Chit Chat Stocks - 5 SPACs With Positive Returns; The Best Types of Moats; Lessons From Fund Mangers With John Rotonti

Starting point is 00:00:00 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 and we are joined today by none other than john rotante a listener favorite recurring guest and longtime friend of the show john how are you this morning i'm doing great y'all thanks for having me and your show is one of my favorites so the uh feeling is mutual perfect okay well we've got lots of topics

Starting point is 00:00:58 this week. We've got my small cap of the week. We've got five SPACs that actually had positive returns. John brought a couple of topics as well. I guess I should give the little lay of the land here. This is our live power hour that we do every Thursday, typically at 9.30 Pacific time, 12.30 Eastern time. We do it on YouTube. However, we also publish it as a podcast on Sundays. So if you listen that way no problem we love uh all our listeners regardless of where you're at but if you want to ask questions typically you can go to youtube 9 30 on thursdays and ask questions hey well i wasn't working for a while but take about 30 seconds in there and it looks like we are live so hopefully we get some questions in here today ryan i'll uh tweet out all the link

Starting point is 00:01:44 hopefully we can get some commenters and yes join typically thursday around midday eastern time but ryan yeah continue with the show perfect yeah we always have technical difficulties here but anyway, we are going for it today. We have tons of topics. John brought a couple that I really like. I look forward to discussing those. We've got a lot of questions as well. But before we get to that, I 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.

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Starting point is 00:02:47 Options are not suitable for all investors and carry significant risk. full disclosures are in the podcast description. Where do we want to start? We've got endless topics here. So John, as the guest, why don't you, we've got, there was one that I liked in particular that you brought, which is kind of the role that ego might play in investing. Do we want to start there? Sure. You know, I just think that valuations look stretched to me across, you know, high quality companies. And, you know, if you're going to pay the valuations that we saw in 2020 and 2021,

Starting point is 00:03:34 and the valuations that we're starting to see now, there's gotta be some ego involved with that because these stocks are priced for perfection, as the saying goes, right? That means that the investor assumes their research and their valuation is perfect. That means the investor thinks the company will perform to perfection with no mistakes, no hiccups. The investor thinks there will be zero negative surprises from the company or from the economy, and that all optionality priced into shares is achieved. That takes some level of ego. And this is not a criticism. It's just an observation. And I think ego harnessed in the right way and combined with some other variables can probably

Starting point is 00:04:22 lead to a lot of financial success. Value investors, though, like my set, know from the outset that we will be wrong somewhere or there will be some negative surprise somewhere because markets are complex and adaptive, and the future is impossible to predict. And so that's why value investors insist on a margin of safety. We're aware of our constant fallibility and aware that the future is unknowable. And I just think that's one of the big differences between intrinsic value investors that insist on buying at a discount, insist on a margin of safety, and whether we want to call them growth investors or momentum investors that are willing to pay what looks like shares that are priced for perfection. It assumes nothing goes wrong

Starting point is 00:05:17 and all optionality is fully achieved. I don't know, just an observation and not a criticism. So I have a question there. Yeah, please. You mentioned kind of what we've been talking about on this show a number of times as well, Almost this like – it's this awkward spot if you're an individual kind of long only equity investor where a lot of the companies you like, a lot of the companies maybe you own have gotten to valuations where they don't seem quite as attractive. If you're an individual investor in that situation, John, what do you do? Do you dig that much harder for something undiscovered or underfollowed, undervalued, or do you start to implement more money in treasuries or kind of keep cash on the sidelines? What's kind of your approach to that?

Starting point is 00:06:08 I mean, so I think there's a big difference between – I think as I understand the question, you own the stock already and it runs on you, right? and it goes up a lot, what do you do? I think there's a big difference between selling out completely, which I almost never do, and trimming. I'm going to be publishing an episode of The J. Rowe Show next week with an investor that tells a story about buying a certain small cap when it was a small cap. It was like $2 billion market cap or something when he bought it, maybe $1 billion, and it's now $26 billion, and it's still in his fund. But he has sold more of the company than he ever bought because it ran up on him so much, yet it's still a decent-sized position in the portfolio.

Starting point is 00:07:01 So I think there's a difference between trimming and selling out completely, and there's nothing wrong with having a, you know, a sale discipline, a selling discipline and trimming when your analysis tells you that the, that the valuation may be stretched, that the valuation may have, have gone outside of a zone of reasonableness. And so what I do is I trim, but I don't sell out completely. And yeah, if I can't find any, anywhere better to put it, then that cash sits in a, you know, money market fund right now, earning me 5%. Sometimes I can find somewhere else to put it. But right now, if I'm trimming, a lot of it is sitting in treasuries. I'm not recommending that. That's just how I've been doing it. Exactly. Yeah. There's a big difference

Starting point is 00:07:51 as we've talked about a ton of times on this show of a price where you would buy a stock versus a price where you would sell it, especially when taxes come into play. Obviously that's important. absolutely it's there's almost i think how i like to think about it is different tiers where there might be one where you're kind of in that limbo where you wouldn't you know buy the stock there you may have bought it at a cheaper multiple you're you're very happy it's it's appreciated in value hopefully if that multiple is expanded a bit but you wouldn't sell it but then there might be another tier where it gets we talked about with costco as it breached the 50 times earnings multiple, that might be a time when you think about trimming a little bit.

Starting point is 00:08:30 And then if something gets absolutely extreme, where it's a low growth stock at 100 times earnings, well, then maybe you have to really consider trimming it down a lot or almost selling most of the position. That's kind of how I look at it. I think it sounds like you do as well. I think so. And the question, definitely, definitely. The question was specific to an individual investor.

