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A Microcap Christmas Miracle; Financial Charlatan Of The Year; 12 Boring Stocks That Outperform
01:06:11
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- [00:00]
A
Welcome to Chit Chat Stocks, a podcast that helps you discover your next great investment. I am one of your hosts, Ryan Henderson, and I am joined as always by the one and only Brett Schaefer. Today we have our weekly Power Hour episode. We do these live, usually on Thursdays at 5pm Eastern Time. However, today we are doing this on a Tuesday because it is the holidays. We're getting out in front of it. And not to mention, there really isn't going to be a whole lot of news this week, I assume, seeing as it's the holiday break. But we've got plenty to discuss so far. We have a huge news for my portfolio, actually, and a stock that we haven't talked about in a long time, but it's sort of a liquidation situation. And most investors might not care about this, but it's worth talking about for us. Alphabet is acquiring a company for just under $5 billion. We've got Nike earnings, well, from last week. I don't believe we discussed those so we can touch on those. And then we've got a few listener recommendations as well. Brett, where do you want to start?
- [01:13]
B
Well, I want to say that for those that joined the last few weeks, we did finally, I believe, fix my technical difficulties. It wasn't the wifi, which we thought it was. It was actually my computer and I said it on another show. But I think we need to short intel out of spite. We fixed it. We're using my phone. It actually works quite wonderfully. And, yeah, I'm excited to get to it. We're going to talk a little micro cap recap with Harvard Diversified. I have some other news. Let's see. Cannabis industry rescheduling. Someone wanted to talk about that. We have Financial Charlatan of the Year. Can't remember if you mentioned that. A little bit of bubble watch and maybe we're going to get your opinion on the new Chipotle food item that's going to reinvigorate same store sales. But I'll let you go first. Why don't we. Yeah, let's talk Nike earnings. Kind of maybe surprisingly bad. Even worse than what investors were expecting.
- [02:20]
A
Yeah, let me pull up the Q3, I guess it's technically a Q2 report and give you some of the headline numbers. Give me one second because here we go. Nike Q2 report. Revenue was up 1% on a reported basis, flat on a currency neutral basis. Wholesale revenues up 8%. Direct revenues down 8%. Gross margin decreased 300 basis points. Part of that, I believe, is the wholesale shift, but maybe Some discounting going on there as well. And diluted earnings per share. Maybe I can check my friends at fiscal AI real quick. Was 53 cents. Usually I have found that when a company in their press release doesn't say whether they just give the diluted earnings per share figure and they don't give any comp, it's usually a bad sign. So I'll double check that. But yeah, it's basically no. Growth is kind of the story here. And this is actually coming off of a year of big declines. So it's almost. It looks like an improvement. But you would think after a year of big declines in discounting, it would actually be an easier comp and you should see some growth. So if I were a shareholder here, I would honestly be pretty concerned. I pulled this stat up because it kind of blew my mind. If you invested $10,000 in Nike 10 years ago today, you would have $9,860. They have had negative returns for a decade. This is 10 years ago. I mean, this was the premier apparel brand. This is what everyone in the apparel space wanted to be. So I guess my question to you, Brett, is what went wrong? Like what? I don't. It doesn't feel like there was necessarily a material misstep that they made. So I'm curious, why do you think they've had negative returns for a decade?
- [04:35]
B
Ooh, missteps. Well, they did try to go a little too dtc, a little too direct to consumer at one point. They also went on and off on Amazon, I believe. I just think that they lost their touch on basically innovating within the shoe space that people want to. People want to wear where a long time ago they were the premier brand with that athletic footwear. And we're still seeing the growth in athleisure, at least I think maybe not over the last few years because of the pandemic bullwhip, but over the last few decades, clearly there's a growth in athlete shoe spend. And right now there's just more competition coming online. They haven't been able to retain that position. What's interesting is we look at the brand surveys from the likes of. I forget what it is, but they do the teen survey every year. Nike's still number one on there by far. It's kind of tough and I think it's just an example of apparel is a tough industry. I have that saying, never invest in apparel. What I really think hurt them at least the stock wise is weren't you buying at 40, 50 times earnings for low Growth, not the best margins, not the best. You would think moat. I mean really, they just have that marketing moat, maybe a little bit of scale, but it's not like they have a distribution advantage. Sound like they have a network effect. Sure, you have some partners with advertising that are irreplaceable. For example, you get the top athlete in a sport, you lock them down for 10 years. That's an advantage. But is it a wide moat business? I'm not so sure. Let me pull up quickly. Try to get it up here. Maybe we can just use PE. What are we looking at 10 years ago? Yeah, PE of 30, 32. Now it's up higher. But probably because they're really facing a tough time on the. How about gross profit? What about that? That's a good top line figure. We're at 4.5 times gross profit. EBITDA gross profit 2016 they're at 7. So it really wasn't that extreme. I mean they only got up there in the pandemic up to 10 or 12. Maybe the business just isn't performing well. More competitive space than people were given credit for.
- [07:08]
A
Yeah, especially in the footwear category. You've seen the rise of both on running and hoka, which there's still a fraction of Nike's footwear business, but they are. They both, I think tripled or quadrupled revenue over the last five years while Nike has seeded share. And earlier I mentioned the earnings per share figure. Yeah, adjusted earnings per share was down 32% year over year. It's a good example of two things. One, yes, apparel is just difficult because there aren't massive barriers to entry. And especially in this case like.
- [07:57]
B
Brand.
- [07:58]
A
I think brand is overrated. Where maybe there's certain industries like finance, for example, brand can be helpful.
- [08:09]
B
Like.
- [08:12]
A
Standard and Poor's is kind of a reputable brand. It's the same for like the. The S&P 500. There's probably a comparable index somewhere out there, but people refer to it because it's kind of the standard benchmark and it's built up a brand and reputation. But brand in apparel, brand in retail, brand in, I don't know, kind of, you name the industry, software. I think it's wildly overrated. I don't think brand is a moat. Can you think of any examples where brand has been the moat in apparel.
- [08:53]
B
Specifically or just in general?
- [08:55]
A
In general.
- [08:56]
B
Oh, it usually reinforces with other stuff. I think Coca Cola for sure.
- [09:05]
A
There's other stuff there as well. I mean there's scale advantages in that industry.
