Chit Chat Stocks - 10 Best Performing Share Cannibals; A Software Giant Gets an Activist; Are We In Dotcom Bubble 2.0?

Episode Date: June 23, 2024

The Investing Power Hour is live-streamed every Thursday on the Chit Chat Stocks YouTube channel at 1:30 PM EST. This week we discussed: (02:06) Nvidia's Rise and High Profit Margins (11:41) The Concentration of Overvaluation in the Market (26:50) The Need for New Management at Autodesk (31:39) Share Cannibals and Underperforming Companies (32:51) Successful Share Cannibals (36:07) The Importance of Non-Sexy Industries and Good Management (48:49) Rave Restaurant Group: A Potential Turnaround Opportunity ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatStocks Follow us on Twitter/X: ⁠https://twitter.com/chitchatstocks Follow us on Substack: ⁠https://chitchatstocks.substack.com/ ********************************************************************* Options are not suitable for all investors and carry significant risk. Option investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date. Certain complex options strategies carry additional risk. There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, among others, as compared with a single option trade. Prior to buying or selling an option, investors must read and understand the “Characteristics and Risks of Standardized Options”, also known as the options disclosure document (ODD) which can be found at: www.theocc.com/company-information/documents-and-archives/options-disclosure-document Supporting documentation for any claims will be furnished upon request. If you are enrolled in our Options Order Flow Rebate Program, The exact rebate will depend on the specifics of each transaction and will be previewed for you prior to submitting each trade. This rebate will be deducted from your cost to place the trade and will be reflected on your trade confirmation. Order flow rebates are not available for non-options transactions. To learn more, see our Fee Schedule, Order Flow Rebate FAQ, and Order Flow Rebate Program Terms & Conditions. Options can be risky and are not suitable for all investors. See the Characteristics and Risks of Standardized Options to learn more. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, Inc., member FINRA & SIPC. See public.com/#disclosures-main for more information. ********************************************************************* FinChat.io is The Complete Stock Research Platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠https://finchat.io/chitchat/?lmref=J3bklw ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Stocks. This is our Thursday power hour episode where we talk all things financial markets over an hour. I am one of your hosts, Ryan Henderson, and I am joined as always by Brett Schaefer. And we can talk all things financial markets, anything that's in the news, any topics we want to discuss. I'm going to be talking my small cap of the week, which is a bit

of a bit of a unique one this week. And then I've also got the 10 best performing share cannibals of the last decade, which we can kind of dig into the results of that. And we got a couple other topics as well. Brett's brought some stuff to the table. But before we get into all that, we want to talk about our friends at Public. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first? At Public.com, there are no commissions or per contract fees. And more importantly, it's the only platform where you can earn a rebate on every single contract traded. That means you can save on your options trading costs and keep more of your capital in play. Whenever you trade options on public, your

savings are automatically applied. So don't change your strategy, change your platform and see the difference in your bottom line. That's no commissions, no per contract fees. And it's the only options trading platform where you can earn a rebate on every contract traded public.com. This is paid for by Public Investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. Let's get into things. Brett, you want to kick us off here?

Do you have any topics that you want to discuss? Well, the big one, Ryan, NVIDIA, top dog, number one. That is insane. What are your thoughts? I get it, I guess. like i get the enthusiasm but it is absolutely insane that uh that could happen in such a short time frame and beth kindig was right she was she did say apple but i believe that was the largest market cap at the time so it's sort of come to fruition and i think and i don't want to put words

in her mouth but i did see that she doubled down and said 10 trillion dollars so putting the chips back into the table um but go confirm that whatever the actual number is i did see she made a new prediction so we'll see yeah i think if you're gonna own it from here you basically have to believe that it's gonna be 10 trillion dollars eventually right well yeah i guess i guess over the next 10-15 years sure but if you're holding it and it's been a 100x for you i don't necessarily think you need to believe that you probably just need to believe it's gonna keep up its profits in a stable manner and then return a bunch of cash back to you as a as a shareholder right even if they if it's a hunter beggar and you get a one percent dividend

you healed over at some point over the next few years well you know you got all your cash back already yeah i want to find i saw this insane stat that i want to find and double check it so let me make sure let me see if i can pull this up okay yeah chris bloomstrand said nvidia passes microsoft and apple as the largest market cap combined the three are valued at 9.9 trillion dollars 21.5 percent of the entire market cap of the s&p 500 so those three alone 21.5% of the S and P the mag seven is now at 34% and the S and P yeah, they now comprise 34% of the S and P and those seven alone have $16 trillion in combined market value. That's more than the S&P 500 as a whole in February 2016.

Wow. That's a lot. Now, I did have, maybe we just roll right into this topic because this was one of mine for the week. And it was around this Chris Blumstrand thread. Anyone on Twitter can go find it. It really, I guess, put some stats up there, as you mentioned, Ryan, about how big these companies are.

And I want to go through a couple of them and see what you think. And what we've been talking about, a few of them, too. He talked about Costco, which is something I believe he follows. I don't think he owns. But here's what one thing that stood out to me. And it's a thread, so it's not like a essay type sentence. It's NVIDIA is valued at 42 times trailing sales and 78 times trailing earnings on an unsustainable 54% net profit margin. Now, how likely do you think that statement unsustainable net profit margin is true?

Do you think that's, I mean, you know, people like to say base rates, reversion to the mean, stuff like that. And sometimes I think that gets overrated. But in this case, I think you are making a huge bet against a reversion back to the normalized earnings power if you think this margin is sustainable. What do you think? Can you repeat the question one more time? Okay.

