Reading Earnings Reports In The Covid Era | 7investing
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Reading Earnings Reports In The Covid Era

August 27, 2021

The pandemic has disrupted a variety of industries and some companies benefited from the disruption. Retailers of essential goods — think grocery chains, Amazon, Walmart, Target, and even others like Ollie’s and Best Buy — saw increased sales as consumers bought things they needed to get through these unique times. That led to some stellar earnings reports where analysts warned that it would be tough to beat those numbers next year. Well, it’s now next year and we’re seeing some earnings reports that show year-over-year declines, but is that really the right metric to be using? Matt Cochrane and Maxx Chatsko join Dan Kline on 7investing Now to discuss how to look at earnings reports with a longer-term perspective and how to tune out top-line news reporting and short-term price hits.

 

Transcript

Sam Bailey  0:11  Welcome to 7investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.

Dan Kline  0:21  Good afternoon. Good evening. Good morning. We have people watching all around the world, and welcome to the Friday edition of 7investing Now. As we head into the final preseason games for the NFL season. Matt, Dolphins looking at I don’t know, seven and 10. No, we won’t talk about that.

My name, of course, is Daniel Brooks Kline. I’m the host of the program. I’m being joined today by the aforementioned Matt Cochrane, and Maxx Chatsko. We are going to talk reading earnings reports in the COVID era. I will point out if you want to know how geeky all of us are, there was about a 90 minute discussion last night between what nine o’clock and 10:30pm on whether we’re in a stock market bubble. That is how into this, the 7investing team is.

Guys, we’re going to hit the ground running really, really quickly here. We would like your comments, we would like your questions, feel free to get them into the chat here. But let me set the table a little bit. So we’ve had a number of companies report in the retail space, Ollie’s Bargain Outlet (NASDAQ: OLLI) yesterday being a lead example, that have delivered numbers that are lower year over year in sales and same store sales, but higher than they were two years ago pre pandemic. So on a two year stack, the numbers look better. Matt, I’ll let you start here with a simple question. Do we have to change how we look at earnings for companies that were impacted positively, at least in raw sale numbers by the pandemic?

Matt Cochrane  1:43  Well, I would I would go even further Dan. It’s not just positively but negatively too. I mean, some company’s numbers were outstanding last year, and now look lackluster this year by comparison, and vice versa. So I mean, look year over year, comparable sales, or same store sales have historically been great metrics for investors to use when evaluating companies, especially retailers. But that being said, look, of course, investors need to recognize what a historically disruptive event COVID was, and how that’s going to make the numbers look like they’re gonna look wonky for a while.

Dan Kline  2:16  I’d argue that same store sales growth is not always a great metric. We’ve talked about it with say Costco (NASDAQ: COST), where membership numbers matter way more than same store sales growth. I’d also argue that right now, margin and profitability matter more, because if you had $3 million in sales due to the pandemic, but you were selling rice and soup, which are low margin, and now you’re selling patio furniture, which is high margin, it’s not that relevant if your same store sales went down.

So why are we talking about this today? We’re talking about it because we think you have to go deeper. I hate saying this, but the financial media tends to cover things like robots. This is how we looked at it last year, I will give CNBC credit, that in some of their stories, they’ve made some of the distinction that I’m making. But most places your Reuters of the world are not doing that. Maxx Ollie’s went out of their way to spell out the two year comparisons. I actually have that in a graphic. JT, if you want to share that.

This is from their CEO John Swygert, he says, “We are very pleased with our results for the second quarter as we delivered comparable store sales growth of 15.3% on a two year stack basis. Well ahead of our long term growth algorithm and adjusted EBITDA, growth of 44% as compared to 2019”. We’re likely to see similar year over year trends that only tell part of the story with mature healthcare and energy companies, maybe people delayed treatments, and/or, maybe certain drugs sold better during the pandemic, Maxx?

Maxx Chatsko  3:50  Yeah, actually, there’s another quote in the press release from Ollie’s, that I looked at, in preparation for this show. And it’s kind of funny to me.

Dan Kline  3:58  That is some deep prep by the way, Maxx does not follow Ollie’s in any way.

Maxx Chatsko  4:02  I go hard in the paint. So Alright, this quote is “We continue to face strong year over year comparisons in the third quarter as we, ‘once again’, delivered record sales and profits last year”. So I envision the CEO just pulling his hair out trying to explain this to Wall Street analysts who are only looking at the year over year difference. And he stressing that the importance of looking at the two year stack as you’re arguing, Dan,

Dan Kline  4:24  Yeah, it’s like if you’re if you’re walking up a hill, if you run for 10 feet, and then walk slowly, it’s only your progress that matters. It’s not the it’s not sort of what you did in the last segment. We’ve talked about this a lot with Netflix, that of Netflix adds 16 million subscribers in quarter one and comes out and says, Wow, that’s way more than we expected. But hey, people are stuck at home. They really wanted to watch some stuff. We expect we’re only going to add 5 million in the next quarter and then they come out and do that. But their original projections were for like 12 million during the two quarters and they get to 21. Wall Street punishes them for that, which is, it’s really like, and I’ve talked about this a lot. It’s like looking at a second quarter basketball score. And they’re like, okay, games over. That is a really strange way to do it. But Maxx you wanted to comment on drug companies here.

Maxx Chatsko  5:15  Yeah, so maybe, I think every industry has been affected, obviously, by the oddity, the outlier, that was 2020. So in the areas I cover, healthcare and energy, I think we’ve seen the same thing. It’s actually like Matt was saying, kind of the opposite, though, sometimes, of what we’re seeing with retail. They had a big year, like certain companies did really well last year. And now they’re kind of going back to trend from above. And then there’s other companies in healthcare, maybe that’s a delay clinical trials or drug launches, or had trouble getting drugs to, access for patients. So they saw sales dip last year, and now they’re returning to trend from the underside. Similarly, with like electric utilities, they saw a big surge in retail, so residential electricity use, which is higher profit margins, higher prices, compared to like commercial and industrial sales of electricity. Which, of course, if no one’s in the mall or a Target (NYSE: TGT) during lock downs, you’re not gonna be selling electricity to those companies, right, and factories are down and so forth. So we see some of those trends as well.