Starting point is 00:08:52 um if you're managing a fund and you have guardrails in place you don't always have that luxury of just trimming and holding on to a small position um todd alston chief investment officer at parnassus a member of the baron's round table he was on the j-row show his fund the parnassus core equity fund can only have 40 stocks and so if he wants to add a stock he has to sell a stock And so sometimes in the fund management world, you have to make these tradeoffs. Individual investors, it's one advantage that they have. They don't have to make those tradeoffs. If you want to run a really concentrated portfolio, you can. If you want to own 100 stocks, you can. And if you want to add a 101st, you don't have to sell something that you currently own. So you have more flexibility. You have fewer guardrails written into your process.

Starting point is 00:09:55 So you mentioned the JRO show. I will say that you do that on Apple, Spotify, YouTube, wherever you get your podcasts. I'll put links to all three of those in the show notes for anyone that can't find it. But when we said that you were coming on the show and that we asked for any questions on Twitter slash X, whatever you want to call it, a couple of people essentially asked the same question, which was you've interviewed a lot of fund managers. That's kind of been your niche within the show, learning from, you know, people that have a lot of experience, have done quite well, you know, over many decades, sometimes in that industry. They basically just ask, what have you learned from talking to all these people over the last year or so? You know, I think the most important thing that I learned is the amount of work, of hard work, of deliberate work, of putting in the reps deliberately and honestly experience too, which you can't cheat. You can't, you know, you can, you can, you can work 24 hours a day if you wanted to, which I don't recommend because the body needs sleep, the mind needs sleep, but, but you can't, you know, fast forward the clock.

Starting point is 00:11:04 Experience just comes with doing it over, over years and then decades, but all of them, um, are dedicated to the craft in an intense way. You know, so one quote from my most recent interview that I told you all I thought was like really a money quote was Bill for Bill Miller's son said, quote, My dad set up his entire day so that he did not have to do one thing except literally look at stocks. He had somebody to do every single aspect of his life. And that's what allowed him to be so good. The focus on the craft, end quote. um a lot of them are like that a lot of them are like that um they they are zeroed in they are laser focused in on the job which happens to be their passion it really does that's the other thing hard work and then it's got to be your passion um and and they you know they just they

Starting point is 00:12:07 do it over and over and over again for decades and then the third you know so the first is just got to put in the reps it has to be deliberate hard intensive work the second thing is you have to love it because you're spending half of your life doing it half of your waking you know half of your day doing it at least and then the third thing is have a process in place it doesn't matter what your process is. Warren Buffett invests very differently from Stan Druckenmiller, which I know y'all profiled on your show, invests very differently from Jim Simmons. They all have Mount Rushmore records over very, very, very long periods of time, And they don't invest like each other. They're completely different in their investing approach, in their philosophy, in their process. But they have a process that they stick to that works for them. And so you have to build that process into your investing. I think those are the three biggest takeaways for me.

Starting point is 00:13:19 Yeah, it sounds like in listening to your interviews, it sounds like almost all the managers you've profiled have just been like maniacally focused, cutting out some of the distractions, like managing their personal life in a way that really allows them the time to spend just absolutely analyzing securities. Which maybe some people don't have the luxury to do that, especially not in the Bill Miller way, but it kind of shows you the level of focus that's required to be at the top, top performing managers. Go ahead, John. I don't know if there's always balance there, Ryan, honestly. You know, so on September 30th, 2023, I had just finished reading Lee Cooperman's book and I posted on Twitter that at 80, at 80 years old, Lee Cooperman is at his desk 17 hours a day at 80. And I posted that and, you know, all of, not all, a lot of the comments in Twitter were that's such a sad life to live. And they were just very judgmental. But, you know, I don't think that's fair. That's how he's happy. That's what he's passionate about. That's what he's good at. He talked about in the book, he loves to win. He loves the competition. He likes being very intense about it. he uses those words, Lee Cooperman. So he's at his desk at the age of 50 for 17 hours a day. And a lot of commenters were very judgmental on that. And, you know, maybe he's not,

Starting point is 00:15:07 maybe some people can't balance the intensity required that some of these people are willing to put into the craft to their passion with other important things in their life, family. And so I'm not saying being at your desk 17 hours a day is the right way to do it. I'm saying that's somehow some of these Mount Rushmore type investors have done it. Whether it's Lee Cooperman at his desk 17 hours a day, whether it's Bill Miller hiring someone to take care of every single aspect of his life except for his investing. These people are, they're deeply committed, almost obsessed. The last thing I'll say really quickly is in the snowball by Alice Schroeder. There was an anecdote. Warren Buffett was at his desk at home reading. He was in the

Starting point is 00:15:53 zone. His daughter was in a minor car accident. She was fine, but she was shooken up. She was in a car accident and she went home to tell her dad, to tell Warren Buffett that she was in a car accident. She went into his office. He was reading. And if I remember correctly, he didn't respond. He didn't even take his eyes off of the paper he was reading. I'm not saying that's I'm saying that level of intensity is what is sometimes required when this is such a passion for some of these people. Yeah, 100%. The other thing is like with Lee Cooperman, if it's something they find real enjoyment out of, which I think for a lot of investors, it's intellectually stimulating. There's almost like this puzzle element to finding a company that's overlooked and you think you have sort of a contrarian view on it.