- [09:09]
B
A Bit sort of. There's no scale advantage in soda. I can make sugar, salt, bubbly stuff in my backyard.
- [09:18]
A
No, but the fulfillment like the network inside all the distribution stores. The distribution advantage. Distribution is what I meant by scale.
- [09:27]
B
But I mean slotting for sure. I don't know if it's scale for the store. Maybe you can negotiate better with each grocery store or 711 or what have you. But yeah, if you're front and center in the fridge, that's very important. I think in energy drinks, brands have been solid. Or maybe we're seeing hyper competitiveness here. Coming online. I think one of the big things that has eroded brand advantage has been the rise of E commerce. Because if I can research online. All right, and even now with AI tools, you can go, okay, I look at this. Nike just put a hyperlink into the Gemini or whatever tool you use. Say, hey, I got these pair of shoes. What are an equivalent ones with good reviews that I can get at a cheaper price? What other options are there out there? Whereas before you went to Footlocker Dick's Sporting Goods, any other store, and you saw Nike's there front and center, they had that slotting advantage. And maybe now it's going away. I remember as a kid now this is aging me a little bit. But go to Sports Authority, I think they're bankrupt now. Half of the wall was Nike. That's what you're probably gonna go for, especially if you like some of the people that they advertise with as a kid. But if we're going maybe outside of apparel, I think in general, when someone says this is a great brand to own, there's already. Or there's usually another competitive advantage on top of it. For example, let's use the buffet ones, American Express, there's a network effect with the payments network on top of a nice brand. If you look at Apple, there are switching costs and maybe you can argue a network effect. But generally I'd say the switching costs would be the number one for Apple on top of a brand.
- [11:19]
A
The brand is always. I can't think of any situation where when I think of a moat and there's brand associated, the brand is just cherries on top. Like when I think Apple, I do not think the moat is the brand. I think the moat is, like you said, stitching costs. You get integrated into the iOS ecosystem, you get used to it. You don't want to switch with American Express. Certainly the network effect and them being able to leverage their own literal payments network. So, yeah, I agree. I mean, it's not. They have good brands, but it's like that is not the advantage. It's not the crux of the advantage, in my opinion.
- [12:05]
B
Yeah, that's what gets back to. The only time I'm interested in some of these apparel stocks is when it's trading at, for example, Crocs, when I originally bought, trading at seven times earnings. Pound money into the buyback. And one, I'm not going to sit tight and go, oh, I'm just going to hold this until it goes into a high multiple. I have a distinct trading plan there. That's why looking at Lululemon, neither of us, which I don't think either of us have owned this one. For me it's been a psychological long. Worked out as a psychological long, but doesn't actually make me any real money. I didn't get interested until it was below 10 times earnings because that's where with any sort of brand investment. And then look back at Celsius. I think it was earlier this year. They were down in the 20s. That was at an extremely cheap price for you. Okay, yes, it's a solid brand, weak moat, but we maybe are getting enough margin of safety when it's trading at 10 times earnings or below or May 12th maybe, you know, whatever the range is. But something like Nike, that would trade at 30, 40 times earnings. There was more risk embedded into this company than Wall street was giving it credit for. Now we're seeing the results of that.
- [13:09]
A
Yeah, I mean it's rare that I am buying something below 10 times trailing earnings because of the moat. If I'm buying it below 10 times trailing earnings, usually it's.
- [13:19]
B
There's moat risk.
- [13:20]
A
Yeah, there isn't much of a moat other than maybe the airports at one point over the last five years. But with Nike and apparel in general, a lot of the things that you would think are maybe a competitive advantage, like more distribution touch points with customers. Maybe there's sort of a, like I'm talking about having like multiple storefronts and all that. And maybe there is some sort of a distribution advantage that I'm not giving it credit for. Those end up being the opposite when the brand erodes or if habits change all of a sudden having a storefront with a bunch of inventory isn't an advantage at all. It's just baggage. So it's. I. Yeah, it once again reinforces for me the never invest in apparel mantra. We do have a lot of questions in the chat here. People are asking about Harbor Diversified. I think we should.
- [14:17]
B
Let's go through it, Ryan? Yeah, a little HRBR Christmas miracle. Let's go through the notes. Let's give context and our relationship to this company. We have finally received some news around what Harbor Diversified, I might say HRBR Air Wisconsin. They're kind of interchangeable here. The ticker is hrbr. If you want to look up what's happened to the stock over the last five years. For those that don't know, this is a microcap Ryan and I invested in. I believe it was a net. It was a net net play now for sure, as a regional airliner with a controlling shareholder, a little bit of a strange balance sheet. They didn't have Investor Relations PA page. We bought back in, I think 2021, maybe difference with the personal accounts in 2022. My cost basis is a $83. I'm sure Ryan's is similar. Ryan, you have anything to add from when we started out here?
- [15:04]
A
No. For any of our listeners that are not familiar with the value universe, will you just explain what a net net is? And yes, my cost basis is similar.
