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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP795: Berkshire, Moody's, & BellRing Brands w/ Stig Brodersen, Tobias Carlisle, and Hari Ramachandra
01:20:40
Stig is joined by Tobias Carlisle and Hari Ramachandra for a new round of stock pitches. They discuss Berkshire, Moody's and BellRing Brands.
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You're listening to tip.
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In today's episode, I'm as usual joined by my friends and fellow value investors Tobias Carlisle and Hari Ramachandra. We kick things off with my pitch on Berkshire Hathaway. We break down the investment case as the company transitions leadership to Greg Abel. We discuss what kind of returns investors can reasonably expect from here and Whether Abel's new $25 million compensation package is reasonable and aligned with shareholders. It's certainly a lot more than the $100,000 Buffett took home annually, but not so much compared to the $19 million average pay package for an S&P 500 CEO whenever you consider the size of Berkshire Hathaway. Then Haru walks us through Moody's, one of the highest quality businesses in finance with its regulatory remote and dominant position in credit ratings. We debate valuation and long term risks. Then finally, Tobias pitches Bellring Brands, a protein focused who consumer company that the market is selling off heavily and currently seems to be offering a appealing valuation. Now, one more quick note before we get into the episode. As we near the Berkshire meeting in May, we'll be hosting a few dinners and socials in Omaha for our TIP Mastermind Community. Our events will be a great opportunity to meet kindred spirits in the value investing space, build meaningful relationships, and discuss stock ideas and investing strategies. We'll be closing the group to new applicants at the end of March, so if you would like to join us in Omaha, you can apply to join the community by visiting theembest Mastermind or sending my co host Clay a note at clay@theinvestors podcast.com since 2014 and through more than 190 million downloads, we break down the principles of value investing and
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sit down with some of the world's best asset managers.
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We uncover potential opportunities in the market
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and explore the intersection between money, happiness and the art of living a good life. This show is not Investment Advice is intended for informational and entertainment purposes only.
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All opinions expressed by hosts and guests
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are solely their own and they may have investments in the securities discussed. Now for your host, Stig Broderson.
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Welcome to the Investors Podcast. I'm your host Dick Broderson and today I'm here with my friends and fellow investors Tobias and Hari. How are you today? Jens?
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Hey Stig. Hey Harry. Good to see you. Good to see both of you guys.
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Yeah, good to see you both. Thank you for having us, Stig.
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It's always great and with Berkshire coming up, you know I can't help but pitch it. I know that's not an unknown gem I know it's sort of like a bit of. I feel like it's a cliche. I mean, we're talking about a company that's more than a trillion dollars in market cap. And I guess everyone knows it, especially followers of this podcast would know it. So why am I talking about Berkshire Hathaway? I should probably do the whole disclaimer thing first. I am long Berkshire Hathaway myself. Surprise, surprise. And I added this recently as January 22nd, so I have all the biases you can possibly imagine. I'm still going to pitch it. So anyways, I felt it was a good time to talk about it. Not just because the meeting is coming up, but also because with Buffett transitioning out, a new sheriff in town, bunch of moving parts here at Berkshire. So I'd be really curious to hear, especially from you two gents, how you see it. But for those who are not familiar with Berkshire Hathaway, I kind of feel I should give a business overview if we go all the way back. Buffett took control of Berkshire Hathaway back in 1965, and at the time it was a textile mill, struggling, certainly seen better days. And then I can't help but mention this fun fact. Buffett was not the CEO in 1965. It was actually Ken Chase, who was president of operations, which would be equivalent to the CEO role. Buffett was chairman at the time and took over capital vocation, and he became the CEO in 1970. And so you might be thinking, does that really matter for today's pitch? No, not at all. It's my way of being a super Berkshire nerd. And I can't help but mention he was actually not CEO. It was someone else. Now, how do you give an overview of a massive conglomerate such as Berkshire Hathaway? Well, you can look at it as having 70 plus major operating businesses. I think legally it's more than 300. Or you can also take a simpler approach and view it as two buckets. You can say one that's operating businesses and then you have one with public equities and treasuries. So that could be a way of, of looking at it. And of course, you have the bucket here of operating businesses that can be broken further down. You have insurance and non insurance. And yes, you can break that down, of course, again, so you have Berkshire Hathaway Energy and bnsf. They occupy a large share of non insurance. And then you have Geico. That's roughly half of the group's premiums in insurance. And so I won't go Further, the time being, because I kind of feel like we can go on and on and on, but that could be a way to sort of get a quick business overview. Now, at the time of recording, we're still waiting for the Q4 numbers. This episode would actually be published 12 hours before they published the Q4 numbers. So we can't turn our episode around 12 hours. But I kind of felt it was a nice segue into talking about how much in this day and age and everything's just moving so quickly, there's still such a high degree of predictability when it comes to Berkshire Hathaway, so it shouldn't change anything material that there's a new quarter coming out, which is the case for some companies, certainly not for Berkshire Hathaway. Q3 numbers closed out with 267 billion public equities. We can typically extrapolate that quite well until what it is today. You can get ChatGPT to help you with that if you want to. You typically don't see a lot of big changes, especially with what is going on right now with Buffett transitioning out. I wouldn't expect there to be any kind of big movements. And also in many of the larger companies, Berkshire, they're also considered an insider. So if there were bigger moves, they would also have to disclose that of course, you have the massive cash position. And now also just want to say, like for a company the size of Berkshire, they don't hold cash in the account, just like you and me. They would use short term Treasuries to make sure they get a bit of yield. And then short term, it's usually around four months. That's the average maturity. So they're not sensitive to interest rate fluctuations. And then of course, you also had to deduct debt there. So whenever you do that, make sure you do an apples to apples comparison. You have some debt, there's interest bearing, some are not, some is on the parent level and some are not. And you also have to back out the minority interests. Munger once said, if you're not a little confused about what's going on, you don't understand it. And to be fair, he was actually speaking about derivatives at the time. After the whole GNB thing, he had this wonderful quote, and then also after gfc, he restated that quote. But the accounting for Berkshire Hathaway quickly becomes a bit of a mess. But I will get to a shortcut later here in my pitch. You can be really, really detailed if you want to, but I think for a company like Berkshire Hathaway, you can also do, as I mentioned, a few shortcuts and you can sort of look at it as in bigger buckets. So, and not think too much about the dismal points. That sort of will take care of itself. Now let's talk a bit about the competitive advantage. Back in the day, whenever book value meant a lot, perhaps a bit more than it does today, people spoke about the Buffett premium. And so you can think about it this way. How much would you pay for a million dollars? And, well, you might say a million dollars. Doesn't that seem to be, is this a trick question? Why are you asking what do you want to pay for a million? Well, if I then rephrase the question and I said, how much would you pay for Buffett managing that million dollars? And then is it worth more? And most people would say, yes, it's actually worth more because we believe that Buffett is going to invest that money wisely. So we are going to put a premium on top of the book value. So that was how some people saw it for quite some time. And I could then ask the question now with Greg Gable coming in as the CEO, how much would you willing to pay for a dollar invested by Greg Gable and the team at Berkshire now? And so of course, some bulls would then say that Greg might be the perfect guy for a trillion dollar market cap company. It's a very different company than the company Buffett took over in 1965. It certainly required a very different skillset at the time. And I should also say we're talking about trillion dollar market cap. We're not talking about trillion dollar in book value right now. And of course, Abel gets a lot of tailwind because of its track record so far. And also I would say that, you know, I think right now the trust in Greg Abel is high just from