Starting point is 00:16:51 Like if you really love that, I don't see the issue with doing it as long as you can. That's why I didn't think it was fair. He's been married forever. His wife is his best friend. In the book, he talks about his brother was his best friend. And he goes on all of these family trips to the beach and fishing and all of these places with his kids

Starting point is 00:17:13 and his son-in-law or daughter-in-law. And I just didn't think that the comments were fair. We may not want to live our life that way. The commenters may not want to live their life that way, but it has worked for Lee Cooper. One more parallel between Lee and Bill Miller. So Bill IV that I just interviewed on the J-Ro Show, he says that every quarter he downloads...

Starting point is 00:17:35 uh so much data from bloomberg that bloomberg uh made him sign something saying he's not at once and seriously that's how much data he downloads and parses through every quarter well lee cooperman in the book it was in the same tweet that i sent out he says the approach described above is intensely analytical in pursuing this analysis i study seven critical building blocks over 100 different data points and metrics so over he over 100 different metrics that's just the fundamental metrics and then if you continue reading the paragraph he also talked about he looks at factors momentum and technicals it's the exact same thing bill the fourth talked about bill the fourth described himself as quantum mental because he

Starting point is 00:18:21 He blends fundamental analysis with momentum, with technicals across so many data points that Bloomberg made him sign something declaring he's not a quant fund. It's the exact same thing Lee Cooperman talked about in his book. Just endless, endless, endless data collection and analysis. And curiosity, yeah. I should say that he should consider a change to the cloud and join our friends at FinChat, our little sponsor there. They might not have a limit since it's a cloud-based, but actually don't quote me on that. Go check for yourself, Bill Miller IV. Let's do a new topic.

Starting point is 00:19:04 Tweeted this one out and it got a lot of responses. It was basically a question that said, what are the strongest types of moats and what are the weakest types of moats? I thought it was a perfect one for you, John, as you're joining the show today, as you like to study this type of stuff. A lot of people said that brands were pretty weak, although there were some people that had some pushback on that, saying stuff like the luxury companies, Coca-Cola, can be extremely strong. A lot of people did not like economies of scale and capital intensity because it's almost like who has the bigger gun. And it seemed like most people, and I'm curious whether you guys agree or disagree with this, most people thought network effects. regulatory capture and why am i forgetting the other one switching costs were the premier moats out there um obviously each case is different you know costco has really strong

Starting point is 00:19:57 economies of scale and a brand and that seems to work well for them and that mode is quite wide but what do you guys think what is your maybe favorite or the best type of moat and what's the the weakest one that you don't like as much right you want to go you want to go oh me okay yeah i i i think i think it's case dependent i you know i think as i think the short answer is um the company that has the most overlapping and reinforcing moats so not just one mode but multiple reinforcing modes and combine that with a management team that invests constantly to fortify and possibly widen those moats. So I think it's a case-dependent basis,

Starting point is 00:20:50 but I think in general, it's the companies that have multiple sources of reinforcing overlapping moats and a management team committed to protecting, fortifying, and even widening those moats. I agree with you that there are moats, and then there are moats. ASML has a 100% earned monopoly because they have a 15 to 20-year head start on extreme ultraviolet lithography. The only three competitors that tried to compete with them were Canon, Nikon, and Intel, and

Starting point is 00:21:31 they all gave up. Literally, one of the main reasons, maybe 70% of the reason that Intel has fallen so far behind, is because they tried to do EUV, extreme ultraviolet lithography, on their own, in-house, without just buying ASML machines. The machines are $300 to $400 million. dollars uh they they take two air buses and multiple uh airbus planes and multiple buses and container ships to transport the components just for one machine they rely on hundreds possibly thousands of suppliers to make one machine and are therefore the linchpin of the global global semiconductor industry along with taiwan semiconductor those moats are almost impossible to replicate in a 10-year period almost impossible there are

Starting point is 00:22:35 moats and then there are moats um you know a company that has so you know those would be at the top of my list they're almost impossible to replicate a company that has multiple reinforcing moats there are so many of them but look at a visa it has a globally recognized and trusted brand number one it has global scale and it has network effects um and and when you have these multiple overlapping moats like that and they're protected by management that is what drives um long duration profitable growth long duration i'm not talking about a company that can grow a hundred percent a year for a couple of years. I'm talking about a company that can grow 10 to 15% a year for decades. And so, you know, you mentioned brands being weak. I think that's the

Starting point is 00:23:32 case sometimes if brands don't know how to adapt to a digital sort of influencer world. um now people can go online and price compare instantaneously you know a lot of the advertising is done on youtube or instagram or wherever on on on facebook and so you know some brands are weaker in that environment if they can't adapt their their go-to-market their marketing campaign in that in that environment other times uh yeah i said i like the idea of reinforcing modes with the brand i kind of think one of the brand and network effect is hard to beat yeah i was gonna say it's hard to beat yeah an example that would be someone like american express where it has the network effect plus the the long-standing brand you have apple kind of

Starting point is 00:24:23 with the switching and cost maybe a little bit of a network effect too um along with a strong brand i think that's where what i like i like that idea of reinforcing when you have two or three working together, that can be quite attractive as a business, especially because I think if you look at some of the apparel companies, you could say their brands are strong, but a lot of the stuff has been ephemeral over the long term. And it's hard for me to identify in that industry, something besides the brand that brings you a competitive advantage. And that's where I get a little bit nervous about durability. We have some follow-ups with you on ASML. I don't know if this is a question you can answer, but Tyler says, how would John attack ASML's moat if he was a competitor?

