Chit Chat Stocks - 4 Great Stocks That Nobody Talks About (LAD, JKHY, ROL, APH)

Episode Date: May 7, 2025

On this episode of Chit Chat Stocks, we discuss four stocks that fly under the radar but have delivered market-beating returns for investors. We discuss: (03:13) Stock 1: A Hidden Gem in Automotive (21:34) Stock 2: The Backbone of Small Banks (33:53) Understanding Roll-Up Strategies and Their Effectiveness (39:39) Stock 3: Pest Control (47:37) Stock 4: A Hidden Gem in Interconnect Products (56:39) Key Takeaways from Successful Companies and Their Strategies ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* 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: ⁠finchat.io/chitchat  ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* 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. Before we get to this episode, we want to talk about our friends at Interactive Brokers. Interactive Brokers is the professional's gateway to the world's markets. Interactive Brokers offers commissions starting at $0 on U.S. listed stocks and ETFs with low commissions on other products, and there are no added spreads, ticket charges, or account minimums. Clients in over 200 countries and territories trade stocks, options, futures, currencies, bonds, funds, and more on 160 global markets from a single unified platform. Clients earn interest rates of up to 3.83%

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Make sure your broker is secure and can endure through good and bad times. We use IBKR here at Chitchat Stocks for their best in class international coverage. And you can too, by heading on over to IBKR.com. Interactive Brokers is a member of SIPC. Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this

episode. Welcome into another edition of the Chitchat Stocks podcast. My name is Brett Schaefer, and as always, joined by Ryan Henderson. We have one of our, I've kind of talked about them as a filler episode, but I think this is going to be a high quality concept. We're not doing a stock research report this week. We are not doing an interview with an analyst. We're not covering a super investor. We're doing one of our quarterly roundup ones where we try to look at a group of stocks that we either own or on our watch list or cover a specific theme. And this time, Ryan came up with a good concept, four great stocks that no one talks about or really that no one has heard of. And the criteria, well, not quantitative, it was basically, is the stock a hundred bagger?

And do we have no idea what the company is? Have we heard of the stock before? And we have four great choices for you. We're going to use these as case studies. They're not buy recommendations. They're more of case studies to help us learn and identify, hopefully, you know, some potentially hunter-beggar stocks at current levels, and we're going to get right into it. But first, I would say if you want to read the show notes, look at some of the charts we've made for this episode, follow us on Substack and get the free newsletter associated with every episode, and give us a five-star review on Spotify or Apple. All right. Ryan, you're up first. Lithia Motors, a company I've never heard of. I hope no listeners have heard of it as well. Take us through their story.

Yeah, I wasn't really sure what my criteria was going to be for this. One piece of the criteria, so the name, four great stocks that no one talks about. One piece of the criteria had to be they outperformed the market, and Lithia Motors has done just that. So has the second company I'll talk about. The only other criteria was basically, do I know anything about them? And with Lithium Motors, the answer was no until actually probably a few weeks ago, I had a conversation with a really talented and bright investor that I admire. And he mentioned Lithium Motors. So I felt inspired to go through it. Lithium Motors is a retailer of new and used vehicles and related services based on

Basically, they are a serial acquirer of automotive dealerships. They have 50 different brands, 500 different locations across the US and Canada. There's no single brand dependency. They will acquire a Ford franchise. They'll acquire a Toyota franchise. You name it. I don't really hear that many people talk about this business, but they have put up phenomenal results for investors. They have beat the market over the last 10 years, 15 years, 20 years. It's been a little, performance hasn't been fantastic over the last five. So we can talk about why that is and sort of the valuation today as well in a sec. But since their IPO in 1996, they have compounded at 13.5% per year for investors versus just 9% for the S&P 500 over that time. They are currently the largest player in the industry, but still have an estimated 1.5% market share. So this is a very, very fragmented space. There are about 17,000 auto dealerships in

the U S and Lithia has gone through that list. They have connections with this, these dealerships. They talk to the dealerships, try to get sort of some sort of gauge on whether or not they want to sell. They are waiting for the time that those dealerships are ready to sell. It reminds me a little bit of constellation software in that way, where there's this huge pool of potential businesses that could sell one day and they're willing to kind of take the long-term outlook and say, let's build a relationship, be there in their inbox, be there on the phones that day that they feel inclined to sell and kind of be the acquirer of choice for them. As for the actual existing business model, I'll walk through kind of how they make money and then we can talk about

some of the advantages. But when people think of car dealerships, you probably think of buying and selling new and used vehicles, which Lithia does, but it's actually not the biggest part of their business. So roughly 65% of the company's gross profits comes from servicing and financing. So that's really where the margins are. There's the financing and insurance division where you're helping people afford and insure their car. And then the services is you've bought a used or a new vehicle with that dealership. You already know them. You know that they know your car well. You don't have to go shop around for a new auto servicer. You can just go to them. And usually there's whatever, like first five services, first five oil changes are free

kind of thing. So they kind of build that relationship with you. And this serves them really well during recessionary periods when people aren't buying as many cars because people aren't buying as many cars, they got to get their existing car serviced and servicing your car is not really something you skip out on since it's kind of critical to earning an income for a lot of people getting around. So it's really kind of, even in 2008, they earned like 2% operating margins. Typically it's 4%. So it was certainly hurt, but they're not unprofitable even in tough times. In general though, it isn't too complicated. They run a bunch of auto dealerships and do everything sort of a standard auto dealership does.