- [15:13]
B
Yeah. So a net net, some people have maybe different definitions, but I would say where you're buying the stock on a per share basis, where if you liquidated the company tomorrow, sold all the assets, netted out the liabilities, this is why it's called net net. Distributed all the cash to shareholders, all the cash you raise or you sell some inventory or property, plants and equipment, it would be worth more dead than alive. It's kind of the old Buffett plays, Graham plays from the 30s, 40s, 50s and 60s. Arbor diversified looked like that. We thought there was probably $3 and maybe or so 3, $4, depending on the outcome here in value per share. But again, I bought it about $1.83, Ryan, at similar price. What happened here is one company had some contract issues that we don't need to go into the details with with their partners for airlines. And then the company, given the accounting revisions they had to make, it wasn't like they were making mistakes on their accounting. They just had to change it because of a. A contract dispute, you know, receivables and all that stuff. And I think they honestly used it as an excuse to not to stop filing. I'm curious if Ryan has the same opinion there. But they went dark, quote, unquote, stopped filing their 10Q and 10Ks on time, which meant only accredited investors could buy the stock. But anyone could sell. So we couldn't buy more, but we could sell. But what happens there, combined with the uncertainty of what's going on is that well if you can only sell if a bunch of people can sell but not very many people can buy, well the stock's going to collapse and what the balance sheet uncertainty looks like the stock cratered to below 50 cents. That was what earlier this year. Now they have announced through an 8k they still have about a year or so of 10qs and 10ks to update us on though. But they have sold 25 rather proposed sale to sell 25 of their regional airline jets for $113.2 million. And I goes through some math here. They'd around double that in inventory. So they still have some jets on the balance sheet. They have about 58.5 million shares outstanding. They had $105 million in cash and equivalents at the end of Q3. If you add that to $113.2 million you have $218 million. We're adding the cash they had plus what they just sold. Subtract out some burn rate which generally they had a little bit of burn but then they had to liquidating the regional airline Air Wisconsin. They had to give out a lot of severance payments and stuff like that. So maybe subtract out $20 million or so to be conservative on that. In that front you have $200 million in NAV before considering any more asset sales above outstanding liabilities which are pretty minimal. They pay back most of their debt. They only have a small amount of debt I believe on their balance sheet. Stock price is $1.75 today market cap is just about a hundred million dollars. I think it's worth about $3. Full disclosure I haven't sold any and I know Ryan will talk about here next. He plans to sell at about A$75. I don't know if that got filled. Maybe we'll disclose that for us because it is trading right around there but it's got a wide bid ask spread. I haven't sold any but I plan to sell it around $3 and that's really it. I know we have some questions Ryan, anything else to add before we go through? Maybe some of these questions in the chat. If you're a regular listener to chit chat stocks then you know that we love investing in international stocks. And no brokerage compares to interactive brokers otherwise known as ibkr. When it comes to international trading you can easily trade assets worldwide using a multi currency IBKR account in 160 markets, 36 countries and 28 currencies with low fees. Compare that to your existing Brokerage and its limited trading ability and high fees on foreign exchange, there truly is no comparison trade stocks, options, futures, currencies and bonds globally with IBKR's unified brokerage platform. I wouldn't use any other brokerage for my investing needs. Switch to IBKR and level up your international trading game today. If you're interested in checking them out for yourself, head on over to ibkr.com Interactive Brokers is a member of SIPC.
- [19:40]
A
Yeah, let me go through my history with the stock. So first off this, this actually goes back, I want to say, to around 2011. Not my history, but the, the kind of. The history of Harbor Diversified where this used to be like a defunct biotech, if I'm not mistaken. And they had a whole bunch of deferred tax assets, so. Or net operating losses. So it was someone, the management team with harbor, they acquired this, stopped filing, went dark, so to speak. And in the meantime, I think they were dark for, I want to say, 10 years. And when they, at one point, I guess one of the shareholders of Harbor Diversified, when it was its defunct biotech, found out that the private equity group or whoever it was that purchased the net operating losses also had purchased Air Wisconsin. And it was like a fully operational regional airline and owned by this stock.
- [20:50]
B
Owned by this company that's publicly traded by this trading by like 5 million dollar mark. Yeah. Defunct, yes.
- [20:56]
A
And he sued them in court for basically them to have to start refiling again. And this came public, I think it was like, I don't know, like a $10 million market cap. It was like 5 cents a share because this was all, all the old shareholders knew was this was a defunct biotech which their only assets were like, I don't know, $10 million or something like that in net operating losses, maybe more. And it was a fully operational airline that I think was probably worth like $150 million and it had a $10 million market cap. So the stock immediately shot up. We kind of heard about it around this time I started buying. I think it was like 150, roughly. My cost base ended up being around 180. And then they had the dispute. They used it, I think as an excuse to stop filing. But also keep in mind they were sued in order to come public. This is a management team that has not wanted to be a public company. Like they're reluctantly public. And so they've been behind for about a year or so on their filings. This is the first meaningful thing we've really heard in the last year. I'd say and I have had.
- [22:17]
B
Yeah, well, there was some, I think fell through of a. There was like, oh, we have a deal. They put on AK we have a deal to sell our assets to some other company. But I guess that fell through. That was in September. But nothing, no definitive number on that. But besides that, I guess they filed like their 20, 24 Q3. They filed that this spring, got an update on the balance sheet. Nothing really new. There was the preferred stock that we got an update on. So they converted all of that. That got us an updated share count. The share count, common shares are down to 40 million. Then they had this preferred that you had to do your own math with. That all got converted in the spring. Now it's back up to $58 million. But if you look at. We were still counting that before in the net asset value. If you were going to liquidate this thing, which they have a board meeting planned for. And this is very hilarious timing given they don't want to deal with anyone December 30th or 31st. So they're going to vote on some stuff there. I really hope they try not to. Don't try to screw outside shareholders. The nice thing is the investment group that owns this thing, they own most of the common stock. So hopefully what happens to that, even if we get a little bit of a take under will be attractive in a liquidation and then if they try to turn into a holding company, just get out of there. But I'm hoping for a little more liquidation. I'm hoping people do a little more math here. Hopefully they get current and yeah, my plan still is to sell three bucks.
- [23:55]
A
So we, we got involved with this when we were running a limited partnership. And at the time we. I had a lot more time to be caring about stocks like this and willing to endure the headache. After about a year of this, I got really fed up especially having it in my personal account. And it was. It has been a big chunk of my personal account as well. So I about four months ago put out an open sell order to. For anyone that's willing to buy my shares at A$75. As of 10 minutes before this recording hit A$75.
- [24:32]
B
It just did at the close. Right.
- [24:33]
A
I would. Yeah, I was the 175 mark. I was this nice shares that sold. So you can see it.
- [24:40]
B
There's like 10 ticks on the stock today. So you're that. Oh, okay. Someone. Someone went out there and got it.
- [24:45]
A
I just want to be done with the headache here at this point. Not running the limited partnership and kind of like this is not how I invest anymore. Honestly, I want companies that I can sock away and monitor their progress and kind of as long as they don't get ridiculously overvalued, I continue to own them. Sort of the coffee can approach. That's kind of how I would say I've evolved as an investor.
- [25:16]
B
So I will say I kind of like some of these. But we have different. We're not, you know, we're not going to be the same type of investor. I mostly invest like how you just described. But you know, these kind of. These are a little fun to me. Make it as 10% of your portfolio or less of the collection of these type of stocks.
- [25:33]
A
But I am happy to be rid of it. The I do hope the remaining shareholders, they get treated well by management. I was a little concerned that management was going to try to turn this into some new business endeavor and the value is going to get destroyed.