Dan Kline  6:14  So when you look at a company, you really need to look at their explanation. And look, we’ve seen a lot of bad companies, retailers, like Sears and JC Penney explain away bad results by saying, Oh, no, no, no, we see in the first two weeks of the next quarter, the demand for leggings has gone up 42%. So you have to be careful about some of the spin. But if a company that sells, I don’t know, tooth whitening, says hey, people don’t really want to sit for an hour and have someone’s hands in their mouth for a voluntary service, so we don’t expect demand to pick up until next year. Well, that makes a lot of sense.

So this is where you need people like us who follow these companies on a long term basis, to say, here’s what’s happening, because I’ll go back to Ollie’s. But this is going to be true of a lot of retailers, you’re seeing it across Five Below (NASDAQ: FIVE), you’re seeing it other places. If they added to their customer count, if they built customer loyalty. It’s not that relevant if they have a bad quarter, because the things you would buy for them aren’t things you generally need.

I’ll give an example. My family home in New Hampshire has an Ocean State Job Lot near it. And every year we go buy my son a whole bunch of winter gloves there because he loses winter gloves. And we’d buy some other supplies like the warmers you put in your gloves. Well, if this year, we didn’t travel there, because we were staying home and not getting on a plane. That is not a long term change in behavior. That is a short term, pandemic driven change.

We’re going to get to Matt in a second. But JT I wanted to take the comment from our friend in Malaysia, just so we could say hello, because it’s pretty exciting. We Ben [unknown name] says, “from Malaysia here. Good midnight”. Yeah, there’s people watching all around the world. We really appreciate that.

Damo San [unknown name], we will get to your comment later on. Feel free to ask your questions. We know this is kind of an esoteric and complicated topic. But Matt, I want to get to you here. Do you expect more companies to offer a broader explanation, spin, nuance whatever we want to call it, as they deal with oddities created by the pandemic?

Matt Cochrane  8:17  Well, I feel like that’s all we’ve been seeing the entire quarter. Like, we talked about Amazon’s (NASDAQ: AMZN ) earnings a couple of weeks ago, Dan, and the CFO on the conference call, carefully just walked through. These were our growth rates before the pandemic, the pandemic hit. And these were our growth rates during the pandemic. Our rates in 2019 were like, it was like 21%. And then in the second quarter, last year, it jumped to over 40%. And this year, it was down to like, I forget, but it was down to like, in the in the 20% range again. And they said look, but this is our two year range. And that’s still higher than our growth rate was in 2019. And he just walked, everybody through the numbers. And video game companies have done the same thing. I feel like that’s all we’ve seen the entire, this entire quarters worth of earnings calls is companies trying to explain this.

Dan Kline  9:10  The big challenge here is going to be separating companies that did well because we needed staples, that are actually going to hold on to those customers. Like you go to a grocery store you don’t usually go to and have a good experience and then you become a customer? Or did you go to a Winn Dixie and find yeah it’s still terrible compared to a Publix and you’re not gonna go back. That’s a very Florida reference Maxx for those watching.

Matt Cochrane  9:34  But look at Walmart, we started using curbside pickup just for that reason, and we’re still using it. We’re not going to go back after this.

Dan Kline  9:40  We increased how much we buy on a casual basis from Wawa. I know that sounds silly. But like Wawa stocks paper towels and things that like you might go to Target and there’d only be a 12 pack and there’d be really easy ways to buy stuff.

We see your questions and comments. We will get to them.

Maxx, let me ask the question. Will there be more uncertainty and more variability quarter to quarter.

Maxx Chatsko  10:04  Dan, I actually was born in Florida and I used to, I lived on a goat ranch there not that long ago. So that’ll be a topic next week, I’ll talk about my tips for raising goats. But yes, I think there’s gonna be more variability this year. I mean, we’re still working out the kinks, right? The economy is recovering, but it’s so unusual. It’s unlike any other recovery in terms of its its speed, the depth of the drop, basically, the whole country shut down last year. So we’re still gonna, see some, dips here, some surges there. But again, I don’t, I mean, what do you guys think maybe we see this kind of returned to more, it’s gonna get more normal over time, but maybe not completely normal until like, 2023. I mean, I don’t know.

Dan Kline  10:43  I think we’re dealing with it and living with it, which is obviously, varied from market to market. So I don’t think we’re gonna see shutdowns. But I do think this will be something we consider. It is absolutely having an impact on, say, tourism.

Matt, I’ll ask you the question before you weigh in here. Domino’s Pizza (NYSE: DPZ), one of the companies that’s incredibly benefited from the pandemic. But it’s also been an incredibly steady winner overall. Because their numbers have been so good, do you think they will have their first quarter, in I don’t know, it’s like six years or some crazy amount, where they don’t post growth simply because the comparables are so high.

Matt Cochrane  11:22  Blasphemy Dan, blasphemy. So I think that’s what, but you saw Dominoes earlier this year, like the stock price like lag because of that, because I think some analysts were expecting them not to show growth. And when they did, even though it was slower growth than they normally show, but on top of the huge sales they had last year the stock price jumped, but I think many people are expecting that, but no way, Domino’s Come on, get out of here.

Dan Kline  11:47  So we all read earnings reports. And that’s like part of what we do for a living. And we listen, we listened to earnings calls. Were probably like some of the only people that get in the car and instead of like throwing on Bill Simmons, or like whatever podcast you might listen to, are putting on like, like the Southwest Airlines (NYSE: LUV) earning call at double time speed.