Right. And you could, for the one word description of this company, describe them as an automotive of dealership roll up. I think this strategy just makes sense. You have a lot of family owned businesses out there. You have a lot of family owned dealerships. You can probably buy them and not that too expensive of an EBITDA or cashflow or owner earnings, multiple, whatever you want to describe it as. And given their scale, given their operational expertise, Hey, it makes sense. and you can see why yeah the business isn't it's probably not the ideal market whereas the constellation software software in general is maybe a better business model but these aren't bad businesses and it seems like i mean i was just scrolling through some of those

washington locations behind me or while you were around me while you were talking there are they own a few in the seattle area but i know plenty of and i don't know them personally but there's plenty of family-owned dealerships around where i live that when the time comes to sell well lithium motors will be waiting right there for them and i think it makes a lot of sense yeah and there are a couple distinct advantages to this business model so for starters throughout most of their history they have focused on buying dealerships in rural areas And those rural dealerships tend to have a local moat, you could say, in that they're literally in their contracts with the OEMs. Like let's say you're doing a Toyota dealership.

It'll say no one else can open a dealership within 100-mile radius or whatever. So you've kind of got like that little geographic moat there. And then there are also kind of the standard size advantages. So unlike smaller independent dealerships, they can centralize the back office functions. They don't have to depend on consumer sentiment for a particular brand. There's like working capital advantages so they can – by having multiple dealerships instead of a single location, they're able to move inventory around their store base to kind of help optimize certain stores. And then the biggest one, and I'll touch a little more on this in a second, is they don't compete with the typical acquirers. They don't compete with a private equity and stuff like that. And I'll explain why that is in general. But they've got these structural advantages and they're typically able to acquire these dealerships at around – they say basically 0.25 times sales and they generate 4% operating margins, Lithia does, across the business.

So that typically means they're paying around six times expected earnings for those dealerships. And this formula has resulted in just phenomenal earnings per share growth for Lithia over time. If you look out, it looks even better in 2009, 2008 if you're comping it to that because there was a down period. But if you look at it since 2011, earnings per share has gone from $2.20 a share to $31.70 a share. So more than a 20% annual growth rate. They've just done really a phenomenal job finding acquisition candidates and allowing them to operate well. They increase volumes typically as well. There's the other scale advantages like you can kind of put more money into marketing and all that as well.

So yeah, in general, just phenomenal earnings growth and the playbook has resulted in exceptional returns for investors. Right. And I'm looking at the chart here, Ryan. I'm sure you're going to get to this now where they're trading at nine times earnings today. There's some other discussion questions, but if we look at our chart from our friends at FinChat, if you'd like to get that discount, the link is in the show notes. It was pretty steady growth. And then the pandemic saw a huge boost in earnings per share that has now come back down. Did you learn? I know this is kind of the first time we were introduced to the company. did you learn anything about it is it kind of the bullwhip effect of the carmageddon and now we're worried about tariffs what did you find out about this huge earnings uh kind of boom and bust of the last few years i believe they had just a huge surge in new and used vehicle sales as we

kind of i mean it got so extreme where people were selling their used cars in some cases for more than they bought that new yeah yeah which is so rare um so yes sort of like ally they had a huge one-time earnings boost that wasn't sustainable 2020 and 2021 yeah there were supply chain issues too so like limited inventory there people were paying just extreme prices and if you look at like used car prices i can't remember who's the aggregator there but it's certainly kind of come back down to earth and so relative to 2022 earnings don't look that great But if you zoom out, it's been just kind of exceptional all around. And if you – the one question people always tend to ask with serial acquirers is if returns on the acquisitions are so good, how come those returns have not been competed away by other acquirers, private equities specifically?

And for Lithia, this is really one of their biggest advantages. Dealerships are OEM's primary touchpoint with consumers. So contractually, the franchisees are actually not allowed to sell to anyone. You have to get OEM approval, which you don't really want to just sell to some private equity company who's going to slash costs because then they're potentially selling less cars. And so for the OEM or the car brand, it doesn't – it's not that attractive. So Lithia has really become just a few companies who is actually able to acquire these dealership franchises. And Lithia has this playbook where they show OEMs, they're able to say, here's how much volume growth we are able to create post-acquisition in our previous deals. And that's ultimately what the OEMs are looking for. So they've got the marketing firepower. They've got the know-how to get customers in the door, whereas a private equity buyer just simply does not. So that's kind of what's allowed them to be the biggest serial acquirer of dealerships so far and generate good returns is it hasn't been competed away by private equity for the most part. Okay. So if this is a good business, if it's growing so much, why is, as of this recording, the PE ratio at nine?