- [25:49]
B
So they might. They might. Yeah, they will. Who know they could. The thing is they're going to purposely try to destroy value. I don't think so. We'll see. They don't seem like the best operators. The CFO left probably to go pursue a new opportunity since Air Wisconsin is not an operating business anymore. We have some questions here in the chat. Do you happen to know what are the ETFs and mutual funds that HRBR has in its marketable securities? I think given how the prices performed in the bond rally of. What was that? 2022, 2023. I think the bond yield rally and when these prices, these ETFs went down on their balance sheet, I think they were just bond funds. So really not the end of the world. Hopefully they got a decent return on that other question, what do you think HRBR is going to do with the possible 38 CRJ2 hundreds left over after the transaction? It seems to me that they're going to scavenge them to sell off parts. Valuable engines. Yeah, hopefully they sell them. They've been doing these charter business. They have some things that I'm very. Maybe they've been flipping back and forth or maybe I'm just confused about it. The easiest thing would be to try to sell these jets to either private buyers, whoever what have you and get maybe another hundred million dollars. That would be a nice result here. That'd be simple and I hope they do that. We'll see what happens at the board of directors meeting. I think they're going to have to publish an 8K if anything if anything happens materially at that meeting. So I'll be looking out for that. Last question. Did you know any. Did you notice anything about liabilities from Air Wisconsin sticking with hbr? It seems to me that HBR has pushed any liability, severance layoff costs onto csi. Csi, I believe, is the ones they're selling to. I'm not sure on that. Again, that's why there's some uncertainty here. And I think the price is still well below the net asset value. There's uncertainty. I read the ak. It's about all I know. I honestly saw. There's quite. There's a couple of substacks newsletters that follow this and they came up with pretty different estimates on per share value. So I think there's a wide range of outcomes here and I'm of the belief, let's just see what happens if we get any more liquidation. I'll maybe sell if it's lower than $3, but that's kind of my outstanding. All right. This is one I'll get out of this thing.
- [28:18]
A
All right. Well, that is. I guess the story's not totally over. Maybe we'll be talking about Harbor Diversified again.
- [28:26]
B
I think I'm going to. Yeah. Hopefully not when it's a conglomerate that goes to thousand dollars a share after it turns into the next Berkshire Hathaway. That would be very disappointing if that was the outcome. But I think I need to put out an outstanding sell order because I'm going to be off the grid for three days. Some of it, the markets are closed, but I don't want to get caught not, not getting that it's only one day the market's going to be open. But still, I'd like to. I don't know. We'll see what happens either way. For full disclosure, Ryan's out. I have a plan to sell at $3. Hopefully. Fingers crossed as we're going through the map there.
- [29:08]
A
I don't think it's a bad choice like on something really illiquid like this. And I'm sure there's people listening to this podcast right now where it's like, what are you talking about? Why would you set a sell order that's like 30% higher than the price? But you, you might be the next shareholder selling if you're. If you sell at 250 or whatever. So there's probably other people in between, but there's a chance it gets filled if there's just like some investor that's gobbling all these up. So if I were you, I'D probably.
- [29:39]
B
It's gone up about yeah, 100 in a week. So. Yeah, that's fair. Okay, Alphabet, sure. What are they doing? Definitely see this. Yeah.
- [29:50]
A
The world's most profitable company, Alphabet. Although part of that is because of their mark to market on operating earnings.
- [29:59]
B
Apple still has them. I've been bookmarking little psychological long when Apple gets dethroned because for spite I've been saying that's going to happen for.
- [30:09]
A
Quite a while now we've got Andrew Marshall from Capital Mindset in the chat. Say what's up guys? What's up Andrew? So we're talking Alphabet, they are acquiring Intersect. So on Monday, yesterday as of this recording, Alphabet. Alphabet announced that they're acquiring Intersect for $4.75 billion in cash. They were assuming intersex debt as well. I asked Gemini which this all sound. This all feels very circular for me to be asking Gemini about Alphabet's acquisition. Anyways, the I said, you know what, I wanted a quick summary. Why are they acquiring Intersect? What does Intersect do? It says Intersect develops and operates massive renewable energy plants, primarily solar and wind, integrated with battery storage systems. They specialize in data parks which are industrial campuses where high capacity data centers are co located directly with renewable power generation. So I guess Alphabet is a construction company now. They've gone full 180 as capital intensive as it becomes.
- [31:14]
B
If only Nelnet could dispose of their assets right now in solar. Could have been timing. Yeah. Intersect says powering AI data centers at scale. Renewable energy, reliable energy. Oh, I mean that's just trendy. Yeah, they want to get as much data centers built as fast as possible.
- [31:34]
A
I asked why.
- [31:35]
B
Seems like. Yeah, go ahead.
- [31:37]
A
I asked why is. Why are they making this acquisition? Because I don't think we've seen any of the other hyperscalers make an acquisition like this. So it says local power grids in the US are increasingly strained by AI demand. Yes, I've noticed that in my. Yeah, Texas, my electricity bills. Owning a developer allows Alphabet to build its own generation capacity rather than waiting for overtaxed utilities to provide power direct to source.
- [32:04]
B
Huh?
- [32:04]
A
Yeah. Does this make sense to you?
- [32:07]
B
Sure. Alphabet should acquire Occidental Petroleum. Let's just be a straight natural gas company. Fully vertically integrate oil, petroleum, semiconductors to AI. This makes sense if you are Alphabet. If you're Sundar Pichai and who I think doesn't get enough respect because people are now saying that Sergey Brin, the Shadow CEO Sundarpachai has done plenty. Well I think he's not getting Enough respect. But besides the point, you're the top people at Alphabet, you're the capital allocators and you're seeing usage on Gemini right now. Absolutely sore. And you go, all right, we don't want to hit any bottlenecks. We have some good infrastructure but we know what this is going to lead to if this trend of our market share gains keep growing. Let's get ahead of this. You could see them now. I'm not sure what the other hyperscalers are going to do because I think at some point besides advertising optimization, Meta is just building capex to nowhere. Right.
- [33:13]
A
I'm not sure what Amazon's smart glasses.
- [33:16]
B
Sure, sure, we're going to. Yeah, but those are going to have chips on them. I guess they're manufactured by a third party too. All right, besides the point, Amazon, Microsoft, I don't know what their plans are, but Alphabet is planning for I think 90 billion plus in CapEx 2025, 2026. You could see them put out a huge number given the demand they're seeing and the vertical integration.
