Shelby McFaddin, an investment analyst at Motley Fool Asset Management, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below, which has been lightly edited for length and clarity.
ANDY MILLS (AM): Motley Fool Asset Management’s Efficiency 100 Index includes companies like Netflix, Walmart, and MasterCard. Can you tell me why these companies stand out?
SHELBY MCFADDIN (SM): Yeah, it really gets right down to why we’ve called the product what we have. It’s really what they are doing with their capital and how they’re able to reinvest it, and also get it back to shareholders in a way that protects them from some of these more wobbly markets, if you will. So when we look at Netflix, Walmart (WMT) and MasterCard (MA), these are all three companies that have pretty strong free cash flow. We trust them in the way that they reinvest in the business, whether that’s gonna be Walmart, which tends to be a little bit more dividend focused, or if it’s going to be continuing to make little acquisitions or starting on different business ventures, we don’t have those sort of concerns that they’re going to be taking a massive hit to the amount of free cash that they’re able to kick back into share value.
AM: Netflix (NFLX) has done a pivot into live sports. How significant is this for their growth and what risks will they face?
SM: It’s definitely early days to see exactly what it’s going to mean for growth, because in this instance, we’re still trying to figure out if their venture into sports is going to make the pie bigger, or if they’re going to have to take pieces of the pie from somewhere else. So it’s early days to see exactly what it’s going to contribute to the top line. But one thing we do know is that it’s going to continue to contribute to competition in the streaming space. And so knowing that Netflix has really solidified their position in streaming, on the whole they’re in good shape. They’re not a new company with a new venture, they’re a pretty mature company with a new venture.
The other thing is it in theory should create an appetite for other sports to want to get more viewers. So sports that wouldn’t traditionally be broadcasting or maybe it’s kind of something that you have to just go on a website, it’s not yet available on any sort of traditional broadcast channel. It encourages them to make the sport something that people want to watch, because now there are outlets that will be competing for subscribers and that is more viewers. So in theory it should do some market making that then allows them to pick up more of that market.
AM: Another pick is Walmart. What sets them apart from their competitors?
SM: It’s really the age-old truth of value when it comes to Walmart. They have continued to pick up the upper income consumer. They actually just announced a new brand refresh. Now, when I looked at the two, I didn’t see huge difference, but I trust that their marketing team believes that this is going to add a lot of value. And really what they’re doing is they’re making sure that Americans have what they need, but that they can also get a little bit of what they want. They’re lowering prices when they’re able to and just making things as accessible as possible in a more inflationary environment. Now, the shares are a bit rich in our purview, but we do not have concerns about management. We don’t have concerns about the operator. We don’t have concerns about how they’re expanding their network, the pace at which they’re refreshing their stores. They’re even improving their competition with the Walmart Plus product, so we do feel good about how the company is being run and the value that it’s going to continue to offer to Americans.
AM: I saw the old logo, the new logo, and it looked slightly different. What is that?
SM: My degree is in economics. I’m not good with color theory, but I’m sure they put a few billions into it. Maybe not billions, but they put a good chunk into it. I gotta trust that they know what they’re doing there.
AM: In your notes, you mentioned Mastercard’s insulation from inflation due to its role in payment infrastructure. How might economic turbulence impact its performance?
SM: When we think about Mastercard, some of the main things I’m looking at every quarter are going to be their gross dollar volume, but I’m also looking at the switch transactions. And when we think about gross dollar volume, how much are people spending? At the end of the day, they’re not sort of assessing their fees on the real dollars spent, it’s assessed on the nominal dollars. So as things get more expensive, that fee is staying this, you know, if it’s a percentage, it’s going to be the same. So if one product costs more, then that’s just going to continue to be more income.
Then, when we also think about the amount of transactions that are passing through the rails, if we think of the same thing as like a ticket — which would be how much you spent that day versus how many times you went in — a lot of transactions are being expanded into multiples. So one transaction of a hundred dollars is now four with things like “buy now, pay later.” So if you are entering in your debit card or your credit card, it’s getting passed over the rails four times for one product, so it’s going ahead and increasing the amount of transactions that they’re seeing. And that’s similar for some of their competitors. When we think about an inflationary environment, we realize that yes, things cost a bit more, but we’re also realizing that people still have to buy them and that they’re not necessarily going to go back to cash just because things are expensive. So it’s not a complete insulation. You can go back and look at the great financial crisis and see that they do move up and down with the market, but they tend to get a little bit more cushion.
AM: And there is that period of time when consumers are going more to credit cards because of the environment.
SM: And that’s going to be more lucrative: Payment networks choosing credit cards over debit cards. Now, there could be credit card regulation, way too early to tell, just far too early. We have an administration change coming. We’re not sure how that’s going to go, but there’s been talk about that for years. Unsure. But again, Mastercard, we trust them as operators. They have a really great system set up, so we would not expect them to be any less prepared than anyone else that would be facing the exact same regulations.
The post Netflix, Walmart, and MasterCard are still top stock picks in a volatile market, according to an analyst appeared first on Quartz.
