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Chit Chat Stocks
Drafting Our Dream Portfolios; 6 Quality Stocks At Record Low Valuations; A Friday 8-K For The Ages
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- [00:00]
A
Welcome to Chit Chat Stocks. This is the podcast that helps you find 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. Brett is in, he's, he's now our Latin American correspondent. He is in Argentina and maybe he can get some boots on the ground research for us there. But we've got a full slate for the show today. This is our power hour episode. For anyone who's unfamiliar, we do these live on Thursdays at 5pm Eastern Time and we talk all things financial markets. So whatever's in, whatever is in the news, any audience questions, any latest AI bubble news seems to be recurring theme recently. We talk about it all, it's live on YouTube and then we turn it into a podcast as well. So if you ever want to ask us questions, feel free to tune in live Thursdays at 5pm Eastern Time. But I'm going to stop right there. Brett, any anecdotal evidence for us?
- [00:58]
B
Let's see, Long Nubeg, long Mercado Libre I guess would be the number one thing.
- [01:06]
There is a lot of work to do, even just for some short experience here on the personal finance stuff, payments, let's just say they got a long Runway to reinvest in a lot of these things. And then on the other hand, it makes you appreciate some of the big box retailers that are reliable in the United States. Costco's the best buys that stuff. People take it for granted back there, but they do have an insanely good value proposition. And I gotta say, the airport was quite busy. Long line at passport control. Those are some high international fees coming in for corporation America, airports or otherwise known as cap. So so far that's my anecdotal evidence for you. I think it's about what listeners might expect.
- [01:48]
A
All right, we've got plenty to talk about today. Michael Burry in the news again, we've got some consumer spending indicators. Mark Zuckerberg decided to get lean again. Not really, but he's cutting some spending and we'll talk about that. But we had a question from one of our listeners, Simon Becker. Thank you for the recommendation. I guess not really a question, more of a recommendation, he says we asked, basically we asked for things to talk about or things that the audience wants us to discuss on this episode. And he said maybe a hypothetical game where you both build a price is no object portfolio of the fastest growing widest moat, longest Runway names, completely ignoring valuation. I love the idea, although simultaneously I always sometimes hate building These hypothetical portfolios. Because afterwards I always think, why don't I just own those? But anyways, we're going to play a game. I've set some criteria here, set some parameters. So Brett, here's what I'm thinking. The game is you get to buy any business in the world at 15 times, quote, normalized earnings, which I guess is subjective. And you get to pick five, five companies. Snake draft, you can start. You can't repeat any names already I.
- [03:08]
B
Got 10 loaded up just in case we all choose the same one here. It was, there was a question there that usually gets asked. Not usually, it gets asked all the time like, oh, what's your favorite company at any price? And people kind of understand what you mean when saying that. But when you actually try to make rules about it, you realize the question is a tiny bit flawed. No, no fault to the listener who asked that question, because I've asked it plenty of times before. But when you say at any price, well, what does that mean? $1.01. It's kind of hard to determine. We put in a earnings multiple.
- [03:48]
Barometer for the rankings here. And it's not necessarily the earnings they have today, but potentially what you think they could earn maybe if they weren't spending so much on marketing, maybe if they were a normalized era and what stock you'd buy there. So I like it.
- [04:04]
A
Yeah, this is, it's a great recommendation, but it's a surprisingly hard like game to actually implement because you have to have a starting price so it doesn't like or else you can't really determine what are the. You know, if you could buy any business for a dollar, you're going to buy the biggest business because you can, you know, resell it anyways. How did you look at the criteria for this? What was kind of your thinking in looking for whatever the best businesses are? 15 times normalized earnings.
- [04:32]
B
I think what I really wanted to look at was high quality, high growth. So where I was regardless of what you think they could earn because margin doesn't really come into the equation. You're like, oh, do you think they could expand their margin? Well, it's kind of factored into the normalized margin equation. So it was really. Why does quality moat combined with Runway to grow. And I think people understand what I mean when I put this list together. And I think, and I really wonder if we had overlapping list here because you can kind of go many different directions. But I will as a spoiler say a company such as Visa, which we talk about all the time, is a wide boat stock. It's already got plenty of high margin. It's already so large that it actually didn't make my top 10. Although I didn't, I didn't spend hours and hours making this. I'm sure some stock fell through the cracks.
- [05:22]
A
No, I'll just pause you right there and say I have basically the exact same framework. I think for me, if I was given the opportunity to buy any company I wanted quote unquote 15 times normalized earnings, I would want a combination of growth and a moat. I wouldn't just want purely the absolute best business if it can only grow the top line 5% a year. This is a good example. You, you're not going to get significant margin expansion either. And just by the fact that they are so large already, it's unlikely that you're going to get. Well, I could be wrong here, but extreme top line growth. So I try to do the same thing. Whichever company I think has the largest moat and will grow by at least 10% annually on the top line. Those are sort of my two criteria. So you're going to kick things off. Snake draft. Who do you have first pick overall?
- [06:18]
B
Okay, before we get into it, I want to say I think given that I just repurchase or purchased a new one, that was actually part of my anecdotal evidence for the difficulties of paying for things in Argentina. I got a new mic and I know we had trouble the last few episodes, so apologies for that, but let us know if it's still not fixed. I think the audio is going to be significantly better now. And when we have both two good mics, two good Internet connections, hopefully from here on out we'll be all good.
- [06:51]
First one here, this is one I own. I tried to put one that I actually own first on the list because if you don't have, if you don't own one of your favorite stocks on one of these criteria, what are you doing? It's interactive brokers. It's currently training at I think 35 to 40 times normalized earnings. And they actually might be over earning a bit at the moment. But if we go to say bring that down a little bit for a non extreme bull market that's getting them to have a little higher trading volumes, 15 times earnings for a company that has just keeps growing its users, some highly valuable users by the way, at 20, 30, 40% year over year with a long Runway to reinvest. I believe they have about 4 million active accounts right now. And if you look at the Amount of brokerage accounts around the world, there's probably a hundred million, two hundred million, something like that. And if you can keep expanding that, and if you look at it, the amount of people that invest, especially with, you know, mobile, Internet taking off, all that good stuff, there's probably going to be a growing amount of people that have brokerage accounts over the next 10, 20 years. So they can take a ton of market share. They still don't have that much assets under management. I think this is my number one pick by far. Given the fact that I'm very, very confident in their growth characteristics over the next 10 years.
