decline. So I took a look at my crowns earnings.
It is a number five strong sell again. And the reason why is because of all these warnings, right? The analysts are cutting estimates all over the place. So 2021, made $6.06 in fiscal 2022, expected to make $8.52 up 41%.
So that looks good. But the recent warning just came out. So the analysts haven't had time to do their cutting yet. So I have a feeling that's going to come down.
But that is still at least a little more elevated from 2021. But where you're really going to see it is in fiscal 2023 with earnings expected to decline 26% back down to 631. And this is only just the beginning of this cycle, the downward side of it, the bearish side of the semiconductor cycle. So it looks cheap at the PE of 6.9, but it is on the trap side now.
So the semiconductors are value traps here. Year to date, the shares are down 34.3%. They are off recent lows, like a lot of these growth stocks have been. And they're up 3.5% in the last month.
But the earnings or revenue warning just came in. And so we'll kind of see what happens with some of these semiconductor side. So the semi is definitely looking like they're on the other side of the cycle, the bearish side. And so that makes them traps, even though they have these lower PEs here.
So be careful. And you're going to have to pay attention during the next earnings season. Now remember with the value and trap analysis, it doesn't stay like that forever. So in 2020, all of the energy stocks looked like they were traps, right?
Because there was no vaccine yet. We had this global pandemic going on, and energy was terrible. The energy prices went negative and then remained low. Demand was crushed.
And so everybody was expecting that to continue into 2021. But then Pfizer announced they had a vaccine that they were going to start rolling out by the end of the year. Remember that? Remember the vaccine?
And they had to turn around and demand immediately. Everyone knew demand was going to rise, even if it was, you know, fits and starts, which it was on the global reopen because we're essentially still in the reopen almost two years later, still going on. But you know, that indicated that earnings were going to take off for the energy stocks, so they were no longer traps. So that's why you have to go back in and reevaluate.
Now, if you're a long term investor, you're ultimately going to get conditions where your stock is a value trap. But you already own it, and you're just going to have to wait it out. On some of those times, I maybe dollar cost average, if I see the light at the end of the tunnel and know that earnings are going to turn around, you just don't want to end up in a company where they never improve earnings. That I'm not saying it goes down every year, but it maybe stays negative like a Roblox appears to be staying and they don't see the improvement in the earnings and the earnings growth that you need as a value investor.
So keep that in mind. And remember, with the slowing economy, it pays to be careful. Nearly every sector may have declining earnings possibly by next year. So most of these could be value traps, but some of them like tech, like we saw with Pinterest, some of them may have been beaten up and the bad news is already priced in and things could be on the upswing by next year.
And we could see an improvement in the earnings once all this bad news is already priced in. And Pinterest earnings for now are kind of telegraphing that whether or not that actually will happen remains to be seen as I weren't. So remember, don't fight the Fed. The Fed wants slowing.
They want to see some decline here, believe it or not. One area I didn't cover that could have rising earnings into next year because they do so far, in addition to a few of these tech stocks, are the banks. I took a look at a couple of them and sure enough earnings expect to be higher for next year, but that all depends on whether and how quickly the economy slows, whether or not we go into a recession that will hit bank earnings. So as you can see, there is really nowhere to escape.
There's a lot of balls in the air, but I will do a further episode later, maybe this fall on the banks, maybe ahead of their earnings, their next earnings report, so that we could see kind of what's going on with that group because they are still cheap. I still like the banks. You can get some decent dividends with a lot of them and they've been in a bear market for over a decade now since the financial crisis, but they won't stay in one forever. And it might be time and an area you might want to poke around I've been early on the banks.
I've started investing in them a year or two ago, might have been a little too early for the turnaround in the earnings, but I am feeling more optimistic now that maybe finally that bear market is over and we will be entering into a secular bull in the banks. That's good for the economy because you need those banks and those bank earnings to be rising because that means economic growth is happening as well. So there's a lot going on, be careful out there, but you can still find some good quality value stocks and look for those that have something positive going on in their industry. Like energy, that's why Buffett keeps diving in.
Even if those earnings are a bit of a decline for next year, the free cash flow, the paying off of the debt, the raising of dividends, all of that is a good sign for any industry. And if you can get all of it cheap, even better. So keep that in mind when you're looking at all these and good luck out there, basically. It's tricky.
So let me recap the tickers we talked about again. So there was Roblox. I still think this is a value trap here and it's just not cheap enough and the earnings situation just does not look good to me, but it's ticker RBLX Pinterest. It's one I'd like for a while.
It was looking kind of not good for a while, but earnings maybe going to be back on the upswing for next year, but we'll see. So that's Pinterest PINS. Signet Jewelers was looking like it was doing okay, but then suddenly business slowed in July and now they've warned us about it. So estimates likely to be cut there.
So even though it's a cheap PE, it's looking like a trap. So Signet S-I-G. Then we had Occidental Petroleum, Buffett Spying It, O-X-Y is the ticker, but earnings expected to decline next year, making it a bit of a trap here too. And then we finished up with Micron, formerly our favorite, maybe coming back on the show as it's still cheap, but it's got the trap component now with basically two earnings warnings the summer.
And so those earnings estimates going to be cut and with declining earnings, that means it's a trap here. So Micron, ticker, MU. As always, you want to be sure to subscribe because things are changing fast, as I said, and who knows what we're going to talk about next week. And any stock we've talked about this week could totally change by next week as we saw with Signet.
So you don't want to miss a single episode, so you're staying up to date on everything that's going on out there in this tricky market. Be sure to get us on Apple Podcasts. You can get us on SoundCloud. We're on Amazon Music or Spotify, but get us somewhere and I'll see you again next week with some more value stocks.
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