yeah i think there's a couple reasons long term there are some kind of looming risks with there's been a rise of digital car buying marketplaces so even though buying and selling cars isn't necessarily the biggest profit driver for lithia it's an introduction to the customer so the customers that buy from them they'll also use them for financing they'll use them for servicing the car down the line, if you strip away that first component, there's risk that it impacts the rest of their business. So Carvana, AutoNation, companies like that, that have built up these really big online marketplaces have potentially have stolen share from them and potentially could do more so down the road. The second one is the rise of electric vehicles. They just have less

moving parts. This could hurt Lithia's parts and services segment, which accounts for almost 40% of their gross profit, just less need to be serviced. It's ultimately going to be a headwind over time. It'll be a slow headwind, I imagine. It's kind of like the same risk you see with O'Reilly and AutoZone, where people just don't need as many parts, so they're not going to go there as much, but it's going to be a slow grind down, I imagine. And then beyond the longer term worries overall i think investors just have concerns around interest rate sensitivity um the big one is that it might impact car volumes so buying and selling uh used cars new cars all that but also it'll increase lithia's cost of capital and they use a lot of debt to acquire other

dealerships so net debt to ebita right now is seven times if you're rolling that debt in a higher interest rate environment potentially uh it's gonna eat away at some of the earnings for shareholders so that is high that is a high number yeah it's now i think the businesses are quite consistent like the underlying dealerships are pretty consistent and that the costs are all variable for the most part like the biggest cost for them are sales commissions right for for the cars so those are generally they're able to maintain pretty consistent profits um or at least there's not risk that they're going to be unprofitable so the debt seems manageable but yeah it's a very i think that's that's one of the reasons it trades cheaply the other one which

is the big question i imagine people think about this with tariffs how do tariffs impact them is this like because obviously automotive companies would be hugely impacted given how much uh imports there are of of cars and i imagine there's a lot of imported dealerships specifically for lithia i think for me the way i think about it is good chunk of their profits car call comes from servicing right so i think that part would be resilient with even in a slowdown they are able to be profitable which gives me some comfort so two percent operating margins in 2008. I think that's pretty impressive. It gives me a little bit of confidence. But the other part, in a downturn, they are advantaged relative to the individual dealership

that might not have as good of a balance sheet. I think that could be a share gain opportunity where maybe they're able to kind of press the accelerator and acquire more dealerships than they would in good times because less people are selling when things are good. So I imagine deal flow kind of increases when things turn sour. Yeah, and it's better to be them than the OEMs, the makers of the actual cars, Toyota, whoever. Yeah, they should do okay, I would guess, unless we see a huge recession and depressionary period where no one's safe. I would worry about that leverage ratio. There's definitely a concern when combined with a potential for an economic downturn, but seems like a good business.

I guess when you look at the PE, EV to EBITDA or free cash flow or whatever is going to be higher than that, so it might not be as cheap as what the PE looks like. But if they can regain their footing and get earnings growing again, yeah, seems like it could work here. And it makes sense to me that no one has talked about this company because it itself is not a consumer-facing brand. The one thing that just pops to mind for me is that if Carvana is on good financial footing again, that could pose a growing risk for the company. Yeah, I think it's a long-term concern, but volumes haven't been that affected. It's still like the dealerships themselves still do pretty well. So it's not like the end of the world that Carvana is doing well also. um the ev to evit still reasonable like you said it's a little higher than the price to earnings

i think it's at around 12 times the and so it makes sense that there's the concerns analysts that follow the auto industry say this is the dealership's business is the best part of the automotive i guess supply chain to own where you've got the servicing revenue that's quite resilient even in tough times you're not as uh susceptible to downturns as the oems your costs are primarily variable so you've got just a lot of insulation from big recessions um and they can do all the added stuff like financing and insurance and stuff like that so uh i think it's a this i'm genuinely more interested in this business i need to study the like risks probably a little more and try to contextualize how big the Carvana and AutoNation threat really could be. That's probably

the one that's outstanding to me, but they've got a playbook that really works and they're insulated from competition on the acquisitions for the most part. Okay, let's move on to my first stock, second of the four. Remember, these are stocks that have gone up a ton and have done well, but no one really talks about. No one has generally heard of. And when I mean no one, I mean just the everyday person. If you talk to your hobbyist dad who's an investor, they haven't heard of it. And my company is Jack Henry and Associates. Not a whiskey brand, Ryan, but a, well, we'll get to what they do. But let's look at the stock returns. First, they have generated a roughly 313,000% total shareholder return since 1990, which would

have turned a $10,000 investment into over $31 million in just over 30 years. Well, almost 35 at this point. It has raised its dividend for 20 straight years. Revenue has grown every year since 2005. And yet, Ryan, no one is talking about this. And I ask why? Because it is the technical plumbing for small banks and credit unions, which is quite boring. And I can already hear people falling asleep at the sound of that. Not only is it in a boring area of the market, which are smaller banks and credit unions, it's a boring part of a boring industry, which is managing deposits, information flows, and all the stuff that you really need to get right at a bank. Nobody interacts with the Jack Henry brands in everyday life, and yet

they may use a bank that is powered by its processing and back-end solutions. We want to give some rough figures here. They do about $2.25 billion in revenue in 2024, 2.2 actually, and that is up from $535 million in 2005. If we want to look at a quote from their annual report, this is what they say they do. Their core software systems primarily consist of the integrated applications required to process deposit, loan, and general ledger transactions and to maintain centralized customer and member information. These are processes that a bank must get correct. Smaller banks, which don't have the multi-billion dollar budgets of a Bank of America or JPMorgan and Chase, they don't have the budget to develop these themselves. This is

where Jack Henry's products step in. They can invest in these solutions and sell them time over and over again to thousands of different smaller banks around the country. Jack Henry has a long history of making strategic acquisitions, buying 35 companies to upgrade its product portfolio since 1999. I think this is the first time we'll notice a theme in these well-performing stocks that no one has heard about, acquisitions and being good at it. and there are very few serial acquirers out there that can actually do it well for shareholders. There are those that do, and the well-known ones are the Constellation Softwares, the Berkshire Hathaways of the world. They can make a killing for shareholders, and Jack Henry looks to be in