- [08:03]
A
I will say that was on my list as well.
- [08:06]
B
All right. That's why we make backups.
- [08:08]
A
Yeah. The only, I guess the only hiccup I had was that I don't expect a ton of margin expansion. So my guess would be you're basically getting a similar earnings growth to top line growth. But, you know, you could get buybacks in there as well, potentially at different prices.
- [08:29]
But Yeah, I think 15 times earnings. It has all the characteristics of a high quality business and probably has one of the largest reinvestment runways of the companies on my list. I've got two companies back to back here, and this first one I've got a feeling is going to be a little controversial. I'm going with Airbnb. It, to me, I think it has a very wide moat. And actually, I don't think a lot of people dispute that. Like some people don't like the customer experience or they question its ability to grow. And those are valid concerns. But I don't think a lot of people question the moat because in North America, the majority of their listings are not dual listings. This is, I think in North America you could truly call this a monopoly because they have such a unique supply that is very much unique to them. So that to me, I deem it high quality. The question would be, is this going to be able to grow more than 10% on the top line for the foreseeable future? And I think that is possible. I think there'll hopefully be a reacceleration in North America. There's been a little bit of a decline in the growth rate here as the market has matured. And they've also reduced the average daily rate. But I suspect the average daily rate won't go down forever. So Airbnb is up there. For me, it's number one. I think it's high quality. I think there's a large reinvestment Runway, especially internationally, for them to go out and get more and more listings in these other markets. Asia, Europe, Latin America as well. I guess Brett, you're, you've got maybe got some Airbnb anecdotal evidence internationally down there.
- [10:13]
B
That's true. I'm a customer. I guess it's a, it's a good product. I'm, I'm helping with that GPV growth. I like the pick. I do own the stock, so it is one of my largest holdings.
- [10:26]
One thing I think people forget about with Airbnb and businesses that are take rate businesses such as know American Express, Airbnb, Uber, stuff like that, is that they are permanently. The business model doesn't change. Inflation protected. And my question with Airbnb for you, Ryan is do you own the stock? And if so, why not? Or if. No, why not?
- [10:47]
A
I do. I do own shares.
- [10:48]
B
All right, beautiful.
- [10:49]
A
I think it's in my top five largest positions. So. And that's happened as of late, I guess I should say. I have been a buyer.
- [10:58]
B
What do you think the historical track record is of when both of us buy stocks? Because sometimes.
- [11:07]
I know.
- [11:07]
A
Concerned that it's not as good as I would have hoped.
- [11:10]
B
I had someone ask us about Harbor Diversified today. That one ended up well, but there's been some other ones that have done fine. Nelnet coupon, at least when we were buying.
- [11:19]
A
Yeah. I think the issue is that we talk to each other about this stuff all the time. So we just convince each other. But let's go with my next one here.
- [11:30]
It's not, I guess I don't have these in any particular order. Actually, you know what? I think you won't guess this one, so I'm going to move this one lower. Next one for me is Coupang. I think it's a large reinvestment Runway. They're having a lot of success beyond South Korea. For anyone that doesn't know, Coupang is the leading e commerce provider in South Korea and they have a significant chunk of the population using them basically monthly, if not daily for a lot of their customers. And it's vertically integrated, much in the same way as Amazon where they have their own fulfillment, their own trucks, their own delivery employees. It's a much more densely populated country, so the delivery times are really impressive. You can order stuff before midnight and it gets there before 7am So I really like the business model and it's one of those where you see like it's not a TAM company. I see this all the time where like people constantly talk about the tam South Korea's Population has decreased, if I'm not mistaken, in recent years and it's.
- [12:35]
B
Going to get cut in half over the next 50 years. Yeah, yeah. It's going to be a slight headwind.
- [12:39]
A
And they are still growing the top line in Korea at a healthy clip because they're delivering more and more value to their customers over time. And they're continuing to take Wallet Share. They have all the Amazon of blank companies that have tried to copy that model. Coupang is the most direct comparison where it has very much employed the same. What's the next sleep saying?
- [13:07]
B
Scaled economy shared.
- [13:08]
A
Scaled economies shared. Where there needs to be some cost savings.
- [13:11]
B
There needs to be some parodies on that. I think we should make one. I can't come up with any off the top of my mind, but I feel like there's a lot of good jokes you can make using that. I think with Coupang, I like the choice as well. One thing they I think doubled something like that in Korean, won their subscription fee for their prime like subscription. They call it something else. But think of it like the prime free delivery network. No, nothing really happened. No one batted an eye. So I think there's a lot of pricing power there. It's a great business. Long Runway, Runway for growth. And when you talk about normalized earnings, actually think this is one that trades at about 15 times normalized earnings, if not lower. And the price has gone down a bit here. So that's why it's one of the largest positions in my portfolio and I think Ryan is as well. The last thing I'll say. Someone mentioned this in the substack chat, which if you haven't, you should join. It's free, it's great. We do a lot of conversations there. There was a data breach that they had with some of their customers in South Korea and they're very strict with these type of data breaches in that country. So I think the stock might have gotten hit a little bit because of that. And I looked it up. They may get fined a couple hundred million dollars because of this, but given the size of the business, that's not going to affect the terminal value that much. Yeah. Would you rather not have it happen? Sure. But there's no reason to sell. And yeah, someone in the comment here says that data probe news was hurtful. Yeah, it is. And if I'm missing something on that or the fine can be larger, let me know. But typically when data breaches happen, it doesn't really affect the underlying business performance. You just mean a government fine.
- [14:44]
A
Yeah, I don't I actually didn't see that, so I should look into it. But it's pretty rare from what I have seen. And this is actually flawed thinking. But you see it all the time where people overlook these things so easily because businesses are consistently analyzed on future earnings. And you just one time everything like this is a one time expense.