So he says they're valued at 42 times trailing sales, obviously high, but the earnings ratio isn't even that much higher because it's at a 54% operating or profit net profit margin, 78 times trailing earnings. How likely do you think it is that the trailing operating or excuse me, profit margin is sustainable because it's a big bet against a reversion to the mean? I don't know. I would typically say, yeah, that's going to come back down, but it also – I would be lying if I pretended to have any sort of grasp on NVIDIA's advantage and whether or not it's something that can last or whether something like competitors could actually catch up to it. Why do you think it would come back down? Well, again, this is not a part of the market that I'm an expert on at all. But I would say that the thesis is probably that there's going to be an increase in competition, even if they're still a leader, there will be an increase in competition as there is such a huge incentive to basically take those profits and make them ourselves with Google's TPUs, Amazon, Microsoft doing that. Now that might take a long time and maybe they don't catch up, but that would be the thesis that I would have if I was going to make that bet.

But I think the key maybe to look at as an investor is I would say it's probably – we can't deal in absolutes. It's probably unsustainable just because it's just unlikely that a company can maintain that profit margin. I think a good rule of thumb that I look at is if the profit margin is super high, that also means the moat needs to be very high because you need to protect that huge spread versus your cost versus the profit that you earn. If you earn a 5% profit margin, well, maybe the moat you have is actually the low profit margin,

similar to a Costco or a Walmart or an Amazon in e-commerce. But if you have a 55% profit margin, like a Visa or a MasterCard or NVIDIA, you got to have a really, really wide moat because otherwise someone can step in there and undercut you. And I think with NVIDIA, there's a lot of uncertainty there,

but obviously, as you mentioned, they've done so well so far it's not something that we know that well and hey you know that competitive advantage could be as wide as some of those top top profit earners like the card networks yeah i think that's probably what investors today would claim right that's probably why they own it is the margins are deserved and can be sustainable because they're so far ahead of everyone else and it's kind of this chasing game of innovation and if you're the leader it seems like you continue to be the leader in semis for at least with the nvidia's gpus it sounds like no one's really catching them um here's here's a question for you from the comments uh first one james

goodwin uh we have the two you know always joins thank you for joining says looking forward to the crash, which, hey, could happen. I think we'll get to another part of his thread here that I think is maybe a bit provocative, but he could definitely be right. And then Tyler says, do you guys think TSMC, that is Taiwan Semiconductor, the manufacturer of NVIDIA's chips will begin to demand higher prices from NVIDIA? Would that damage margins? I mean, yes, it would damage margins. And I think that's one thing that would concern me as well versus some of these other really high profit margin businesses is that they do have suppliers that may have just as wide of a moat as them. So is ASML, all the semiconductor equipment companies

going to sit back and let NVIDIA take all this margin? Is TSMC and Samsung and Intel going to, or I guess they don't use Intel as a foundry, but Samsung and TSMC going to let them sit back and take all this margin i'm not sure and maybe maybe that nvidia does have all the power here to say hey look we'll go somewhere else if um if you want to raise prices by 50 on us uh you know if they were talking on tsmc but from what i've read well tsmc is the only game in town for super low nanometers but tbd here's the thing that blows my mind if you would have told me let's say four years ago i'm just pulling up the numbers now just to make sure i'm not Crazy. Okay. If you would have told me five years ago, NVIDIA is going to be the largest company in the world by market cap. I would have thought for sure that this was trading north of a hundred times earnings.

True. Like you would not have thought that it was purely – well, not that it hasn't – not that there hasn't been some valuation or multiple expansion as well. But the fundamental improvement here or the improvement in revenue and earnings is – I'd almost argue it's more crazy than the change in the stock price alone. Yeah. Yeah, that's true. I mean, yeah, obviously there has been fundamentals there. It was a $100 billion. It was a $93 billion market cap in June of 2019.

Yeah, it's been quite a run. Now, this is another part of the blimster and threat. It's actually the end, but I think it relates perfectly to what you're saying here. Mr. Market is very good at rewarding success, but to a fault. In the short term, stocks can trade at extremes relative to fundamentals, but on the low side and on the high side at 23 times 24 expected earnings, the market cap weight S&P 500 is froth with excess and my judgment on investable. Now, he also has another part here where he says, this is the goofiest and likely most dangerous concentration of overvaluation

I've seen in 34 years investing and throughout financial history. That includes the dot-com bubble what are your thoughts on there is this worse than the dot-com bubble uh if it's not it's getting closer by the day no it's not worse than the dot-com bubble look it's showing look okay hey yeah you go first you go first it's showing up in their financials the dot-com was fluff like there weren't these were pre-revenue businesses i would say the SPAC craze was crazier than this, like 2020, 2021, that bubble was crazier than this. The difference here to me is that it's just people extrapolating out the existing growth rate maybe further than they should. But previously, there was no revenue growth rate.

As Tyler says in the comments here, it was .com had 100 times price to click ratio, like not a price to revenue or price to earnings whatever at least there's some actual fundamental improvement here yeah that to a point yes there was the pets.coms there was plenty of other ones like that those were small companies though and there were the big four at the time which i'm hopefully going to get all four i know three at the top of my head microsoft oracle cisco and oh intel and these are real businesses they were trading in extreme valuations and what happened with someone like a Cisco or some of these telecom equipment companies or the internet equipment companies, which I don't know if it's going to mirror it exactly. But what would worry

me is that during the dot-com bubble, there was such a big spend on this and people overspent for almost 10 years. And then once they realized that there was such a supply glut, a cyclical business like semiconductors went through a huge drawdown or these computer equipment companies and revenues fell 90% for a lot of these businesses. So I think that could happen because, I mean, it's a similar thing. It's not guaranteed to happen, and there has to be

the expectations are obviously higher now that the AI spending will generate actual profits for these companies, but I could see that scenario happening. And it wasn't all, from what I remember reading, it's not all zero revenue companies at the