I’ve listened to a lot more earnings calls than companies, I actually care about all that deeply. Because it is a really good way to take the temperature of a company. But most media doesn’t. I think the average person who’s casually writing about 100 stocks at Business Insider or wherever it might be, they are following news of the moment. So how to long term investors when they’re seeing news stories written by people that don’t truly understand what they’re covering. How to long term investors look at a company that on the surface had a bad quarter and figure out what really happened. Maxx, you wanted to weigh in first year?

Maxx Chatsko  12:43  Yeah, I mean, we see a lot of attention get paid to analyst expectations. And, I think all of us here at 7investing, put each quarterly operating result announcement into the context of like, two or three or longer term trend, right. So it’s not just how does this quarter compared to last quarter, the year ago period, but, how does it fit within the context and nuance of the last eight quarters or more. All these companies face challenges and opportunities, they’re investing in growth initiatives. Some of those are nearer, some of those are further away. So how well a business operates in a three month period doesn’t really tell you a whole lot about the business Dan.

Dan Kline  13:23  Yeah, I agree with that. Matt, your thoughts here?

Matt Cochrane  13:25  Uh, yeah, no, look, investors need to be able to recognize the difference between short term hiccups in their companies and long term results. I mean, you can go back to Chipotle (NYSE: CMG) a few years ago, and they had those food poisoning issues. And the stock price dropped dramatically. And like some people are able to, like, recognize this was probably more of a short term problem, measured over a couple of years. But that it was something the restaurant was going to get through and go back to their previous growth numbers

Dan Kline  13:55  Yeah, so that was a non story. I’ve called it, I’ve said this before people get mad at me. 137 people have the stomach ow’ies. If you produce fresh food, occasionally, people are gonna get sick. The problem is, if all your marketing is about how great and fresh your food is, and you have something slip through, it’s going to hit you worse. But the reality was Chipotle poorly that, and I’ve talked about this so I won’t belabor it, as well as any company, they shut down for half a day. They hired advisors, they changed procedures about how they cook food, they did everything you could do, and it was two years before the stock price, it cost the CEO his job. He didn’t, he didn’t necessarily make all the right moves in other areas.

So sometimes a very small thing can have a very outsized impact. And where you come in as a long term investor is identifying that this doesn’t matter. If a company achieves its five year goals. It doesn’t really matter if it got 90% of the way in year one, and then struggled the next four years as long as it explains why that happened and why and year six things will be different or what the next five years are.

So why do we listen to earnings calls? It’s because we want to hear the CEO and the CFO explain what’s happening quarter to quarter. I talked about those Sears numbers, they would often bring up okay, well, this was bad. But here’s where it’s trending and why we think it’s turned around. And I would make a note, okay, women’s apparel trending up, and then I would watch the next quarter and women’s apparel wouldn’t be mentioned. Those are red flags. That’s what you have to. You want a company when it’s dealing with a problem, like Chipotle did, to be very in front of that problem. As ridiculous as it was, remember when Chipotle a warned that they might have shortages of avocados in some markets, and people freaked out as if like the mayor announced there would be shortages of water and oxygen.

But that’s what you have to do. You have to explain that this is where we’re going this is what might go wrong. And this is what we’re going to do to correct it. That doesn’t make for a good headline, nuance is not good. Look I have a newspaper background. And you put the biggest boldest headline up. Maxx faults me for this some times when we’re titling these shows, that I want as many people as possible. So I’ll come up with bold headlines, and he’ll sort of dial it back a little bit. That’s sort of what we should be doing. And that’s what you have to do as a long term investor.

We’re gonna close out this topic soon. We’ve got a few of your comments in there a few more people saying hello, we’ll take those in a minute. But let me jump in Maxx, you wanted to comment on drug companies and how they should be dealing with this over the long term. And I skipped you completely there.

Maxx Chatsko  16:29  Yeah, so I mean, you were asking if a company should be reporting their two year, performance just to, isolate 2020. And I was just gonna say, I mean, it depends on the industry there. But Matt had a comment in the sheet. I don’t know what we’re doing. But hey. Yeah, so I mean, for some industries, it matters more, for some last, if you’re an early stage drug developer, obviously don’t have any revenue, so doesn’t really matter. But even some of those companies, I’ve seen a big trend in the first half of 2021, where they’re still seeing delays in clinical trials due to the pandemic.

So there’s a lot of companies that are seeing delays in getting access to non-human primates to conduct pre-clinical work, which is going to delay their entry for some of those up and coming programs into the clinic. A weird, crazy hangover from the pandemic, right? There’s still a lot of research being devoted to vaccines and other things and just a shortage in general of those research tools. So an interesting kink that maybe is not as apparent, as the chip shortage or something else, but something that has an effect none the less.

Dan Kline  17:27  That was actually the question, I was gonna ask you, Maxx, because we have a number of testing centers here that are used for trials. And of course, they were used for the vaccine trials. There are billboards offering pretty stupendous amounts of money to take part in certain trials. So that would suggest to me that it’s difficult to get people to take a voluntary drug trial, in a situation where they risk exposure to something that could make them sick, and it could get confusing. But Matt you want it to close out on this one?

Matt Cochrane  17:55  Yeah, so I was just gonna say like, I mean, this wonkiness, it might continue yet. I don’t think we’re through it. This quarter it was a perfect storm for some of these legacy, brick and mortar retailers, you had easy comparables from last year, you had stimulus checks hitting the bank accounts of consumers. There was a lot of pent up consumer demand and supply chain issues led to lower inventory levels, meaning retailers could sell merchandise at higher prices, without like running a lot of promotions and sales. And next year could be the opposite. You’re gonna have harder comps, you’re gonna have no pent up demand, or less pent up demand. You probably won’t have stimulus anymore. And those supply chain issues could be resolving, meaning you’re gonna have this huge surplus of inventory.