this rare mold. Ryan, I think, was showing the free cash flow per share growth over the last two decades. It's gone from $0.50 to $7 over the last 12 months, and that is a 14.4% annual growth rate. I'm going to get down to how they make money, Ryan, but had you heard of this company before, and what do you think of the industry? I have never heard of this company, which for a big business, and especially the Compounder cohort of companies, I honestly thought I had known about most of them. Going through this exercise and looking at all these companies told me just how wrong I actually am. There are a lot of great stocks out there that I've never heard of. This is definitely one of them. I will say, yes, thought this was a liquor

company based on the name. No, it's amazing to me that if you look at 2008 and 2009, which is Like Armageddon for banks, like worst possible year. I don't think anything was up for any bank that year. Jack Henry still grew revenue and free cash flow. So really – You got to process their system. You can't have people not know what their money is and it has to be accurate. Let's dig into how they make money actually.

I'm curious around, like, I've got some follow-up questions and pricing power type questions, but how do they make money? Okay, so yeah, like a company that processes payments, they do a lot. They have two separate segments, software and services, and then payment processing. And as you can guess, processing is revenue associated with the payments processing. So as more dollars flow through the system, I believe they have a take rate on that. It also has, you know, debit and credit card, ECH stuff, check deposits, all that good stuff. And when reading through the annual report, we can see here that when they describe their software and services segment, they say it's, you know, private and public cloud fees, which

predominantly have contract terms of six years at inception. So they sign these software and services contracts for long-term deals. And then if we look at their processing revenue, that includes remittance revenue from payment processing, remote capture, ACH transactions, card fees, and stuff like that. So that'll grow as deposits and just money that flows through the bank or in and out of the bank grows. Software and services revenue was $1.28 billion in 2024, so 58% of sales, and then 42% was processing revenue at $940 million. Processing revenue has actually grown at twice the rate of software and services revenue in the last decade. And I think this makes sense, you know, given that

with inflation and stuff like that, as inflation protected, as more dollars are flowing through the system, they're going to have more and more money that is processed. And I think it also shows potentially some untapped pricing power with the software solutions, where they haven't been egregious on price hikes. Yeah, they probably steadily raise prices, but the fact it's only grown at a few percentage points per year. And it's such a vital part of these banks because if they tried to rip and replace, that's a risky endeavor. They probably can raise prices if they want. I would have a note here of the difference between their on-premise solutions versus cloud revenue. Like a lot of software companies, they've switched to the cloud. And when they break that

out, now that makes up the majority of software and services and has grown at a faster 11% clip in the last decade. I like this, even though they're a pretty old company, they've been able to adapt with the times, at least, you know, maybe a little later than other cloud-based companies, but they've done fine. And it's important for a technology company to, you know, durably grow and do this over the long haul. Here is why, and then Ryan can have any follow-up questions. Here's why I think Jack Henry stock is under followed. It's not a brand individual customers interact with. It operates in the back end of an already boring industry. It has not had explosive revenue growth to drive eyeballs. So there wasn't some, oh, this company is growing

50% year over year. I'm going to start writing about it on The Motley Fool. Ryan's going to start tweeting about it at FinChat. Thousands of other people are going to start hyping up this company. And then fourth, the name of the company does not indicate whatsoever what they actually do. And being under followed can be an advantage in long-term stock performance. It allows the company to purchase stock at cheap levels consistently. And it keeps any potential competitor ignorant of the cash cow you're generating. What do you think has gone right here? What did Jack Henry do so well that created such great returns for shareholders? Well, they understood, well, at least they got into the right industry where, you know, the last three to four decades, we've seen the digitization of almost all industries and the consumer banks, the credit unions, the small banks out there needed to compete with the Bank of Americas of the world.

So there's just a growing market out there for these type of products. I also think they've been smart acquirers. They've acquired tons of companies over the years. So the roll up strategy works well again, in this case, similar to lithium motors. But besides that, though, I don't think it's that complicated. No one really cares about this market. Venture capital isn't targeting it. People even don't like the market because the number of like tiny banks are disappearing. But the core market that they've gone after from what I've read, of kind of mid-sized credit unions, mid-sized banks upwards to, I think, $50 billion or $100 billion in deposits. That's been fairly steady. And the fact that there's smaller and smaller

amounts of these, well, the deposits are growing and the cumulative size of this business is growing. So I think that's a good thing. I'd say the number one risk is maybe the neobanks of the world, such as I doubt Ally Financial uses them. I doubt SoFi uses them, I would guess. And anyone that knows this company, well, this is just introduction. I haven't done much research on the actual company. Maybe they do use them, but I doubt that they're using these products. But there's a lot. We still use one of the local credit unions in Seattle. I don't know if it was a mistake for us to use them for a company that didn't really require any local expertise, but we did and we're still with them yeah it's just like ultra sticky like as uh as dumb as it might be

like you can get better uh high yield savings rates elsewhere you tend to just stick with your bank people do it's just a pain to switch um it makes sense that a regional bank small maybe not too small, midsize, you could even say, obviously don't have the resources to build this out internally, at least to the ability that Jack Henry provides. So yeah, that makes all the sense in the world. It'll cost less for them. Another thing I'll note, market share taker, good unit economics as maybe most listeners were aware of, but they have gross margins just north of 40% and operating margins consistently above 20%. And here's what also I think helps with the total shareholder return, well, I think it does, is consistent and growing dividend payouts.