Buffett anointing him and you know, for at least U.S. shareholders. And I can't really speak for all shareholders, of course it bugs a Hathaway. But, you know, but I can probably say that Buffett's work carries a lot of weight until proven otherwise. And then of course, if you're an uber nerd like me, you can't help but think about David Sokol and everything that happened with Lupus scandal. And I think most people would also agree that he was the one who was widely expected to take over for Buffett. So even the mighty fall, and it's very, very difficult to be the next guy anyways, in my eyes, if we're talking about competitive Advantage. Berkshire's competitive advantage is the strong culture of prudent capital allocation and this ethical, decentralized approach to running a company. And it sort of takes me to the next point because if we're looking at the risks of such a company, what are those risks? And capitalism is brutal and Berkshire competes in the same market as everyone else. So if we look at it very broadly and we're saying, hey, if you have a castle, someone's going to storm it, yes, there is of course a risk there. But some people would then also turn the tables and say, well, you have roughly two thirds of the market cap, that's backed by equities and Treasuries. And then you have a great selection of diversified, high quality operating businesses. Not the biggest risk, perhaps. Now, Tobi and I, we had an episode recording here not too long ago and we talked about Tobi's latest book, Soldier Fortune, and we talked about whether Berkshire was safer than the S&P 500. And it's sort of like a bit of an probably intellectual discussion, but I kind of felt it was interesting because over the next 100 years I would like to make the statement that The S&P 500 is probably safer because the worst companies are being replaced by new good companies. So you don't have to think about, I don't know, AI threats because whatever happens, you have that recycling of people who benefit or not. And if it's a big if, nothing happens, then you also sort of get that indirectly from owning the S&P 500. But then what Toby and I also talked about was that over the next decade, at the current valuations, perhaps one would pick Berkshire because of the downside protection and strong culture. Now you should probably go back and listen to the entire episode. I don't think I did justice just from that paragraph alone, but I sort of wanted to use that as talking about his competitive advantage, talking about risk. And Buffett is still the chairman. And whenever Buffett is no longer with us, his oldest son Howard would be the non executive chairman with sole responsibility for ensuring that the culture remains intact. But of course, there is a but here somewhere. And so I wanted to talk about Greg Abel's compensation, sort of like to start up the conversation and to talk about culture. In some Berkshire circles, people were talking about that perhaps Greg Abel would take the $100,000 pay package that Buffett had and he was actually paid 21 million before. So I didn't really believe that he would. I think he would probably get a lot of browner points if he did. But he's now making 25 million in base. He's not making any bonus, no stock options either. And so I think you can look at this many different ways. So, Tobi Ohari, how do you think about this new compensation structure for Greg Abel? What does that tell you about the new culture that's, or perhaps the continued culture that's going on at Berkshire Hathaway right now?
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It's a funny number, isn't it? 25 million. Because that's a fabulous sum of money, particularly to be earning in one year for any person. And it's not incentive driven. So he gets that for showing up. But in the world of very big businesses that's probably the lowest compensation package around. And he has put his hand into his own pocket and bought a very material sum. I think it was like $70 million or something like that initially, which would be worth more than that now. Might be a few hundred million now. Do you guys have any idea what his equity holding is worth now?
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Yeah, I have the proxy here. He has 228 A and 2363B shares. So you can just quickly do the math. Toby, it should be one of those Ready Set Cook shows like. Oh yes, and this is how much it is.
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And probably he bought it on his own. Like Berkshire doesn't do stock options or RSUs.
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Correct.
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They don't give shares to their executives. They're supposed to buy it on their own, isn't it?
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Yeah, yeah, but I think he had a decent size share in Berkshire Hathaway Energy, which is probably called Mid American at the time.
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But for what it is worth, the salary of IBM CEO is also 25 million and their market cap is around 243,245 billion compared to Berkshire which is 1 trillion. So the salary of Oracle CEO for example is 138 million. So if we see the comms of CEOs and Oracle market cap is 460 billion. So half the size company. So if you look at that from a competitive landscape it is much different. And it probably is also unfair to compare Greg Abel's salary package with Buffett because Buffett is the owner, Berkshire is his company. He was, he didn't really need the salary as such and that was the difference. I think many owner executives also pay themselves handsome salaries. So Buffett is one of a kind. Very hard to kind of replace Buffett. That's the other challenge.
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So I looked it up. His holdings are 170 million to 175 million. And he cashed out 870 million when Berkshire bought Berkshire Energy. So the salary's not material to what he's worth, what he holds in Berkshire, a solid amount of money and not incentive driven. So it is what it is.
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Yeah. What would you have preferred, Toby, to align interests? I'm not insinuating that it's high or low, I guess I'm just asking what do you think would be the best way of doing it?
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I think a base salary and I don't know where you would set that, but a base salary and then the same way that the two investors were compensated, where you get charged on the capital that you have under your control at whatever the 10 year, so you get charged 6% on that capital and then what you earn over and above that, you get some portion of that. So you're incentivized to focus on return on invested capital and you do it over a rolling five year period. So you're not making short term decisions to pump it up. That's how I would structure it. I think that's the fairest way to do it.
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Yeah, I think it's incredibly challenging. Buffett and Munger themselves and with all the discussions that they had about how terrible stock options were, and I tend to agree with them, there have been a terrible number of compensation packages and still in place today in so many companies. They have talked about how it may make sense for some CEOs to have stock options, but they also talked about that was probably only the case if you were the guy who were in charge of everything. It probably wouldn't make any sense for a lot of people, let's say VPs who couldn't influence the entire organization. I was very curious to see what would happen. I don't think I ever thought he would take something like $100,000 paybacks going to Hari's Point. Why would he do that? And of course you could say something like, hey, his net worth is so and so much money. So does it really matter if the 100,000 25 million. No, it probably doesn't. But I think everyone wants to be well paid. And I think I don't really have anything against that. And I generally think there's a lot of different philosophies whenever it comes to compensation. I remember I was reading one of the Netflix books, no Rules Rules, and they talked about how, and I don't know if this has changed, but they talked about how they wanted to find people with the right character and then pay them a very nice base and then the rest would sort of, like, be sorted out. And I was quite influenced by that at the time. And I've tried it out and that did not work at all. But perhaps just because it was a different organization and whatnot, it might work with Greg Abel. I can see why it would work with him. And we're going to get to your stock picks later. And I actually had a chance to look up management conversation. It was kind of interesting. So, in comparison, it's actually. You could say Greg was actually not well paid. And most compensation packages in the US are being handed out is that much of it is in equity and then they sell it as. Oh, but it's very much in line because you get it as equity and it vests and so on and so forth. And there is a ring of truth to that. It's very difficult to do perfect because it is a bit of a participation trophy. Oh, but the base salary is this and this low. Yeah. But as long as you have a pulse and you go to work, you're still getting tens of millions. And then you are sort of aligned with shareholders, but then you can also just sell it. So it's like, it sounds good, but in reality it's not really that aligned with shareholders. And then you probably have to do some kind of adjusted EBITDA thing, and then you get more equities than you can then sell. So it sounds good, but it's really, really difficult to align incentives. But then we can look at Berkshire Hathaway, and Buffett would probably be the number one guy to understand how to structure that. And he came up with, let's give Greg Gable a nice base and then the rest will figure itself out. And I found that to be quite interesting.