time, although it may have been a combination of the SPAC era and today. you know into one yeah no i look maybe nvidia itself the thing that concerns me about nvidia is the revenue that it's earned over the last 12 months that is not guaranteed revenue like that's not a locked in revenue base for the next 10 years it's not a subscription yeah these aren't super long contracts as far as i understand it's not guaranteed recurring revenue so you you do have to believe that spending on ai and gpus will continue to rise and you have to believe that nvidia will be the one the primary distributor of those chips and maintain their

lead so like i don't know if you believe that i guess you can find a way to rationalize the evaluation here but i think that would be pretty extreme my i like bloomstrang because he does really good work but he sometimes comes off as like a little too bearish for me if it sometimes like people we we did this we're like this is an ai bubble a year ago yeah we still could be right but obviously it can it could continue the opposite direction like a few years from now we could be proven terribly wrong or completely right but no one either way no one will remember so uh okay the other part we don't need to talk about this stuff forever because we don't want to just be cnbc that talks about nvidia's stock split all day uh which is

some nonsense but there was another part in this that related to a poll that i did on costco he says essentially some stuff we've been saying here costco has a 2.8 profit margin 54 times earnings, going to grow sales pretty slowly, blah, blah, blah, blah, blah. My question is, you're at a essentially 2% dividend, or excuse me, earnings yield. And I guess this wasn't as controversial as I thought it would be, because it's kind of related to when, I think almost a year ago, exactly a year ago, when you did a tweet about Visa not stopping their buyback and just sitting on treasuries because that's a higher yield. I said, should Costco basically sell as much stock as it can and buy treasuries because you're selling your stock at a 2% earnings yield

and then buying short-term treasuries at 5.5%? What do you think about that, Ryan? Is that getting too cute? Because I kind of look at, hey, some of the great capital allocators of our time, Buffett with General, whatever that one, that reinsure. You have Henry Singleton at Teledyne. I think they would have done something similar, but what do you think? Yeah. And to kind of go back to that, people kind of dunked on me for that tweet, like, should Visa stop the buyback and put more money towards treasuries? But it seems to be what they've done to some degree. They didn't stop the buyback, but their percentage of excess capital that was distributed to buybacks versus treasuries skewed more towards treasuries as

yields kind of went up and and the multiple on visa grew as well so grew in sync with it so their their free cash flow yield relative to treasuries didn't look quite as good now you don't want to stop it in total because you'll probably lose a shareholder base and there's like i think there's some value to just being consistent in that regard but yes it's hard to do it's a hard pill to swallow but i would probably issue shares if i were costco yeah i think if you were saying i have a fiduciary responsibility to my shareholders you would try try to do that i i would guess and what's what do you think's more overvalued costco or nvidia ask me in three years we'll know for sure nvidia has such an uncertain outcome

costco i think is almost guaranteed to be overvalued unless it it's it feels the craziest to me but when you look at it i gotta think like okay is it is it one of those times where everyone is just going into housing bubble mode where they're like it goes up forever because it's a good business or am i just missing something i'm not i'm not sure but it seems the one where it's it's just there's not that much upside where nvidia you go hey ai is going to take over the world it's the new internet sure it'll it'll do fine you know sort of how like microsoft and oracle are above their 2000 highs hey maybe that could happen but they're they're two entirely different businesses we have some comments here uh do you guys think this time the froth is in

the businesses that are still private how many ai companies are getting multiple billion dollar investments right now. Yeah, that's a good point. We have no idea, but it seems like there's a lot of kind of nonsense going on in these private AI companies, but we don't really know for sure. Let's see. Once all these private businesses go bust, NVIDIA's earnings could fall. Yeah, that's true. That is true. You need the whole supply chain to be working here. Let's see. We have something on your Visa take. Treasuries don't go revenues at 8% or 12% in Visa's case. Yeah, but I think you can compound them.

You can reinvest. Yeah, right. I mean, the revenue growth isn't really what matters here. It's like if you have the chance to buy your own shares in your own business at a 2% free cash flow yield versus buying treasuries at a 5% free cash flow yield, your business, you're right. Treasuries don't grow revenues.

Well, they don't have revenues, so they don't grow revenues but the uh in the next year it is potentially a better use of your capital and it's a better use of capital for your shareholders and you can reinvest yeah and it's not like people act like you can buy back shares later yeah at the end of the world exactly and i think it's you know when something's maybe at 35 times earnings and they're buying back stock and the treasury yield would be like a 20 times earnings if you flipped it around. You can make that debate. But when it's as extreme as Costco, I don't think they're buying back stock. I think they understand capital allocation fairly well. But it's almost like

flipping around the idea of I have a super depressed stock, but I have consistent earnings and I can take out some low, cheap debt and buy back stock. It's almost the opposite of that, where I think some of the great, you know, the outsider level capital allocators would be taking advantage of this and they should and buffett has in the past yeah i would i kind of feel for costco shareholders at this point like if you're buying shares today i just don't see the upside i don't get what do you think about their special dividends they frequently distribute out special dividends at this multiple does that really make sense i mean i guess you can do that I don't think it doesn't matter.

Sorry. Yeah. I don't think it matters that this – Right. Dividend doesn't matter. Yeah. I was asking like – I asked on Twitter basically,

isn't it better to just buy treasuries? And everyone is basically like, yeah, probably not. It's better to just give it to investors and let them choose to buy treasuries if they want. So I think that's probably the right way to go. Yeah. But if you're going to have cash on the balance sheet, I don't think you should be buying back stock.

you should maybe try to sell it at the 2% yield to see what happens. But I know Costco doesn't operate like that and they're not going to be turned into a conglomerate overnight just because the stock's expensive. But other companies, maybe. Okay, new topic. Ryan, do you have one of yours?

