Podcast Summary: The Compound and Friends – "Price-Chasing Donkey"

Release Date: February 28, 2025

Hosts: Downtown Josh Brown, Michael Batnick, and guest Jim Leventhal

Overview: In episode "Price-Chasing Donkey" of The Compound and Friends, hosts Josh Brown and Michael Batnick welcome Jim Leventhal, Chief Equity Strategist and Partner at Serity Partners, to discuss a myriad of topics ranging from his naval experiences to deep dives into current market dynamics, stock analyses, and economic policies. The conversation is rich with insights into investing philosophies, corporate strategies, and macroeconomic trends shaping the financial landscape in 2025.

1. Introduction and Personal Insights

Jim Leventhal's Naval Background:

• Jim Leventhal shares his seven-year tenure in the Navy from 1990 to 1997, highlighting his service during the tail end of the Cold War.
• Notable Quote:
  • “Right at the tail end, the Cold War... when you got to 1995, this was Yeltsin talking to Clinton...” [00:20]
  • “I'll tell you the truth, not a day goes by I don't think about it. And it was the best time of my life.” [00:10]

Submarine Service:

• Detailed discussion about life aboard a nuclear submarine, emphasizing the small crew size (130 sailors) and the youthful age of submarine operators.
• Notable Quote:
  • “The captain is asleep in the stateroom, it's two in the morning. It's a bunch of 24 year olds and 19 year olds driving nuclear submarines.” [01:24]

2. Market Dynamics and Stock Analysis

Nvidia's Earnings and Market Reaction:

• Josh Brown analyzes Nvidia's outstanding earnings report, noting significant year-over-year growth in GAAP operating income (77%), net income (80%), and earnings per share (82%).
• Despite impressive numbers, Nvidia's stock fell approximately 6% post-earnings, attributed to high valuation and limited upside potential.
• Jim Leventhal argues that Nvidia is a bargain at its current price, with a PEG ratio of 0.7, indicating it is undervalued relative to its earnings growth rate.
  • Notable Quote:
    • “The PEG ratio is like 0.7. PEG ratio of price to earnings over the growth rate of earnings... it's phenomenal.” [17:00]

Post-Earnings Sentiment:

• Discussion on investor behavior, particularly the role of speculative trading (e.g., zero time to expiry options, leveraged ETFs) affecting stock prices without reflecting fundamental values.
• Jim Leventhal emphasizes focusing on valuation over market sentiment.
  • Notable Quote:
    • “What I do every day is I wake up in the morning and I say, where is it? Where is there a dollar's worth of value selling for 50 cents.” [38:45]

3. Corporate Strategies and Management

Intel's Strategic Missteps:

• Jim Leventhal critiques Intel's failed 10nm process and subsequent strategic moves, including foraying into foundry services, which were hampered by internal issues and lack of trust within the semiconductor ecosystem.
• Reflects on lessons for investors regarding the importance of strong management and the ability to pivot strategically.
  • Notable Quote:
    • “There are good lessons to be learned from the intel story... a good CEO is essential.” [24:50]

Cisco Systems as a Value Pick:

• Jim Leventhal highlights Cisco as an undervalued stock with a PEG ratio suggesting potential for re-rating. Discusses Cisco’s diversification into software and cybersecurity, particularly through the Splunk acquisition.
  • Notable Quote:
    • “They've got partnerships with Nvidia which keeps that business humming along and it gets to use the letters A and I...” [65:59]

Airline Stocks – Delta vs. Competitors:

• Analysis of Delta Airlines’ robust performance compared to peers like American Airlines, attributing success to effective management, operational efficiency, and strategic cabin segmentation.
  • Notable Quote:
    • “Demand is good. Fuel prices are low. Contracts with their major unions have been done...” [69:03]

4. Economic Policies and Reshoring

Reshoring and Supply Chain Realities:

• Jim Leventhal discusses the shift from just-in-time supply chains to reshoring manufacturing closer to home, influenced by policy directions and past supply chain disruptions (e.g., semiconductor shortages).
• Emphasizes the necessity of balancing autarky with international partnerships, particularly with Mexico and Canada, to sustain production capacity and resource availability.
  • Notable Quote:
    • “Policies right now are designed to bring production back home... you really need that production capacity, resources.” [48:32]