- [33:44]
A
Andrew says in the chat here, I know for a fact Google is trying to double their capacity over the next year. So this tracks. Yeah, so this. I can't imagine that Alphabet wants to have to own a business like this. Like a, like I don't think entering this decade they were thinking I want to get into the, you know, construction business basically or the renewable energy business. But it almost is like, it almost makes me optimistic about the demand they're seeing with Gemini because I imagine they're like a reluctant acquirer for a business like this and they need it as opposed to having to rely on these utilities.
- [34:29]
B
Oh sure. Oh sure. Yeah, yeah.
- [34:32]
A
The more I keep thinking about the data center space and the data center build out, it's like that meme where, where there's all those military guys behind a wall and then there's that clown and Oracle's Oracle clan.
- [34:45]
B
Who's corewave? Who's coreweave? I think you could do like ant on the ground.
- [34:50]
A
I don't know.
- [34:50]
B
Yeah, the. What is there like the different tiers that everyone. The S tier to A through. Is it A through F? You know that, that thing that people do S Alphabet and then go through. You keep ranking them. I think probably you put the next one Microsoft, then Amazon, then Meta, then Oracle, then way down at the bottom, core weave and what have you. Nebbyous. Some people, smart people argue Nebbyus is a good business but yeah, Alphabet seems to have right now the clearest ROI in AI because you can do the advertising stuff, the optimization there, and you have more and more people paying 20 bucks a month to use Gemini, such as myself. And I'd be willing to, especially because they can bundle it in, which I think I get YouTube Premium maybe. And I don't even use it. There's, there's the Google Drive, like 2 terabytes of storage, which is more than enough that I'll ever need. But on its own I'd pay 20 bucks a month, if not more for Gemini and their deep research tools. I'd be willing to pay maybe 40 bucks a month. I know when people look at OpenAI, they go, well, how many people are going to pay this much a month, month for this stuff? I'm not sure. But I think Alphabet has the clearest path to our positive roi, especially because they have the most efficient spend, it seems to me.
- [36:20]
A
So let me ask you this, Brett. I'm going through physical AI, hair shout out to just the best data terminal around.
- [36:29]
B
Yeah. Do you work for them or something? Is that.
- [36:30]
A
Yeah, I don't know. Shameless Plug. Google subscription platforms and devices revenue last 12 months. They have $46 billion.
- [36:41]
B
It's a nice chart. I think we're $100 billion within a couple of years here.
- [36:45]
A
Yeah, that's, that's my question to you. Google subscriptions revenue in 2030, is it above or below $100 billion?
- [36:55]
B
2030, above, I'd say above. A lot can happen from here on to then, but again that's YouTube Premium, YouTube TV, Gemini, some of the other subscriptions I may be forgetting the Google one, I think that's the one. I have Google one. It's all confusing. All I know is I pay 20 bucks a month for a lot of stuff and it's work related, so it's like technically a business expense.
- [37:20]
A
Let me think of all the stuff I pay Google for. Drive, the Office, Google Office. I don't even know what they call it now. G Suite.
- [37:30]
B
G Suite, Yeah, terrible naming.
- [37:33]
A
Yeah, it sounds like a dirty word. The YouTube TV I pay for, although that's probably not super high margin. I should pay for YouTube Premium, but instead I just eat the ad load.
- [37:51]
B
They should bundle YouTube Premium with Google One slash Gemini. They're like 40 bucks a month. Ultimate. Ultimate bundle. Yeah. There's a lot. There's a lot. I'm on a Chromebook right now. Now can we blame the Chromebook for my technical difficulties? Maybe. But according to the research I made that was entirely Intel's fault and not the Chromebook software. But we're getting around off point here. We have a question from Andrew that says interesting question on OpenAI monetization. They're planning to do ads. They're going to have to work with Amazon's dsp. Correct. They can't use Google Meta, Microsoft, I'm guessing competitive reasons. Isn't that going to be a nice tailwind for Amazon? Maybe. I don't know that DS demand side platform space that. Well, it's possible.
- [38:46]
A
So what does ads look like in this?
- [38:50]
B
You say, I'm looking for some sneakers. Can you give me some options? And then you have here are some options and here's a sponsored one. It's going to be pretty nice. Google's going to make a lot of money.
- [39:04]
A
If you were Google, would you hold out on adding advertisements to Gemini as long as you can?
- [39:15]
B
Yeah, and I'd give away the stuff for cheap price as long as possible. Just a bankrupt OpenAI. The thing is they're kind of doing that because they're deploying Gemini 3 across all of their platforms to the billions of users. I think it was instantly right once they launched. Now the pro tier with the research that I think is highly compute intensive is 20 bucks a month. But I feel like that is still really unprofitable. Like I bet my 20 bucks goes well in like the compute capacity I'm using right now is much higher than the 20 bucks per month. Yeah, they're in a good spot. I think Amazon is sneakily in a good spot because they can be one that's not a direct consumer player. And the relationship with Anthropic. Anthropic seems to be doing quite well at the moment.
- [40:13]
A
Yeah, they kind of seem like a neutral provider in this world. I don't know a lot about Amazon's demand side platform, but I guess if OpenAI is keen to not work with any of their direct competitors, Amazon or Tyler mentions the trade desk. It seems like they're more likely to work with Amazon would be my guess. But I guess I don't know the industry that well. But how much, honestly, how much do you think that would actually benefit Amazon? Is that a rounding error on the financial statement?
- [40:53]
B
Advertising business is pretty strong. Demand side platform there's pretty strong, especially because now they've combined everything from sponsored listings to premium video to all that. All that stuff and other things. I'm missing Amazon Music, which is a rounding error. Forgetting what else? Not Alexa. Let's see. Tyler Ferris asks, do you think OpenAI will be the next we work? Yeah, let's say there's a fighting chance, but probably not. Maybe they're clearly like burning money at 10 times the size of wework, but we'll see if they lose a bunch of market share. It's possible.
- [41:40]
A
I think there are some shared character traits among their leaders.
- [41:46]
B
Yeah, that's true. Cult following, not afraid to burn a boatload of money.
- [41:52]
A
But business model wise, I don't really see the analogy, but. All right, I want to go through this really quick because I spent time with.