You want to hit the activist stake? My favorite activist stake I saw in a long time. Yeah, I saw you were quite excited about this. So I guess a little bit of context here. So Starboard Value has amassed a half a billion dollar stake in Autodesk. Autodesk has been treading water for quite a while. There has been some – I mean, we've been shareholders and we've expressed some concerns about capital allocation and, frankly, management in general. Maybe just having the wrong objectives, measuring themselves, using the wrong measuring stick, a.k.a. optimizing for rule of 40 when you really aren't that – you're not at the stage of a software company where that matters anymore. So anyway, we thought there would be an activist at some point. An activist has come along.

And here's a couple quotes from CNBC. So Activist's starboard value has a $500 million stake in Autodesk and is weighing legal action over the company's delayed disclosure of an internal investigation into accounting malfeasance. This is kind of where it gets interesting. It says Autodesk moved its chief financial officer to a new role after an internal probe found that executives reversed a shift in billing structure to inflate the company's free cash flow and operating margins. Those two metrics determine executive pay and measure company success. Starboard is concerned that Autodesk delayed disclosing an internal probe until shortly after the nominating deadline for the company's board, which would potentially limit a shareholder's ability to nominate its own candidates in a contested fight. Maybe it's just the way these bullet points are laid out, but that sounds, I don't know, a little damning. Yeah, or God.

I was going to say it is a little funny that they said nothing came of the investigation, but we have – we've removed our CFO. Yeah, well, they changed it to a new role. They eventually called chief strategy officer, which – does she have blackmail on these executives? Because I don't – that's a joke, but like why would she still be there? I don't really understand. You're going to be paying her a lot of money as a chief whatever officer. also uh if they use this investigation to add another executive that's a bummer also um i don't really know if the cfo should should be the one that moves to chief strategy like

yeah maybe an engineer or someone involved with the product yeah well depends i guess what strategy means yeah the ceo is also the chief strategy officer if i understand that role correctly but i think the key here is so they did that thing where they basically secured their board of directors uh while they knew this thing was going on but didn't announce you know they delayed releasing that the investigation was going before an activist like this could step in so they're going to go legal action to see if they can re-nominate people but i think the most damning part is that they found evidence that so the company switched from upfront payments from big customers to more extended payments on an annual basis. And if you go from upfront to

annual, it's going to change your free cash flow number. Now, they were telling investors that they were still doing this, changing from upfront billing to annual subscriptions. But in practice, they were actually still, they reversed it to doing upfront billings while not telling investors because they were going to miss their free cash flow numbers. And that means the business wasn't as doing as well as they thought at the time and guess what the executives are paid on right sorry i was on mute uh free cash flow yeah so it was a bit misleading in all regards obviously doesn't look good on this management team and we had a question in here about how much the stock would pop if the management team left i don't know it's always

hard to tell in that regard i almost wish that it would go down because you want that situation where a company that's can grow revenue super super easily uh which i think has a wide moat you know gets a new management team in there that can maybe fix some problems um but it doesn't sound like that's going to happen it's interesting because the stock doesn't even look that cheap but maybe it's because those margins haven't gotten to the level that they think they can get him too curious does it make it more you more bullish or bearish on autodesk ryan no i i it's it solidifies my belief that this management team is bad i know that andrew anagnos was maybe not the one necessarily pulling the strings it sounds like

maybe it was a cfo but it happened under his watch uh it's kind of that they are who we thought they were meme where we kind of thought these are mercenary executives that have come in they get paid exorbitant amounts and it's a business that isn't that hard to run and they seem to be optimizing it for themselves and enriching themselves in the process and it was exactly i don't know i mean this this investigation seems to prove exactly that so yeah i i think this is one of the more this is a ham sandwich company where it doesn't require that great of a ceo or executives it's a wonderful product it's ingrained embedded in the workflows of architects and engineers around the world and i would love to see these

executives replaced most of them yeah that'd be good hopefully it's a big battle and the stock goes down because of uncertainty i would love i would love that because i still don't think it's that cheap although if they get if you can believe in margin expansion yeah it would be pretty cheap i did like how you used uh our good friends at fin chat which will be our next segment here on basically showing the growth and revenue versus the growth in stock-based compensation which is Quite astounding. I think stock-based compensation has grown 700% in the last 10 years, something like that.

Let me pull it up real quick. And I always make sure when doing these to, if I'm going to comment on something on Twitter, to at the CEO, just so when he opens Twitter, I don't know how often he opens it, but if he opens it once a month, he sees some ads from me saying, we're watching you.

We know you're doing this malfeasance. yeah i thought that was quite a hilarious uh i think it's funny that you tagged him wow look at this chart andrew anagnost yeah exactly i don't i don't think he minds he's probably got a nice house in the bay area where they're located okay so i am pulling it up right now hold on just give me like two seconds uh let's see we got some comments here someone said Autodesk rejected my application for their senior revenue accountant position. Executives compensated ex-SBC. Guess how much dilution via SBC is going to occur?

True. And someone says, hello from Europe. I see Power Hour now live. I tapped the link. Hello. Thank you, Quant Compounder, and appreciate it. We got a global audience over here. This is kind of funny.

Seeing the data from the, what is it, whatever our podcast aggregator is. And it's quite the international audience. It's cool to see sometimes. Only about half from our home market in the United States and a lot from Europe, Australia, Asia, even all the different continents. It's awesome. All right, Ryan, what do you got? Got it loaded up? It seems to be having a hard time populating what I'm looking for right now, but I think I can do it.

Essentially, it was 700% SPC and 150% for revenue. something like that i can yeah no okay i got i got i got it sorry okay pulling my sharing my screen now sorry it's just because it's a little wonky because you got to be like the percentage change and stuff but i am opening it now okay so i know this doesn't make for great audio so i apologize if you're listening to the podcast but basically i just since 2006 because there was a big stock based compensation that occurred in like 2004 i think that was related to the ipo so um it's not but no oh yeah that's right i don't know what it would be then because it makes it look very extreme um but basically revenues have grown revenues have tripled since 2006 which is

actually lower than i would have expected it's up 207 roughly stock-based compensation over the last 18 years is up around 628 so it has trounced the uh the revenue growth so very concerning for the business very concerning for shareholders i guess you could say yeah for For everyone watching, orange is SPC, blue is revenue. Yeah, for anyone watching there. Yeah, it's kind of bugging out on my end. So anyway, yeah, bummer. At least there's an activist on board now.

