Chit Chat Stocks: What Makes a Multibagger? (Interview with John Rotonti) – Detailed Summary

Release Date: August 1, 2025
Hosts: Ryan Henderson and Brett Schafer
Guest: John Rotonti, Portfolio Manager of the Bastion Industrial and Infrastructure Portfolio

1. Introduction and Portfolio Launch Recap (00:00 – 05:57)

Ryan Henderson opens the episode by welcoming John Rotonti, a recurring guest and the portfolio manager of the Bastion Industrial and Infrastructure Portfolio. John provides an overview of the portfolio's inception and its early performance.

• Portfolio Launch:
  John launched the portfolio on January 23, 2025, following an extensive research phase in 2024 where he curated a watch list of 60 stocks.
  “I launched on January 23rd. The portfolio had 32 stocks in it and a big cash position, really big, like more than 30%. It was 40% on day one because I just wasn't done building out the portfolio.” [00:33]

• Initial Challenges and Strategy:
  Shortly after launch, the portfolio faced significant drops due to DeepSeek's announcement, affecting companies tied to AI and data centers.
  “This is not an AI portfolio and happy to talk about that. ... but a lot of the companies that I own sell into the AI data center and so they get caught up in that AI trade.” [02:00]

• Long-Term Focus:
  John emphasizes a long-term investment horizon, avoiding benchmarking and short-term performance metrics to focus on building generational wealth.
  “The goal of the portfolio is not necessarily to beat the market. The goal of the portfolio is to help build generational wealth for my clients.” [04:50]

2. The AI Spending Surge and Data Centers (06:44 – 15:00)

Ryan and John delve into the massive increase in AI-related spending, highlighting the competitive race among big tech companies to expand their data center capabilities.

• Capital Expenditures (CapEx) Race:
  John outlines the staggering CapEx projections for major tech giants:
  “Meta... guiding to 100 billion in CapEx for 2026. Amazon's going to do 100 billion this year. Alphabet's going to do 85 billion this year. Microsoft 80 billion.” [07:10]

• Long-Term Commitment:
  He argues that the current spending is just the beginning, with a backlog that could take 10 years to build out at current rates.
  “There's at least 10 years of backlog build from just announced data center CAPEX in the US.” [09:00]

• Impact on Related Industries:
  The discussion extends to the various components and suppliers benefiting from the AI boom, including electrical components, cooling systems, and networking equipment.
  “30% of an AI data center is electrical components. ... wiring, copper and fiber optic, backup power generators.” [13:27]

3. Valuations and Market Outlook (15:50 – 21:06)

The conversation shifts to the current valuations within the S&P 500, particularly the dominance of mega-cap tech stocks and their implications for investors.

• High Valuations:
  John notes that the S&P 500 is trading at historically high multiples, comparable only to the dot-com boom.
  “I think that The S&P 500 is very rich from a historical multiple basis ... the goal of the portfolio is not necessarily to beat the market. ... the market believes that AI has a long Runway of growth.” [17:38]

• Comparing with Treasuries:
  He highlights the disparity between the S&P 500's earnings yield and Treasury yields, raising concerns about valuation:
  “The earnings yield is trading at historically low figure, like 3.3% ... Meanwhile, Treasuries are at like 5%.” [15:50]

• Investment Strategy:
  John discusses maintaining a significant cash position to capitalize on market opportunities, aiming to reduce cash holdings over time while ensuring flexibility.
  “The model portfolio is 22% cash right now. ... I like to deploy at least 10 points of that, get down to 10% cash.” [21:06]

4. Market Speculation and Bullish Indicators (22:00 – 31:34)

John addresses the current speculative environment, acknowledging potential bubbles while outlining reasons for maintaining a bullish stance.

• Signs of Speculation:
  Referencing Richard Bernstein and Goldman Sachs reports, John points out indicators of rampant speculation, especially in AI:
  “There have been two times ... when speculation ran rampant ... the current environment seems very much the same as those two periods, if not bigger.” [27:24]

• Bullish Factors:
  Despite speculative concerns, John remains optimistic due to factors like consumer confidence, stimulus bills, household cash reserves, and historical stock performance:
  “Consumer confidence has recently been near record lows ... there's a massive stimulus bill ... over $15 trillion in household dry powder on the sidelines.” [28:28]

• Historical Performance:
  He cites historical data showing the resilience and growth potential of the US stock market:
  “Stocks have historically gone up three out of every four years ... there have been more 20% up years than total down years going back to 1950.” [30:00]

5. Crypto Debate: Intrinsic Value and Portfolio Inclusion (33:21 – 39:22)

The hosts discuss the role of cryptocurrency in investment portfolios, debating its intrinsic value and diversification benefits.

• Personal Holdings and Views:
  John admits to holding a small amount of Bitcoin for FOMO (Fear of Missing Out), despite acknowledging its lack of intrinsic value:
  “Just being honest ... If you know, I could be wrong about crypto and so FOMO is the reason that I own a little bitcoin.” [34:19]

• Intrinsic Value Concerns:
  Ryan challenges the notion of crypto as an investment, emphasizing the absence of cash flows and intrinsic value compared to stocks:
  “What makes it worth. What it's worth is obviously just whatever people think about it. ... It lacks intrinsic value.” [35:02]

• Historical Resilience:
  John counters by pointing out Bitcoin's history of recovering from significant drops and potential regulatory tailwinds:
  “Bitcoin is a 16 year history. It has survived definitely 2, maybe 3, 80% drops, Ryan. But it always recovered to a new high.” [36:26]

6. Multi-Bagger Stocks: Insights from Recent Research (39:22 – 52:43)

John reviews a recent report on multi-bagger stocks, identifying key predictors of exceptional stock performance.

