The Case for FedEx Stock. Plus, Data Driven Investing.

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UPS and FedEx have similar annual sales at around $100 billion, but UPS has 3 times the market value of FedEx. So therein lies the opportunity for FedEx.

Welcome to the Barron's Streetwise Podcast. I am not Jack Howe. He's on vacation. But lucky for you, we recorded a couple of interviews before he left. That voice you just heard is our Barron's colleague Andrew Barry, who will soon explain why he thinks FedEx is a buy. After that, Dollarsanddata.com founder Nick Majuli shares highlights from his new book, including thoughts on renting versus buying a house and why he's against saving up cash for a stock market dip. I'm Jackson Cantrell. It's a special vacation edition episode. Bring flip-flops. Don't forget sunscreen on the toes.

Andrew, we're talking to each other from our homes still, but it's been a couple of years. You used to be able to look up and see me sitting 10 feet from you. You can't do that now. It must be a very hard time for you not being able to do that.

I miss you. You were closer, probably 5 feet away.

So, uh, well, this is a very brave call of yours in the magazine, and I'm really intrigued. FedEx, it trades cheaply. There's no doubt about that. 10 times earnings, but it's just been kind of languishing for a while. You see a chance here for some money to be made. And you say that FedEx needs to bridge the gap with UPS, take a cue from UPS. What do you mean by that?

Well, I mean, UPS and FedEx have similar annual sales at around $100 billion, but UPS has 3 times the market value of FedEx. So therein lies the opportunity for FedEx in terms of closing the margin gap, in terms of its margins are lower than those of UPS and its stock market valuation is lower.

And by the way, 3 times the market value, but also much higher free cash flow, right?

For you, it's higher.

So it's not just perception here.

UPS is a better business with higher margins, higher free cash flow. And the opportunity for FedEx is to narrow that gap. That's why we took a look at it. Rare to find a company that's a market leader in what essentially is a duopoly trading for only 10 times earnings and with a 1.5% dividend yield.

An old boss of ours used to say— I used to say, here's a cheap stock. He used to say, cheap is one thing, but you need a catalyst. What's going to stop it from continuing to be cheap? What's going to stop FedEx from continuing to be this cheap?

There's actually a catalyst brewing in that Fred Smith, the founder and longtime CEO, will be retiring as CEO at mid-year. A new CEO who's a hand-picked successor will be taking on the reins, and that could be a catalyst for a change at the company. What investors might like to see them do is focus more on margins rather than on growth. The mantra at UPS is basically better, not bigger. And so, you had an outsider come into UPS, which had been a very insular place, essentially was filled with corporate lifers who kind of worked their way up from like, I mean, driving trucks to become CEO. And you brought in an outsider from Home Depot And she's basically gotten the job done. Margins are higher at UPS. They're turning away business that they think is unprofitable. And the mantra at FedEx has been more about growth than essentially margins. And if they refocus the attention on margins rather than on growth, there could be real opportunity there.

What are the lucrative parts of the business? There are a few different things going on, right? The ground delivery, the express delivery. I mean, describe these different businesses to me. And what do you think is the culprit here in terms of low margins?

They have 3 main businesses. They have the Express business, which is essentially overnight package delivery, which is their heritage business, which is very profitable, but there's not as much growth there. Then they have their Ground business, which they essentially compete against UPS for like package delivery, e-commerce. And then they have a, actually a very valuable trucking business, which is called their Freight business, which if they were to spin that off would be very valuable, but they want to keep the company together. The big opportunity is in Ground, which is where they compete against UPS, Their margins are about half of what UPS's margins are. That's where the opportunity may lie.

There's a new chief, Raj Subramaniam. The company was run by its founder, right, Fred Smith. So this is really the first new chief. And there's an Investor Day coming up in June. And you know how it goes. The new guy comes in. He's got to say, wait a second, I've got a lot of ideas. There's a lot of changes coming. He's got to go out and he's got to make his case to Wall Street and investors. Do you think that Raj is the right guy for the job? And do you think that he's going to be successful making that case to Wall Street in June?

Well, I mean, the Investor Day in June will be important. It will be basically the unveiling of Raj as new CEO for the company. The question is, how much of a break will he make with Fred Smith's policies and programs in the past, which have tended to emphasize growth over profitability? The company is talking the talk. They say we're, we are focused on margin, we're focused on profitability. And so this could be a real opportunity for him to show that. I think if he doesn't show that, and if investors on Wall Street are disappointed with the results of the Investor Day, it could open the door for activist investors to get involved in the stock. It's a $50 billion company. UPS is $150 billion plus. I think it's even a company that Warren Buffett might like to acquire if it were available. I mean, it's right in Buffett's wheelhouse. He loves the transportation business. He owns Burlington Northern Railroad. This would greatly complement that if you could do it from an antitrust standpoint. I think Buffett would buy this company in a minute at a nice premium, but I just don't think that FedEx wants to sell.