- [42:01]
B
What do you mean selling dollars for 10 cents? This is the same business analogy. It reminds me of. Sorry, let me finish and then we can stop with AI. There was some podcast of an OpenAI person and they said, hey, look, if we could get 10x the computing power tomorrow, we would utilize it. I was thinking, yeah, you're selling a dollar for 10 cents. If I started up a Chipotle stand, a Chipotle location, I started selling burritos for a dollar, do you think demand would skyrocket? Yeah, I'd also have negative 200 operating margins, which OpenAI does. So unless your subscription goes up to 100 bucks a month. Okay, then would your compute capacity be up 10x? I mean, look like I just hate. That's just something I gotta get on my soapbox quick.
- [42:53]
A
All right, folks, before we move on, we need to tell you where we get our data. Fiscal AI. Fiscal AI is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts in our podcast, you'll see it in our newsletter. This is our one stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including the largest company specific segment and KPI data set on the Internet. That includes metrics like Du Lingo's daily Active users, Oracle's backlog, Rocket Labs, revenue per launch, and literally millions more data points. They've also got earnings call transcripts, ownership data, equity research reports, and much, much more. If you want complete financial data at your fingertips, you need to check out Fiscal AI. And if you use our link, Fiscal AI Chitchat, you will automatically get two weeks of Fiscal Pro for free, no card required. If you want to upgrade, our link will also get you 15% off. Again, that's fiscal AI chitchat. The link will be in our show notes.
- [43:57]
B
If you regularly listen to Chitchat stocks, then we know you love analyzing individual companies. We do too. That is why I, Brett Schaer, co host of the show, decided to start writing The Emerging Moats stock Research service. Emerging Moes produce regular stock research reports on companies with emerging competitive advantages, regular updates on stocks I own and on my watch list and has full transparency to my portfolio transactions and returns I cover under the radar. Emerging Moat companies with prior research reports on Oscar Health, Kraken Robotics, the real brokerage and much more. Emails will be sent out on a weekly basis. Explore the service today and find your next great stock by going to emergingmotes.com the link will be in the show notes.
- [44:41]
A
But the operating. The operating margins don't have anything to do with the compute costs.
- [44:48]
B
Well, yeah, I mean when you have negative margin, it goes down to that. Yeah, yeah.
- [44:56]
A
Okay.
- [44:57]
B
But I mean the only way to get positive gross profit is to have OpenAI raised their subscription price to 100 bucks a month. 200 bucks a month given their.
- [45:10]
A
Well, you just think the compute is that costly. I mean I would assume a lot of that operating loss is coming from developers like opex.
- [45:20]
B
No, no, it's all compute. Really. Yeah.
- [45:28]
A
I find that surprising. Well, so then what is the idea here? If put yourself in OpenAI shoes, is the idea that the cost of compute just comes down, that they don't have to.
- [45:43]
B
I don't know what their idea is.
- [45:47]
A
Just keep dancing while the music's playing, I guess.
- [45:49]
B
Yeah, yeah. I mean they plan to lose like $40 billion. Burn $40 billion in 2028. So that's the base case.
- [45:57]
A
Okay. On the exact opposite side of the world or of the investable universe. I put a thread together called 12 boring stocks that crush the Market. They could not be run differently than the open AIs of the world. I'm just going to rip through these really quick. And it really didn't require that much work, honestly. It was just stocks that beat the market over the last 10 years that I thought were boring. There's really no criteria.
- [46:26]
B
Cookie. Are they in there? The Biscoff Cookie?
- [46:28]
A
They probably could be. I did not add them in here. So companies for me were United Rentals. Much better performance than I realized. They were a 10 bagger over the last decade. 12 bagger actually. Amphenol, which is like I feel like they're an exciting company that doesn't want to be exciting. Like there you should look up Amphenol headquarters on Google and it is the most depressing image you'll ever see. It's like they are like the least exciting business of all time, but they are just catching a tailwind with data centers, Caterpillar, Cintas. It always surprises Me that Cintas is such a large business like uniform rentals.
- [47:17]
B
Basically they're trying to acquire the second player in the space too. Create a full monopoly.
- [47:24]
A
Yeah, it honestly looks like it's worth spending some time on msci. Investors might think that's a little more exciting, but I think maintaining equity indices is not the most sexy business in the world. But the returns are probably great. It's very capital light. Curtis Wright, Old Dominion freightline. Arthur Gallagher. W.W. granger. I almost laugh when I say that because it seems.
- [47:53]
B
What is WW Granger?
- [47:56]
A
They are an online distributor of like, industrial parts. They have like literally 30 million products. So it's like motors, wires.
- [48:05]
B
I think I used to use them back in the day.
- [48:07]
A
Yeah, yeah. It's basically just have a ton of suppliers. They're one of the. Since they're the leading distributor, they've kind of got a cost advantage. Bunch of distribution centers and they ship faster than others. Rawlins, O'Reilly and Waste Management. Real quick. Going through that list, I did notice that physical networks like old Dominion, Freightline, O'Reilly, Cintas, Waste Management, Waste Management, these are basically physical networks that have just developed over time. Those. Granger too, they turn into massive. Not only massive cost advantages, but that you can provide a better service to customers. So I think that's something like an asset that people should pay attention to.
- [48:59]
B
Is physical networks and operating leverage at Scape.
- [49:02]
A
Yeah, yeah. Do any of the stocks on this list interest you?
- [49:07]
B
Maybe. W.W. granger. Honestly, I can see the value there. Waste Management. At the right price, O'Reilly. At the right price. Nah, nothing else. I get the physical networks make sense. Fastenal has always been a good business. There's some other ones out there. Yeah.
- [49:28]
A
Let's do a little Granger analysis, shall we?
- [49:31]
B
Yeah, sure, sure.
- [49:33]
A
Little live Granger analysis. Okay.
- [49:36]
B
With our friends at Fiscal AI Which I'll say. While you're looking at the numbers, use our link. Fiscal AI chitchat link is in the show. Notes 15 off any paid plan. You know them by now. You should be signed up if you aren't. All right. What is. What is Granger looking like? W.W. granger. That was called.
- [49:55]
A
Yes. Which just almost looks like the UFC logo. Almost. Okay. Revenue has grown at 6% a year for two decades. Diluted earnings per share, 12%. That's a good sign. Let's. Moment of truth here. Valuation, let's go. Yeah, I can do that in a sec.