- [15:10]
B
Like remember when Meta probably is this one probably is Meta and Alphabet, they get fines every year. So maybe you should include a couple three to five billion dollars for that each year. But I agree with you, it generally, it generally is one time. And when you look at something like okay, maybe a marketing blunder where people say they're going to boycott a certain brand almost every time, it doesn't happen where it's like Bud Light or Anheuser Busch. But something there's a one time can happen and hurt the business. Maybe that is what's happening with coupon, but as of now, I'm not too worried.
- [15:39]
A
Yeah. All right. That's my, I guess second and third pick of the draft here. The total second and third pick. My first two. Brett, you've got two picks back to back here. What are you going with?
- [15:49]
B
Okay, first one. And it's kind of a insight into what I was looking at for kind of inspiration for, for companies to, to pick here. And it's one that has a high current earnings multiple. But I do think has a long Runway to grow, take market share and would be a very attractive stock with a wide moat if it was trading at 15 times earnings. I think it's probably on your list as well. And if not, you're going to be kicking yourself for not taking this. Brian. It's adjunct adien without the Dutch accent.
- [16:18]
A
Oh great. That was the one I pushed down because I thought you might not take them.
- [16:22]
B
Can't forget the Dutch. I think they're the Dutches. If not, they're from the Netherlands. Yeah. And ASML driving that economy. It's great business. Inflation protected, similar to an Airbnb which I mentioned with those payment companies. I was trying not to spoil it when saying that, but they keep growing at a very steady clip. They have locked in enterprise customers, minimal churn, extremely profitable. Even though that doesn't necessarily matter here. But I think that their ability to take their revenue that comes in and turn it into cash flow is just not unmatched, but top class worldwide fantastic business. And if there was an opportunity to buy this along with interactive brokers at 15 times earnings, I would make them large, large positions in my portfolio.
- [17:05]
A
Yeah, this was this was the one I thought you would not go with, so I didn't say it. But I love payments processors, especially one that is not riddled in fraud like a fiserv or something. But the. I shouldn't say fraud riddled in accounting gimmicks, but alleged.
- [17:25]
B
Alleged. Just say alleged in front of everything. You could say anything.
- [17:29]
A
Yeah, it, it is so sticky. Like it is such a pain to switch payments processors once you've scaled a business on an online payments processor. Like I would. I like Stripe too. I really like Stripe as far as the product goes. And I just keep thinking because I deal with this on a regular basis for my day job, it would be so cumbersome to try to switch because there's so much data on there, there's so much that you rely on for those payments processors. So I really like that one. And this is basically the public equivalent of Stripe and has three times the operating margins if I'm not mistaken. So good choice. I would love to own this, but aside from that, like one month period where it dropped, we have not had an opportunity to buy this at what I would call a reasonable multiple. If you're a regular listener to chit chat stocks, then you've probably heard us talk about Interactive Brokers. Here are three reasons that Interactive Brokers is better than any other brokerage platform. One, they've got it all. Stocks, bonds, ETFs, options, crypto, you name it. 160 markets, 36 countries, 28 currencies are the absolute best platform for global investors. Two, best in class pricing. They have zero commissions on US listed stocks and ETFs and offer margin rates up to 54% lower than the industry. And three, you can ditch the separate high yield cash account. Interactive Brokers offers up to 3.37% interest on cash held in your investment account. Head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC.
- [19:08]
B
Yep. Okay. It's gonna be hard to pick my third one. There's a lot of choices here. I'm gonna go with. I think I'm gonna go Mercado Libre. Not just because I've got anecdotal evidence here, but there's been plenty of good, I think research out there recently. I know that Ian Bizek, guest on the show from Ian's Insider corner, has covered them. Plenty of other people have looked at them. We had Brian Stofel on the show. Lots of good analysts follow them. And I've been doing a little bit more research just simply because and maybe this is a bad habit. The stock's been flat over the last five years. I think people still really underappreciate the Runway to grow. It's not apples to apples because they have some third party stuff versus first party. But Mercado Libre's revenue is actually lower than Coupang's. It's only $26 billion. They also have the finance, personal finance stuff on the side that's, that's massive with tens of millions of users and they, if you look at the Latin American countries, Argentina, Brazil, Mexico, some others, their E commerce penetration is like half the level of the United States, maybe a third of the level of East Asia. I feel like there's room for, I mean over the next decade, especially if they invest in their internal delivery stuff for revenue to probably not 10x for a decade, but maybe the next 10, 20, 15, 20 years they could 10x their revenue. I feel like that wouldn't be surprising. And if you could buy that at 15 times normalized earnings with the wide moat they have in these nations, I feel like that's a great pick here. Was it on your list or not, Ryan? I feel like it was kind of a curveball for this draft.
- [20:46]
A
That was on my list as well. And it's hard to imagine that a only public company in the world that has grown 30% year over year on the top line for more than 22 consecutive quarters. I mean they're the only one. It's hard to imagine that they still have a massive reinvestment Runway. But all those data points that you just showed and the customer experience that you're seeing there is a massive reinvestment Runway. They can continue to drive down delivery times. I imagine they can continue to put first party goods on there, make it more competitive on the marketplace and just attract more spenders. Not to mention if there's a economic, a positive economic environment in Latin America, it helps consumer spending in those countries. And so far lately it's been looking good for them, I guess.
- [21:37]
B
Yeah, politically it's gone from less socialism leaning to more free markets which is probably nice for the business. Ryan, what do you got for your. What is this? Third and fourth? Fourth? Yeah. Third and fourth picks.
- [21:48]
A
Yeah. I'm a little worried because you stole two of mine and I did not put 10 on here. So I was putting. Playing it a little dangerous. I think I'm going to go with Taiwan Semiconductor. This is a little heavier on the moat side, maybe a little lighter on the potential top line growth side.
- [22:08]
B
Normalize earnings to X out the AI bubble, Right. Then you're safe.
- [22:13]
A
That's the only thing that kept me from saying this. Number one, overall, because it's big business, it's huge. If they fulfill what management expects, which I, I believe they said 40% annual growth rate for their high performance chips business. If that happens over the next five years.
- [22:32]
This will work out and the moat is massive. So I do think if you can get this at 15 times normalized, which that's the big question is basically is normalized earnings higher or lower? That's kind of my concern than current earnings, I would be buying it. I worry that there's some over. Over. We're in a period where there's a lot of spending from customers. I don't think that would come to a grinding halt because chips will continue to be needed and they. At the worst, unless I'm mis imagining this, like they're still going to have the lower end chip demand on a regular basis, even if GPU demand isn't quite as high. Now I know high performance units has helped margins quite a bit, but it's.