Starting point is 00:25:08 Well, that's a trillion-dollar question, but maybe you have any answer for us. You need hundreds of billions of dollars in 20 years, 10 years minimum. Maybe let's say 10 years because new technologies are allowing things to be developed at a rate never seen before. so but like i said canon and nikon and intel all tried and they failed and no one else is trying um it's it's really really hard to beat they're they're the linchpin in the global supply chain for semiconductors i think yeah to get back to your initial question brad just like john said very case specific there's network effects that i absolutely love i don't think they're breakable like a visa and then there's network effects that i think are kind of soft like a posh mark

Starting point is 00:25:58 or something like that where it's kind of a marketplace and it really depends how much value you're driving to the stakeholders the i like economies of scale when they are as long as a company doesn't abuse their position kind of the nick sleep thing where they're like passing back the cost savings and it kind of is reinforcing shared yeah yeah scale economy shared it's that makes me feel like it's more durable like a more a lot more lasting moat i i did see that like morningstar did some uh analysis on which moats generated the best returns and economies of scale was not that high on the moats list um i'm guessing it's because capital intensity where like all else equal you'd rather have a company that doesn't need to spend 100 billion dollars

Starting point is 00:26:54 and they can just return that to you as cash versus one that has the equivalent growth rate on with no capital needs yeah i think with brand is like i don't think of brand itself as a type of moat like what i think brand is like a byproduct of how they treat customers or what value they provide to customers or heritage. Like you're talking about the luxury companies. I would say the brand is built on the hundreds of – Ferrari, for example, 100 years of racing heritage where they've been a winner and they've been kind of this icon in the sport.

Starting point is 00:27:34 And it's not necessarily like just the Ferrari logo that gives them a moat. It's all the history that's impossible to replicate. i don't know there's so many ways you can go about it and every mode's different and even i don't know if there's one catch-all that's like that's the best yeah we have a unique one here where we have someone uh named fake alias says do you consider nintendo to have a moat with legendary ip i think that's a good question because if nintendo just had their franchises i would not consider that maybe a wide mode business and this is definitely unique one because i think a lot of the moat comes from the culture and um comes from how

Starting point is 00:28:14 how they run their business and have run it over the last few decades but i think where the moat comes from is the vertical integration with their hardware um where you're forced to buy it if you want to play all the games that people love and it gives them a lot better runway and margins than the competition publishing games but let's see other question maybe one more follow-up with john yeah are we still on notes though yeah i was gonna have a follow-up on the most okay because i want to say one last please go ahead okay so let's see how does john and maybe ryan to differentiate between growth that is stable slash sustainable i.e durable versus unsustainable so how do you maybe you look at a watch list of companies where do you go okay this one i'm

Starting point is 00:28:59 confident in durability this one not so confident ryan go ahead i have my thoughts but go ahead i mean i definitely prefer something that's going to last the difficulty is like differentiating the two it's not like flash in the pan success it's not always easy to tell that that's just going to stop you just have to i think get to the get to the source of truth and just say like can somebody do what they're doing at a fraction of the price can someone steal customers from them if the answer is no then maybe you've got some durability but you got to be pretty confident that's the case especially the faster the growth rate the higher the returns the more people are going to come for them so then you really have to be that much more confident

Starting point is 00:29:46 do you have any characteristics that come to mind of one or of you know of a like a flash in the pan that no of the of the opposite of one where you're like the auto parts businesses o'reilly auto zone those guys don't grow very fast but they just have durable returns on capital that they deploy and i i know you've been attracted to those recently what's like the characteristics of those businesses that makes it attractive to you there's relative to like the mom and pop auto parts supplies or auto supplies type of stores they can uh provide lower rates they can get lower rates from suppliers so it's kind of that economies of scale they do because of their size and their resources they're able to provide i think a better

Starting point is 00:30:45 customer service in terms of delivering directly to customers, being in more places. If you're a customer and you look up O'Reilly's, because typically when you go to O'Reilly's, it's not because you're buying something four months from now that you're going to need four months from now. It's because you need it immediately. I think their footprint's an advantage there. And then, yeah, the growth isn't going to be much, but the other part here is for them, it's the software and being able to have like the inventory control whereas complicated inventory yeah yeah and they can share it across their stores and because they run their stores just slightly more efficiently than every other mom and pop when they gobble up 10 mom and pop auto

Starting point is 00:31:33 parts or a smaller chain they can instantly make it that much more efficient and drive margins a little more because they have all the software to help their representatives at the front desk Yeah, it sounds hard to replicate. All right, John, back on the original one, characteristics of sustainable versus unsustainable. Yeah, you know, I think this is one of the biggest mistakes analysts make is they assume that if a company grew 20% in the past, it will continue to grow 20% in the future. but the analyst the investor has to make sure that the context and the factors that allowed a company to grow 20 in the past are still in place today to allow it to grow 20 in the future or maybe there's a completely different set of content of context and factors that indicates

Starting point is 00:32:23 growth going forward may slow down decelerate or possibly even accelerate as we've seen recently with NVIDIA. Growth has dramatically accelerated due to demand for AI chips and Gen AI chips. So you have to build conviction in your forecast. If you're using historical growth rates as one input to your forecast, that's okay. But you need to dig deep to understand why a company, even a stable modest grower um delivered the historical growth rate that it did and then be able to look forward and see if each of those variables each of those factors each of those all of that context remains in place so i i think i think what i'm trying to say is uh the past is is is rarely an exact replica for the future and so how do i come up with a growth weight

Starting point is 00:33:19 one is if management has provided a long-term growth rate or a medium-term growth rate three to five years i think about that i look at historical growth rates i look at consensus estimates for growth rates i look at industry growth rates historically and industry estimates of growth from third-party research organizations like Gartner, for example, Forrester, for example. And I think about base rates for the industry. How have other companies that have already scaled in this industry grown? How long were they able to maintain supernatural growth? When did growth start to fade. And so you have to look at the base rates of the industry and of the peer group. And I ladder. I ladder when I'm modeling revenue. Home Depot, right? Let me just give you an example.