So if we look at the total return since 1990, it's about 313,000%, but the stock price is only up 173,000%, which would still be good, but it doubles your dividend reinvestment helped double shareholder returns for this company yeah it's amazing how so many people think of dividend payments as a restrictive thing where it becomes like you have to give out the dividends to shareholders and because you're kind of obligated to you don't i mean you could technically stop paying a dividend but people think of it as like oh you don't have as much money to invest in new initiatives or you know you could be buying back stock it seems like that forcing function of we are going to be paying out this dividend this is the capital we have to work with always tends to

result in pretty good returns for investors like a better outcome then stick in your niche let's not expand into something stupid it might work if you're a berkshire hathaway but you're probably not warren buffett so i wouldn't try that and it keeps you locked in on the consistency and if you have a good business, stick with it. That's what you know well, and you're probably just going to diversify. All right, Ryan, what is your second stock? How did you find it? And what have its returns been? All right, folks, before we move on, we want to talk about Blue Chippers Club. Blue Chippers Club was started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. Inside this community, everyone gets to share and

break down their portfolios, pitch stocks, receive feedback, and even participate in weekly calls. I truly love this idea and it's why we're promoting it here on the show. I join the calls pretty much every week and it's phenomenal for generating new ideas and receiving feedback from other like-minded investors. If you're interested in joining, head on over to bluechippersclub.com and hit apply. That's bluechippersclub.com. The link will be in the description yeah we're starting to see a recurring theme here where roll-ups in unsexy industries can produce phenomenal returns and i would i imagine all four of the companies that we're discussing here are market share takers sometimes by buying market share like we're going to see

with this one but ultimately it really having a great roll-up strategy can work wonders for shareholders, but there's sometimes where it sounds like a great roll-up strategy and you're not actually getting the synergies that they preach. So you really have to understand what are the benefits of being a part of the overall conglomerate and whether or not it is attractive for acquisition targets and whether or not they're able to actually juice earnings once it's under the hood. My third company or my second company here is Rawlins, which is a global leader in route-based pest control services for both residential and commercial customers. If that doesn't sound sexy, I don't know what does. To paint a picture of how well this stock has

performed, if you would have invested $10,000 in Rawlands in 1990, today you would have $1.4 million. That's a 15% compound annual growth rate. Keep in mind, S&P, which has been phenomenal for investors over the last 35 years is doing just 9%. I think did 9.2% annually over the time. So they have crushed the S&P 500 over the last 30 years, I believe tripled the total return cumulatively. And as for the business model, it's somewhat similar to Lithia where they own a number of pest control brands that are well-known within certain geographies. And the customer journey often starts with someone that experiences an issue with pests or termites, or maybe has like a, whatever, a snake in their yard that needs to be removed.

They're having bugs, like issues with pests. And most of the time, customers want it taken care of right away. So they will call their local pest control company, which is often a Rollins brand, depending on where people live. And that will become the beginning of a longer term relationship. To paint a picture of some of the brands that are in here, there's one that I imagine most people will recognize and then there's some regional ones so orcan is kind of the big one they do a lot of national advertising they've got locations all over the place there's crane pest control opc pest services basically all these kind of uh big regional players as well and the the process for rollins is pretty straightforward they get the call a technician

at one of rollins various brands will drive out there like let's say an orcan technician will drive out there. They'll go assess the property. They will then look for conditions that invite pests and will stop the spread by typically spraying some sort of a chemical. Sometimes it'll be like a trap. Sometimes it'll be a removal, but often it's kind of chemicals to prevent it. And then this one-time visit, which solves an urgent issue for customers, then typically turns into an annual or semi-annual inspection just to make sure there isn't anything that could become an issue later on. So they create, it's usually event-driven initially,

and then it becomes recurring revenue for Orkin or whoever the pest control provider is. And for the cost, this is a predominantly fixed cost business. About 80% of the costs, it's estimated, for Rollins are fixed costs. So that's labor, trucks, chemicals, equipment, which they're able to spread across a wider asset base compared to the smaller players. so like lithia this industry is full of smaller players there are two giant companies that lead

the industry rollins and rent to kill which account for 24 and 30 percent of the market share respectively so much bigger in terms of market share than lithia like lithia was one and a half percent of the overall industry uh rollins is 24 but there are still 40 000 roughly, regional and local players in their markets where they can go after them and have these bolt-on acquisitions. And as you can probably imagine, Rollins has all the standard economies of scale that work for them. So they can spend more on national advertising. They've got the centralized back office functions, better IT systems, which is huge for route optimization for their technicians. The biggest cost detractor, or sorry, the biggest

uh burden to their unit economics is just technicians wasting time sitting in the car on the road so the the it systems that they've built have been great for route optimization and they can also spend more money on time uh training new technicians which is a huge deal i know people probably think of this as like oh you know anyone can just go in there and like you know get rid of the bugs they're just told what to do but it's really it requires a lot of training. You have to know what you're seeing, how to diagnose it. It doesn't always look the same every time. And they've really invested in this. They have a 27,000 square foot training center in Georgia. So this is a huge part of their process. And because they have these scale

advantages, they're able to make tons of bolt-on acquisitions at attractive prices relative to what the companies could earn under Rollins umbrella. Just to paint a picture, in 2024, they acquired 32 new smaller players um the the big thing here and i think just the big thing in general with all successful roll-up strategies is the devil is really in the details it's one thing to just say like oh we're bigger we have more money we can spend more on advertising you know we have advantages relative to the smaller players but you really have to do the work to be advantaged You have to have the better IT systems. You have to have the route optimization.