- [23:16]
They are still, from everything you hear, capacity constrained. So my only concern would be that they invest in all these facilities abroad in the US and, and I think Japan.
- [23:27]
B
Yeah, Japan maybe Europe maybe.
- [23:29]
A
And then they invest in all that and you get a three, four year slowdown in high performance GPU demand and suddenly they go from capacity constrained or supply. Yeah, I guess it's capacity constrained to being having a glut of machines that aren't being used as much.
- [23:48]
B
That's why we have the loophole normalizing the earnings there. I think that's it. Yeah, it's a good choice. The only thing I worry about is the size, but people could have said that $50 billion in revenue ago. I have my last two here. I'm going to maybe put in my two honorable mentions. Did you already.
- [24:03]
A
I got.
- [24:04]
B
You have one more, right? Yeah.
- [24:07]
A
What? Airbnb add. No, I did not do add in. I did Airbnb coupang Taiwan Semiconductor.
- [24:13]
B
Okay, so you have your. I thought I was.
- [24:15]
A
One more.
- [24:16]
B
Not listening. Yeah, one more for you, then I go.
- [24:17]
A
So I'm a little hung up between two. I really like American Express. I wanted one of the card networks because I think they're very good business models and I think it's a wide moat. And I think if you're looking at all three of the card networks, MasterCard, Visa and American Express, sorry, Discovery, I'm not including you.
- [24:33]
B
Capital Bank.
- [24:34]
A
I would, I, I would think that American Express has the highest growth rate over those of those three over the next five years. So I'm going to go with American Express. But my honorable mention here, and I'm curious your take because they're kind of in the news right now. Would you buy Netflix at 15 times normalized earnings?
- [24:54]
B
I saw Tyler put, one of the Tylers put it in the chat. He said Microsoft, Netflix, Hermes, MasterCard, Nvidia, TSMC, ASML, Uber booking. I think it's a good list. I don't, I don't know if it would make my top five for Netflix just because of the size. And I will worry that they don't have an extremely wide moat given the competition. That's not apples to apples, like an add in and a stripe where it seems like it's going to turn into a duopoly where they have the competition from YouTube, even stuff like Instagram, what have you. I mean, but it would be up there. I mean, I think it's a pretty darn good business.
- [25:26]
A
You know what I missed? Google. I would buy Google at 15 times normalized earnings. It would be ahead of me for American Express.
- [25:34]
B
Yeah, I like your pick though. It's more inflation protected. I do think that's underrated over the long term. Maybe I'm just turning into a, a macro bear here. But inflation could be persistent. It has been sneakily persistent since it kind of came off that 8%, 9% boom. Let me go through mine. So we, we got other topics here. We don't want to take up the whole episode. I have two here. I'm going to go. Not gonna explain them, but I have my honorable mentions. I have the two luxury giants, Hermes, Ferrari, I think those are permanent growers. I have Autodesk at TSMC and I had asml. I think those are good ones. But I'm gonna have two. Well, one, you actually own one of these. Other ones are on my watch list. My first one here and it stock's been down, so maybe it actually is getting closer to 15 times earnings. It is wise. I think they're building a moat. It's, it's a perfect emerging moat stock and they have a long Runway to reinvest. Pretty much put it as simple as that. And given the stock, I think I saw our friend. We should get back on the show. We Sanchez, talk about how the stock's in a 25% drawdown. I hadn't been following it closely. I feel like that's a very good pick. And I'm noticing here I have a lot of Financials in my list, Interactive Brokers, Yen Carolibre, which is half financials and Wise. And then I'll put on my other honorable mention, New Holdings. But I wouldn't keep that as a pick because I don't know if banks, they kind of deserve to trade it. 10 times normalized earnings. 15 times is not some dirt cheap multiple for them.
- [26:59]
A
All right, let's shift gears.
- [27:01]
B
Wait, wait.
- [27:01]
A
What do you want to do?
- [27:02]
B
My last one.
- [27:04]
A
Okay.
- [27:04]
B
Honorable mention's a sneaky one.
- [27:06]
A
Real quick. Yeah, I think Wise belongs on there. That's a good call. I think I'd include Uber on this list. I know you hate that. I think I'd include them.
- [27:14]
B
Yeah. Not on my list. We talked about that though. I hope all the Uber shareholders prove me wrong. Some of that Waymo data, it just keeps getting scarier and scarier. At least for me. 10% of Reds in San Francisco now. Something like that. It's pretty high. All right, my last, my last one. This one we covered this year. This is one. Where is the moat? Super wide today? No, but I think it is wider than people think just because it's a small cap. But they have a very, very long Runway to grow with. I think no competition. And again, people are going to be surprised, but I think it's cracking Robotics. If you could buy that at 15 times normalized earnings, the amount of basically booked Runway for earnings growth where I think they can grow revenue 5, 6, maybe even 10x in a short while. Yeah, I mean the stock trades at I think, what was it, 10, 20 times sales right now. So I'm not buying. It's on the watch list. But in a crash. I feel like this is a great one to pick up.
- [28:05]
A
We just had someone comment. Either of you guys consider Axon. That would have been a good one as well.
- [28:09]
B
I like that business model. That's a great one.
- [28:11]
A
And my biggest gripe with them has always been the valuation.
- [28:15]
B
True. And the spc. But we include SBC in the, in the valuation so that that'd be fine. I just don't like them because I missed them 10, 10 bagger ago. So I get frustrated and I've just stopped following them.
- [28:26]
A
Yeah, that's a common issue for me as I hold a grudge when I miss the boat. So there's one that I've been looking into over the last couple days since we did the Chris Hone episode. That ferrovial company, they've got some phenomenal assets. The highway, if you live in Ontario, Highway 407. They own that. And it's got like 80% EBITDA margins and they've just been jacking up prices and people still pay them. And I.
- [28:53]
B
It's a literal toll road. You gotta. You have to go.
- [28:56]
A
Yeah, and they've got some in Texas here, too. The put it in my company, Internal Communications, because most of the people are from Ontario and they were.