It's good to see that. They are who we thought they were. I guess that's kind of the moral of the story here. Yeah, I think that sums it up. We'll keep following this story. I think it's quite an interesting one from one of the businesses. I think is one of the best in the world. But let's hit another topic, Ryan.

We're about halfway through. So I think that means time for your listicle, which is this week about share cannibals. So why don't you go to that segment? Sure. So I was looking at some share cannibals, which the way I'm just defining that is companies that have bought back a lot of their stock

over a sustained period of time. You can kind of quantify it however you want. I did companies that bought back more than 5% of their stock annually over the last decade, which it's hard to do that if you're a company that grows quickly because you're probably going to get a premium valuation. So it's difficult. You basically have to be valued quite cheaply in order to buy back more than 5% of your stock every year. but only 46 companies in the United States have bought back more than 5% of their stock each year over the last decade. Interestingly,

most of these have underperformed the market. Wow. I guess that kind of makes sense because a lot of these companies are kind of at the stage where there may be low to no growth and they don't know what to do with the cashflow that they have. So they just buy back stock. there's been a lot of multiple expansion driving the broader market that as well but there are some gems in here as well that have been misvalued i would argue and uh they've been

able to both grow and buy back stock over the last 10 years and so i'm going to go through 10 of them these are the best performing ones so the number one best performing share cannibal is murphy usa the gas station operator primarily operate throughout the southeast southwest and midwest i believe because they don't have any up here in the pacific northwest um but yeah they have compounded their total performance total return performance they're up 25 a year over the last 10 years i can pull up the more specific numbers actually to get down to it um but yeah i mean they were the best performing stock by quite a lot uh the second highest performer is louisiana pacific i'll say this is a company i had never heard of

um prior to seeing them in the screener they sell building products for new home construction repairs remodel stuff like that they have reduced share count by 48 over the last decade and their total return is 578%. So pretty solid. I'm not going to go through all the numbers. I think I'll speed this up a little bit. But third best performer is Pulte Group. It's a home builder. Fourth, O'Reilly Automotive. Fifth, Lowe's. This is an interesting one because... So the sixth one here is AutoZone. So O'Reilly and AutoZone have both been valued very similarly. And they've both been able to buy back a lot of stock. They've had the same tailwinds To some extent, they've had the same tailwinds where cars on the road continue to grow.

The average age of cars on the road continues to rise as well. So it's just overall increases in serviceable customers. But Lowe's, who you would think is benefiting from a lot of the same tailwinds as Home Depot, they have not grown the business quite as quickly largely because Home Depot has done so well optimizing their existing stores and also catering to pros. But they've been able to generate similar, if not better, returns purely because they're valued at a discount to what Home Depot is valued at. So their buyback has been really incredible. So yeah, they've been the fifth best performer here. AutoZone 6, 7, Ameriprise Financial. 8 is Dillard's.

This is an interesting one because it's one where I would not own the business if it were trading at like 15 times earnings. it's retail department stores unownable that's what i think but it's not well right because they essentially went up like 600 because they just bought back so much it was so yeah it was and i'm not sure what exactly happened here but so in 2019 they were doing about six dollars per share in earnings and they bought over the last 10 years they bought back 66% of their stock, which is one of the fastest pace buybacks I've seen other than maybe AutoNation might've done more. So $6 in earnings per share in 2019. 2022, $42 in earnings per share. I guarantee you that is not because this is a rapidly growing business. They sell fashion

apparel, accessories. It's big retail department stores. It's not a glamorous business, not hyper growth but it's a good example of a management team with a good head on their shoulders being rational about the way they allocate capital and they've done a good job and they've actually been able to just operate okay i would have thought they'd been crushed but they've done all right yeah number nine oh yeah sorry the rest of the list yeah let me just finish up here uh number nine group one automotive they own automotive dealerships franchises and collision centers throughout the u.s and the uk actually pretty intriguing business honestly earnings per share have grown at 24 annually trades an ev to ebit of eight times so

kind of intriguing there um similar it's kind of in a similar boat to automation where you operate these dealerships and there's some ebb and flow with the auto market generally so maybe it's kind of potentially a cyclical here. Then the last one is Credit Acceptance Corp. They just provide financing programs to auto dealers in the US. I guess I'll let you kind of give your thoughts here and then I'll give, I don't know, some of my takeaways looking at this list. Yeah. So while you were talking, I pulled up Murphy USA here on FinChat. I'll share the screen here in a minute, but I will say if you want to use any of these cool screeners, you can actually

do it for international stuff as well. All these different sectors. It's a really, really robust screener now. You can go over to finchat.io slash chitchat, get 15% off any paid plan. We love using them. It's a wonderful product and they improve all the time. We just added median, or not we, Ryan works there, but they just added median, min and max on the charting, which can be quite interesting, I think, to help visualize whether a stock's trading at a premium valuation. I mean, And for example, we talked to NVIDIA today. You could check that out in the past, valuing cyclicals, all that stuff.

I mean, you could even do a screener with stuff over at Japan, Korea, even something even smaller like Thailand. I mean, they're building it out even better every day. So finchat.io slash chitchat. But let me share the screen here. I have shares outstanding at Murphy USA along with earnings per share growth.