You have to have the training for new employees, the systems to integrate a new company. Once you've really nailed that process, I think that's where the best roll-ups are formed is in those kind of internal systems. And Rollins is really just one of those. And look at this free cash flow margin. It went from 6% in 2005 to 17% in 2025. I'm not sure if there's any business change that would have caused this, but it seems like at scale, they're getting much more efficient. They're helping these companies convert more of their earnings into cash flow, which is one of the key parts of being a conglomerate. You can get better negotiating, working capital cycles, stuff like that.

And look, we want more cash. That's the key. We want more cash coming to shareholders so they can pay it out as dividends or reinvest into new pest control businesses. Yeah, and some of that has been the shift to more commercial. They've been investing a lot in trying to get commercial customers, which have higher margins and they're very sticky. So I mean part of – I think that margin evolution is kind of – you could probably see it coming with the relationships with customers are really sticky. In most cases, they're recurring. They've got those recurring inspections.

It's not a cost that you're going to skip out on even when times are tough. Like if there's an infestation of bugs in your house, it's not like, you know, this month's been tough. I'm going to just let them stay there. So, yeah, a lot of the costs are fixed, like I said, and they've got those scale advantages. So it's really been able to create a lot of operating leverage for them to kind of sum things up. recurring revenue, which is resilient in tough times, better economics relative to smaller players because of all the things we discussed, high fixed cost and scale advantages created the operating leverage. We saw free cashflow margins have basically tripled over the last 20 years.

And this has just led to really strong free cashflow per share, well, revenue and free cashflow per share growth over time. I believe revenue has grown at about 8% a year. Free cashflow per share has grown, I think between 14 and 15% a year. So it's, it's just been kind of this perfect formula for Rollins shareholders. Makes me want to start a rollup, Ryan. What are you going to, what are you going to roll up? I've always, I want to do driving ranges, but I always think that's a good idea. Yeah. I mean, it does. I think everyone has the ambitions to like have a roll-up of whatever their hobby is or whatever it sounds fun yeah exactly yeah you won for soccer but yeah i mean people buy multiple sports teams i think it's people tend to do that

but that's the point is like that's the private equity model right they're like oh like we'll just we like it we'll buy it we'll juice the profits whatever yeah but to be a great roll-up you have to love like building the systems and actually getting in the weeds and you got to know the business you can't just acquire it and let it run like the underlying businesses have to perform well and you have to give some incentive beyond just cash typically to the companies you're trying to acquire but what went right for all in shareholders regionalization in general that they're very close to a lot the customers which means they don't have to like instead of having one larger location in an area, they'll do multiple smaller ones, multiple smaller trucks

so that you can get to people quicker. They do the hard stuff really well. I've talked about this at length, but they've created true national brand awareness with Orkin. They have optimized the routes for their technicians. They have built that huge training facility so you don't mess up on the first time you go and assess a house. Because if you mess up and assess the house, you got to go back and they pay for it. And let's say you did not get rid of the issue. You got to go back.

You got to do a free second session. And it becomes kind of like this, you're less likely to become a recurring customer. So they really train their technicians. And then the other one, which is a little hard to, I guess, identify early on is multiple expansion. This free cash flow multiple for Rollins has gone from mid-20s to basically just over 40 times free cash flow multiple, which has – Just start calling it the Constellation Software of X and then –

Yeah, I guess. It's the Constellation Software of plumbing. It's the Constellation Software of – what is this? Pest control. Yeah. That will help get investors hyped up. The one big risk – and then we'll move to your second company. The one big risk for me is we talked about why has there not been more competition from competitors to acquire companies.

In this case, there has been. Apparently, in 2023, private equity really started to push towards pest control services. And there's actually – if you look up like private equity buying pest control, there's all these articles of like why you should sell the private equity. Written by Blackstone. Yeah, written by private equity. I think this is a legitimate risk. I don't think there'll be better operators than Rollins by any means, but it's going to drive up the cost of acquisitions for Rollins for new businesses that they're trying to acquire or they're just not going to be able to acquire as many, wouldn't I guess. So I do think that's a real risk. This is what the Ivy League endowments are investing in. We're investing in private equity. And what are they buying? Pest control. They probably know so much. Yeah, I mean, this is why Rollins is better. They probably have that local expertise. I couldn't come in and just go, yeah, I can run pest control. You need to know how an industry operates. My parents have an Orkin annual inspection, biannual, something like that. And there's some really valuable know-how. And okay, there was like bugs that kept kind of showing up and they looked the same. And the guy came in, he's like, oh yeah, boom, like stink bugs. Here's how you get rid of them. Where are they coming from? Like he can spray the chemical there. but it's like he knew all this stuff i would have had no clue on maybe chat gpt could have

helped me but who knows uh and i just like feel like if you're just pulling out as much cost as you can like as a private equity operator a your technicians are not going to want to work for you i think i can't think of i would hate to be like like acquired by private equity as like someone that's not higher up that would just be frustrating because they're trying to strip away the cost at all times so it's just i don't know they're not very motivated not very inspired to help i guess yeah either way though yeah i mean 40 times yeah doesn't seem too attractive today but who knows it's been a winning company all right ryan you read a talk about which i think this is the most obscure company out there i i don't know this one might this one