- [29:08]
B
Is it actually Ontario, Ontario?
- [29:11]
A
I don't know.
- [29:11]
B
I don't know. Well, you hang out with the Canadians. I don't know.
- [29:14]
A
I think it's Ontario.
- [29:16]
B
Well, that's how they say. If that's how they say it. I've always said Ontario. Maybe. Maybe I'm saying it completely wrong. The Canadians are laughing at me.
- [29:23]
A
Yeah, they were. They were surprised to find out that it is some Spanish company that has just been jacking up prices because apparently that's a sore spot for Ontarians because they said the tolls have been getting more and more extreme. And I. I put that meme of Mac from Always Sunny of like, oh, my gosh, that's disgusting wear. Because it's a monot. It's literally a toll road jacking up prices, which, as much as people hate it, it's a irreplaceable asset that you're going to have to take.
- [29:55]
B
Irreplaceable roads. Well, I mean, I don't know.
- [29:59]
A
It's hard to build a highway across the.
- [30:03]
The province.
- [30:04]
B
Yeah, I get what you mean.
- [30:05]
A
It's not quite as hard as, like a railroad, but. Yeah, I thought it was an interesting business. Any more honorable mentions or should we shift gears then?
- [30:12]
B
We got to shift gears. We're about halfway done here. Hopefully people like that one thought we went a bit long, but I think it was a fun one. And thank you, Simon, longtime listener, for giving us the shout out there. All right, I'm gonna give you a choice for first, Ryan, do you want to do an 8K story for the ages for Thanksgiving Friday, 8K? Or do you want to do Michael Burry and historian sbc, which I think is more of a eat your vegetables educational stuff for the listeners.
- [30:41]
A
We absolutely have to do Rick's Cabaret Collapse.
- [30:45]
B
Yes, yes. The only episode I think we've deleted. Sorry. To the CEO or ex CEO.
- [30:52]
A
Now, full disclosure, let's maybe mention this for any listeners today. We're about to talk about a company that was a public, publicly traded gentleman's club roll up. And we had the CEO on the podcast, I think, three years ago. And honestly, there was like, there was a pitch to be had a Lot of value investors were actually like the pitch because it's a sin stock and there was sort of repurchase story. We after this news came out because he's been accused of fraud and bribery, if I'm not mistaken. Or actually alleged.
- [31:26]
B
Oh, a legend always say legend alleged.
- [31:30]
A
We took the podcast down not to save face, although maybe there's an element of that. But I don't really want to be giving if people are going back and listening to that. I don't want to be really.
- [31:40]
B
Yeah. Without knowing that the indictment was there. Yeah. Three years ago. And it's not like it was probably like one listener a week at that point. But still, that's the context there. We've. I don't think I've ever owned it, Ryan. You've never owned it, but. Or actually I should have flipped that. I know I've never owned it, Ryan. I don't think you've ever owned it. But he's nodding along with me. Ticker is Rick. And I guess we're bearing the lead here. It has had quite the interesting last few months. A lot of strange 8Ks without press releases, kind of trying to hide the information in the 8K. So if we go, there's three big ones here that I think people have to understand. First up, I was reading a yet another value blog. Nice substack. He was writing a lot of good stuff about and summarizing the situation, which kind of helped me get up to speed for someone that doesn't follow it very closely. So on September 16th, the company, Rick's Cabaret, put out an 8K saying that they were being indicted by the Supreme Court of New York for tax fraud and bribery. I believe we've covered this. At the time, they were taking accountants, I think their auditors to allegedly the gentlemen's clubs and giving them, say, $10,000 worth of services. And then, oh, okay, hey, we don't have to pay too much in taxes. Pretty. You know, that's like a movie like the tax fraud there. Now, on November 24th. Now right around Thanksgiving, right before Thanksgiving, it executed a buyback with ADW Capital. And this is in the 8K. ADW Capital and Adam Wieden for $30 million at a price of 30, $36 a share, which is about a 50% premium to where I think it's trading at today and where the stock was trading at the time. So it's a huge premium to buy back at. Buy out one of your existing shareholders who is pretty much stuck in this business now. Why they did that I'm not so sure what sort of negotiating leverage ADW Capital has. Kudos to them for, I guess, getting a really good price on that deal. Then on Friday after Thanksgiving, which is one of the absolute hottest days for sneaky 8Ks for information that companies don't want investors to know because you have Thursday off, a lot of people are taking Friday off. The market's barely open on Friday. So if you found an 8k, it might totally go under the radar. And they filed an 8K on the Friday after Thanksgiving, saying that the CEO and CFO had resigned, effective immediately, earlier that week. The question for you, Ryan, is are you buying the diploma on the stock that's down about 80% from all time highs? And is their only path forward to just buy some Trump Coin and hope for the best?
- [34:13]
A
Absolutely. Well, so that does seem like the plausible path at this point. Like if everything else goes to shambles, you just basically become a crypto.
- [34:22]
B
It might honestly. It might honestly be a buy if they buy Trump Coin. I'm not joking like that.
- [34:29]
A
You're not allowed to say that. I just. I don't. I refuse. Even if, Even if you're right, I.
- [34:35]
B
Have no insider information on that. I'm just saying, given the historical.
- [34:40]
A
My morals tell me, like, I can't make money that way. So.
- [34:44]
B
You have more morals than me.
- [34:46]
A
This thing re. This thing reeks. Obviously a fraud. Now, the. I mean, it is a gentleman's club business. So there was always kind of the hint of wrongdoing going on.
- [34:59]
B
Just. It's the type of business that can lead to that. Yeah.
- [35:02]
A
This Adam Wyden guy. I saw a lot of people. First of all, my. I have red flags galore with Adam Wyden. It's like I've seen a lot of stuff historically where it's just kind of. It was hard to get around, like publicly shamed his dad one time. It was just a very weird thing. His dad, I believe, is a senator sitting.
- [35:19]
B
Senator of Oregon. Yeah, it's quite the story, honestly. This could be a movie.
- [35:23]
A
Yeah. People are talking about, like political corruption as well. Once again, all of this alleged.
- [35:28]
B
I should say we know nothing.