Let me pull it up to get the exact numbers here, but I'll read them out. So we got shares outstanding declining at a very consistent rate, 8.2% per year since December 2014. But what's interesting is that earnings per share really didn't go anywhere from 2014 to 2019. They actually went down slightly. And then during the pandemic, they've boomed and now stabilized over the last couple of years. What would you think seeing this chart, Ryan? Would that scare you or not? Because it feels like maybe the

pandemic helped them a ton or maybe I would just have to investigate what was going on in kind of 2017, 2019 range because maybe they're reinvesting or something and all that bared fruit over the last few years, but something that I would be concerned about, but I would need to know why earnings per share growth has been so sporadic. If I remember correctly, I believe Murphy is one of the gas stations that actually earns a decent spread on the gas prices as opposed to a lot of convenience stores they'll sell the gas essentially at cost and then they'll make money on the goods in store you know selling food and stuff like that i believe murphy earns a good spread on the gas so the fuel revenue um and

i think gas prices shot up during that time period if i'm not mistaken so that might have had an impact as well i would have thought though they'd keep their spread similar so i don't know how much it would impact earnings per share but might have had a good point yeah so i still think it's an interesting chart though and seeing an eight percent per year decline is quite good i usually like to see you know i i get excited when i see three percent per year over an extended time period but if you do eight percent decline for 10 year i mean that can be quite good let's see tyler asks what companies do you think will be on this list in 10 years what do you think brian my bet is there will be a good amount of home builders on this list

there's a good amount of home builders already on the list but if we zoom 10 years out and you think that the supply and demand balance for home builders in the u.s is okay a lot of them trade really cheaply right now so i would suspect they're going to be able to buy back where i think you get leaders in share cannibals where companies that really reduce stock by a lot is when there's a like a common narrative that doesn't hold true so like autozone and o'reilly electric vehicles are going to eat up a lot of the market share for o'reilly and autozone or a lot of the potential customers they're not going to be able to sell as much products that just really hasn't held true the

The number of internal combustion engine vehicles on the road has continued to grow, and it's just basically been this tailwind for them where that narrative has let the stock be cheap, but they've continued to generate cash and be smart about how they allocate it. So cars on the road, that kind of is one that's maybe a false narrative. potentially, if you believe that home builders aren't going to be able to sell as many homes or there's going to be this big downturn in the real estate market in general, if that's the narrative out there, which it seems to be the narrative that real estate's going to struggle because of the multiples that we're seeing on a lot of home builders, if that's false, I imagine they're going to be pretty high on this list in 10 years. yeah i agree that makes sense someone here said ulta ulta beauty they buy back stock and the

stock's gotten cheaper so hey if it keeps being perennially cheap it could stay there we have a comment that says boring out of favor and good a cap allocation that's what he's saying with all these companies i think that's true when looking at that list one of my takeaways is you have to be in an industry that's not sexy and as you mentioned the other tenant there as well that i agree with where you know you have stuff that no one is really getting excited about it's not going to be in the home page of the motley fool with the top trending article writing about these companies so i i guess you have to look at something that people are too bored about someone mentioned tobacco but they pay they pay too much in dividends but that can

make sense if they were if they were buying back all that stock there right because the narrative is that the profits are going to go away and if they don't you know if they bought back a lot of stock that would help i think another one people talk about the energy sector i don't know how it's a little cyclical for me but i don't know you know maybe there's some stuff with stable earnings who knows don't know about don't know about it that much um but yeah what do you think the other thing that seems to be a trend here at least when you look at like Like Murphy, O'Reilly, AutoZone, Polter Group, Lowe's. These are businesses where their size has afforded them the ability to take share because they can sell goods at a lower cost or reinvest some of those margins back into being a better provider for customers.

Like O'Reilly, for example, they've stolen a lot of share from kind of your mom and pop auto parts stores. Lowe's, certainly, if you've got like a home improvement type of retail location, I bet it's real hard to compete with Lowe's and Home Depot come into your market because they get such lower rates from suppliers. It's just companies that have also gained share. Even though it's a slow-growing industry, all of those, the share growth has allowed them to also kind of grow revenue at a quicker pace. Right. And I think what's dangerous and counterintuitive is if something starts randomly growing 20% revenue growth. For example, we talked about Elf Beauty or Hims and Hers, which we actually have a question on Hims and Hers I don't think we could answer because I don't know the answer to it. But, you know, if something starts accelerating revenue a ton, that multiple is going to expand. But if you keep revenue growing at 5% for 10 years and the earnings multiple is below 10 and you buy back stock, hey, that's a great recipe for 15%, 20% compounded returns. Someone mentioned coal here as well on the chat. We had a lot of people saying they enjoy the interactivity with the chat.

So we'll keep doing that. I think if more people start joining, it'll be harder. I don't want to get to that point where it just starts scrolling and you can't even read anything, but I guess that's a good problem to have. Well, let's move on to the next topic. And Ryan, do you want to talk about our friends at Public again and then go to your small cap of the week? Yeah. And I think you're going to like the small cap of the week as well, Brett. Restaurants. Hey, I like restaurants. You do like restaurants. Anyway, so before we get to that though, earlier in the show,

you heard us talk about the investing platform, public.com. That's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract traded. NerdWallet recently gave public five out of five stars for options trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description, US members only. Let me pull up my small cap of the week. So I've gotten a little bit of love on Twitter actually for this new bit that we're doing, segment if you want to call it that.

