Shelby McFaddin, investment analyst at Motley Fool Asset Management, recently spoke with Quartz for a new episode of our “Investing Smart” video series.
Watch the interview above and read the transcript below, lightly edited for clarity and brevity.
ANDY MILLS (AM) : Motley Fool Asset Management’s Efficiency 100 Index includes companies such as Netflix, Walmart and Mastercard. Can you explain to us what sets them apart?
SHELBY MCFADDIN (SM) : Yes, that really goes back to why we called this product that way. It’s what they do with their capital, how they’re able to reinvest it and also redistribute it to shareholders in a way that protects them from some of the more volatile markets. Looking NetflixWalmart (WMT) et Mastercard (MA), these are three companies with strong free cash flow. We have confidence in their method of reinvestment, whether for Walmart which is more focused on dividends, or for acquisitions and various projects. We have no major concerns about how they will manage their ability to reinvest in shareholder value.
AM : Netflix (NFLX) has recently turned its attention to live sports. How important is this development for their growth and what risks do they run?
SM: It is still early to accurately assess the impact on growth, as we are still trying to determine whether their foray into sports will expand the market or whether it will cause them to lose share elsewhere. It’s true that there is growing competition in the streaming space. Netflix has solidified its position and, as a mature company, is not in a start-up phase with this new approach.
Plus, it could spark broader interest in other sports that weren’t traditional on television. By competing for subscribers, this could actually turn certain sporting events into spectacles that people want to watch, thereby amplifying overall interest.
AM: Another choice is Walmart. What sets them apart from their competitors?
SM : The secret lies in the notion of value, as is often the case with Walmart. They continue to attract high-income customers. They come from elsewhere announce a renewal of their brand. After looking at both logos, I don’t see much difference, but I trust their marketing team to judge its importance. They make sure Americans have what they need while offering them a little of what they want, lowering prices where they can, and making products accessible in an inflationary environment. Our analysis shows the stock is a little expensive, but we have no concerns about the company’s direction, their expansion strategy, or the pace of their store upgrades, especially with the launch of Walmart Plus improving their competitiveness.
AM: I’ve seen the old and new logos, they look slightly different. What can you say about it?
SM : I have to admit that my education in economics did not prepare me to understand color theory. However, I am sure they have invested significantly in it. I trust their expertise in this area.
AM: According to your notes, you mentioned Mastercard’s insulation from inflation due to its role in payments infrastructure. How might economic turbulence affect its performance?
SM : Regarding MastercardI analyze each quarter their gross trading volumeas well as card transactions. Indeed, with the increase in prices, even if the fees are evaluated on nominal amounts, the percentage remains constant, which can generate more income. Additionally, many purchases are now split, increasing the number of transactions.
When spending increases due to more expensive products, it doesn’t necessarily push people back to using cash. Although there is variation across economic cycles, Mastercard generally has a slight cushion in tough times.
AM: There is indeed a trend where consumers are moving more towards credit cards in such an environment.
SM : This translates into greater profitability for Payment networks which favor credit cards. When it comes to credit card regulations, it is still too early to tell, and we are awaiting changes within the administration. Nevertheless, we have confidence in Mastercard’s ability to adapt to situations that its competitors may encounter in the face of similar regulations.
In summary, as markets experience fluctuations, it is essential to observe how these companies attempt to adapt and innovate. This raises questions about the sustainability of their strategies in the face of increasing competition and an uncertain economic environment. A thorough analysis of their movements can offer interesting insights for investors looking for stability.
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