- [50:23]
B
I'll look up free cash flow while you're talking.
- [50:25]
A
EV to EBIT. 20 and a half.
- [50:34]
B
I know. Free free cash flow positive every year for the last since 2015. Doesn't look like the best cap cash flow conversion though. Let's check. Yeah, yeah. Not the best cash flow conversion I would imagine.
- [50:52]
A
There's some capital intensity there just in the distribution working.
- [50:56]
B
Capital intensity, right.
- [50:59]
A
Yeah. I'm curious how much is like supplier financed like or if they're holding. Holding the inventory themselves kind of thing. The one that I was maybe the most excited from on this list honestly was msci. It to me, like, what's not to like about that business? I can't think of a simpler business to run. You're basically just creating like creating and maintaining an index, which can't be that hard. It requires probably like an hour of some analyst time per week and you've got a whole bunch of asset managers that just have to default to using you as their benchmark and they pay you licensing fees because they, in order for them to be able to sell it, they have to license the reputation of msci. So it seems. I don't know. I really like it, but we'll see. I kind of have a financials preference, so I like.
- [52:07]
B
I like financials. You want to talk? Speaking of finance, Financial charlatan of the year, did you vote? The voting has been done and the winner has been cast actually today. So we can get a little live update on this.
- [52:24]
A
I think I voted. Yeah. Do you remember, I always feel this year who won?
- [52:32]
B
Well, let's go through the candidates and people you can maybe say any you disagree with or any that should have been added. It's kind of hard to think of everyone at once. Howard Lutnick, Peter Navarro, Anthony Pompoliano, Bill Pulte, Michael Saylor, James Fishback who wanted to come on our podcast. Sorry, James, Bill Ackman, the all in crew, Larry Summers and Mike Green. Let me find who I voted for. Do you wanna.
- [53:03]
A
Why is Mike Green on there?
- [53:04]
B
Yeah, I thought that was a bit unfair. He. I think he's trying to do good stuff. It's just controversial. A lot of people disagree, but I think that's not, you know, that happens. That happens. All right, this is my vote. You can tell me if you agree or disagree with any of these. 1 Fishback 2 Sailor 3. Pulte, pulte, pulte, whatever you call him. What do you think?
- [53:32]
A
So the only issue I have with this is the Fishback guy. It's like we're giving him more attention than he deserves.
- [53:42]
B
Feeding the devil.
- [53:44]
A
Yeah, like there's no reason that he should have this much attention.
- [53:48]
B
Isn't he running for Congress in Florida, or is he running for.
- [53:53]
A
I don't know. I don't know.
- [53:54]
B
Pretty sure he is. Look up his Twitter right now. No, he's running to succeed Ron DeSantis as Florida's next Republican governor.
- [54:01]
A
I. Wow. Can't. I just don't care about that guy. Sorry. Sorry, James. It's just. You don't.
- [54:09]
B
I don't know.
- [54:10]
A
None of my investing work overlaps with you whatsoever. The one that I was personally triggered by is Bill Pulte.
- [54:19]
B
So that's your number one. Yeah.
- [54:22]
A
I was just so constantly frustrated with him this year, and I can't remember his title. Yeah, yeah. But it's basically like, what, Housing development director or something with housing.
- [54:35]
B
Did he keep yelling that the Fed people should be fired and that just. He was just trying to yell, mortgage rates down.
- [54:41]
A
Yeah, he's basically pretty much. He just wants. He wants to prop housing prices up, which is. It's a very easy thing to. I always think when people are dying to have, like, housing prices up, you're just catering to make people make homeowners happy, which is like, kind of a way of, like, currying favor with their vote, I guess. But it's so, like, he was just calling for Jerome Powell to be fired over and over because Powell was reluctant to drive rates down.
- [55:16]
B
And it now he did, and now he hasn't talked. All right, do you want to know? Drumroll. Can you hear that?
- [55:23]
A
I can't hear it. But who won?
- [55:24]
B
All right. I was. I was hitting my desk. I guess the mic's good. I'm not putting that. Number one, Michael Saylor. Number two, James Fishback. Number three, Howard Lutnick. Hey, I got close. I kind of do this to vote who I think's gonna win. I had Fishback one, Sailor two. Had a flip there. I think that's not a bad outcome.
- [55:47]
A
Sailor deserves it. Yeah, I gotta. I remember I actually technically listened to Sailor this year at a conference, and.
- [55:56]
B
You were there, just lost.
- [55:58]
A
And everyone in the crowd was too. Like, there's. It would be one thing if they were just like. If he just got up there and was like, bitcoin's gonna go up. You know, I think people would be excited about that. But then he went into, like, details of the bitcoin yield and how he can just kind of forever dilute shareholders and buy more bitcoin, and I think he started to lose. If I were him, I would stop doing the press tours. I think it's hurting more than helping.
- [56:23]
B
Oh, yeah. But if you don't do the press tours, how are you going to have a premium to nav? And your whole business model works in that regard. Yeah. Do you want to go through the. Let me read out the previous winners for you. 2024, Ackman, the General. Maybe a little unfair, but I think he. He kind of got ahead of himself in 2024. Really out there. 2023, all in crew. 2022 SBF. 2021 Chamath. Two time winner. Kind of like one of those musicians that does the group and then they do the solo. The solo album. That's Jamath.
- [57:00]
A
Unpopular opinion. I don't mind chasing. Jason Kalakamas.
- [57:05]
B
Yeah, he's at least, I say, genuinely a nice person.
- [57:09]
A
Yes.
- [57:11]
B
You know, you can just more optimistic.
- [57:13]
A
Than I would be on some stuff. But.
- [57:15]
B
Yeah, he just said this week that robots are going to take every job at Amazon in a warehouse by 2030.
- [57:21]
A
But he is. He feels more genuine than some of his.
- [57:29]
B
Than the AIs are some of the.
- [57:31]
A
Other people on his podcast.
- [57:32]
B
All right, 2022 or. Sorry, 2020 Raoul Pow. I'll admit. Hand up. I subscribed to Real Vision for a year. Yeah, it's embarrassing. 2019, Larry Kudlow. 2018, Ross Gerber. Remember him? 2017 Jacob Wohl. I don't know him. 2016 Trump. 2015 Shkreli. 2014 Keith McGillahoo. And 2013 Keith McGillahoo. Wonder what happened to him back then. Yeah. What a list. Honestly, hope I'm not on it someday.
