In this segment of Motley Fool Money podcast, host Chris Hill asks Million Dollar Portfolio's Matt Argersinger, David Kretzmann of Motley Fool Rule Breakers and Supernova, and Total Income's Ron Gross about the companies they're most intrigued by this week and why: paint retailer Sherwin-Williams(NYSE: SHW), SaaS player AppFolio(NASDAQ: APPF), and credit rating agency Moody's (NYSE: MCO).
Chris Hill: Let's get to the stocks on our radar this week. Our man behind the glass, Steve Broido, will hit you with a question. Ron Gross, you're up first. What are you looking at?
Ron Gross: I'm going back to Sherwin-Williams, the paint retailer that I think is relatively ubiquitous. Really strong management team, strong retail distribution system. Over 4,000 stores. They just acquired Valspar paint for $11 billion to accelerate their global growth, and it's an exciting move for me. I think it makes good sense. Hurricanes have hurt results recently, but that's just a short-term blip, nothing to worry about. The stock has done so well, it's up 116% over the last five years, that the dividend has actually now dipped under 1%. I do like it for the dividend, though, because they have increased that dividend for 37 consecutive years, I think they'll continue to do so.
Hill: And the ticker?
Gross: The ticker is...
Hill: You're going to look that up. Steve, question about Sherwin-Williams?
Gross: [laughs] Steve, what's the ticker? SHW.
Steve Broido: Thank you very much. My question is, Ron, how often should I be repainting the interior of my home?
Gross: [laughs] Well, I am not a paint expert, but I would like to say every three to five years, Steve.
Broido: Have you done that, Ron?
Gross: Recently, we repainted our whole home, within the last three months.
Broido: With Sherwin-William paints, I hope?
Gross: For sure, and I was in the store, yes.
Broido: Good.
Hill: Oh, I was really hoping Steve's question was going to be, "What's the ticker symbol?" David Kretzmann, what are you looking at this week?
David Kretzmann: I'm going with AppFolio. Not a household name. The ticker is APPF. I came prepared.
Gross: Show-off.
Kretzmann: I do what I do, it's why we make the big bucks. This is a software as a service provider for small and midsize businesses and niche verticals. They primarily serve property management companies today, and they also serve small law firms. Property managers are their bread and butter at this point. Those are actually multi-billion-dollar addressable markets. Management basically wants to expand into other niche verticals down the road, but for now, it's still a large opportunity with those two markets. This is a company growing revenue at above a 30% clip. They're now profitable and free cash flow positive as they scale. The two co-founders are still involved, and they own over 18% of the company. So, a lot of things to like here.
Hill: One more time, the name of the company?
Kretzmann: AppFolio.
Hill: Steve?
Broido: Can you explain what a vertical is? That one always gets me.
Kretzmann: I just think of it as an industry. One vertical is the law firms, another vertical is property managers. That's my definition. But, go to Webster's, Steve! [laughs]
Hill: Matt Argersinger, what are you looking at this week?
Matt Argersinger: I'm going with a Warren Buffett favorite, and that's Moody's, ticker MCO. We own it in Million Dollar Portfolio, and we actually just added it to our best buys now. It's not the cheapest of stocks, but basically you have an oligopoly business that has tremendous margins, great returns on capital. As world financial markets continue to develop, and banks get disintermediated, corporations go out to the credit markets for debt, I think Moody's volume is going to continue to grow, and that's going to get more cash flow for Moody's management to buy back more stock, raise the dividend. So, I think double-digit returns buying Moody's today is a cinch.
Hill: Steve, question about Moody's?
Broido: Explain a world without ratings. If Moody's didn't exist, what does that world look like? There's no ratings on companies, there's just none.
Argersinger: I think what you would have is a situation where debt would be a lot more expensive, because the Moody's AA, AAA rating is what really satisfies investors and enables yields to be so low.
Gross: I hope to never live in that world.
Hill: I was going to say, first and foremost, a world without ratings means chaos at the movie theaters, total chaos.
Argersinger: That's right.
Hill: Moody's, AppFolio, Sherwin-Williams. Three very different businesses. Steve, do you have one you want to add to your watch list?
Broido: I'm going SHW, Ron.
Kretzmann: Nice. [laughs]
Hill: Steve, do you have a particular paint color you want to go with the next time your house needs a touch-up?
Broido: All of them. We need to repaint desperately.
Gross: You have to go neutral for resale value. I recommend eggshell.
Broido: I'm not selling, though, so I can go crazy.
Gross: Everyone sells eventually, Steve.
Kretzmann: But then the buyer repaints it, too.
Hill: They say taupe is very soothing.
Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of AppFolio. Matthew Argersinger has no position in any of the stocks mentioned. Ron Gross has no position in any of the stocks mentioned. Steve Broido has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Moody's. The Motley Fool recommends AppFolio and Sherwin-Williams. The Motley Fool has a disclosure policy.