- [35:30]
A
We know. Yeah. Am I buying shares? Absolutely not. Because there is just. You could make money, but there's gotta be easier places to make money than this. Like, this is. If you're right, you're. You're betting on a lot of things not being true. A lot of. I mean, the CEO and CFO resigning, like, come on. They, they. I read somewhere that they are not actually. They're not even sure if the CEO can remove himself entirely because he personally guarantees the company's debts.
- [35:59]
B
Yeah, and do you want to hear the worst part about it? The CEO is resigning and his pay isn't changing. Isn't that just hilarious? Yeah, tax loss, harvesting season. Yeah, just not everything's going to be a winner. I know some smart people that were in that and it's unfortunate it turned out that way. It happens.
- [36:18]
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 Duolingo's daily active Users, Oracle's backlog, Rocket Lab's 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 free 15% off. Again, that's fiscal AI chitchat. The link will be in our show notes. Okay, where should we go for next? Michael Burry?
- [37:26]
B
Yeah, I promise the listeners we're not just going to be a Michael Burry substack summary show, although we are giving you maybe some insights as it is a paid substack and I promise not to do this for 20 minutes every episode. We did two in a row and actually realized it put him in the title twice. The show's got listens, so I kind of feel like he's a good SEO target, but we're not going to do that every time, just so you know. All right, his latest one, his latest article from last week was right up my alley. Ryan knows I'm a stock based compensation. Would you call me a stock based compensation hater?
- [37:59]
A
I think hater is a fair word.
- [38:01]
B
Yeah, I think so as well.
- [38:03]
A
I'm trying to think of a better description. Maybe a.
- [38:08]
Sbc.
- [38:11]
Now, hater is probably the best word downer.
- [38:13]
B
I think so. I think so.
- [38:14]
A
You understand that it has its place.
- [38:16]
B
Yeah, of course. But as Burry Articulated much better than I ever have. The true dilution value of sbc and the true expense of SBC is understated with Gap account, especially if you have a winning stock, which is if anyone says, well, the stock has to go up by a ton. If it's, if SBC is going to be a terrible expense on your investment, I would say, well, what are you buying it for? Because you think it's going to go up by 10x. Right. So Burry wrote about this. He goes into a lot more detail than I am on this call, but he says that SBC needs to take into account either one in your DCF this kind of cash flow, setting up a perpetually, perpetually setting aside capital to offset dilution, which is essentially saying we're going to buy back an X amount of stock every year using the cash flow in our discounted cash flow model in perpetuity to make sure the share count doesn't go up. Or this is what I like to do, counting for the sbc. By issuing new shares each year in your DCF at a certain rate, 1%, 2%, 3%, what have you just peg a rate out there. This is what I think to simplify things people should do and just peg what the share count will rise at as a form of your sbc. Now, I kind of like when you can peg a discount in the shares, which is where your cash flow is going. That's why we like share buybacks. That's why we like share buybacks. That for companies that are heavily reducing their shares outstanding. And I think he had some good quotes here. Well, actually, let me look at this first one. Skipping down the list. He said take two identical companies, company A, company B growing at the same rate, and you discount them at the same rate in your DCF 10% a year. Company A pays employees all in cash. Company B uses SBC and it's dilutes owners at a rate of 1% annually. This is only 1%, mind you, there are companies so my own like for midly that can go 5%, 6%, even 10%. Now using a DCF, again, this is assuming all else equal company A. A fair multiple for them is 20 times earnings, but only 1% dilution a year. Company B is worth 16.4 times. Think about that. I think that's just so understated. You just go, oh, this was 1% a year. Who cares?
- [40:39]
A
Yeah, yeah, it's a good illustration of it. Anything else that he added here? I see some quotes for you.
- [40:45]
B
Yeah, he has some quotes he specifically. And I think the man knows how to poke the bear because he always talks about the most battleground stocks. And I gotta say, Dr. Burry, for someone who says they hate the limelight, why don't you just talk about obscure Valley stocks? If not, then. But you're talking about Nvidia and Palantir. Those are going to get attention and I think you know that quo. Such buybacks represent a true cost that penalizes both present value and potential long term returns. Many of our most popular companies such as Nvidia are engaged in buybacks to nowhere where the cash spent on repurchases does not reduce share count. The original cumulative GAAP SBC expense for Nvidia, $20.6 billion is now irrelevant and may as well be imaginary. Never an expense replacing GAAP SBC or SBC expense with the $91 billion in buybacks they've had to nowhere results in total owner earnings of $135 billion. So he's saying with a big winner like Nvidia, the GAAP SBC expense, or I think it was a five year period, was $20.6 billion. But in actuality it took 91 billion in buybacks to offset the dilution. So it actually should have been 70 billion higher. You want to hear something using a big short quote that is going to blow your mind? Ryan, you seen this tweet? You might have clicked on it in the Google Doc.
- [42:04]
A
Pulling it up now.
- [42:05]
B
Okay. There are 36,000 Nvidia employees. There are $630 billion of RSU's outstanding, meaning that's $17.5 million per person. Can we tone that down a bit?
- [42:20]
A
Yeah. Obviously not how the distribution works out. Those RSUs are heavily concentrated to probably, okay, average still maybe.
- [42:33]
B
They don't have that many. They don't have Amazon low. Like they don't have the small amount of employee or you know, like most of those people at Nvidia are earning 4 or 500k here, if not significant like on their base salary. Oh yeah. Oh yeah. But even if we. Okay, even if you say the median is $5 million in RSUs still 5.
- [42:54]
A
Yeah, that's.
- [42:57]
B
Just. Slow down the SPC. I mean, for crying out loud.
- [43:00]
A
I mean it's got to be heavily concentrated to people that were there. The value, those RCUs people that were there five years ago.
- [43:08]
B
Right, I agree.
- [43:09]
A
Four years ago, five years ago, before all this. Well, I guess it's about right when it started to take off, but.
- [43:14]
B
Right. And how much was. How much is Jensen that's also a good question. It's still quite the stat. 630 billion in outstanding RSUs for a single company.