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It's very simple, has the advantage of being very simple. There's not much incentive in it, though. That's the problem. And so I guess you're relying on the fact that he's got a big. He's written a check for 10% of his net worth at the time. That's now I don't know what his other investments have done, but could be 20% of his net worth if it hasn't, if he's kept it all in cash.
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And also I think lately Buffett and Munger have been emphasizing that Berkshire is a fortress in a way. I take it as a cue as like, don't expect outsized returns from this business going forward. And is Greg able the steward, to keep it safe rather than taking unnecessary risks? And that's how probably the incentive structure also looks like he's not being incentivized for growth. It's basically keep it safe is kind of how I see it. And maybe dividends in future, who knows? Because if they can't grow There was a recent comment by one of the Silicon Valley investors, Chamath Palhapatiya, in a podcast where he compared Buffett's returns before Reg FD was implemented and after Reg ft, which reg FD had some unfair advantage for people with information asymmetry and reg FD kind of eliminated it. And he compared that and said, hey look, Buffett's returns pre reg FD were way greater than S&P 500 at around 24% or so annualized. But post Reg FD his returns were on par with S&P 500. So even Buffett could not really beat S&P 500. And that was when Berkshire was still much smaller back in 2000 and later. Now, with a trillion dollar market cap with the size they are, it's also mathematically very hard for somebody like Greg to say, okay, now I'm going to beat S&P 500 over a long period of time.
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all right, back to the show. Yeah, thank you for your comments Jens. I just wanted to also mention that whenever you are comparing compensation, it's really, really tricky to do that. And to Hari's point, I feel that Buffett should be applauded for only taking $100,000 in compensation and then I think he had like $300,000 in other expenses or I think it's the proxies. What's the other compensation? But he's been famous for the 100,000. I kind of feel like whenever you hear those numbers, it's really important to understand where that's coming from. You have all these high fly CEOs, tech bosses, and they're like, oh, I only get like $1. And you're like, yeah, but you also founded the company and if you reach these milestones you're going to get like, was it a trillion dollars or whatever. And yes, I know that's going to be really difficult to achieve and but it's like whenever you have so and so many shares, it's just, it's a different game. And I think you have to have to understand that as you're comparing conversation between different CEOs. Anyways, let's talk a bit about valuation. So first you normalize operating earnings and then you apply an appropriate multiple. So if I use 40 billion here on the operating companies, I use a multiple of 17. I come up with 680 billion for those businesses. I would like to think that is directional. Correct. I'm definitely sure that some would use a different multiple and a different normalized number and I think that's perfectly fine. And then in the other bucket you can look at the value equities plus cash and then deduct that. And of course you can then make an adjustment to what you think the intrinsic value is of those equities. And so if you look at the top holdings, you have Apple, American Express, bank of America, Coca Cola and Chevron, then you could be like, oh, you probably want to start there. They're roughly like 70% of the value of the equities. And then you can make your own adjustments. But if we say that you have roughly 500 billion in equities and cash net, then you end up with something like 1.2 trillion ish if you round it. And who's counting when you're talking about disabled points of trillions of dollars. But the back of the envelope valuation gives you A number around $550 for a B share. At the time of recording, a BCI is trading at $497. It's close to rounding error. If you're plus minus 10%, it's roughly reasonably valued right now. And so it sort of goes to the point I had there about risk. There's a lot of high flyers out there, lofty valuations. Berkshire is not One of them, of course, the future is always uncertain and it's no different today. But that might be a good reason why you want to own Berkshire in the first place. And Berkshire typically does well in bear markets. And you also see that and sometimes the market is selling off. And there are a few companies that are not. Some of them are Berkshire. And I attribute that to if you're looking at the investing mandates in a lot of funds, the equities owner are part of this equities and they have to be placed in some kind of equity. And so it's very reasonable for a lot of asset managers that if you don't really know where to put it, some of them just put it into Berkshire sort of like as a wait and see type bucket. And the drawdowns you see are typically not that dramatic. It's probably not lost on the listeners that Berkshire had the capital to buy back a huge amount of stock if the price is attractive enough. And I don't have any concerns about Greg Abel not being able to do that. I think he very definitely understands the value of the stock. And then also Berkshire shareholders, they've been trained for decades now how to think about intrinsic value. So we've seen that multiple times whenever the market is selling off, Berkshire typically is not allowed to be at a huge discount for that long. And so that also goes into my point here about perhaps for some people, such as risk averse people like myself or. So I like to think it might be a good placeholder for cash, especially if you don't know where to put it or if you have a mandate where you need to invest in equities. I would imagine that if we're talking about valuation, you can probably expect to get something like a 10% normalized return moving forward. Of course, that varies from year to year, but it sort of gives you a sort of a yardstick what to expect. And then at least the way that I use Berkshire is that if I don't really know what to invest in, sometimes I would just invest in Berkshire. And then if something sells off, like you have a lot of software companies that are selling off right now, and I guess we can talk a bit about that later. But if something you really like goes on sale, perhaps you want to trim some of your Berkshire holdings and start building positions, something else. So at least that is how I'm looking at it. And also I do tend to run a pretty concentrated portfolio. I currently only have five individual stocks. I also have a few other things in the portfolio. But whenever you Run a concentrated portfolio. Perhaps you want to have something that's somewhat antifragile in that portfolio, and Berkshire could be one of those. Buffett has famously said that that's not how you become rich, but perhaps you will stay rich. And I kind of feel like the way he's looking at utilities, that is perhaps the way you can look at Berkshire today. It's. It might be a stock you once held because it could make you rich. That's not the case anymore, but perhaps you could stay that way. So anyways, Jens, I want to throw it back over to you guys.
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Yeah, I fall in about the same place with the expected return about 10%. And I agree, 10% is still a pretty good return, but it's equivalent to holding the S&P 500 with maybe a slightly different characteristics. As you point out, it's not going to draw down as much, probably in a bear market, it's probably not going to run up as much in a bull market. You're probably going to get more of a less volatile ride. But growth is certainly slowing and they've got a lot of cash there, so they're gonna have to figure out what they do with that at some point. It's hard to imagine that even in a crash, something big enough becomes available that they can really put all of that money to work. And buybacks aren't gonna move the needle really either. So at some point there's gonna have to be a special dividend or some dividend probably. I don't know how long they can sort of sustain that. No dividend policy. But five years later, maybe. Does a dividend become possible five years later? Probably something like that. I think it's. It's certainly. It's definitely worth looking at it. As you point out, the valuation is distinct from the S&P 500. That's one big thing that we didn't discuss that in the compensation. But I always think if you're going to take over a business, you want to take it over when it's completely busted and the valuation is. The multiple is as low as you can possibly get it. You don't want to take over a high flyer because then you're fighting the valuation as well as sort of help trying to run the business, which is why I like measures of compensation that are internally that they have some control over. You want them focusing on those kind of things. So Berkshire is much, much cheaper than the S&P 500. And I think that like we discussed, Stig, that'll be the thing that has the most impact over the medium term, three, five, ten years. Beyond that, it's the quality of the businesses and it's hard to know where they're going to be at that point. But I tend to agree on the valuation and the return front.