might be the winner. I've never heard of this whatsoever. All right, folks, if you are a regular listener to Chit Chat Stocks, then you know that we use FinChat.io daily. FinChat is the complete financial data platform for stock-focused investors. They have robust financial data on more than 100,000 stocks globally, including company-specific segment and KPI data. For example, you want to see Amazon's revenue from advertising? FinChat's got it. How about Netflix's paying subscribers by region yep they've got that too and they recently added custom metrics so that you can build your own formulas to track the numbers that matter most to you so head on over to finchat.io slash chit chat all new users automatically get two weeks of finchat pro for

free but if you want to extend to any paid plans our link will get you 15 off that is finchat.io slash chit chat link will be in the show notes but it's huge but it's huge it's called amphanol corporation for whatever reason. And since 1990, it has generated a total return of 63,000%. Not as good as Jack Henry, but still would have turned $10,000 into $6.3 million. I think hidden 100 baggers can be found by finding products that are a small part of an overall ecosystem or supply chain, a large supply chain that the rest of the players in the sector cannot do without. I think Amphenol Corporation is figuratively this and literally this as a seller of interconnector products for electronics, automotive and aerospace, and industrial use

cases. It sells products like simple point-to-point cables, power distributors, sensors, and if you work in automotive plants, science labs, R&D departments, you are probably using some Amphenol products. There will be a graphic in the newsletter that has their end market exposure. We have 24% industrial, 20% automotive, 24% IT and data centers. And like these other hundred beggars that we looked at here, well, one of them might not have been a hundred beggar, but still like these other market beating stocks. And this is a trend four out of four here. Amphenol has deployed a disciplined acquisition strategy, acquiring 50 companies in the last 50 years, all focused on this one sector. So again, another roll up that no one has ever heard of. Amphenol's history can

be traced back to 1932, when a man named Arthur Schmidt founded American Phenolic Corporation to sell a molded radio tube socket that had better durability than existing products at the time. And as you can see, they've still had like, the same idea or the concept of what market they want to go after. We want to be when stuff that connects electronics and basically systems together In 1957, they listed on the New York Stock Exchange. I mentioned the early history because it looks like the company has been focused on this key niche throughout its history. There has been some acquisitions and some combinations. Let's see, in the 1970s, I think they were struggling. They were bought out in 1987 by private equity. By 1991, with

costs in control, they re-IPO'd. There was actually a big investment from KKR as well, but not really important to the story today. And the last 30 years has been a fantastic time to lead the interconnect and sensor market. Everything is getting increasingly electrified. There's multiple tailwinds to drive long-term growth. And I bet this is what drove their acquisition strategy to work so well. If you buy at a disciplined price, or if you buy at maybe even not so disciplined of a price, if the market is just growing so quickly, you're going to do just fine. I mean, we had fiber optics. The internet and telecom boom has helped feed demand for their products. This continues to steadily grow. We have IT

and data centers. Spending on data centers means more spending on Amphenol products. The AI boom is likely helping them a ton. There's the electrification of automotive and aerospace, whether in military or commercial products, these Amphenol products are getting more, excuse me, cars and plane trains and automobiles are getting more advanced and more electric. That is a boom for Amphenol. And then we also have the electrification and digitization of manufacturing. The more we digitize and electrify manufacturing plants, the more Amphenol products are used. Things that came to mind, the debate over automating the ports, the Taiwan semiconductor factories that are getting built in the United States.

I'm sure they're using plenty of interconnector products. And when you look at that, it's no surprise to see Amphenol sales steadily growing. Revenue is up. I think this is the IPO numbers. Revenue is up 3,570%. Free cash flows up 13,000%. Revenue has grown at a 12.3% annual rate since 2005 with only a few down years. growth is a bit lumpier than Jack Henry, but that is due to the end markets. You can have some down cycles and spending. This isn't software and services. And when you look at it today, is there any reason for this end market tailwind to stop? Amphenol doesn't think so. I mean, for example, you have the electric vehicle market, which is still a decade or two before becoming the majority of automotive sales in the United States. And I would think not even Tesla, which vertically integrates so many parts of its process, is going to build its own connectors.

They don't care whether the connectors are slightly higher in price every year. They don't care that they might be charged with a pretty hefty margin because it's a tiny part of the overall cost of its business. If, for example, something goes from $5 to $10, no one is going to notice and customer demand is not going to change. But that can be very helpful for Amphenol to keep growing and growing and growing. So maybe I'll stop there before we go into the financials and the stock returns and how they wanted to 100 beggar but ryan i'm guessing you haven't heard of this one i think recurring

guest sleep well capital was the one that responded to my tweet trying to find some undiscovered gems seems like this is a monster business hiding in plain sight i mean what's the market gap here it's pretty big i can pull it up but i got almost 100 billion wow i actually have heard of them recently because our friend john rotante follows them writes about them on his j-ro notes page i hadn't read up on them and my assumption here was that they were some sort of a pharmaceutical company because amphenol kind of sounds like a drug um but i did not realize what they did it makes sense that there's been some company that was the picks and shovels provider to just electrification of everything over the last 30 years and this is clearly the

one that it was it i see no reason why it would slow down like well sorry slow down because eventually they'll get too big but revenue is not going to stop growing right now if we look at it actually there's been a massive acceleration maybe i can pull up revenue growth over the last couple of years thank you ai and electric vehicles i would say yeah it's gone from wow well about it grew revenue 21 in 2024 thanks to probably the data center explosion would be my guess um and it's growing really quickly in 2025 as well so i really like this what uh what does the multiple look like today and how has the valuation changed over time how many like what's investor sentiment like here it's it's probably pretty good i don't follow it too closely but the stock