- [58:05]
A
I don't know most of those names. The. There are some of them. Ackman kind of feels. I know he's kind of shot himself in the foot a number of times and says some kind of goes outside his circle of competence. But he's a pretty.
- [58:23]
B
I don't know.
- [58:23]
A
Feels a little unfair to have him on that list.
- [58:26]
B
Sorry, who?
- [58:27]
A
Ackman.
- [58:28]
B
Yeah, I know, I know. All right. Do you want to talk Listener suggestion. Some guy, Julian, who pitched himself to come on the show. Julian, I gotta say, I'll investigate your work and we'll see if we can work something out here. But cannabis got rescheduled. I don't know if you saw this. It's kind of a.
- [58:48]
A
Kind of feels like a boy who cried wolf situation with cannabis.
- [58:52]
B
I don't know if it's a problem. Yeah, it's almost like, all right, it's illegal, but no one really cares. It's not. Not everyone's going to use it. It's a way smaller industry than people thought. But here's his pitch. So rescheduled cannabis. You have innovative industrial properties, a REIT for cannabis growers. 14.6% dividend yield. They are positive operating profit and cash flow from operations the last five years. Not a terrible amount of debt versus their earnings power. They recently tried to diversify out of cannabis and into life sciences, maybe to get some sector diversification. Market cap of $1.5 billion. $1 billion in total dividends since inception, which is not that long ago since they went public. Feels interesting. There's a lot of pushback, saying look, all right, banks won't deal. Used to not be able to deal with cannabis growers. There's a lot of really distressed customers of innovative industrial properties and that's maybe what you would expect with a 10% plus dividend yield. So this could be some deep valley dumpster diving. There's also some people arguing that rescheduling it actually hurts them because now more people can associate with the industry. You can get bank financing and all that good stuff. It could be interesting situation. But that dividend yield's, it's spicy and it's been consistent over the last few years.
- [60:21]
A
What is their coverage of that? Like what percentage of their cash flow is that?
- [60:28]
B
I'm pretty sure it's below their cash flow. Let's check. You want free cash flow per share. I don't know if that's the reason. Right. One for a reit, but we can look that up. Maybe we'll just do total on nominal. The cash flow from operations. How about that? Cash flow from operations versus total dividends. Okay, let's see. 2024, 258 million in cash flow from operations. Operations, $212 million in common share dividends. It was higher every year going back since inception. Last 12 months. No, but maybe that's a one time blip on a quarter. So what's the idea?
- [61:18]
A
They just sell them or they just lease them land here? That's it.
- [61:21]
B
It's a reit. Yeah, for cannabis growers.
- [61:25]
A
I mean the good thing about like a REIT like this, I can't imagine once you've set up your area for growing cannabis that you're like super eager to relocate it. So even if there is more competition from other players in the like.
- [61:45]
B
Real.
- [61:45]
A
Estate space for this, it's not affecting their existing cash flow.
- [61:50]
B
Right.
- [61:51]
A
It's more so just affecting their growth.
- [61:53]
B
What if none of their clients pay them and go bankrupt?
- [61:58]
A
But in this scenario, if it got opened up, it's less likely, right?
- [62:07]
B
Yeah, yeah, maybe that's. Yes. But maybe that's why the stock didn't react like, okay, you still have distressed customers.
- [62:21]
A
I've seen a lot of cannabis pitches that I just have a hard time getting behind. There's two parts to it with cannabis. The regulatory environment is difficult to predict and what impact on consumer demand does the regulatory decisions actually have? I think is separate question that people should be asking, like, does this mean there's more customers? I don't know. I feel like from what I've seen, if you want cannabis, you get it right now already. In a world where it's maybe not available in every area, but people find it. I don't think it's like alcohol.
- [63:10]
B
No, I don't think it's. I don't think it's a secular growth trend. There's just not. Pouches are better. It's just not that attractive to me.
- [63:19]
A
Yeah, one question before we sign off here because I know we're running up on time. I put this one down and I was thinking about it for myself because I've got these harbor diversified funds now that I need to redeploy. If you could only own one stock for the next five years, what would it be?
- [63:41]
B
If I could only own one stock for the next five years?
- [63:45]
A
Yeah.
- [63:47]
B
Has to be my entire portfolio. Or is it. Or we're just saying an investment.
- [63:56]
A
Let'S say, has to be 20% of your portfolio at all times.
- [64:01]
B
Nintendo. Interesting. If we're talking highest upside, that's not it. In my portfolio, I'd say coupang remitly. The real brokerage, Airbnb Interactive Brokers, Oscar Health. But they have a little more risk, a little more meat on the bone. Nintendo. $15 billion in cash. Just running the numbers today. $70 billion market cap. So 75. So you have a $60 billion enterprise value. I think they probably over the next five years generate $30 billion in cash. So you're going to have the current enterprise value, half of it generated in cash. You have the assets there. I think the downside over the next five years for Nintendo is minimal. And especially the margin of safety with their balance sheet and entertainment ip.
- [65:01]
A
All right, I like it. Anything else? Anything else to add? Are we signing off?
- [65:08]
B
I think we're signing off. We have our actually pre recorded since we're taking the next week off. 2025 year in review portfolio review predictions. Review in 2026 stock market predictions. Fun episode coming out next week. Tomorrow as we're recording this, we are doing six stocks we like for 2026. A lot of stock ideas or the New year. A lot of ideas getting thrown around and say listen to that. Check out the Emerging Moats newsletter and I think that's it. I'll hit the disclosure and get out of here. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you everyone for tuning in and we'll see you next time.
- [66:14]
A
And Doug, here we have the Limu Emu in its natural habitat, helping people customize their car insurance and save hundreds.
- [66:22]
B
Of with Liberty Mutual. Fascinating. It's accompanied by his natural ally, Doug.
- [66:30]
A
Limu is that guy with the binoculars watching us.
- [66:32]
B
Cut the camera. They see us.
- [66:34]
A
Only pay for what you need@libertymutual.com Liberty Liberty Liberty Liberty Savings Very unwritten by Liberty Mutual Insurance Company and affiliates. Excludes Massachusetts.
- [66:42]
B
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