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Yeah, I agree. I think especially stick the point you made about a parking space for your capital till you find good opportunities is a good framework to think about Berkshire as. Because if I want to have it in my long term bucket, I would rather have S&P 500 where I don't have to really worry about. Okay, I need to move this capital around. But if I am looking at it as a placeholder, then definitely, yes, I would definitely favor Berkshire both from a valuation perspective, as Tobi was referring to, which is lower than S&P 500, and also from a downside risk protection perspective because if there is a drawdown, number one, Berkshire tends to get hit less harder on the downside. But also they have the cash hoard, which can be an opportunity and a drag. And maybe Buffett will get lucky again, similar to what he did during the financial crisis that he can get some of those few elephants that he is looking for. Especially as we are seeing a crisis in the private equity funds now. Lot of private equity firms are struggling. That means there is less competition in the private markets in the short to medium term, which might present a good opportunity to Buffett. Even though he says he's not the CEO, I'm pretty sure he cannot contain himself from deploying that capital when the right one arrives.
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Thank you. Hari and Toby, I think another stock that you definitely want to hold or consider holding if we do see a downturn in the market, might be Hari's pick. But that's going to be a cliffhanger because I know you're going to go next. Tobi, I'm curious to hear what you're going to pitch for us today.
- [34:34]
A
My pick is Bellring Brands. The ticket is brbr. It was spun out of Post Holdings. So Post holdings is this, it's been around forever. Consumer packaged goods. They have everything from like cake mix to they used to have this business under its umbrella. And it's kind of interesting because they talk about, you know, they have, they can see consumer behavior through various different events. So through Covid, they saw everybody kind of went away from the healthy stuff and started buying all of the cake mix and all of the that sort of stuff. And then everybody got too fat and decided they had to go back to the healthy stuff. So what Bill Ring Brands does they? They're pure play protein. So their main thing is the premier protein. I see these things around and I, I heard some influencers talking about these. It's just like a milk drink that you can find in any convenience store or supermarket and they're very high protein per serving and low calories, low sugar. And so they're the thing that I, if I am out and need something that I grab one of these things and drink them because they're reasonably, you know, just help you meet all of your macros, do whatever you're trying to do. So I quite like them. And so that's not how I found this business. I found this business because it's financially, it's very cheap. It's not an unusually good business. Sorry, but it's a good business. I like these kind of little industrial businesses that are very simple, like basically pure play. The problem with this one is it's very small market cap's $2.1 billion in December 2024. So a little bit over 12 months ago this thing was trading over $80. It's currently trading around $17. So it's had a huge fall from grace. I can't really work out why that's happened. There's no, there's nothing obvious to me why that has happened. But it's probably something to do with the GLP1 shots that folks are taking. I'm not sure that if you take the GLP one shot, you wouldn't continue to drink this stuff because you still need to get a certain amount of protein every day. If you're out and about and you can't get access to your protein, then this is probably the stuff that you're going to drink. The brand's pretty well known among folks, so that's important. They've got distribution, which is hard to get. They've got distribution in the little convenience store near where I live. It's in there, it's pretty well distributed. So those two things, that's the old classic formula for consumer packaged goods. Pretty good brand, pretty well known brand and pretty good position in. Pretty good distribution position in aisles and all that sort of stuff. That's less important now. I guess I get that there's social media pushing different proteins and there's a lot of competition in the space. So the business is good. The business isn't great, but it does earn pretty high returns on invested capital. It's like 80% using the green light measure because they don't do their own manufacturing, they outsource all of their manufacturing. So that might be a, that might be also be a risk. But it's worth sort of mentioning that it's a very small business. I think the valuation is way too low for the quality of the business. I think that at $80 it was too expensive by two times. At $17 it's too cheap by about half. It's an 11% free cash flow yield here. EV EBIT's 10, EV does 9, PE is 12. So on any sort of metric it's cheap. It's certainly over earning on its invested capital. Pretty good brand, pretty good distribution and I don't really know why it's sold off as hard as it has but I think that it's one of those things that it could easily be a target for private equity because it's got a big shareholder in Post so it can't do that. It's not going to happen in a hostile way but it's one of those businesses that it's pretty easy to run. It's the sort of business that attracts private equity equity I think. But even if that doesn't happen, they've got a pretty good track record of buying back stock. It's well managed. I like it as a business and I think it's a reasonable bet at $17. I think it's good risk adjusted bet.
- [38:51]
C
Yeah. Toby, very interesting pick. I don't know how you find these gems. It's like from 79.$80 to $17 that a big drop. I'm just curious like number one, why did post holding spin it off? Is it because it's too niche a player number one? Number two and does that factor actually protect them from somebody like Pepsi or Coke making a play into healthy drinks? Is it too small for them? Because I don't understand their distribution and how it is compared to a Pepsi or Coke. And would this be like one of the acquisition target for the giants, one of those two?
- [39:36]
A
I think there's a lot of buying and selling in these kind of businesses. I think there's a lot of like gin rummy played with these kind of businesses and I think what they've done is they've taken Premier Protein which is growing fast and they've combined it together with Dymatize, which is like a protein powder type business which is not a brand that I've heard of and I'm, I kind of look at these brands a little bit so that's a red flag. And then they have this power bars like I don't know if you Power Bars were like the original protein bars way back in the day and they've discontinued that in North America. I didn't realize that there. It's a legacy kind of brand. Now. The sales have still been growing. Sales have been growing pretty well for an extended period of time. Pretty consistently pretty well. So I think they've put a good business together with a middling business and a bad business and then spun it off because that's the kind of shenanigans these guys like. They just like to do this stuff. They like to buy and sell the businesses. Then it had a pretty good run when it came out, probably because it was right on the heels of COVID Everybody was trying to get fit and healthy again. Stock price ran from 20 bucks in the spin to $80. Maybe that's just momentum, people just chasing momentum. But it was ahead of where it. It was ahead of its valuation at 80, let's say, and I picked it up in December last year. I've paid 25 bucks a share or something like that for it. So it's 17. I'm down a little bit on that. It's down 30% this year. So it's. Since the start of the year, it's been a miserable run just watching it fall because it's the worst performing stock in my portfolio and it's down a lot every single day. And it's kind of perplexing because I like the business and I. It's a very simple business. It's not a great business in the sense that the brand is, as you say, somebody could compete with it, but it's so small and it's so profitable that I think that an easier way is to sort of acquire this thing rather than to just try to compete directly with it. That would be the simplest thing to do, I think. Yeah.