• Report Overview:
  The report by Anna Yartseva examines 464 stocks that achieved at least 10x returns from 2009 to 2024, maintaining their performance over time.
  “The strongest single predictor of multi bagger returns was high free cash flow yield.” [39:53]

• Key Findings:

  • High Free Cash Flow Yield: Consistently the most reliable predictor of multi-bagger success.
  • Small Cap Advantage: Smaller companies tend to outperform larger ones in achieving multi-bagger status.
  • Growth Rates Irrelevant: Historical growth rates (sales, earnings, etc.) were statistically insignificant in predicting future multi-bagger performance.
    “Historical growth rate of any metric ... completely statistically insignificant.” [43:56]
  • Dividend Payouts: A significant percentage of multi-baggers paid dividends, indicating disciplined capital allocation.
    “57% of the companies paid a dividend. And by the end of the study, 75% of the companies paid a dividend.” [48:45]

• Investment Implications:
  John emphasizes focusing on companies with high free cash flow yield and those trading near their 12-month lows for potential multi-bagger opportunities.
  “Close to a 52 week low ... is very important.” [48:45]

7. Portfolio Management and Investment Strategy (52:43 – 65:15)

The discussion shifts to portfolio management strategies, including stock screening, dividend policies, and sector-specific investments like railroads.

• Dividend Philosophy:
  John advocates for dividends as a sign of management discipline and shareholder alignment, challenging the notion that dividends indicate stagnant growth.
  “It shows that you have a management team that thinks and acts like owners. ... Companies that pay a reasonable and prudent dividend have gone X growth.” [50:15]

• Investment Criteria:
  He outlines his investment criteria, emphasizing quality, high Return on Invested Capital (ROIC), stable free cash flows, and long-duration growth prospects without relying on screening tools.
  “I don't screen. ... most of them have already achieved scale. ... high and or rising returns on invested capital.” [52:59]

• Railroad Consolidation:
  John discusses the ongoing consolidation in the US railroad industry, highlighting Union Pacific's planned acquisition of Norfolk Southern to create the first transcontinental railroad.
  “Union Pacific is going to take [Norfolk Southern] and create the first modern day transcontinental railroad west coast to east coast in the U.S.” [57:33]

• Implications of Consolidation:
  Consolidation is seen as a trend towards more rational pricing and reduced cyclicality across various industries, benefiting investors by stabilizing market dynamics.
  “There's a natural tendency towards consolidation in corporate America.” [63:04]

8. Conclusion and Final Remarks (65:15 – End)

Ryan wraps up the episode with final thoughts, emphasizing the importance of John’s newsletter, J. Rose Notes, for subscribers interested in detailed analyses of companies.

• Newsletter Promotion:
  “My newsletter is my My Second Baby. My portfolio is the First Baby, the newsletter the Second. It's J. Rose Notes, and you can subscribe@LastBillion.com.” [64:54]

• Closing Disclaimer:
  Ryan reminds listeners that the podcast content is not formal financial advice, ensuring compliance and listener awareness.
  “We want to remind listeners that nothing we say on this podcast is formal advice or a recommendation.” [65:15]

Notable Quotes with Attribution and Timestamps

• John Rotonti on Long-Term Focus:
  “The goal of the portfolio is not necessarily to beat the market. The goal of the portfolio is to help build generational wealth for my clients.” [04:50]

• On High CapEx in AI:
  “Meta... guiding to 100 billion in CapEx for 2026. Amazon's going to do 100 billion this year. Alphabet's going to do 85 billion this year. Microsoft 80 billion.” [07:10]

• On Market Valuations:
  “The earnings yield is trading at historically low figure, like 3.3% ... Meanwhile, Treasuries are at like 5%.” [15:50]

• On Speculative Behavior:
  “There have been two times ... when speculation ran rampant ... the current environment seems very much the same as those two periods, if not bigger.” [27:24]

• On High Free Cash Flow Yield as a Predictor:
  “The strongest single predictor of multi bagger returns was high free cash flow yield.” [39:53]

• On Dividend Philosophy:
  “It shows that you have a management team that thinks and acts like owners.” [50:15]

Key Takeaways

• Long-Term Investment Horizon:
  Focus on building generational wealth without being distracted by short-term market fluctuations or benchmarks.

• AI and Data Centers Are Growth Drivers:
  Massive CapEx from big tech companies signals a long-term commitment to AI infrastructure, benefiting a range of related industries.

• High Valuations Require Strategic Positioning:
  With the S&P 500 trading at high multiples, maintaining a flexible cash position allows for opportunistic investments during market dips.

• Be Aware of Speculative Risks:
  Indicators suggest possible bubbles, especially in the AI sector, but bullish factors like consumer confidence and substantial household cash reserves provide a counterbalance.

• Quality and Cash Flow Are Paramount:
  Multi-bagger stocks tend to exhibit high free cash flow yields, disciplined capital allocation, and sustainability through dividends.

• Industry Consolidation Creates Stability:
  Trends in industries like railroads and semiconductors point towards fewer but stronger players, reducing cyclicality and enhancing rational pricing.

• Critical Evaluation of Crypto:
  While recognizing Bitcoin's resilience, John remains skeptical about its intrinsic value compared to traditional, cash-generative assets.

This episode of Chit Chat Stocks provides a comprehensive exploration of factors contributing to multi-bagger stock performance, the implications of the AI spending boom, and strategic portfolio management insights from John Rotonti. Listeners gain valuable perspectives on balancing long-term growth with market volatility, the importance of quality investments, and recognizing emerging trends in various industries.