Starting point is 00:34:20 Home improvement as an industry in the U.S. has historically grown 1% faster than U.S. GDP. U.S. GDP is 2% to 3%, right? So you add 1% to that and you get 3% to 4%. percent at the industry at the home improvement industry level gdp of two to three percent home improvement has historically grown one percent more than that you get to three to four percent i'm laddering then for home depot i add one percent for market share gains mainly from mom and pops going out of business unfortunately that gets us to four to five percent um you know maybe if if if they enter more of an acquisitive mode going forward maybe i add a percent for acquisitions that gets me to five to six percent but you know whatever it is you

Starting point is 00:35:11 ladder what you think um and you have to ask yourself are all of the variables and factors and contexts that allow them to grow at that rate in the past are they still in place today that allow them to grow at that rate going forward i mean i do this for every company that i have a large position in. Lindy, right? Lindy, the global oligopoly industrial gas supplier. Global GDP, let's say that's 3%, right? On top of that, Lindy's backlog has historically added another 1% to 3%, depending on the year. So global GDP is 3%. Let's say backlog adds another 1%. That's 4%. Then you have all these growth engines that they're doing with semiconductors and hydrogen, that adds another 1%. Acquisitions have historically added 1%. So, Lindy, you ladder

Starting point is 00:36:03 and you get growth somewhere in the 5% to 6%, 7% range. And so, that's how I think about it. Yeah, it's interesting when I think one thing that could be extremely helpful is you have to look at maybe the last couple of decades of, this is very easy for some industries, but not others. for example it's much better to be in energy drinks all else equal that has had a multi-decade tailwind and taking share from a lot of places versus cigarettes that's like the complete opposite where it's secular decline versus secular growth and then yeah like how you put on the gdp stuff a lot of those industrials and something like home depot could be influenced by that let's hit another topic though we do have to move on here and this ryan has a follow-up and ryan we

Starting point is 00:36:49 have your topic on SPACs. You want to lead in right after that. Yeah. Before we get to that, I do want to mention our sponsor one more time. Earlier in the show, you heard us talk about the investing platform, public.com. That is 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. Yeah, let's hit SPACs. So

Starting point is 00:37:28 I love, I was going to say, I did some research on SPACs, but it took me like two hours to look at some SPAC aggregators and see some stats. Here's a little bit of the data I found. From From 2019 to today, 466 companies went public through a SPAC. Not a SPAC that was listed, but a company that completed a merger with a special purpose acquisition corp. Of the 466, and by the way, some of this data might be off. Some of the aggregators had different figures. So I think it's generally correct, but not precise.

Starting point is 00:38:05 Of the 466 companies that went public through a SPAC, 42 of them had positive returns, have had positive returns. That does not mean they beat the market. That doesn't mean they were better than treasuries. That simply means they had greater than 0% returns. That's 9% of them. So rough performance from the SPAC community here. The average return of D-SPACs, so companies that went public via a SPAC, negative 67%. So this is, for all intents and purposes, a little bit of dumpster diving.

Starting point is 00:38:45 But I do think some of these SPACs that have been kind of blown up and maybe companies that have been thrown out with SPACs overall and even I get it. there's kind of, if a company, if I just look at a company and I think, wow, I like everything that's going on here. And then it says they went public via SPAC. There's something, I kind of get the ick, like something's wrong with the company in some way. There has to be a hidden red flag. Anyways, there are, like I said, there were some companies that had positive returns and I actually found a couple that I find pretty interesting. I'm going to go through five of them. Maybe you guys can pick the ones that you find to be the most interesting from this list. Number one is DraftKings, one of America's leading sports betting companies. They have grown like gangbusters

Starting point is 00:39:36 as the whole industry has, and they've poured money into marketing and customer acquisition. They are up 291% since their merger. They trade an EV to gross profit of 11 times. They're not consistently profitable. So it's a little hard to value the business, but still in a category that looks like it's kind of a secular growth category. Second one here is Hims and Hers Health. Brett and I, well, mostly Brett did a research report on this company. It's a platform that allows doctors to offer telehealth consultations, manage electronic records, and make digital prescriptions. If you just go to Hims and Hers, go to the website you'll see it's a pretty sleek kind of website and you can get medications and

Starting point is 00:40:26 prescriptions at a pretty cheap rate and they just added weight loss drugs as well they are up 134 since the merger the third one here this is a company i had never heard of but bolero they operate 352 bowling centers in the u.s mexico and canada it's i think it's like basically just like a bowling alley roll-up uh trades at ev to evit 32 times it's funny how there's like a roll-up for everything in the public markets if you find it you know there's always something out there um yeah ev to evit 32 times market cap 1.9 billion total return since the merger of 40 the fourth one here is hagerty insurance they offer insurance products for classic cars, boats, and motorcycles. Basically, if you're an automotive enthusiast, you've probably

Starting point is 00:41:18 heard of Hagerty. They have a famous magazine. They have famous enthusiast events. We actually interviewed their CFO two years ago. Whenever I think SPAC, I think promotional, and Hagerty is the opposite. They're just this insurer for automotive enthusiasts that just happen to go public via spec um 865 million dollar market cap priced a book was 9.1 but they have a lot of revenue that's like they have some segments that are not really included in book value so kind of hard to value there and then the last one i'll mention here is veritive holdings brett you want to share your screen on veritive maybe pull up fin chat here yeah i had draft kings loaded up okay i can hop back to that one here in a second veritive it's actually the best