- [41:32]
C
I think for a Pepsi or Coke, 2 plus billion dollar is not a big deal. If they want to really acquire this brand.
- [41:40]
A
The post holding still has a big holding in it. So it has to be a negotiated sale. So I would say that a negotiated sale happens a fair bit further north than where it is now, but still we're talking $4 billion instead of $2 billion plus $1 billion in net debt.
- [41:55]
B
So, Toby, I always like your picks and this is no different. I certainly like the price. I think my concern is a bit on distribution. At least that's one of the concerns I want to raise. So three customers are 74% of sales. So you have Walmart, Sam's, Clubs, like 34%. Then you have Costco and Amazon. So I can't help but wonder, why wouldn't Costco say, hey, we have Kirkland and it's cheaper and it has even more protein. I don't know anything about protein, but it's even better. And here you go. Don't drink Premier Protein. So that would be my concern. And sort of like in continuation of that, are people asking for a protein drink or do they ask for a Premier Protein? And if I can sort of extrapolate that, I would say some people ask for a soft drink, but a lot of people ask for Coca Cola and there's a reason why they ask for a Coca Cola. So with that framework, I'm kind of curious to hear, how do you see that brand strength?
- [42:59]
A
Yeah. So I think that when you go looking for a high protein, low calorie, low sugar drink, they're actually reasonably hard to find. A lot of them have a lot of sugar in them. And so I heard about this brand through social media and then I sought out this brand particularly, and I've bought it in California and I've bought it in Florida when I was traveling. I found it in a few different places when I was traveling because I didn't want to eat junk food. I just wanted to eat, drink something really quickly and keep going. And I think that that's the sort of the use case for this stuff when you're out and about and you don't have what you need. So I, I was, I am personally looking for the brand when I go in because it's, you know, the search risk that you have the search time, you don't have a lot of time. There's a whole lot of brands there. You're looking for the one that, you know, fulfills the requirements that you need. It's not hard to recreate that. That's simple to do. It would be not hard, but also not trivial to create brand awareness around a new one, but easy for one of those bigger, bigger brands. As I say, the business isn't great. The business is not a deep moat. It's a thin moat. But there is a little bit of a moat there. There's a little bit of brand awareness. And I think for the valuation, it's just all of that risk is already embedded in the discount that you're getting from that valuation. So I think, I think it's like 40 bucks, like 11% free cash flow yield. They're using a lot of it to buy back stock pretty consistently at these levels. I just think that, I acknowledge that it's an imperfect moat, but it's so cheap that I think that all of that is already counted in the discount.
- [44:42]
B
So as often is the case with very attractive priced companies, there is a reason for it. And I think you're right, Toby, I think it's factored in. But I would probably be a bit concerned about the coverage ratio right now. They're buying back a lot of shares and then that's great. Should they be paying off debt instead? Have like a billion, a bit more than a billion dollar in debt, which is a lot for such a small company. Average rate just a bit more than 7%. Have a Moody's rating of B1. If one is so inclined to look that up, perhaps we can talk a bit more about that later. And so I like it, I like it because it's so capital light. You know, they build up this brand. That was also why I wanted to ask about the brand strength. And to your point, they outsourced manufacturing. And so like, yes, the return on investor capital is absolutely amazing. It also looks a little vulnerable. And I think, I guess it also comes down to how much of this is people are going to continue to focus a lot on protein or is it going back to normal, whatever normal is? Because this is not a niche bodybuilding something product. This is a mainstream product. But it wasn't mainstream before. Everyone wanted to talk about protein. And so I guess that would be my question to you being the fitness guru here in the group, Toby. No, I'm just kidding. But how much is this a secular trend into protein and, and the focus on that and, and how much is this a trend that's going back to normal?
- [46:24]
A
So the, the focus on protein is, that's been around for decades in the bodybuilding community that the bodybuilders know that you get three macros fat, carbohydrate, protein. You need this amount of protein for this amount of body weight. You need to get that every day. If you do that, life is easy. If you don't, you're hungry all the time and you can't put on muscle. That knowledge has seeped into the public consciousness more recently. I don't know how long, but like maybe the last 10 years or something like that. And it's more of a focus now. Like you walk through the supermarket, everything's got a bit of protein packed into it because everybody's kind of. And it's the CPG firms that's the expensive part. So they've kept it out so they could sell you at bigger margins. And now everybody's sort of looking for it. They've found a way to artificially stick it back into a whole lot of stuff. So it's not ideal, but milk is a good source of protein for humans and this is good for you. So from that perspective, I think that the focus on the GLP1s, the fact that people are using these more and more, I think that that indicates that people are. There is a desire to get fit. Like, no kidding, everybody has that desire. And if there's an easy way of doing it, hit the GLP1s and then you can't eat as much. So the next stage after that is, you know, get your protein first. I think people sort of. I think there's a broader understanding that that's the way that you do it. So I think that it's around for a long time as a category. Is this brand around? I don't know. But the, you know, the nature of this stuff is that they'll come up with something. They do keep on coming up with something better. They'll say, oh, this has got more protein and less sugar at some. No doubt that. And tastes better, you know, more attractive branding, whatever. So that, that, that risk exists. But these guys are spending money on that stuff too. They're trying to compete and iterate as much as they can, new flavors or whatever the case may be. And they do have the distribution. So distribution's hard. They've got the manufacturing and they've got the distribution. The ca. I don't know how big the category can get to, but it's. It's capped. Probably it's not going to be huge. And so there's a finite amount of this production around and they've got, they've got the manufacturing, they've got the distribution, and they do have a brand. So they're the category leader and they're sort of out there in front and it's theirs to lose.
- [48:40]
C
Yeah, thank you for that context, Toby. One question I had was why such a significant drop? And I was trying to look for reasons. When I was looking at this pick, it's like, okay, is it tariffs? Is it a risk that you said there is a. Most of its production is outsourced. Is it like outsourced outside us? Is that one of the reason the CEO retiring? Is that the reason? I'm trying to come up with a reason why the drop and I'm not really able to put my thumb on any specific problem for this significant drop.
- [49:14]
A
I think I looked at it too, and I couldn't find what the catalytic moment for it was. I've been saying this for a while. I just think there's this rolling speculative mania in the market that moves from, you know, crypto to meme stocks to NFTs to precious metals. And for a little while it was in this thing at 80 bucks, it was too expensive. It was two times what I think it was worth. It was worth about 40. And at $17, it's too cheap. I still think it's worth, you know, well, $80 was worth 35. At 17, I think it's worth 40. So I think that it's the valuation got ahead of it and then the same behavior that makes it run up well past what it's worth makes it run down well past what it's worth. And that's totally normal behavior in the market. Very common for stocks to go up three times or down to one third of where they were over the course of 12 months. So I think that's like the average move in the business. So I just try to pick them off when they get low like this and try to avoid them when they're high. And I like the risk reward at this level in this stock.