It is incredible when you think about it. You point this out in the story. It's almost a duopoly business. Being in a duopoly, you're supposed to be rewarded with huge profit margins and a sky-high valuation. You've got railroads that are not duopolies, but they're trading at 20 times earnings, and here's FedEx at 10 times earnings. What do you think the potential upside looks like for the stock?

The upside's a lot. I mean, they have 6% margins. They're trying to get to 10. That's their goal. The company's earning about $20 a share right now. The stock is around $200. So, it's trading for 10 times earnings. This company, an investor told me, could be earning potentially $30 a share or potentially $40 a share if basically the economy continues to do well and they can improve things. So, there's potentially a lot of earnings upside. So, I think that's the story. On the railroads, they actually are duopolies. And so, while there are 4 main railroads in the country, There are two on the east of Mississippi and two west of the Mississippi. So, essentially, you have two duopolies in the rail business. They trade for 20 times earnings. That's kind of a model for what this could be. It's true people will say Amazon's in the business, the post office in the business, but for all intents and purposes, it really is a duopoly right now.

[Speaker:TREY_LOCKERBIE] That is the last thing I want to ask you about FedEx is about Amazon. I think that there is this view on Wall Street that Amazon is becoming more of a competitor to FedEx and has potential at any time to say, hey, this is a business where we want to just go headlong into this business and provide third-party shipping to people. We see good margins here. What do you say about the Amazon risk to FedEx?

I just think it's probably not there in a major way. It's extremely capital intensive and difficult to take on. I just don't think Amazon wants that. I think they have delivery capabilities. They have been building them out mostly for their own packages and for their own business. It would be a huge endeavor, and I'm not sure whether Amazon wants to take that on right now. They've got other things on their plate now that I think interest them. I mean, in terms of advertising, their cloud business, and, you know, some of their other initiatives in retailing. And so I just don't know whether they want to spend, you know, $20, $30, $40, $50 billion on trying to outcompete, you know, two entrenched players in delivery and logistics.

Let me just ask you a question about the broad stock market then while I have you. Rates rising, right? There's inflation. The Fed has to aggressively raise rates. Stocks don't look especially cheap. What are they going to be able to stick this landing? The Fed— how fearful should I be right now?

Should I be—

is it time to panic? Tell me before you tell everyone else when it's time to panic. Is it time to panic now?

I would think there's potential to earn decent returns. I mean, I think the Fed is going to be raising rates. I think some of that is discounted already. I mean, that's really the issue. And can inflation be brought down? It's paid not to bet against the stock market. I mean, valuations are not that high. Maybe the stock market's trading for around 20 times earnings. Many industry groups are trading at below market multiples and companies have been able to pass on price increases. I mean, in the 1970s, you had many companies do well. And so I think you may not have outsized returns in stocks, but we're down, I don't know, mid-single digit this year. And if you kind of get back to even or a little bit higher by year end, If there's some optimism, you could earn a 10% plus return this year.

So, you're staying invested. You're not making any different moves yourself.

Where else will you go? I mean, bonds are looking better right now, but you're getting like 3% yields almost on treasuries and 3% to 4% yields on munis, 5% on preferred stock, 6% on junk. I mean, that's okay, but I think stocks are still better. I mean, Warren Buffett is still heavily into stocks and he's been buying some stocks and buying companies. You take a cue from Warren Buffett. I mean, he's not, I think, shifting much into the bond market or basically getting out of stocks right now. If anything, he seems to be more interested in the equity market now.

Great seeing you, Andrew. Thank you for walking me through this great story on FedEx and Barron's, and I'll talk to you soon.

Great to be here.

Coming up, a wealth manager and author shares data-backed investing advice. Plus, How stock picking is different from basketball. That's next after this short break.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where Where data speaks.

Welcome back. Here's Jack with dollarsanddata.com founder Nick Maggiulli. His new book is called Just Keep Buying: How to Save Money and Build Your Wealth.

I'm excited to talk to you about this book. This is what everyone asks for when they're new to investing. They say, where do I go for a book that just tells me how to get started and everything Everything to Do. What made you want to write this kind of book?

Nick Maggiulli: The main reason I wrote it was because I thought there was a lot of theories out there in personal finance, things I had heard over the years that just weren't accurate. And so I slowly debunked those over time through blogging. And I said, "You know what? I think I can write a book that attacks a lot of these things." For example, should you raise your income or lower your spending? That's a very common trope and people debate, debate, debate. And I think the data is pretty clear that the most reliable path to wealth is raising your income. I show that across many different datasets, different ways of thinking about it too. So that's just one example of something like that. We have enough data now where we can answer a lot of these questions definitively.