- [43:25]
A
I'm sure the low level employees at Nvidia are wishing that figure were true for them, but. Yeah, it is. It's an astoundingly high headline figure and I, I do think it's a good illustration. He does a very good job. Like you. Well, he does a very good job describing all this and it's actually a really good substack. But I think you're right. For a guy who claims to hate being having attention. He's had a movie made about him. He started a substack. He had an off and on relationship with Twitter over and over.
- [43:56]
B
Yeah.
- [43:57]
A
And he just did a podcast and then every, every time he posts about it, he's like, I don't usually do podcasts, but here's a podcast. It's like you, you could just say no.
- [44:05]
B
Yeah, he is a. Not that I don't like his writing. His writing's great. But yeah, provocative guy for sure. All right, let's go back to one of your topics, Brian. Oh, yeah, we can talk Zuckerberg first and then close out with your listicle as a tease for the listeners. Six quality stocks trading at record low valuations. As you can tell, Ryan's very good at this. Now he does this for fiscal AI. And those are the tweets that get the most clicks. Am I right? Along with Mercado Libre. That's your. That's also the bread and butter. Can you find. Did you know one stock has, what is it, 30% for 20 quarters? I mean, that's. It is impressive.
- [44:39]
A
That is. Yeah, it's.
- [44:41]
B
And it gets retweets.
- [44:42]
A
Cross standing growth rate. Yeah, let's talk. We can actually, why don't we hit this really quick. Six quality stocks trading at record low valuations. Basically all I did was try to find.
- [44:52]
And I didn't have like a screener for this exactly. But trying to find stocks that are obviously quality is subjective. But what I deem high quality. Plus my like only quantitative parameter was revenue has grown over time and profit margins have expanded over time and that's over like a decade or could be shorter as well. I'll just rip through these and you tell me if any excite you. I know one of these does Airbnb 22 times EV to EBIT. Most of these are all EV to EBIT except for the last two. Salesforce 28 times, Lululemon 9 times, Adobe 16 times. And then the last two are EV to free cash flow because they're kind of turning the corner to profitability here. Duolingo 21 times Monday.com 21 times so one more time. Airbnb, Salesforce, Lululemon, Adobe, Duolingo, Monday.com, all trading at or near their lowest valuations ever.
- [45:52]
B
Well, let's take Airbnb off the board because people know I like that since I own it. Lululemon does attract me. That's a double entendre, or what do they call it? Double meaning there nine times earnings just so damn cheap. And it seems like the brand is going to have at least some form of durability. They'll turn the corner. They'll get around these kind of recent blunders with their product. I don't know why I don't own it. I guess I like Crocs a little more and the other one I'm very interested in and we're betting this as a tease for your upcoming research episode Monday.com that growth rate they put in with revenue is just highly impressive and I don't know much about the business. I used it once at a company I worked at. Seems fine, it's a good product. But.
- [46:36]
Curious whether.
- [46:39]
They'Re probably deemed an AI loser. I'm just curious what it's going to be a fascinating episode. I think people, people should listen to it.
- [46:46]
A
Yeah. I'd say from this list the two that stand out, I mean Salesforce 28 times for a business that's basically growing 9 to 10% on the top line and operating margins could expand. But I'd say my guess without having done any real digging here is you get high single digit revenue growth over the next five to 10 years and mid teens earnings growth 28 times feels like a fair price to me, but it's one that has historically just traded at ludicrous multiples. So it's.
- [47:19]
B
Yeah, it doesn't interest me.
- [47:21]
A
Adobe and Monday.com are probably the highest on that list. I've got nothing against Duolingo, but I don't think it's actually as cheap as it looks on a free cash flow basis.
- [47:33]
B
So let it be.
- [47:37]
A
They've turned the corner to profitability ability on a gap basis too.
- [47:40]
B
But remember we just talked about how gap svc, you gotta watch out for that something. Honestly I learned a lot from that, from that burry post. But I know you like Adobe, I know you like Airbnb.
- [47:50]
A
The two things for Adobe and Monday.com and this is kind. This still gets into the whole like will AI kill SaaS discussion. Very different businesses. I think money.com a lot more similar to like a Salesforce because they. It's more task management work, operating system type of stuff as opposed to creative software like Adobe. But the idea for me that this cannot actually be the bear thesis because people are saying like it's AI is going to disrupt them. I don't get that at all. Like, I do not understand that. What I saw that on Gemini, this newest developer model, you can take a picture, you can put it in and say, build me the code for this website. That's great, but that's not like, okay, great. You've got the bare bones for like a basic website. You now have to go find millions of customers. You have to know how to diagnose any issues. You have to know why it was built a certain way. Like Obvi. You are so far away from a legitimate business. Just because.
- [48:49]
B
Go ahead.
- [48:50]
A
Just because you've built the bones for a website does not mean you have a legitimate competitor to Salesforce. Like it's. If it's like a meme that people are like, hey ChatGPT, build me a Salesforce and $40 billion in revenue. Make no mistakes. Like, that's. This is not happening.
- [49:08]
B
I think for your Monday.com episode you need to try to build a Monday.com competitor and test it out and see if you can do it.
- [49:15]
A
It'll last 30 seconds before I realize I can't do it.
- [49:18]
B
Well, I think you should try because I. Okay, that's fair. As you've told me before, you are technologically challenge, let's say challenge sometimes with computer stuff. So that'll be a good test. And if, you know, if you can, maybe that is the bear case. I think, I think you need to try.
- [49:36]
A
Yeah. It's not like this field isn't competitive, but software is generally sticky, especially if it. Multiple people on a team use it regularly. It's sticky. They have a high attach rate with organizations and it tends to expand within organizations. So I am going to look more into it. The stock has sold off a ton, I would say that. And then obviously Airbnb. I'm interested in Adobe as well.
- [50:00]
B
All right, we're going to close things out. We got a couple of quick segments here. First, I need to mention Bubble Watch is really turning into Sam Altman Red Flag Watch. Every week. There was reports that Altman is apparently trying to take a stake, controlling stake in a rocket launch company. I assumed it was going to be Rocket Lab, but it's Some random company that I know this industry fairly well isn't doing anything. He wants to build a competitor to SpaceX. You really know I don't love Elon much at all, but are you really going to try to do this out of your spite and your spat with Elon? I don't get it. It's just a red flag again across the board and I feel like this is a total Icarus situation. Getting way too close to the sun gonna burn up. It feels textbook altmantist.