- [50:26]
B
Fantastic. Thank you as always, Toby. And to Hari's point, I don't know how you do it, Toby. You find these small gems and they're always really, really attractive valuations. Let's take a quick break and hear from today's sponsors.
- [50:41]
D
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- [54:01]
B
All right, back to the show. Hari, I'm very curious about your pick. Very high quality company.
- [54:09]
C
Yeah, my pick is Moody. It's along the lines of Berkshire. In fact, Berkshire has Moody in its portfolio and this has been something that all of us who are followers of Buffett Berkshire, we have been looking at this business but always felt like, okay, this is perfectly priced. There is no discount available for us to own this. For those of you who are not familiar about Moody's, it's a rating credit Rating agency. A simple mental model I have of Moody's is like a toll bridge business. So if anybody in the world, whether it's corporations, governments or banks, when they issue a bond they essentially have to pay one of the credit rating agencies in order for them to issue their bonds. Because many of the pension funds or other financial institutions are required to have a rating from one of these approved agencies in order for them to buy the bonds. So they are called as NRSRO status and only few have them. In fact I believe between Moody and S and P together they control 80% of the global market, not just US market. So Moody as a business has two broad streams of revenue. One is the one that I just talked about, investor services, which is is basically credit ratings. They rate everything from AAA to junk. And between them and S and p they control 80% of the business. 55 to 60% of Moody's revenue comes from this line of business. The other one is their analytics business. It's more like a subscription based SaaS style business basically selling risk models, KYC tools, credit research and data to banks and insurers, insurances, insurance companies and corporations. It's a recurring revenue, it has a very high retention rate because it provides a lot of value and that's around 40 to 45% of their revenue. And in terms of their mode, I think one is the regulatory mode because they're one of the few. NRSRO has been there for over a hundred years, over a century. They're well recognized and everybody just go use their service. The issuer pays for the, for their service, for the credit ratings. And when somebody like U.S. government or corporations like Google, recent 80 or $100 billion bond offerings, when they're talking in billions for them the rating agency fee is not that significant. That's why Moody can command a 51% operating margin and at the same time it is capital light. And it also has a not just US but across the world. So its revenue split 50:50 which gives its diversification. But recently there are a lot of concerns about the business because of the one is because of AI. The other one is recently S and P had some issues that the. That was specific to their mobility spinoff. But still as Toby was mentioning, there is this wave of momentum driven mindset that is going through the stock. So Moody was also impacted significantly. I think both AI fear and then the recent S and P guidance issues. Weak guidance by S and P together the stock is down 22% from the beginning of the year. And the AI fears are not completely unfound because especially for their analytics business, if lot of companies are able to automate use AI, they can do some of this analytics part of these services that Moody offers by themselves. So I'm not too worried about worried about their investor services or credit rating business because that is legally bound unless there is regulation risk where we have liberalization in the regulation which probability is very low. So 60% of their revenue is pretty safe, the margins are pretty safe there. But the analytics part of their business, which is 40% of their revenue, can face headwinds in terms of pricing power because of the use of AI. They can definitely leverage AI themselves with all the institutional knowledge, information source of records that they have. But still it is a risk we should acknowledge for their analytics business. So that's why the stock is down. Just a quick overview of the business in terms of financials. Their adjusted EPS for end of 2025 was around $14.50. That is around 17% up year over year. Their Q4 EPS 2025 is expected to be around $3.46 which is going to be up 32% year over year. Their operating margin as I mentioned overall for the business is 51%. I'm pretty sure their credit rating business is much higher in terms of their operating margins. Free cash flow of two and a half billion. They return a lot of their value through buybacks and dividends. They have been raising their dividend for 25 consecutive years. Their historic PE has been around 35 always. Now it is 34 after this drop. So in fact I think last year, right now, even this year, they have around 4 billion new authorization for buybacks which is around 85% of their free cash flow because they have the luxury of not having to invest too much. But with AI that might change. They might have to adapt to AI. So we'll have to see. And the risks, if I have to see the risks in the long term is as I said, regulatory reforms that might take away that requirement for credit rating agencies. The debt issuance cyclicality is also a risk because if the bond volumes go down, which I don't think is happening anytime in the near future, but that's a core edge risk as well. The third risk I see is they have been fortunate to be having a rich valuation 35 PE all the time. As with AI and other things, if the market decides that that's too high, then we have a valuation risk basically that might happen in the medium term to near term. So for me, why am I looking into it is because of their. This is one of the stocks I have been following for a long term and it is experiencing a short downgrade or sell off for various reasons. EI I don't think is as disruptive as the market is making out to be for them. So my bull case is like, you know, the management is projecting anywhere between say 11% to 14% as their kind of, you know, compounded EPS growth in the next three to five years. That's the base case. If they continue at around 12% we are looking at around $26 EPS by 2030. And even if the PE continues to fall and it's not at 34, let's say 28 pe instead of 34. So even if we bake that in, it is still a 70% upside from here which is around 11% annualized. And the bull case is that if the PE remains the same like around 34, not even going back to 35, between 30 to 34 then we are looking at a upside of around 100% like you know, 16% annualized. So that's kind of, you know, the upside downside is okay, the PE compressors comes back to around 25. The growth multiple is not as good as we thought. Maybe it's below 10% and all, but that's around 30% upside here. So with the kind of business Moody is and the moat they have, like how you're pitching Berkshire's dig, I see minimum downside at this point. A great place to park the cash, even medium term to long term and enjoy the dividends that they pay. I would put them in my tax deferred fund, kind of, you know, avoid taxes on the dividend as well. That's kind of, you know, the reason I picked this at this point of time one is that there is a, there are some stocks that are being thrown along with the bat tube, whether it is Toby Spake or this one because in general there is waves going on through the market and these guys are falling, not just them, like Schwab is down, I was like, you know, S and P is down. So a lot of fintech stocks are also down. JP Morgan Chase is down as well. So I was actually finding it hard to pick one. And then I said okay, this is what I would go with at least. So that's my pick. And look forward to your feedback.