Starting point is 00:42:11 performing spac of the last four years up 593 since their merger i think this is one that kind of got lucky to some degree maybe with the ai boom they basically compete as i understand it with super micro computer and revenue has just absolutely surged they offer digital infrastructure technologies for data centers. And needless to say, that's been a category that has seen a lot of demand. So I'll stop it there. We got Hagerty, Veritiv, Bolero, Hims and Hers, and DraftKings. Any of those pique your interest? Well, I like Hagerty. I will say we interviewed the CFO. It's an interesting company. It seemed like they had a good head on their shoulder. I will say with that last one, I already know

Starting point is 00:43:01 the first sentence you said, it's going to go in the too hard pile, but let me pull up from our friends at FinChat, which you can go check out with our link, finchat.io slash chitchat. Link is in the show notes. Get 15% off any paid plan. Help us out as well. There's tons of KPIs. I'm actually going to pull them up for DraftKings here that they make for you themselves. I mean, it's well, well worth the subscription, but let me pull up. I have a chart on their monthly active users. And if there's any, John or Ryan, any KPI or earnings thing you want to see with DraftKings to kind of, as we've been doing here, John, a little bit of a live analysis of a company. Love it.

Starting point is 00:43:39 For almost a first look. So let me pull up first to have their monthly active users. Do they have spend per customer? They might on the KPIs, but let's look at this one first. It looks like we have about 3.4 million. I can see it December or the fourth quarter is probably higher because of the National Football League in the United States. But it looks like it's been growing at a consistent rate, 32%. Any other KPIs here? Let's see. Revenue per.

Starting point is 00:44:06 Is that what you want to see, Ryan? Yeah. I want to see how much people are gambling once they get on. Oh, that's a concerning chart for America. Yeah, that might be a concerning chart, but good for the business. Such a cool platform with these KPIs. yeah it's nice it's nice especially with a company like this where you want to look at specific stuff and i think it's my favorite again not to toot their horn too much when you have

Starting point is 00:44:32 a company with say different segments like a nvidia or something like that where you want to parse out and charts the separate segments and don't have to do it on your own anymore which can be a big time suck let me just go uh why don't we look at just operating income let's look at that one oh well not the best it is improving yeah remember in there how crazy some of their customer acquisition things were it was like you got like a thousand dollars worth of bets if you joined draft kings like free yeah look at a while but i'll show you this right here we got gross profit um and then selling general and administrative expenses which i guess is not entirely marketing but i mean how many quarters here has that been higher and it's only slightly

Starting point is 00:45:18 you know catching up as gross profits catching up here which i guess is fine they're getting better here but look at you know 2021 2022 they're spending so much on marketing um let me just do one more chart here which is probably just do valuation maybe we'll do a price to gross profits because the PE is probably pretty ugly. I see about 12 times gross profit. All right. I think that's enough info. John, maybe on this one,

Starting point is 00:45:50 what would be the first thing you'd want to investigate after looking at some of these numbers? I wouldn't. Not profit. Yeah. And I don't know if there's a big enough moat for me and it's outside my... I have never really studied gaming.

Starting point is 00:46:07 casinos or or online gaming and so just so far outside of my circle right now i would need to spend too much time on it it's not a knock not a knock on the company yeah what if i told you on hagerty that markel was one of their initial investors yeah that would interest me yeah that would definitely interest me yes that's uh i i like that one a lot and what about the bowling alley roll up uh i have i i would i would look at that i would look at that bowling fun people enjoy bowling i would look at that true and given what yeah it's probably one honestly just kind of thinking out loud here where you don't do it all the time and it's probably low cost to maintain and you can charge you know people aren't gonna go crazy if you're like well

Starting point is 00:46:54 it's 12 bucks to bowl versus 10 like they're not gonna go all right i'm gonna i'm gonna leave this institute or i'm gonna leave people uh people pay you for shoes you give them to them they give you back and then you charge them again for the same shoes that's right right in there yeah exactly all right yeah it's interesting i'm not even i don't know jones hymns is unprofitable currently um draft kings unprofitable currently um so far i think went went public via SPAC um you know net income unprofitable currently uh so I don't I don't know they they need they need more operating history more time in the market um and I would like to see profitability before I got too interested in in them what do you guys think of

Starting point is 00:47:50 searching in this area to begin with fishing in this pond if you will the d-spec pond i like it it's going to be a lot of rough companies but i think there's a lot as john mentioned here he basically said you know we looked at draft kings for a couple minutes and you can identify stuff that you're going to get rid of right away so i think that can make it easy to sift through but there is going to be some stuff i know when we went over hims and hers uh for that show we We didn't have that much confidence in management and we like to get people that have or at least show maybe in their speeches and when they're talking on their transcripts that they have some sort of capital allocation mindset or they understand capital allocation. We got a little bit nervous about that, which kept us out of it. But I mean, the opportunity seemed really high giving their growth rate and giving the market opportunity to go after this little niche they had in in pharmaceuticals and health care and all that stuff.