So retailers might be running a lot of sales and promotions next year. So the wonkiness, I don’t think we’re over it. I don’t think we’re through it, in fact, in some ways like as extreme as this was to one side it could go to an extreme other side like next year when we’re 12 months out from this quarter.

Dan Kline  18:59  Yeah, and our producer JT Street brings in, he said, “hell look at lumber”. And as someone who bought lumber for four years while working for my family business. I bought planks for scaffolding. You don’t plan your lumber purchase a week ahead. You are generally hedging your lumber bet. Where okay prices are low. I’m putting some on hold. I’m bringing some in.

Now there’s a lot of that in say the airline industry where they’re hedging their fuel bet and agreeing to pay X amount for a certain time which might average out the price but you can only do that for so long. Home building here and I know this because what my wife and I are looking at new homes. They’re building relatively slowly to sort of even out the supply chain. We saw lumber go very high. We’ve seen it come crashing back to Earth. This year at Christmas. We’re gonna see something really interesting that’s going to make same store sales hard to predict. We’re not going to have the prevalence of $300 to $350 65-inch televisions we had last year. I bought a cheap 65 inch television for somewhere in the low $300’s last Christmas season. Because of the chip shortage, we’re not going to have TVs at those price points most likely.

Does that mean that Matt Cochrane goes out and spend $600 on a TV because he wants a TV and he’s doing reasonably well, which offsets two other people who didn’t buy a $300 TV? I think these numbers are going to be very nuanced, very hard to dig into.

I want to take the comment from Daimo San [unknown name] before we move into what we’re watching and talk a little bit about the Supreme Court and the eviction moratorium. “Looking forward to this as always, and how we look at some of the figures of growth enterprise data focused companies, how to work out what is a good figure or metric to look at”?

Matt, I hope you had some time to think about this. As we were, we’re doing that. I’ll vamp a little so you can get your thoughts together? I think it’s going to be tricky. We’ve talked a lot about sales Zoom (NASDAQ: ZM), where that company might build into its valuation over the next few years, but maybe is not going to grow as quickly. Matt, your thoughts on this one?

Matt Cochrane  21:01  Yeah, I mean, I hate to say this, but I don’t know if there’s always just one number you can look at. Um, one thing I would definitely take notice of is when, it’s companies that can raise prices in times like this. So like you saw Microsoft (NASDAQ: MSFT) the other day raise prices on their Office 365 services and subscriptions. Companies that have pricing power in times like this are companies that are really well positioned to tackle this. There’s not always like a great one number magic number you can look at, you always want to see revenue increasing, of course, but like to go more in depth than that it’s almost on a company by company basis. But one thing you always want to see is pricing power,

Dan Kline  21:40  I think you also want to look at customer count, because in theory, there is volatile demand. So let’s say some companies see a return to the workforce, like as much as we’re gonna see flexible work and people working at home, we might see some companies like Netflix (NASDAQ: NFLX) has said they want most people in the office most days. And that makes sense, creative collaboration. There are a lot of interviews with the Saturday Night Live staff talking about how hard it was to write that show when they were working from home Mondays and Tuesdays during the last season.

So when companies like that start heading back, we might see them use something less that’s on a usage basis pricing. So one of the things I’d look at with companies is how many customers do they have? So we’re gonna see Zoom usage go down, we might see some companies cut their Zoom subscriptions or have a few less seats. But we’re not going to see companies drop Zoom, most likely. So I think that is really telling and yeah, it’s amazing that Microsoft can raise that price. It’s gonna be about $5 billion in incremental revenue for them.

But another one, do you know what the prices are at Starbucks (NASDAQ: SBUX)? I go there five times a week. I have no idea what the prices are. So if they go up by 6%, that doesn’t matter. They could probably go up by 10%. In Vegas, they’re like 50% higher than they are here. It’s noticeable, but you’re in Vegas. So I do think there’s a lot of story to tell here.

Daniel Curren says hello from Atlanta. Not too far away from us here in Florida. I’ve driven to Atlanta many a time. And Mike Fee, I’m not sure what you were trying to say. So we will just say hello.

Maxx Chatsko  23:13  It’s a goat.

Dan Kline  23:14  Oh, okay.

Maxx Chatsko  23:15  He was calling Matt “the GOAT”, the greatest investor of all time.

Dan Kline  23:17  That is possible. Warren Buffett is on the phone arguing. Warren Buffett texted me. DO you think Warren Buffett knows how to text Maxx? That’s gonna be my question. I was supposed to go to their investor day. Not this recent one that was cancelled but the one before it. If I get out there in a couple years and they have one I am asking that question. Only questions about like, do you play Xbox games like that? I am being silly.

Before we segue into the rest of the show. And again, we are going to talk about energy storage. We are going to talk about the moratorium on evictions. Before we do that, it is nearly the end of the month. We are all finishing up our reports for next month. So what do we do at 7investing? What do our members get? They get our seven highest conviction stock picks each month. That means that each one of us sits down and says okay, here’s my field of stocks. Everything I’m looking at, which is the one I think is the one I would want to add to right now. And then we tell you why. My report is closing in on 3000 words. It has a bunch of graphics in it. It is it is a pretty telling report about a company that I’ve actually been buying shares of almost if not every month. That is how strong I feel about this company.

If you would like to become a member, you can go to www.7investing.com/subscribe and pay us $49 a month or $399 a year. I always love when they compare things to the price of a cup of coffee, but that is roughly what it would cost you to get a cheap cup of coffee at say a 7-Eleven every day. You can get access to all our incredible picks. The videos we make where we do a PowerPoint presentation and we pitch to each other. And Matt can ask me questions, we cover our coverage overlaps. Dana can ask Maxx questions, we can push back and say, Hey, what did you think about this? What about that? Sometimes we get ideas for Okay, I don’t know that answer, but I’ll do an update for you and for our readers, our members based on that. So you get access to that. You get access to our members only call the third Friday of every month. We actually do a call just for our members.