- [63:54]
B
I absolutely loved your pick, Ari. I kind of feel like I'm probably going to be too hard on Tobi here, but I kind of feel like it's almost the opposite of Toby, where I was like, I'm not really sure about the business, but I certainly like the valuation. And here with your pick, Hari, I'm like, I love the business, but the valuation, it's kind of like, it's terrible that you can't get the best of both worlds, but I guess capitalism is just that brutal, amazing business. Hari, you outlined everything good about that business. And I think you mentioned 80%. Just with Moody's and S and P Global, I think Fitch is around like 15%. So you have like, tropoly really, at most would need both the Moody's and an S and P. It's more or less just a market standard and it's kind of like, amazing the more you look into it. Moody's has been on my radar for similar to you, I don't know how long since I learned that Buffett invested in a long time ago. And it's such a good business. And also because you literally save money, if you don't get a credit rating, there's definitely a yellow flag, if not a red flag. So you have to pay more in interest, and no one wants to do that. So even after you paid Moody's or SP Global, you still save money. So it's not like whenever your wife is like buying a designer bag and she saves, like, I don't know, a thousand bucks, it's like, oh, my God, look at how much money you saved. Like, you're literally saving money. So if you're paying them, I don't know, seven basis points, whatever, to get your rating, it's still a massive saving in terms of for you to go out and try to raise capital on the public markets without that rating. So very, very powerful. Probably not like, to your point, not a lot of things to disrupt it. It would have to come from regulators, where they have to go in and say, you can't do that anymore. Then I'm like, if that didn't happen after great financial crisis, when is it going to happen? With all the criticism that was for good reason that you saw back then. So I don't really see that happening. You could theoretically say that, I don't know, the world's governments will go in and force everyone to use a domestic rating system. But you also, why would they do that? And also if they did that, and it's complicated then to attract foreign investors and provide that liquidity in the market. And so it seems like everyone would lose. And I don't think necessarily regulators would try to do that. I mean, they tried to do it in some jurisdictions, but it hasn't really caught on. And I don't really know why anyone would necessarily want to pursue that. I think there are so many other things you could probably pursue in the fancy sex if you wanted to regulate it in any case. But if I have to find the hair in the soup, and I can certainly find some if I really try to look private markets like, you see a rise here in private markets, and again, I should say it's very small, but it's growing fast. The game you play there is just different, because if it's private equity that's, say, extending private credit, then you would have a small group negotiating with one borrower and differing. They have their own team. So you don't need that credit rating because they would do that in house. So it's sort of like if you had a. I don't know if this is the best metaphor, but if you're trying to sell a house and you're trying to sell it in public, you need a rating. But if it's like from one buyer to one seller, whatever price you can come up with sort of works. So if we were to assume that private credit would just take off and public credit not as much, there could be a risk there. But I'm trying to come up with a bear case. As you can tell, I'm not doing a good job. So, anyways, I'm too excited about this pick, even though not about the valuation. Toby?
- [67:40]
A
Yeah, I like Moody's as well. It's a great business in an oligopoly. Buffett's identified it. It's got great, huge margins and so on. I think, just to play devil's advocate, just to pick nits, just so there's somebody on the other side. I think the risks to Moody's are that it's a little bit more cyclical than it appears. It does depend a little bit on where the markets are. When the markets are up a lot, Moody's does very well. There's a lot of issuance, so they tend to be peak margins and peak multiple right at the very top of the market. And then as the market goes down and the issuance sort of dries up, then margins come in, revenues come in, and you can certainly see that in the revenue line that it's not that sort of tech growth path. It's much more cyclical. And then the margins are a little bit cyclical on top of that. Having said that, that's just how much it earns. That's not a risk to the business, it's purely evaluation risk. So you have to find some way of normalizing for the margins, normalizing for the multiple, have some risk to the 40% of the business. That's analytics. I don't know yet what AI can do in that. But you're right. It's like this sort of existential risk for it. It's not a direct risk just yet. And there's also the regulatory risk that if at some point the government gets upset with the way these guys are doing their ratings, or there's enough lobbying so that some of the rating requirements are taken away, then that's the part of the business that's at risk. But I don't think that the likelihood of that is very high. But it's another existential risk. So business is great. Valuation is kind of the risk. I think the free cash flow Yield is like 3.7%, which is a little bit south of the 10 year, 10 years probably coming down. Moody's is probably growing over five to 10 years. I don't think the valuation's too far off here. So it's probably premium valuation for a premium business. What do you think that you earn at this level? What's your expected return, Harry, from where we are now?
- [69:43]
C
Yeah, I think you both brought up very good points, Toby. I think there is definitely downside or risks, I think especially in the regulation side, apart from the private market that Stig mentioned and what you said about the US Government, for example, having concerns about moody. There is also a lot of movement from China of standing up their own credit rating agencies and creating competition. And as we head towards kind of a de globalized world into fragments, will say Europe still consider moody or will they go with their own flitch as their, for example, the rating agency that they would approve in Europe. And if the world heads towards a fragmented rating agency situation, then definitely it will hit modi. So that's the other risk I think I should have highlighted. That is not a trivial risk for them. And I agree that it's a cyclical business as well, because the bond volumes is what dictates their revenues. In terms of my expected return, I think my base case is that the management is promising anywhere between 12 and 14. I would take the lower end of it, say 11% annualized EPS growth over a period of time. If I say like 11, 12 ish analyzed growth in Epsilon and even if I put a health kind of less PE multiple than what it is today just to kind of COVID my downside, I'm looking at an annualized return of 11% from this. It's slightly above S and P. That's what I'm looking at. I'm not seeing it like a home run with this. It is definitely not something where, like the previous pick that you mentioned where it's so suppressed that there can be a coil spring effect. I don't think that's the case here. It's marginally low. It's kind of 20, 20% lower. Even if I look at it just kind of coming back, mean reversion, whatnot. With the continued growth, I'm comfortable holding it for the five years. It's a safe bet. And getting 11 to 12% annualized return.
- [72:00]
A
It's interesting because the free cash flow yield is 3.3.13 and that's actually higher than it has been since August 22, July 22. But before then it did trade at a higher free cash flow yield than that. So it was sort of above 4. Before 2021, 2015 it was 6. And then if you go back sort of further than that, I don't want to cherry pick too much, but there were some higher peaks. The highest peak here was a 10% free cash flow yield in 2011. So a lot of the return, I think that's generated when you look at the like it's had a fantastic run. It's run from whatever 20, 30 bucks to 420 bucks. A portion of that is the valuation has. It's three times more expensive, four times more expensive on a valuation basis since then. Still, it's grown very quickly over that entire period of time. So I think that there's a lot of businesses like this in the market where they have been fantastic businesses, but the valuations have become really compressed and I think if folks look back and see the rate of growth, they have to make that adjustment in their mind for the starting price for a lot of these. So Microsoft, a lot of these names, Microsoft was 11% free cash flow yield in 2011 too. A lot of these businesses. There's nothing in the rulebook that says that even really good businesses don't go back to more long run free cash flow yields. It used to be that the old rule of thumb would be you don't want a free cash flow yield much north of the 10 year or much below the 10 year. You want to get the 10 year as a starting point plus some growth. There's your margin of safety and so on. The valuation is the only thing that gives me pause. But the underlying business is great. I think the Risk is just that if your holding period is long enough, three to five years, you just don't get enough return. That's the risk. It's not like you're wiped out or anything like that. You just get maybe the valuation goes from 3 to 6% free cash flow yield and you get the growth as well. So you get a little bit of valuation headwind and the returns are a little bit north of a 10 year through that period because of the growth. But a great business.
- [74:20]
C
Yeah, but very good point actually, Toby. I think in fact for Moody, if I have to kind of pick one risk, it's actually the valuation risk which is the most critical one because it's 34. I mean it's priced like a Max 7 stock. So for a business that is just credit rating, maybe it's because of Buffet stick, that lot of people kind of attribute all the good qualities to this business so that they're not willing to let go of the valuation even if the business is not growing as fast as say any of the Max 7. So that's a very interesting point, Obi, which we should definitely consider.