Small cap of the week. I've got a thread now of like 20 in my notes app on my folder. So I'm just going through these, finding the ones that I like the best. And the other thing that I have found while looking at some of these micro caps and small caps, there is not – other than if you're a part of like micro cap club, there's really not like a single place where you can just constantly find interesting small caps because it's hard to screen for – a lot of these companies are like on the cusp of profitability. Maybe there's a good year, a bad year. It just doesn't screen well. and the companies that do screen well, usually there's something wrong with them. It's a difficult industry or a segment of the market to screen for. However, I found this kind of cool book

called The Weird Shit Investing Ebook. I think it's a blog, The Weird Shit Investing. I think it's a blog, but the ebook is just 50 pitches, or maybe it's not 50, a little less, but a bunch of investment pitches in a row on small and micro caps. And so one of the ones I came across was Rave Restaurant Group. The ticker is R-A-V-E. It's traded on the NASDAQ. And so Rave is the franchisor of 125 Pizza Inn locations in the Southeastern US. Pizza Inn, it's like an all-you-can-eat pizza buffet concept. Now, Brett, I don't know if this is getting you excited because I don't know if you're the biggest pizza guy in the world, but I know you like restaurants or studying restaurants. So I'll keep going here. Here's a quote from the ebook. It says

the company has been around since 1958, has a lot of brand value in its local markets, but is largely seen as a dying business that peaked with 700 locations in the 1980s. A new CEO, Brandon Solano came in october 2019 he helped domino's turn around in 2008 to 2014 and will do the same with rave solano has stated that he thinks he can 10x store count just by re-entering the old markets where that were lost over the last 30 years so it sounds like this is a pretty poorly run business comp sales have looked pretty good over the last two or three years double-digit comp sales at a lot of the pizza in locations. So really solid. And the thing I like about Solano as well as the new CFO that just came on board

is that they speak like – they don't speak too insanely optimistic. They're very clear about what they want to do and they sound very shareholder-friendly. So here's a quote from the new CFO. He says, I am very excited and feel fortunate to join the incredible rave team at this time when we are focused on right-sizing expenses to grow the bottom line. To generate over $1 million in operating cash this quarter, that was the most recent quarter, was truly impressive. Equally exciting is the company's commitment to revitalizing and growing sales through re-imaging existing restaurants and opening new franchised restaurants. The middle of the P&L is solid and the top line has tremendous growth potential. So they've done a good job controlling

costs. They've had 16 quarters in a row of profitability. And now they're kind of gotten to the point where it's like, okay, we're comfortable with our base restaurants here. They're consistently profitable. Now let's work on kind of expanding. It's a $27 million market cap. So this is really kind of a micro cap. $6.3 million in cash, no debt. So basically $20 million enterprise value. They did just over $2 million in earnings over the last 12 months. So a little under 10 times earnings. Thoughts here, Brett? Yeah, it does seem interesting for sure. My first questions would be to ask, are the earnings normalized? Do you think like how much room is there for a margin inflection? Because I wonder if they're at a subscale where

the overhead costs are eating up a lot of the potential earnings if they were two, three times as big. Yeah, I don't have the answers. I haven't dug deep enough on it. I struggle with turnarounds of this size sometimes like investing in companies yeah and they've just had such irregular profitability like if you look prior to the last 16 quarters the last four years profits have kind of gone up and down you really have to believe in this brandon solano guy because he is the one that took over 16 consecutive quarters of profitability that's been done under his watch he does have some experience in dominoes he was like head of innovation or something like that so it's not like he was just some like low dominoes employee that happened to

be there during the turnaround he was like i think a part of the actual turnaround that they performed if you believe in this guy yeah i think this is probably a pretty good opportunity and it's i do like the idea that they've been there in the markets before so people know them like it's not like they're starting from scratch and have to build a brand. Yeah. And it sounds like they were around since the, you know, 1958. So maybe like over the last decade or two, they lost a little bit of their quality and they can say like, Hey, you know, we're under new management. We got a better system going. We redid our restaurants, all that stuff, type of stuff, like with the re-imaging and people be like, okay, it's the pizza and I'm the old. And anyone from the

Southeastern US tell us if these things are a good or a bad brand. I'm assuming it's not like a Chick-fil-A level brand. But that definitely seems interesting to me. The balance sheet is, you know, the box gets checked there with some of these companies. You worry about just a distressed balance sheet. So six million in cash, which is high for them with no debt. That's good. That gives them a lot of wiggle room, especially to invest. And they're generating operating cash, as you mentioned, for what? Or profitability for 16 straight quarters, something like that. Yeah. Net profitability for 16 straight quarters. And we do have some comments here. rave is terrible terrible locations uh that's too bad i mean yeah i'd probably want to talk

to some people i think in the markets it does serve like like it's mostly working class americans meant to be like a cheap way to get a lot of pizza um so i could see a lot of people that have maybe a more advanced palate not liking that well i think you have to ask whether something like this yeah you know look if that's been true and they're still earning money and things don't change well it might be cheap enough right and i think the ceo from what i understand from looking at this he understands that it's not the best brand and they're trying to improve it which of course is tough to do and it takes many many years to do that but hey if it's priced like it's not going to you that that's all upset yeah and hey domino's brand was good the domino's brand

was horrendous in a way remember oh yeah that's that's a good point that is a good point now they had a fantastic turnaround yeah it took him about a decade to do it but yeah we have someone here saying that i was you know i was looking to short this you can't short a stock like this on that balance sheet i don't think i mean you'd have to look for more distress but who knows i don't know how to short the other thing that i'm finding a lot of uh finding a lot of in microcap land is like companies that don't report every quarter companies that constantly have delays like stuff where it's just like hard to actually get information the one thing i did like about rave is that they seem to be completely up to date with their reporting and have that all figured out so

So there was plenty of information available. Well, yeah, I think it's interesting. And with micro caps, if you're going to have that be a part of your portfolio, I think the key is you need to have higher expected returns or however you want to describe it, where you get cheaper starting valuations. Because like Ryan mentioned, it's hard to follow these companies. There's not that good of information on it. A lot of them aren't the best businesses.

They're disadvantaged versus a larger player. So you need that advantage in that, right? We had someone here mention Genk, G-E-N-K, as a restaurant play. I think we will look at that as another time. I will add that maybe to your list that we can do sometime in the near future. Genk, huh? Yeah, it's a Korean barbecue buffet growth story. Pulsaro over at Cedar, what's the name of his thing?