- [50:51]
A
Like this is the thing you do after you've had a very successful company that's gone public and it, it feels like not to say ChatGPT or OpenAI hasn't been successful. Obviously they have you built, what is it, $8 billion in revenue. But you have a lot of skeptics right now as to whether or not this is a sustainable business model. Why are you stepping aside now? Not stepping aside. Distracting yourself, I should say with this.
- [51:18]
B
It'S not gonna happen.
- [51:19]
A
But prove one business first and then go, I don't know, go the Bezos route.
- [51:25]
B
So you're about to make a trade based on a friend's text, but which u do you listen to? Is it we could buy a house in Tulum.
- [51:36]
C
Get optioning those options.
- [51:40]
We could lose everything.
- [51:43]
B
Or let's do a little research, get your head in the trade and make the investment decision that's right for you.
- [51:49]
A
Learn more@finra.org TradeSmart.
- [51:54]
Coca Cola for the big, for the small, the short and the tall. Peacemakers. Risk takers for the optimists. Pessimists for long distance love for introverts and extroverts. The thinkers and the doers for old friends and new Coca Cola for everyone. Pick up some Coca Cola at a store near you.
- [52:24]
B
Yeah, exactly. All right, let's do a little macro shopping at Halloween. Or not Halloween, Black Friday slash Cyber Monday. I should say thank you to everyone who did themselves a favor. Signed up for fiscal AI with the double discount for Black Friday. Using our link, quite a few did. So really nice to see that. Nice to have a little holiday bonus every once in a while for the business. But there's been a lot of talk about deteriorating consumer spending and I think Black Friday is one of the best barometers out there. If you look at the numbers and maybe if you divide it by income demographics, it's going to look like a different picture, but I think kind of always will. Here's the quote from US spending US shoppers spent $14.25 billion on Cyber Monday pushing total online sales to $44.2 billion. For the so called Cyber Week, spending rose 7.7% from Thanksgiving to Cyber Monday, compared with an 8.2% increase last year. So 8.2% increase last year, 7.7% increase the year before. Things are looking quite, I think, healthy across the board. And any company that you're interested in or any stock that said that blames consumer spending from a macro basis on their underperformance. I think you got to look yourself in the mirror and say, is management trying to pull your leg?
- [53:42]
A
Cough, cough. PayPal, they just talked about weak consumer.
- [53:47]
You know what else?
- [53:50]
Let me read you this quote one more time. US shoppers spent 14.25 billion on cyber Monday, pushing total online sales over Thanksgiving weekend to 44 billion according to Adobe Analytics Report.
- [54:04]
B
Well, that business, they haven't gone bankrupt yet and I think didn't shopify go down. I don't, I don't really. Yeah.
- [54:12]
A
What do you mean?
- [54:13]
B
Like there's an outage on their AWS server or something like that. All right, we got like one minute left. Let's talk Zuckerberg Reality Lab spending. This is not one. I think we can pat ourselves on the back too hard on. Because it seemed like everyone except the core Metaverse people saw this as a writing on the wall. But here's a quote from a Bloomberg article. Executives are considering potential budget cuts as high as 30% for the metaverse group next year, which includes the virtual worlds products, Horizon Worlds and its Quest Virtual reality unit. Cuts that high most definitely include layoffs as early as January, according to the people, though a final decision has not yet been made. I saw someone estimate this could SA save $5 billion annually. That goes straight to the bottom line. What do you think, Ryan? Getting lean get rid of this whole division? Why not?
- [54:58]
A
I saw. Yeah, I saw. I think an expert network transcript from like a year ago where they're like, this is the big year. If we don't figure it out with Reality Labs in the Metaverse, they're going to cut spending is like it was like an employee or something. So they're going to get on the wall. Yeah. And it's weird to me that maybe they're just waiting for an actual prove it from Zuckerberg, but I don't know if anyone toys with Wall street better than Mark Zuckerberg.
- [55:26]
B
Yeah, I know. Here's a.
- [55:27]
A
We're going for a spending boom. We don't like that. All right, well, I'll cut it.
- [55:31]
B
I think it's going from about 25 billion to like $20 billion in spending. So you're still burning $20 billion on nothing right now on science experiments. But hey, it's probably good for the stock. And $25 billion on science projects is. It's insane. It's insane. And I pray. Well, I'm not a Amazon shareholder, but for the Amazon shareholders out there, I hope one day the same thing can happen to you and Alexa.
- [55:57]
A
Yeah, I think Zuck spends more on this than Amazon does on Alexa, but.
- [56:04]
B
I heard 10 billion or more on Alexa. I heard more than 10 billion on Alexa, but that's still like half of what Zuckerberg's done.
- [56:11]
A
Remember when everyone, like, had to have a Metaverse strategy?
- [56:15]
B
Like, every company in the world?
- [56:17]
A
ServiceNow is like, what's our meta. What's our metaverse strategy workday? How are we gonna get people to do their payroll with VR glasses? It's like, yeah, and nothing. It's funny how nothing materialized from that, really. I mean, has anything changed? Like, maybe more games have been created?
- [56:35]
B
No, no. AI is clearly actually something, even though there's probably a little bit of that mixed in. But we're going over in time here. Got to get out of here. Let's get the disclosure and get out of here. We're 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. Let us know again if we have any audio problems, but I hope we got them fixed. If you want to check out the Emerging Moats newsletter, please do. That link is in the show Notes have something coming out on Crocs the same day this episode comes out, so please give that a read. If you are willing, sign up for that newsletter. It is.
- [57:16]
Well free to sign up, but the paid service will have the Crocs write up and I think that's it. Episodes coming out with the Basic Capital founder, which I thought was a fantastic interview. Episodes coming out with Ryan's research report and a lot of fun end of the year stuff around the holiday season. Thank you everyone for tuning in. We'll see you next week.
- [57:52]
C
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- [58:21]
B
Hey, Ryan Reynolds here wishing you a very happy half off holiday because right now Mint Mobile is offering you the gift of 50% off unlimited. To be clear, that's half price, not half the service. Mint is still premium unlimited wireless for a great price. So that means a half day. Yeah, give it a try@mintmobile.com Switch upfront.
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C
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