[Speaker:TREY_LOCKERBIE] Two sections of the book, saving and investing. Is one more important than the other? Does it change over time?

[Speaker:RYAN_LAWRENCE] It changes over time and it changes because it depends how much you can save and how much you have invested. I'll give you two extreme examples. Imagine someone who's 23 years old, as I was. They just started saving money. Let's say they have $1,000 in their 401(k). Let's say they could get a 20% return on that money, right? A decent return, very good return actually. How much is that in absolute dollars? $200. It's not that much money, right? When I was 23, that would be like 2 nights going out in San Francisco. My whole investment return, that's 20% return is a great return, right? So that's not slouching there. But now let's take the flip side. Let's take someone with $10 million. 20% return for them is $2 million, or 20% drop, God forbid, you know, that's $2 million just evaporated, right? So they couldn't save that. You know, you'd have to have a very, very, very high income to save $2 million after tax in a year.

You've got a section here on should you rent or should you buy? Tell me about that in the context of the here and now real estate market in the US where we've had close to 20% price growth in a year.

[Speaker:BRAD_STONE] Before rates went up, I mean, prices, I mean, yes, prices have gone up, but if rates are low, you can still make your mortgage payment. But now with rates as high as they are, the game has changed a lot in the sense that I've actually heard horror stories of people who bought a property and it's supposed to be built and the financing hasn't been done yet. And so now the property is built, but because rates are so much higher, they can't even afford their own house, which they could have afforded back when rates were lower. And so that's kind of a wild thing. But I think the main thing to take away with renting versus buying is figuring out if the time is right, the timing's right for you. Because if you think about it, for most people, this is going to be the biggest purchase of their life. And it's not a diversified basket. It's not like you're buying an S&P 500 index fund. You're buying basically a single stock, which is real estate, and you're putting way more money. It'd be like putting $300,000, $400,000, $500,000, however much your house is, into Apple basically. And you're not You're not just doing that, you're levering by borrowing money to do it. So it's a big decision. I think what you have to think about is like, okay, is your personal life stable? Is your financial life relatively stable? That's one thing. Are you going to be there for a while? What I said is like 10 years because the average real appreciation across history is 0.6% a year. Obviously what's happened in the last year, even if inflation's like 8%, you're looking at a 12% real return in this case or something close to that in housing, which is way outside of the norm.

All right. So now let's get into what people should do when they invest. You explain to people why you shouldn't buy individual stocks. The average member of the investing public must say, "But wait, that's the advice for everyone else. I'm the guy who knows about the right stocks to buy. So of course I should be buying individual stocks." Why should I not buy individual stocks?

[Speaker:BRYAN_LAWRENCE] So there's two arguments for this, two main arguments. The one most people already heard, which is probably like, "Hey, you're probably going to underperform the market." You look at the research, most active managers, these are people, professionals, right? People who are mutual fund managers, all this, they underperform, like 70% to 80% underperform. And this is true across most markets out there. You look across domestic market, international, et cetera, that's generally true. That's the argument everyone else— you're saying, "But I'm exceptional." Okay, so let's say you are exceptional. Research shows about 10% of people are exceptional, have skill. The problem I have though, which is what I call the existential argument against stock picking, is how do you know you're exceptional? Like if we go into a basketball court, like myself and LeBron James, let's say LeBron James was unknown, but he still had his skill, right? Same skill level. We went out there, start playing. You just know within minutes, like, oh, okay, that LeBron James guy has skill. This Nick Majuli guy doesn't, right? So you'd just be very obvious, right?

Although my advice to you would be chuck the ball up as soon as it hits your hand. If it's a swish, just turn around and walk out the door.

Say, look, that's it.

I would want to exactly leave it up to people to guess, but go ahead.

Yeah. So the whole idea is the feedback loop's quick though. If I'm missing shots and he's making shots, it's clear that he's He's better. It's a very quick— within 10 minutes, we would know. Within maybe 2 minutes, you would know. But with stock picking, you and I can pick a set of stocks and we can come back a year later, and if yours is higher, that doesn't necessarily mean you're better. You could have just gotten lucky. You could have had one stock that no one predicted. You could have something like the GME thing, or GameStop went to the roof in early 2021. All sorts of things that can happen where you can win without actually having skill. I think to prove it statistically, how much time you need, I mean, estimates vary, but you're going to need probably at least a decade. The feedback loops are so long, it's basically a guessing game to me. So my whole thing is like, yeah, if you want to pick some individual stocks, take some small part of your money, do it for fun, 5% of your wealth, whatever, have at it. I don't have a problem with that. But if you're going to do this as a full-time, like this is most of my money and you're really trying to beat the market, I think that's where you can get into trouble.