Cedar Value, I think. cedar grove cedar grove cedar grove yeah he had some stuff on his sub stack on that which i thought was quite interesting now let's move on to another topic we had some questions on twitter uh someone said have to get ryan's updated thoughts on wise do you want to do that this week or do you have anything for maybe next week or you read the stuff yeah i've read most of I didn't get through the entire annual – I think it's an annual report. It's like half shareholder letter, half annual report, which it's funny. Like the European reporting methods, it's like an annual report, but you just – everywhere there's like management commentary on everything.

It just feels kind of strange. 200 pages of ESG. yeah so uh i guess summary the second half of 2024 looked good they uh continued to grow we already knew some of the numbers because they have like a temporary report that gives like the headline numbers but they grew customers they the customer funds held in wise accounts continued to grow as well so they were earning good interest on that which has really helped boost the bottom line. The issue and what drove the stock down more than 10% following the report is that they guided for A, a little bit of margin compression, as well as a decline in revenue

growth. So they're expecting lower revenue growth. And management essentially said, we're going to reinvest some of the cash that we have gotten this year. And we're going to reinvest a good chunk of the income that we get to trying to lower costs, transfer costs for customers. So, and the way they do that is investing in the payments infrastructure, which I think it's not easy to build out. There's a lot of regulatory hurdles when dealing with, If you read the shareholder letter, you can see the number of regulatory hurdles that a country like Japan had in getting bank accounts set up natively in those countries so that you can create true low-cost transfers. And there's a whole bunch of restrictions that the governments try to more or less kneecap Wise with. So they say they're going to reinvest a lot of the proceeds into lower transfer costs.

If that is really the case, if you believe that they're going to be able to lower costs with these investment proceeds, I love it. I like that story. I like the way that works out. It's scale economy shared. It's the Nick Sleep principle of instead of choosing to return the capital to shareholders right now, they are returning the capital more or less to customers in the form of lower costs, lower prices, which hopefully means greater and greater volume. More and more,

I am seeing people raise awareness for Wise or become aware of Wise as the lowest cost provider. And I've seen some, there were certain corridors where prices rose a little bit, but in general, they seem to have the same goal that they had at the onset, which is to have whatever, money without borders, try to make it as low cost as possible. I've explored my alternatives. And for me, I get paid through Wise. It's still the lowest cost solution for cross-border transfers. Gotcha. Yeah, it makes sense to me. Do you think the stock is down because they said they're going to reinvest and maybe lower their margin a little bit and the short-term analyst and whoever cares about that in the short-term

is worried about an earnings crunch or whatever it would be an earnings you know you kind of get what i'm saying there yeah i think that's part of it the only other thing that is maybe cause for concern is that they said they're going to reinvest into building out their infrastructure for lower price lower transfer prices and at the same time they the revenue growth guidance was lighter than expected so i feel like you would think if you're investing in the infrastructure volume is going to grow faster so maybe there's something missing there but i guess that they're passing through some of the prices to customers then that's going to ultimately hurt their revenue or their their take on each transfer yeah and i think what helps me

wise is look is the moat as wide as someone like visa mastercard no but at the end of the day if we're customers we're not going to leave if they keep lowering prices and they're equal or better to any competition out there for any specific quarters now you know maybe remitley's better at mexico united states quarter corridor because that's their bread and butter or maybe someone else is better at some other corridor but on the whole they're trying to do as best as possible And I like that culture of, as you mentioned, Ryan, giving back some of the profits or, as they say, sharing, you know, the economics of the business to try to maintain. I thought what was interesting of reading as a little teaser, we're doing a Nick Sleep Nomad Partners episode next week for our legendary investor study. And I didn't know that Costco actually had a strict, like, we can only sell something 14% above what we buy it for.

I did not know they had a strict number there. So I like that same similar concept here where they're saying we're going to earn a specific spread. I don't know if they have an exact number, but it's similar in a way where whatever we earn, we're going to keep that. But that means we want to grow the volume and then we'll earn the money that way. But we're not going to try to eke out more from our customers, especially when at the end of the day, this is something that is not a huge branded differentiator.

Yeah. Yeah, I agree. And reading through a lot of those Nick's sleep letters, this was one of the companies that I kept kind of drawing comparisons to just in the way that management talks about like rewarding customers. But maybe that's because I'm a shareholder and I'm biased and it's just recency bias too. Yeah, confirmation bias on coupon as well. Yeah. Definitely. Definitely.

It was exciting. But yeah, look out for that next week. We're also going to do one on Molson Coors. i think that's a potentially cheap beer stock not so sure yet i should remind everyone as we close up this episode that uh when we talk about stocks we will tell you if it's something we own and most of the time 98 of the time we talk about something we don't own it and we if we talk about it like bullish or bearish it doesn't mean we have any hard takes on it it's just it's just a conversation because it seems it comments about it like when we talk about another company you know good luck

with this one i just want to make sure that we write about something or talk about it does not mean we own it we will definitely disclose all that stuff yeah and i've done three of these small caps of the week so far and i don't own a single one of them just to be clear exactly yeah trying to turn over some rocks all right thank you everyone for joining us let's hit the housekeeping stuff i haven't said this in a while but if you're new to the show if you like it you've discovered us from somewhere else give us a five-star review on apple podcast or spotify it's the best way to grow the show. You can follow us on Apple, Spotify, or YouTube at chitchatstocks. Never miss an episode in that way. And then let's hit the disclosure. We are not financial advisors.

Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. One more thing. We went live at 1.30 PM Eastern time today, 10 30 a.m on the pacific coast in the united states i think we're going to change to this from now on just because of ryan's building has maintenance that goes right by his building at the prior time slot so we want to make sure the audio is best as possible so we think we're changing to one hour further but we'll keep you updated on that and you can join live thursdays if you want to join the comment section okay thank you everyone we'll see you next time

We'll see you next time.