currently trades at a PE of 39. If you look at Chris Meyer's recipe for 100 baggers, you don't need, but it's very nice to have multiple expansion. I doubt this is where they traded at in 1995. And it looks like the company is a strategic repurchaser of stock. They were in a large drawdown during the great financial crisis, and they aggressively took out their shares. They're not really doing too much of that anymore while the stock's up higher. And they've had improving free cashflow conversion because we look at that free cashflow that I mentioned earlier, it grew much faster than revenue since the 1990s. So better cashflow conversion, it opens up the balance sheet to be more aggressive on acquisitions and at a lower

cost of capital, or they can return more cash to shareholders. I think this is an underrated aspect of high quality businesses. And we sum it up. Here is how Amphenol crushed the S&P 500. and turn $10,000 into six, was it 6 million or even higher? I think 6 million bucks. They played in an industry with rising market demands. They made smart acquisitions at a reasonable price. They made smart capital allocation decisions and improved free cashflow conversion.

And their multiple went up. If you do all those four things, it is going to be hard to lose money. Now we're not recommending to buy any of these four stocks today. maybe someone can do the research further. Maybe we can rank what ones were inspired to research further at the end of this, Ryan. And we can talk about themes as we close out here. You know, we don't know enough about these companies today, and they're likely either out of our circle of

competence or overvalued. But using these four examples as case studies, they can help us all identify promising stocks with 100 mega potential. So maybe let's go through the two topics to end it. First, what lessons do you take away, Ryan, from studying these four companies? roll-ups can be huge successes if there is like if the details are all sorted out if there there really are synergies in acquiring companies like if you're seeing the acquired companies grow earnings after they've been integrated and you're seeing the integration process start to speed up, you're seeing a huge area of actual acquisition candidates and reasons to sell. It can be sort of a perfect formula for the best operator there. That's one.

I guess other highlights or things to look for would be market share takers. You want to find market share takers. It helps if they're doing it organically, but if they can successfully acquire market share at reasonable prices as well, that works too. And look in unsexy industries. I was actually thinking, okay, the data center boom, like we're still seeing this play out. Data centers everywhere, huge investments. There's got to be some picks and shovels providers that are benefiting, that are like, I don't know, the doorstops that they sell to data centers, whatever it is. And I've now seen two. There's this AAON company, which does commercial air conditioning for data centers. They've had a huge jump in their backlog. And now Amphenol, which has seen big revenue growth from it as well. So try to look, I guess, deeper down the supply chain. Don't just look at the big names. Look at who else benefits and don't be afraid of unsexy industries.

Right. If you talk about the data centers, there's costs within their income statement. Look at what those costs could be and who those providers are. The one thing I'll add here is improving free cash flow conversion. I think that was a theme for all of these companies. You have improving free cash flow conversion, that free cash flow per share goes up, and free cash flow per share, as long as you have intelligent capital allocation, that will drive stock returns over the long haul. I mean, a stock at the end of the day is worth the cash it produces for you, the shareholders. All right, Ryan, from a standpoint of not buying, but what one you're inspired to research first, rank these four stocks. lithium motors is probably the one i feel most inclined to research because i think we saw very similar characteristics of all these businesses where it's been multiple decades now of great uh operating efficiencies and and just uh good performance at the operating level but also successful acquisitions all that lithia to me seems to have the biggest runway i think for acquisitions where they're only one and a half percent of the market there's 17 000 dealerships

in the u.s i think there's room for them to gobble up more dealerships and i like that they're trading at a pretty reasonable multiple it looks like ev to ebit at 12 times so uh they would probably be number one for me i like rollins was too expensive and i don't love that private equity is getting involved there and probably making the bidding more competitive so they might be number four for me jack henry i don't know if i've ever seen a revenue chart that consistent uh yeah it's nice so maybe they'd be number two so i'd go one lithia two jack henry three amphinol and four rollins how about you i think i'll put lithia at one because just the price looks potentially cheap who knows there could be some underlying risk here we're not

looking at i'd say two jack henry because it also kind of comes down to valuation these all seem like good businesses, but they didn't seem extremely cheap. Although I didn't, I may not have put up that valuation figure. I think third would be Rollins, but Rollins and Amphenol don't excite me too much. One Rollins is just kind of seems generally very expensive from an earnings multiple place. And then for Amphenol, I worry that, you know, they've seen the benefits of a huge boom uh and multiple expansion but again that can reverse and you don't make money buying after boom you make money buying before the boom all right i think that's going to do it we want to remind listeners to give us a five-star review because it's very helpful that's the best

way to help the show grow any other parting thoughts brett i don't think so subscribe to the sub stack to get the free graphics for this episode let us know if you like or don't like i guess these type of topics i think this was very illustrative for ourselves and i think the listeners will hopefully learn something from this episode as long as being a title that i think people will listen to let's see teasing any interviews we have interviews coming up on Airbnb, Robinhood, and the ticker is A-S-T-S, but I always forget the actual name, A-S-T Space Mobile, which is a very hot stock that I think will be three fun interviews. So look out for those.

All right, who wants to do the disclosure? Ryan? Go for it. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I aren't 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.

Thank you everyone for tuning into this episode and we'll see you next time.