Starting point is 00:48:49 And the stock's done really, really well. I mean, the growth has accelerated and they've executed phenomenally and it traded at like three or four times gross profit and was inflecting the profitability. So I think there could be opportunities there where if I was going to guess, I would say that HIMS and HERS was probably beaten down because everyone had given up on SPACs. And so maybe there can be some other opportunities there. John, what do you think? yeah i i had had no interest in looking at spacks when everyone was spacking right because they were just markets were in were insane there were just so much fomo going on you had celebrity spacks you had athlete spacks cannabis electric vehicles yeah everything and and and so i had no interest then but yeah if some of these things have gotten beaten down then i'd be much more interested in looking yeah there actually there were some that i noticed that the companies that went public via a spac prior to 2019 seemed to be a little higher quality uh there were some companies that have actually performed well it was maybe used as a more it wasn't seen as like easy money i don't

Starting point is 00:50:00 think back then maybe people pursued this route for a number of reasons but vera mobility was one that went public via SPAC a while, a decent time ago. And then probably, it must have been like 2015 around then. And it's like a toll road. I think you called it, Brett, a toll road on toll roads. It's like a software that helps toll roads identify cars. And the traffic cams, I think. Good description.

Starting point is 00:50:30 Yeah, I think that was a good title on that one. although what's funny is the indicator on whether we should look at a company more is we're like, oh, this one's interesting, but then it usually doesn't get that many lessons. Although I will say that we had a guy on from just a college student from North Carolina State, and he did a great pitch. It was awesome, and you'll probably still be able to find that in our feed. We have about 10 minutes left.

Starting point is 00:50:51 I think we started. Can I do my small cap of the week? Yeah. We have a comment here from John Gallagos that said, because of John's past interviews of Bill Nygren and chris bloomstrand he had the opportunity to chat with both of them in omaha so it pays awesome john to listen to the j rose show thank you yeah tons of industry legends out there uh on the feed all right yeah ryan do you want to talk small cap of the week sure i'll make this

Starting point is 00:51:18 quick john just so you know we got a new segment going that i started last week i'm going to do a small cap each week just profile one and i'll see if it interests me i just feel like in general i should be looking at small caps more. So this is a way to kind of force myself to do that. Small cap of the week, WAG exclamation mark group, kind of a bad name, but that's besides the point started as a dog walking marketplace, came public through a SPAC, one of the SPACs that's been kind of bombed out. And so people actually might be familiar with this, but WAG it's kind of most popular for like, if I want to earn some money walking dogs in my free time, I can sign up for wag and people will pay me to walk their dogs. And I think you can like set your own rate and

Starting point is 00:52:05 wag takes, I think it's like a 40% cut, which is a little high, but they also have acquired some other businesses since coming public. So it's, here's a quote from their page. In addition to the dog walking marketplace, wag operates petted.com, the nation's largest pet insurance comparison marketplace, firmacy.com, a concierge prescription and compounding service and dog food advisor.com. One of the most visited and trusted pet food marketplaces that all gets grouped into basically wellness revenue, which they is actually their largest revenue driver. So these like comparison marketplaces are really driving the bulk of their revenue. The dog walking is still growing, but it's smaller. $60 million market cap,

Starting point is 00:52:53 They're projecting $105 to $115 million in revenue this year, and right now they're slightly adjusted EBITDA positive, which I know people look at adjusted EBITDA, they say, who cares? But it's kind of important because they have some high interest rate debt that they have to pay down, and EBITDA is relevant for the debt holders and what they can pay off. And they're projecting $2 to $6 million in adjusted EBITDA. It's not that far off from their free cash flow. So doing a little bit of back of the napkin math here, if they can get to $150 million in revenue, which keep in mind, this is a service that is still growing. It's actually grown rapidly over the last couple of years. 5% free cash flow margins. We're looking at like anywhere from $7 to $10 million in free cash flow a year on a current $60 million market cap.

Starting point is 00:53:42 So might, might, might, might be attractive. Not the most intriguing small cap I've looked at, but it's one of the ones where it's not like just a family business. It has aspirations of becoming a bigger business. So kind of interesting, but there were definitely some red flags as well. It reminds me of something that I wouldn't put words in his mouth, but just a quote that Ian Cassell puts out there a lot of the times of he likes to look at when he's looking at smaller stuff. And I think this might be too big for him unless it is a micro cap. So stuff that goes from, he uses an example, it's hypothetical, negative $0.01 earnings per share to positive $0.01 to positive $0.30, and that can be highly underrated. It seems like that could be an example of this here, but I would have to be curious about whether this has been infected with the VC Silicon Valley spending virus.

Starting point is 00:54:36 It looks like they're fixing that a bit, but John, what do you think? Nope. Interesting though. What concerns you? I just want to invest in the best businesses in the world. That's probably a safer bet. I'm not – I think it's fun, and I want to turn over – like Bill Fore said, I want to turn over as many rocks as I can, and I have a process that I do that. I can go through a company in an hour, so I go through several a day, but I just want to invest in the best businesses in the world, and I wait until I think they're attractively priced.

Starting point is 00:55:10 okay what's uh now you don't have to share anything like you're buying or anything like that but what's an example of one that you found recently that might be an underrated and maybe not even recently but it's an underrated or ryan do you have something on this i just want to close the loop on this before you ask john a question wag's closest competitor rover was acquired this year at a at 2.3 billion dollars it was like a 60 premium by blackrock so it's a multiple of something do you know i'm not 100 sure because that now maybe i'll get a little interested if if the multiple of whatever is multiples of where wag is trading right yeah let me check it of adjusted ebita right like if i'm just making numbers up if rover was acquired at 12 times