Impact of Tariffs on the Economy:

• The hosts debate the inflationary effects of tariffs, with Josh Brown positing that tariff-induced downturns can create buying opportunities once the immediate impact fades.
• Jim Leventhal concurs, suggesting that initial negative reactions to tariffs often reverse, leading to stock market gains once uncertainties are resolved.
  • Notable Quote:
    • “The problem goes away. And... the bulls make everything back and then some.” [52:31]

Federal Workforce Reduction and Economic Efficiency:

• Jim Leventhal contends that reducing the federal workforce reallocates talent to more productive sectors, aiding economic efficiency despite short-term pain.
  • Notable Quote:
    • “It's very good for the country... private sector workers tend to be more efficient.” [60:03]

5. Investment Philosophies and Strategies

Valuation vs. Market Sentiment:

• Jim Leventhal advocates for a valuation-centric investment approach, focusing on intrinsic value over market hype or bearish sentiment.
• Josh Brown and Michael Batnick engage in discussions reinforcing the importance of sticking to investment theses despite market volatility.

Long-Term Growth and Capital Allocation:

• Emphasis on investing in companies with strong free cash flow generation and disciplined capital allocation, such as through share buybacks.
  • Notable Quote:
    • “They have $12 billion in the last few months... share buybacks are crucial.” [43:36]

Lessons from Warren Buffett and Corporate Leadership:

• Josh Brown reflects on Warren Buffett’s strategic decisions during the pandemic, highlighting the importance of leadership in navigating corporate crises.
• Jim Leventhal underscores the necessity of owning industry-leading companies to minimize risk and capitalize on growth.

6. Stock Recommendations and Final Trades

Cisco Systems (Ticker: CSCO):

• Jim Leventhal recommends Cisco as a strong buy due to its diversified business model, strategic partnerships, and potential for valuation re-rating.
  • Notable Quote:
    • “They have a nice run to it right now. That 3.2% keeps you warm.” [69:34]

Delta Airlines (Ticker: DAL):

• Highlighted for its operational efficiency, customer satisfaction, and strategic cabin segmentation, positioning it as a resilient investment in the airline sector.
  • Notable Quote:
    • “They do things like fly their planes on time...” [69:44]

Citigroup (Ticker: C):

• Discussed as part of the banking sector, with emphasis on strong management under Jane Fraser and a focus on deleveraging and value creation.
  • Notable Quote:
    • “They're generating about 3,4 billion of free cash flow a year against a debt load that's around in the high teens.” [43:22]

7. Closing Remarks and Personal Reflections

Hosts’ Personal Anecdotes:

• Jim Leventhal expresses admiration for Josh Brown's integrity and investing approach, highlighting the importance of accountability and humility in financial discourse.
• Josh Brown shares personal milestones, including his 50th birthday celebration, emphasizing the camaraderie and mutual respect among the hosts and guest.

Final Thoughts:

• The episode concludes with reflections on maintaining a disciplined investment strategy amidst economic uncertainties and market fluctuations, reinforcing the value of staying informed and adhering to fundamental investment principles.

Key Takeaways:

• Focus on Valuation: Prioritize intrinsic value and growth potential over short-term market sentiment.
• Corporate Management Matters: Invest in companies with strong, adaptable leadership and strategic foresight.
• Reshoring and Economic Policies: Understand the long-term implications of policy shifts on manufacturing and supply chains.
• Market Dynamics: Recognize the role of speculative trading and the benefits of patient, value-driven investing.
• Diversification and Sector Rotation: Embrace diversification across sectors to mitigate risks associated with market concentration.

Notable Quotes for Reference:

• “I'm buying a dollar's worth of value at like 70 cents on the dollar.” – Jim Leventhal [38:45]
• “The PEG ratio is like 0.7... it's phenomenal.” – Jim Leventhal [17:00]
• “It's very good for the country... private sector workers tend to be more efficient.” – Jim Leventhal [60:03]

Conclusion: "Price-Chasing Donkey" offers a comprehensive exploration of current financial trends, investment strategies, and economic policies, enriched by Jim Leventhal's expertise and candid discussions with the hosts. Listeners gain valuable perspectives on navigating the complexities of the market, underscoring the importance of informed, disciplined investing.