Trey Lockerbie: Have you noticed, speaking of GameStop, there's no benchmark for arrogance level, but when you have a market where some things make a lot of money in a hurry. There are people who are momentum investors who just, I bet you made some real quick profits and imagine that they just have some sort of unbeatable investing skill. I think back to the dot-com bust. I bet you there were a lot of people who thought they were skillful back then. Let's say best case scenario that these people do that, what should they be investing their money in for the stock exposure? I assume that the core of building wealth in your investment strategy is having exposure to stocks.

For me in particular, yeah, it is low-cost index funds diversified, like S&P 500, international stocks, emerging market, all that stuff.

Yeah.

But you don't have to necessarily do that. I know people, as I said, there's a lot of ways to get rich. I know people have done it in real estate. You can do it with farmland. You can do it with all sorts of different ways. You can make your own products. In theory, that's an income-producing asset. You have to create that thing. So that's more linked to your labor explicitly. So there's a lot of different ways you can do this. In terms of the GME thing, like you're talking about the arrogance stuff, that happens. And I think if you had given that speech in November 2021, it would've been far more relevant than it is today because we've We've already seen that happen. The market has collapsed since then, for at least the high-flying growth stocks, and some of the crypto stuff has come down a bit. I knew a crypto guy that went 10x in 2021. He's like, you know what, I just need to do 7 or 8x this year, then I'll be good. I'm going to retire. I'm like, okay, cool. 2020 was the craziest market I've ever seen. I mean, I don't have massive tons of experience, but I still think it's one of the craziest years ever because what happened in 2020 made sense. Yes, the markets were dropping 10% a day and this and that, and it was wild, but The global economy shut down. It made sense what was happening, but what happened in 2021 made no sense because prices of these obscure things were just going to the roof. So the stuff I've seen, yeah, people thought— it's like you realize who's a genius and who just was in a bull market pretty quickly. And so I think for most people, it was like, oh, we were just in a really crazy bull market.

[Speaker:TREY_LOCKERBIE] For a new investor, you don't have to worry about losing your money. You don't have money. I mean, if you're a new saver, but what about somebody out there who's been underinvested or had too much money in savings? They're reading your book and they're saying, I know I have to do something different. I know I have to get involved, but the markets are so high right now. What would you tell someone like that who's been sitting too much in cash and waiting for that next big downturn so that they can buy cheaply?

[Speaker:MICHAEL_SEIBEL] The issue with that strategy is usually, I mean, most of history, 80% of the time you're going to underperform compared to just putting all the money in now. Now, of course, if you've been sitting in cash forever, going from all cash to 100% invested overnight is not going to happen, even though the data shows it's optimal, whatever. Those people are going to have to average in even if it's suboptimal, but they're going to pay a peace of mind fee to do that, and that's fine. And yes, stocks are— prices are elevated, but also yields are pretty low too. So if the 10-year goes above 5% again, then we can discuss whether— I don't think stocks are going to stay where they are, but I don't know if this 10-year is going to go above 5% again. So that's the question. So I would say, yeah, just get into a diversified basket of stocks and bonds. You want maybe real estate, farmland. I mean, find what works for you, what type of things you want, You've got a chapter called The Most Important Asset.

I'm guessing it's not Dogecoin or AMC Entertainment. I'm out of guesses. What is the most important asset?

It's time. Time is the most important asset because I started the book talking about where you should spend your time. When I was younger, I spent so much time looking at my investments when I didn't have much money to invest. I should have spent my time really focusing on my career, building more skills. That would've been better suited for my career. And I think for most people, that's true of anything. It's where you're spending your time, where you're spending your energy. The thought experiment I used came from Peter Attia, and Peter Attia basically gave this talk where he was like, you know, do you think Warren Buffett would trade all his wealth and fame and everything to be 20 years old again? And the answer is yes. And I'd argue he'd actually go into debt for it. Like, he'd be willing to give up all his billions and everything to go back in time and kind of, you know, relive that. Because I think at some point, all the money in the world is not going to buy you more time. And so figuring out that balance is the key to life.

Thanks, Andrew and Nick, and of course Jack. And thank all of you for listening. If you have a question for us, tape it on your phone, use the voice memo app, and send it to jack.how@barons.com. You can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. And if you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow Jack on Twitter @JackHough, that's H-O-U-G-H. See you next week.

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