So it is a wealth of stuff. We do a new members call, we do company updates, we do advisor updates, all sorts of things, just for members. Once again, that is www.7investing.com/subscribe.

And I should mention, we have a housekeeping note that I should have brought up at the top of the show. As of Monday, 7investing Now we’ll be live at 1pm. So here’s the idea. Finish what you’re doing at 12:30pm, grab a cup of coffee, maybe have something to eat and settle in and watch us at one o’clock. We’re gonna go all three days a week, Monday, Wednesday, Friday, at one o’clock.

EB Capital, our good friend, Todd Campbell, who I believe Maxx is doing his podcast at some point and Todd’s gonna do our podcast, says, “you’re worth way more than a 7-Eleven coffee Dan”. Todd, I really look forward to buying you a cup of coffee at some point. There are a lot of people I miss. He is absolutely one of them.

So, Ravi Shah [unknown name] says, “is anyone upping Steve’s video pitch background?”. So Matt and Steve have made a real effort to shoot their pitches outside in the wild. I tend to shoot mine with a digital background. I believe it was Rise of the Resistance, the Star Wars ride last time, which had nothing to do with my pick. So that probably confused people. We appreciate all of you interacting.

But I want to talk about the Supreme Court striking down the moratorium eviction. Matt, this is your topic what happened and what should we be looking at?

Matt Cochrane  26:56  Yeah, so yesterday, the Supreme Court ruled that they blocked President Biden’s eviction moratorium, allowing property owners to begin the process of evicting tenants who are behind on rent. The Supreme Court ruled that Congress has the authority to pass such an act. But Congress’s eviction moratorium ended in July 2020. And after that it was extended by the CDC, the Center for Disease Control and Prevention. And we have a Supreme Court quote JT, if we can throw that up, from the ruling. “It would be one thing if Congress had specifically authorized the action that the CDC has taken, but that has not happened. Instead, the CDC has imposed a nationwide moratorium on evictions and reliance on a decades old statute that authorizes it to implement measures like fumigation and pest extermination and strange credulity to believe that this statute grants the CDC the sweeping authority that it is theirs”.

So, look, right now, according to the US Census Bureau, more than three and a half million people said they are likely to face eviction in the next two months. And I guess the million dollar question is, with eviction processes beginning will this lead to residential real estate prices dropping? I don’t think so. I think while one this can affect this, all this affects renters and their landlords, tenants in their landlords, but can also affect like people who are behind on their mortgage and owe money to their bank. But with so much home equity that has been gained over the last year and a half, I don’t personally see too many homeowners that are going to walk away from their homes with that. Interest rates are still low. Unemployment is getting lower rapidly. And there’s a lot of job openings out there. And institutional investors are investing in US residential real estate now, so I don’t think it’s gonna affect home prices too much.

Dan Kline  28:51  Let me jump in here. Do you think banks are actually going to step in and be more willing to negotiate? Because banks have a vested interest in home prices staying high. If they’ve made, say, home equity loans at your house being worth $500,000. They don’t want to see it dropped to $350,000. Because then they either have to call that loan, or they have much more exposure on that loan. Is it fair to say that I think the banks are actually going to prop this up where if it looks like you will be able to pay, there’s much more likely to be forbearance and other deals here.

Matt Cochrane  29:23  I have no idea of what banks are going to do. So I don’t even want to opine on that. Yes, I do think banks have a vested interest to like work something out with homeowners. I also think though, was so much home equity. Like right now if you were going to kick someone out and evict them, like I don’t think they would be hurting too much because there’s so much home equity has been gained in the last year and a half.

Dan Kline  29:47  So there’s two issues here, and Maxx you can jump in in a second. There is the person hanging on by a thread who is a renter, who will then have trouble finding another place to live. That is obviously, homelessness is an issue. Then there is the person who owns their home, is behind in the mortgage, they get kicked out, the home gets sold, they get a check minus whatever they owe, and they likely move into a rental property.

Now, it makes sense to not have that to make a deal with your bank, where you sell it or they sell it. So you don’t have that black mark, on your credit record. I do think that we learned from the 2008 housing crisis, that if you appear to have the ability to pay back your loan, or at some point soon would, that banks are really good about doing things like pushing payments to the end. You have to ask, you have to you have to open those letters, you have to deal with the uncomfortable. But I think the reality is, is banks don’t want to be in the business of repossessing homes. It’s not good publicity, it can lower values. There’s a lot that could go wrong. Maxx, I know you thought this might lead to you getting a deal on a home. But probably that’s not the case. What did you want to add to this topic?

Maxx Chatsko  30:53  Well, yeah, just two comments. I mean, we don’t know like the numbers of the three and a half million, how many homes might be on the market, because of this, right? If you can evict people who are behind on their mortgage, but this would potentially increase the supply. There’s a lot of first time homebuyers out there who are interested in buying a home potentially. So that just kind of changed the equation a little bit. I mean, Millennials like me, are young and beautiful and awesome. But we’re also the largest generation now. And we’re at peak home buying age.

So anything that can help increase supply would actually be a good thing. And additionally, I think it’s important and Matt this is way more your area. But banks are sitting on a ton of money in cash, and they have really few productive uses for it. So I think they actually, we talked about the vested interest they have been working out a deal. Isn’t there a vested interest in increasing the number of mortgages that they can actually sign up? Like, isn’t that better for them?

Matt Cochrane  31:46  Yeah, to an extent, there’s also though, banks don’t want to be seen as the bad guys, too. I mean, they already faced a ton of regulation. And out of the great financial crisis, they were hit with more regulation. They don’t want that again. And I think they are conscience about their image. Also, Maxx, another important point, your beauty is all on the inside.