- [75:03]
B
So, Hari, I already said how much I liked your pick, so I probably shouldn't continue doing so. But I think to your point about the evaluation, I've been in financial markets for I don't know how long and we've done these episodes for more than a decade together. It continues to surprise me how long high quality companies can continue to compound. And you're seeing this and it paints me as a value investor or a so called value investor to say this. And they're priced at 30 times plus price to earnings and then they just continue to give you double detailed returns. And it's so difficult for at least for me to invest in those companies because they always look expensive. But the best companies, they just tend to always look expensive and they still outperform and it's so painful. I completely agree with you in terms of the AI threat, I think it's probably overblown for their analytics part, the rating part is just, it's just so strong and I don't see that getting disrupted anytime soon. So it's definitely not where you're going to make the greatest returns. But perhaps we are also in the market where you want to protect your downside even more than you always want to do. Just a few fun facts is one is so inclined the CEO pay of Moody's 16 million versus 25 million for Berkshire Hathaway. And Berkshire is like more than 10 times as big in terms of market cap. And then of course, this is also snapshot. They would say 94% is equity based on. Keep in mind though, that the whole thing about being equity based and how it's based on performance, for a company like Moody's, it's difficult not to get paid in equities, even if you do a terrible job. I think I can say that without offending the CEO too much. So anyways, another fun fact here with bell ring market cap $2 billion CEO pay 6.5 million. I can't help myself. That was all I had to say about Moody's.
- [77:00]
A
I just want to talk a little bit about the valuation. I agree with you that it has been, particularly for a deep value investor, it's been a frustrating period of time that high valuations have tended to get higher. I don't quibble much with the way that the companies are sorted in the market. Like, I do think that the Mag 7 are probably the best seven businesses in the market. And I don't think that Bellring Brands deserves much more than a $4 billion valuation. You know, I'm not out of my mind in the sense that I dispute the rank. I just dispute the multiples applied to these things. I do think they're a little bit too expensive. And I just think that's what happens in some of these markets, that if you don't get a shakeout, the valuation just keeps on getting increasingly stretched. I've been putting these charts on Twitter for an extended period of time, but just observing. The one really simple way to think about it is the equal weight version of the S&P 500 versus the market capitalization weighted float adjusted. So what everybody, The S&P 500, the SPY ETF, the index is market capitalization weighted float adjusted, which means that the bigger market caps with more float occupy a bigger part of the index. All else being equal, that means that The S&P 500 is essentially a momentum investor in the biggest companies. And that's why The S&P 500 has done so well since 2015, particularly in relation to everything else. The equal weight version just puts the same amount into the smallest business as it does into the biggest business. And so it's more of a proxy for small, it's more of a proxy for value, and it's a little bit of a proxy for cyclicals because they tend to be in the smaller part of the business over the very long run. Over the hundred or so years of data that we have, equal weight has massively outperformed market capitalization weight because small tends to outperform, large value tends to outperform growth, and so on. If you look over that period of time, even though equal weight has outperformed market capitalization weight, there are many periods of time where you can see for extended periods of time, 10 or 15 years where market capitalization weight outperforms equal weight. And it's always around these technological transitions in the market. So you can see it in the 70s with the Nifty 50. Same idea, the very best businesses. And why buy the other 500? Just buy the 50, just hold onto them, pay any price, don't worry about it, it'll all work out. Then you look@the.com 1.0 that stands out. If you don't have this sort of global reach, you're not going to be able to make it. If you're not on the Internet, if you're not in cyberspace, you're not going to be able to make it. And then again now, I don't know what you would call this Internet 2.0 sort of become AI at the end of this long boom. But since Q3 last year, there's been this pretty significant turn, I think in the markets that I haven't heard a lot of people talking about. But it has been small has started outperforming large value started outperforming growth. Equal weight's now outperforming market capitalization weight. You can think of it like The S&P 100, which is the biggest 100 now outperforms the 500. Mag 7 underperformed the S&P 500 last year. I think that these things are going to start happening. That's the ordinary course. That's what usually happens in the markets. And it's unusual because people have been conditioned by what's happened over the last 10 or 15 years to think that the other way around is the way that it works. Which is why you look at those stocks and you say, gee, they're expensive and now they're much more expensive. But gee, the stock's up so much because they caught the earnings growth on the way through there. That could easily reverse and we could go back much more to a market that's one that I like much more, one that is much more like the long run average, in which case valuation does become more important. And business quality, if you look from 2000 to 2015, very good businesses, Microsoft, Walmart, they traded sideways for 15 years. There was nothing wrong with the underlying businesses. They continued to do what they had done. Before 2000 and after 2015 it was purely evaluation coming back into line and it could easily happen again.
- [81:09]
C
Yeah, that's a very good point about the valuation swings. And I guess some of the barometers of the mood of the market is like Bitcoin is also down now almost 50%. That is tracking some of the more speculative tech stocks. So they all kind of are going down. And it's interesting to see that some of these companies like Moody's are still holding up their valuation. I don't know when their turn will come. So that's the risk, Toby, because we don't know. It's almost like every group of stock is being taken in a group and then fired at in terms of valuation and we don't know which group is the next.
- [81:49]
A
It's been funny to watch this rolling mania that sort of rolled through lumber stocks rolled through it's precious metals. Like a month ago it was gold and silver going crazy. Before then it was mag7. Before that it was the NFTs and crypto. It feels like it's been going on for a long time without any. Like it's never. There's never been a systemic crash. There's been like a specific crash for the mania. But at no point have we had the clearing of all the decks and restart.
- [82:20]
B
All right, Jens, thank you so much as always. Hari, any concluding remarks here about Moody's before we round off the episode?
- [82:30]
C
No, I think this is a great discussion. Thank you for the perspective. And I think for me the key takeaway is the valuation risk. Yeah, it has gone down a significant amount right now. But what's next? We don't know whether Moody will be in one of those groups which will be taken to the woodshed in terms of valuation. So thank you, that was helpful.
- [82:53]
B
Yeah, I love that you say that, Hari. I also love Tobi. Whenever you talk about it, it's not written anywhere that it's supposed to be these lofty valuations for such a high quality company. With all of that being said, Jens, I want to give you the opportunity to give a handoff to whatever you want to give a handoff to. Toby?
- [83:11]
A
Yeah, I run acquirers funds. We have two ETFs that trade us domestic deep value names. Zig, which is 30 names in mid cap and large cap and deep, which is 100 names in small and micro. It has a very distinct bet on in the market, which is that small micro value, reasonable business quality turns around. And mid cap, I think mid cap is this sort of undiscovered part of the market, which gives you the earnings growth of small with the volatility of large. So that tends to have quite a good mix, better quality management and better valuations for the most part. And I have a website, acquirersmultiple.com which has free stock picks on it like we've been discussing here today.
- [83:52]
C
Yeah, great to be with you guys today. You can find me on Twitter. Hari Rama is my handle. Happy to continue the conversations over there.
- [84:00]
B
Thank you, thank you Hari. Thank you so much for your time. Jens, as always, it's a privilege.
- [84:06]
A
Thanks Stig. Thanks Hari. Always great.
- [84:08]
C
Thank you guys.
- [84:09]
A
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