In this Motley Fool Money podcast, host Chris Hill kicks off the year with a 2018 preview show, aided by Motley Fool Hidden Gems' Abi Malin, Million Dollar Portfolio's Jason Moser, and David Kretzmann of Rule Breakers and SuperNova.
In this segment, Chris asks the gang to pick sectors and stocks that they still see as having upside, despite a market that's been setting record highs. Their answers: Disney (NYSE: DIS); mobile payments, and specifically PayPal Holdings (NASDAQ: PYPL); and the recent IPO set. You'll be interested to hear why.
Chris Hill: David, the market has been on such a great run for so long, and investors out there are certainly forgiven for thinking that it's no longer an opportunity to find upside. But we know there's always upside out there in the market. Where should investors be looking? Whether it's in terms of an industry or an individual stock, if they're looking for upside in 2018?
David Kretzmann: One company that I'm going to be watching closely this year is Disney, a little hidden gem you might have heard of. This is really the beginning of the company's big push into direct-to-consumer streaming platforms. They're going to launch their stand-alone ESPN Plus app. So, really adding on content from ESPN that you don't get on the linear ESPN stations today. I think this will be interesting, because obviously, they're looking to acquire 21st Century Fox, making a bigger push into their own original content for a stand-alone Disney streaming service launching in 2019.
So, I think this year, we'll get a preview of how the company can stack up against Netflix when it comes to the user experience with streaming platform, considering that Netflix has a 10-plus year head start fine tuning a streaming platform for users. So, Disney certainly has a lot of strong content, but they need to prove that they have the wherewithal to put together a compelling and user-friendly streaming platform. But, looking at over the past couple of years, the stock has really treaded water. It's still today trading lower than it did at different points in 2015.
Hill: Oh, I know.
Kretzmann: Yeah, it hasn't been a fun road as a shareholder the past couple of years. But, trading for less than 20 times earnings. I think if they can crack that nut with the streaming platform this year with ESPN, I think the market could give that a higher multiple and the stock could do well.
Hill: Jason, what about you?
Jason Moser: I'm a big fan of the payments space. I think the war on cash is real, and I think PayPal is a company that's going to continue to benefit from this space for many, many years to come. It's a wonderful, high-margin repeat business. Big tailwinds just in the move toward electronic payments, mobile, on a global scale. And to me, there was one catalyst toward the end of the year that I think will help this company out, that Synchrony deal, where essentially PayPal unloaded a credit portfolio off of its balance sheet and sold it to Synchrony. And this is going to free up a lot of cash flow for PayPal to invest more in the business and products and figuring out new ways to bring that offering to consumers.
The stock today trades at around 30 times free cash flow, but I think we also have to pay attention to the fact that their cash flow number is going to see a little bit of boost here in the coming years because of the deal. And it's a $90 billion company. It's a strong business, profitable, makes a lot of cash over the course of the year. So it's just a wonderful trend, I think, in electronic payments, and PayPal is certainly one of the biggest players in the space.
Hill: Easily one of my favorite business quotes of 2017 was the Visa executive who came out and said, "We are at war with cash." I just want to remind listeners, when we use that phrase, that's not from us, that's a Visa executive saying, "Let me be very clear -- we're looking to take cash out."
Moser: And we capitalized on that. The war-on-cash basket, we talked about it on MarketFoolery in the middle of the year. We put together that basket of stocks with Visa, Mastercard, PayPal and Square, a very nice little risk spectrum there of companies that are all playing into this trend. And at the end of the year, that basket of stocks, that portfolio outperformed the market handily, and I think it's set to keep doing the same thing this year and years to come.
Hill: Abi Malin, what should investors look to for upside in 2018?
Abi Malin: I think you said it well when you said the market has been on a tear. And as an analyst in a small cap service, it's been definitely getting harder and harder. I think one place to look for opportunity is anywhere where there's a lot of volatility. Something that I've recently started looking at more is recent IPOs, just because when things have less clarity, there's more room for opportunity in that space. So, as an example, I started following GrubHub back when it went public in 2014. And I've always liked this idea. I like the mission of the company, to deliver food. I think it's exactly where our society is going. But, I think when it first went public, people weren't sure about whether or not this would work, or how these competitive factors would play out. And looking back, two years after the IPO, GRUB was down more than 28% from its IPO price, but the S&P had climbed 11%. And it really wasn't until March of 2017 when the market started to really accept this. And since then, it's been up and up with everything else.
Abi Malin owns shares of Grubhub and Walt Disney. Chris Hill owns shares of PayPal Holdings and Walt Disney. David Kretzmann owns shares of Mastercard, Netflix, and Walt Disney. Jason Moser owns shares of Mastercard, PayPal Holdings, Square, Visa, and Walt Disney. The Motley Fool owns shares of and recommends Mastercard, Netflix, PayPal Holdings, Visa, and Walt Disney. The Motley Fool owns shares of Square. The Motley Fool recommends Synchrony Financial. The Motley Fool has a disclosure policy.