Dan Kline  32:08  So we would love your questions and comments. Doesn’t have to be about this at the end of the show. If you have questions about the market broadly, companies you want to ask us about, we will do our best if you want to say hello, just say hello, but let me speak about this personally, anecdotally. And I’ve talked about this on air before I think I talked about in our Spaces yesterday. In 2007 I got a no income verification loan, basically, they run a credit check. You tell them how much money you make, and they give you a loan, that type of loan doesn’t exist right now. Right now, though, I am looking at, my wife and I are looking at, buying a house. And I did what’s called a bank account loan when they actually look at one year of the deposits into my bank account. And they determine my credit worthiness. They also look at your credit and how much I could, I could borrow. That is a more secure version of a no documentation loan.

So they’re getting some documentation. They’re seeing my income, they’re seeing my credit, and they’re making a decision. So money is out there. And it’s certainly not like 2006-2007 where people who are not really worthy of loans can get loans. But people like me who have an interesting financial situation, can get loans, you pay a little more for it, the upfront fees are a little bit higher. So I do think banks and sort of non traditional lenders are looking to put money into the market. And Maxx I do think the home builders are struggling to figure out how quickly can we build homes. I don’t know what it’s like in Pittsburgh, I will tell you in Central Florida, the sheer amount of empty land getting turned into like massive, townhome and single family home communities is at the fastest pace I’ve ever seen in the seven or eight years I’ve had a place or at least visited that area.

So I do think we are seeing a population shift. I don’t know if that will benefit Pittsburgh, it’s certainly benefiting Florida, we’re having a lot of people move here it’s warm and we have pools and there’s lots of fun stuff to do that’s pretty close by. But it’s also benefiting say Austin, Texas or Colorado or other places that have you know technology centers so this is a story that’s just starting.

Matt excellent job doing a story with the word Supreme Court in it that in no way wet political so I am happy that we still have our jobs and we’ll be back Monday at 1:00pm Eastern. JT Street points out to me that it is important to say Eastern because as we have noticed we have people watching all over the world.

Maxx, US energy storage capacity expected to surge. Is this mostly me buying phone chargers or is there more to this story than that?

Maxx Chatsko  34:38  Yeah, Dan you need to stop losing them, leaving them in airports and hotels. You’re most of this graphic.

Dan Kline  34:44  I actually just accumulate them. Like I was looking for one of my bag and realized that in my bag I had four. That is three too many.

Matt Cochrane  34:53  They’re not collectibles Dan, not collectibles.

Dan Kline  34:55  I would argue that the Dunkin Donuts one I have is a collectible, but most are not.

Maxx Chatsko  35:00  When Dan was moving last year, he sent us a picture of like, here’s all the chargers and random things, and batteries and all that, like it was a mess, guys, just take my word for it. But yes, in 2020, just to put this in perspective, the US added 458 megawatts of energy storage capacity. And that was a record has almost doubled the record of the previous, almost double the previous record. But in 2021, through 2023, the US is actually expected to add over 10,000 megawatts of energy storage capacity. So that’s 20 times more than the 2020 level.

JT, I think we have a graphic we can show. Yeah, visualization of data is always really important to put things into perspective, look at this trend, it’s incredible. So this is the cumulative capacity. And look how it jumps in 2021 to 2023. A lot of this is caused by the improving economics of energy storage. So these battery technologies falling down the cost curve pretty rapidly. So that’s changing the economics, making it more viable to add energy storage. And this is really good news for renewables and also battery manufacturers.

So a lot of these additions are actually accompanying utility scale solar installations, solar kind of has this challenge, I guess we’ll say in terms of when it produces power, right, when the sun’s out. In the summer, it’s usually producing power, in the middle of the day, and people are at work, maybe not anymore, maybe they’re working at home, but energy usage is typically lower than middle of the day. So how do we stretch, and collect all the energy collected in the middle of the day, and then, dump it into the grid later on, people are home and they’re cooking, running their washing machine, dishwasher, whatever it might be. So batteries can help us to limit curtailments, so that more energy that’s actually generated is getting into the grid.

So that’s good. That explains a lot of that trend. There’s also some battery installations going for onshore wind projects, as well. But mostly, it’s solar. And we’re adding record amounts of solar every year now. This is also pretty good for battery manufacturers. Although it’s mostly dominated by Tesla (NASDAQ: TSLA). We don’t have exact numbers because the company hasn’t breakout between its solar business and its energy storage business. But it said it installed 1,250 megawatt hours of energy storage. In the second quarter alone, that was a record. It also generated a record $801 million in revenue, including solar, and had positive gross margins for the first time in Q2. So again, we don’t we don’t break out batteries specifically. But this is really good news for that part of Tesla’s business.

Dan Kline  37:37  So Maxx, there’s two pieces to this right, there is the, call it, drum of oil piece where you’re just storing oil somewhere. And that’s a type of energy, where now with the battery, we are producing solar power and storing it in a nonspecific way for people to draw it in from the grid. But there’s also the second piece of this, that is something like the Tesla battery, and there are other batteries, were at my house, I can be producing solar power and in theory, storing it up to us at night. Are both pieces of this growing at similar rates, I don’t expect you to know those numbers. But are both pieces of this growing, it’s probably fair to say.

Maxx Chatsko  38:11  So important to point out when I was talking about Tesla there that’s for commercial, like large batteries like commercial infrastructure that doesn’t include their Power Wall for your home or your business or things like that. That’s still a very small part of the market, the economics, there still really don’t work out. Your return investments, pretty lackluster, and the battery doesn’t last that long. So really not a great investment at this time. But again, costs are falling pretty quickly. So that is good news, at least, maybe in the back half of the decade, in terms of if you wanted Dan to get a battery for your home.

Dan Kline  38:41  Actually, almost every house I’ve looked at either made you have solar, or it was an option. But in most cases, the grid here does not allow for storing energy at your house. So you can feed excess energy into the grid, and you get paid for that. And that helps pay for your lease or your purchase of the equipment. But we do need a lot of infrastructure, just simple things. Like I thought, hey, if I have solar and there’s a hurricane, I’ll still have power. The reality is no, because if there’s power down other places, the grid is not equipped for my house to be powered and someone to not get electrocuted when they go work on the rest of the grid. So, do you think Maxx, we need sort of some of this infrastructure money where in theory spending over the next few years has to go into to our power grids?

Maxx Chatsko  39:29  Yeah, I mean, there’s, there’s a lot going into things like that. So there’s transmission, which is getting it from, the solar field or the wind farm into the grid at large. So that’s actually the biggest the most important investment we can make as a country in order to get more penetration from renewables. And then there’s investments in distribution. So that’s more like the local level, right, getting it from the street pole to your house, Dan. So there’s investments there and then yeah, it’s not as easy as like you said, having solar and a battery because your house is still connected to the grid. There’s safety issues, there’s regulatory issues, some of that’s just due to lobbying, and so forth. So it’s still really messy, because it’s still we’re in the earliest stages of a lot of these markets and technologies. But it is becoming more realistic and more viable to have maybe, at home energy storage.

Dan Kline  40:19  We are nearing the end here. So what is your last chance to get in questions or comments. Maxx, you also didn’t comment on there was a brief hint of Electro in the Spider Man: No Way Home trailer. So he is very dangerous and hooking into the grid that is an obscure Spider Man, villain reference.

JT Street who is was now taking over production duties on this show. I am not sure I love the close up view of me. But I will pass on that. Why don’t we bring up and hit our finisher here.

“Which of these will have the biggest impact on the economy over the next three years?” 28.3% of you said inflation. 26.6% said labor shortage. 13% said big tech regulation. 32% said global tensions.

I’m going to way in here and say, I don’t know what I really meant by saying “the economy”. But I think the single biggest driver we’re going to see over the next few years is actually a labor shortage. And we’ve talked about this a lot, that labor shortages don’t have to mean, we don’t have X amount of people and we have X amount of jobs. You have to have the right people for the right jobs. I think we’re gonna see pretty wide scale training changes. I think we’re gonna see more companies follow Starbucks and Walmart (NYSE: WMT) and pay for college. Target doing that, as well. I think we’re gonna see a pretty sizable shift in how we view labor. We saw Google (NASDAQ: GOOGL) putting out very short term degrees that make you eligible to get hired at Google, which is a pretty good job.

So I do think we don’t have the labor force that matches our available jobs right now. And there are some lingering pandemic reasons for that, childcare, and some other things. But I actually do think we’re going to see a pretty big shift of what labor looks like, but you do not have to agree. Matt Cochrane, what’s your thoughts on this one?

Matt Cochrane  42:08  Well, I do think we’re gonna see labor shortages, I think we’re gonna see inflation, but I think I would go with global tensions. Trade is global now. Supply chains are global. We’re already seeing COVID disrupting supply chains, and what kind of turmoil that can throw the economy into or especially certain segments. And I think we’re gonna see more of that, unfortunately. I don’t think the world’s in the best place right now. And I think people are going to be testing, the US overall, unfortunately. And I think we’re gonna see more global tensions.

Dan Kline  42:44  Matt, let me ask you, because we’ve talked about this in other cases. In the chip market, we’re seeing some repatriation of these businesses. Do you think that more companies are going to take control their supply chain, and actually make things, if not in the US in Canada or Mexico, where there’s, a little bit more certainty?

Matt Cochrane  43:02  Yeah, so I think right now, we’re probably overly efficient. And I think more people are going to go scale back on the efficiency, for robustness, and like security and things like that. So, I think COVID kind of exposed this, which is probably a good thing in the long run as far as that goes. Because I think people saw just like how fragile everything could be. Because we’re so efficient, there’s no, there’s no extra factory, you can make this part at somewhere else, and things like that. So I think we are going to see that for sure, over the coming years. But it’s going to take a few years to get there. And so the next three or four years, we’re still going to be in this weird period where we’re investing heavily to get this stuff up and running in the US, but we’re not going to get there yet.

Dan Kline  43:51  Yeah, and I’ll let Maxx weigh in in a second, I just want to speak from personal experience here. I’ve talked a little bit about my family’s in the ladder and scaffolding business. We don’t make ladders anymore, but we did for most of my life. But when I was in that business, I ran a factory that made scaffold planks and we had another factory in New Hampshire, that makes steel scaffolding. And it’s dramatically more expensive than what we brought in from China. But bringing things in from China took six to eight weeks, and you might have an inventory of it.

But a customer might come to you and say hey, I need this amount to redo this skyscraper that’s falling down in New York and I need it now. And you give them the price and the price is comparatively outrageous, because you’d have to give them things you make in America because nobody has the quantity. And they will get angry at you and then they will go around to all of your competitors and none of them will have the quantities they need readily available at Chinese prices. So you will get the sale.

So I do think you’re going to see a little bit more of a hybrid approach. A little bit more of, Okay, this company is making its expensive cars here. We’ve already seen this in the car industry where it’s very difficult to actually pinpoint where a car is made because parts are being made all over the world. Maxx Chatsko, your thoughts on this?

Maxx Chatsko  45:03  Yeah, it’s an interesting question for the finisher, I guess, in terms of global tensions, that was the top pick among the crowd there. I would disagree with that, what happens to the rest of the world doesn’t really affect the United States that much anymore. And, we’re seeing the onshoring of a lot of critical supply chains, and actually, as much attention as it gets, the United States is actually the least dependent major economy on the rest of the world, on a relative share for its GDP. If you draw a broader circle around Canada and Mexico, that number shrinks even more.

So the whole continent of North America is pretty well insulated from the rest of the world. We’re energy secure, we’re food secure, if we really wanted to, or the you-know-what hit the fan, we could kind of just turn inward. We’ve done that a lot in the past throughout history, and kind of get on and be fine, as, dark as that might seem. And then in terms of the labor shortage, I kind of hate that term. There’s really not a labor shortage. I mean, I get your your point was there being a mismatch between skills and job openings, that’s valid.

Dan Kline  46:03  There’s also more openings. And there are people looking for jobs.

Maxx Chatsko  46:07  Yeah, but there’s a pay shortage. It’s not, my sister was a teacher. And it’s like, the worst job in the world, you get paid peanuts. And it’s like you have to spend all day at school and deal with parents, and kids can’t fail anymore. It’s pretty miserable time to be in a lot of different jobs, but like, if I went to the grocery store and tried to buy milk, and I gave the cashier $1.00. And he said, it’s five bucks. And I said no, I don’t want it, I wouldn’t get the milk. It doesn’t mean there’s a milk shortage, right? That means I don’t have enough money for the milk.

Dan Kline  46:35  So we had this conversation with one of our friends on Twitter, who made the same argument, and here’s what I’ll say. In the retail world, we’re seeing wages rise pretty rapidly. $15 minimums and a lot of places.  You know I’m not a fan of any of these blanket increases, because, a wage in Pittsburgh is different than a wage in West Palm Beach. But we’re seeing fairly significant increases, because these are jobs nobody wants to do. Here’s the problem facing your sister who’s a teacher. Is when you leave being a teacher, somebody else wants to be a teacher, and will do it for that bad money.

So labor is very much supply and demand. And you’re seeing here Taco Bell is offering $600 sign on bonuses. Why is that? I’m guessing being an entry level employee at Taco Bell, it’s probably not the best job in the world. Chipotle went from minimum wage in a lot of markets to $15 an hour. So places are going to do what they have to do to stay operating. And obviously, they’re going to pass some of that on. But the jobs that people want. High school football coach isn’t going to see a big increase in wages, because a lot of people want that job. This is a very complicated topic.

Maxx Chatsko  47:48  I’m sorry, I mean, even $15 an hour, that’s very difficult to live on pretty much anywhere in the United States. If rent increases by more than the increase for minimum wage, which has not kept up with inflation over the last several decades, then you’re still not coming out ahead. Right?

Dan Kline  48:04  And I hate to pin this on Disney (NYSE: DIS). But because Disney operates in Orlando, Florida, where there is some very cheap housing nearby. And essentially, in Los Angeles, California, where there isn’t. There were all those images a few years ago of like Cinderella having to sleep in her car, who might have been making $15 or $16 an hour? So yeah, absolutely. I experienced this, I worked with a company that did local music stores. And all the managers in Texas were super happy, because like their wages, like bought them a house and like a good life and their wives were teachers and combined their income. I’m generalizing, but combined, their income was enough to live comfortably. And the managers in Connecticut were all miserable, because it was a wage scale. And they made roughly the same amount of money and they could barely afford like, a single swinging light ball but a hot plate.

So we really have to look at, the labor market on a national level, we’re seeing a reshuffling of where people are. We’re seeing, sort of different standards. JT brings up news reporters. Yeah, he’s right. I was a news reporter. And when I worked at the Boston Globe, but my base salary was $72,000 a year. That is not a ton of money. I made more than that, because I got some overtime. But there were like a thousand people making $30,000 a year at like a crappier paper who wanted my job.

So I didn’t have a lot of leverage when you could say, okay, like, I’m not a starting shortstop for the Yankees or like, I might be better than that person who wants my job. And we’ve seen this in a lot of industries. I know we talked about it with ESPN. I hate to keep picking on Disney, where they have like this senior producer who makes $300 grand they’re like wait a minute, we could replace him with three kids who make $50 grand or $40 grand or whatever it is. So we’re gonna see a lot of this shakeout.

I want to take a last couple of comments from TomWeBenOne [unknown name] who we talked to early in the program. We can have them both in order if you like JT. “Delta is hitting Southeast Asia hard and it will cause chips and materials shortage”. Yes, that is absolutely been forecast. We have already heard the reports that car manufacturing is not going to pick up quickly. That electronics that use chips are going to be in shorter supply. With that being said, and he follows up with, “inflation and chips and other materials is still unfolding”.

So we’re going to see higher prices based on shortages. Cars are a lot higher now because we don’t have as many new cars the market for used cars is picked up because of that. I’m very hesitant to call that inflation because the reality is that will reverse at some point when we have a flood of these goods. So I do think we really need to keep an eye on the multi-year trend with all of this.

With that it is a Friday afternoon depending where you’re watching, it could be Saturday morning, it could be any time during the day we appreciate so many of you participating. Reminder we will be back at one o’clock starting at one o’clock eastern starting this week. And yes if you’d like to be a member that is www.7investing.com/subscribe. If you’d like to get a hold of us. Maxx will tweet out his phone number but an easier way to do that is info@7investing.com. That is an email for you young folks who don’t know, we don’t have like a WhatsApp.

But we are info@7investing.com. That is questions about your membership. Questions about what it would be like to be a member. Questions about Matt Cochrane’s childhood, whatever you’d like. Please don’t ask us to research a penny stock we’ve never heard of. We are probably not going to do that. If you would like to interact with us on social media. We are @7investing. Feel free to tag us, that is @7investing. Tag our personal accounts ask us questions. Me perhaps more than others like to play on social media, so send us your jokes send us your vacation pictures. Send us your favorite flavor of hard seltzer there are now 14,000 flavors of hard seltzer so it is it is particularly difficult to do there.

I’m getting silly and that is usually a sign it is time to end the program. Thank you JT Street. Let’s figure out for the next show how to make the graphic not just show my eyebrows and have the graphic there. That is very disconcerting when the graphic doesn’t fill the whole page. Not a great look for me. But for JT Street, for Maxx Chatsko for Matt Cochrane, we will be back on Monday. I am Dan Kline. See you then.

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