Starting point is 00:56:00 adjusted EBITDA and WAG's currently at five, then, then maybe, you know, maybe I'd get a little more interesting. Exactly. Yeah. And like you said, like you're the game you like to play is by the best companies in the world or follow the best companies in the world. And that's what you want to own. But for people that play the game of, like you just mentioned, beaten down stuff could be acquired. There's almost a catalyst. I mean, that one seems interesting if that's kind of in your wheelhouse. Definitely. And I like studying stocks, even if I don't plan to buy them. So this was very helpful to me. All right. Okay. Yeah. And back on that question, you mentioned the best businesses in the world. What's one that maybe for the listeners,

Starting point is 00:56:39 obviously, you know, you may not be buying it today. It's obviously not a recommendation. What's one that you think is a best company in the world that you follow that is potentially underrated by the investment community? um i'll just mention really quickly that uh in um let me get a date here on december 6 2019 i published an article titled everything you want to know about arista networks i think arista is unquestionably one of the best businesses i've ever studied december 6 2019 and i and i said this in the article the market cap was 14 and a half billion it hit 100 billion market cap today so the company has done exceptionally well it is um

Starting point is 00:57:30 you know there are high expectations priced into shares now but rightly so i'm not buying here i own it's a large position for me i've owned it for a while i'm not adding but the you know 30 second is um cloud software and and ai whatever is distributed across hundreds of thousands of servers in these data centers as we all know that's how it's distributed and those servers and those data centers are connected to each other and connected to the internet with high speed switches and routers and that is what arista makes arista literally literally designed the modern day hyperscale cloud with microsoft they have the blueprint for the hyperscale cloud that everyone else is using um so that's an incredible business incredible uh that you know

Starting point is 00:58:29 the market knows it the market knows it for sure but like i said i wrote this in 2019 14 and a half billion market cap today it reached 100 billion that's one uh one i'll tell you i don't often buy if ever but i did i bought some more i added to my position in builders first source ticker bldr it sold off 19 when it reported earnings about a month ago um and you know shares are at 150 now. So they're 30% off their 50, 52 week high. It's got a lot of what I look for. Um, it's one of the best performing stocks in the last, I don't know if it's 12 or 15 years, whatever it is. So it's got a chart that's up into the right. And then just recently down 30, that's what I look for. Super, super high quality fundamentals, um, that, you know,

Starting point is 00:59:25 falls out of bed for what i believe to be you know temporary reasons or fixable reasons um trades at 12 times earnings uh the company is the company is guiding for 18 dollars in earnings per share three years out so it's trading at i don't know eight times three years out numbers um yeah that's about right yeah it's you know this is a 30 return on equity business it's got two percent inside ownership they pay themselves based on return on invested capital um i don't think it's over earning like a lot of um building materials companies because its returns on equity of 30 are back to where they were kind of pre-covid um and they had they create win-wins for their customers there's no question about that

Starting point is 01:00:22 they save their they save their they save home builders time they save home builders money and then they you know they get paid for that so it's a win-win situation and so i bought some i bought some builder nice two uh two good examples there and i think ryan who was the guy the fund manager that did the Sub-C7 interview with us. He owns Builders First as well. Bob Robati. I would check. Oh, yeah, the Robati & Co.

Starting point is 01:00:50 Fascinating interview we did back with him on Sub-C7. But I believe, and again, I might be misremembering, it could be some other fund manager, that they were big into that as well. That was a big idea they had. So if you like those kind of under-followed, as John just mentioned there, of high-mote stocks, high-quality businesses,

Starting point is 01:01:09 It's some of the best in the world. Go check out Bob Robati as well. I don't know how public they've had on their write-ups on that, but yeah. All right, anything else? We hit the hour mark. Anything, final topics here, John? Anything you want to hit to let the listeners know? Nothing I want to hit.

Starting point is 01:01:25 Just because you asked me about high-quality companies. Visa's average free cash flow margins over the last four years were 58%, which is incredible. Incredible. I'm not using five years because their five-year outnumber of free cash flow was abnormally low. So their margins drop if I use five years. CME groups, five-year average free cash flow margins are exactly 58%. That's pretty incredible. It's pretty incredible to have free cash flow margins better than visas over the last five years.

Starting point is 01:02:05 Because visas five years are like 50%. 50%. Visa's four years are 58%, which is exactly equal to CME Group's five-year average free cash flow margins. CME Group is a free cash flow, literally, machine on par with Visa. I only mentioned that because you asked

Starting point is 01:02:25 for high-quality business. It's like the bond exchange, right? Yeah, options and tradings exchange, yes. These types of businesses, indexes, and exchanges are some of the high, you know, if you look at s&p global you know if you look at um international ice continental exchange some of the highest margin most profitable free cash flow generative businesses in the world what do you think of the texas stock exchange oh yeah i read about that yeah trying to open up a new exchange

Starting point is 01:02:54 yeah well i think the the thing with that is that i believe it's like citadel they have to have such of big backing because you need so much momentum to get this thing going. Oh, they have some big backers, I think. Yeah, so you can't do this as a small startup. Yeah. So let me... Wait.

Starting point is 01:03:14 John asked about this, so I'm going back to it. Yeah. Rover Group acquired... It was Blackstone, not BlackRock, my bad. When they got acquired for $2.3 billion, the latest data I see here is they had $217 million in revenue.

Starting point is 01:03:31 So, roughly 10 times sales. Rover, a little over $100 million in revenue annually. Trades at a $60 million market cap. You mean WAG? WAG, sorry. Yeah, not Rover.

Starting point is 01:03:47 WAG. Wow. 10 times sales buyout versus less than one times. You got my interest. You got my interest. when was the acquisition that feels like 2021 it was like two months ago oh wow

Starting point is 01:04:05 really but there's some red flags with wag though you got my interest okay everyone do your own research we that was our first time looking at both of those john where can listeners find you

Starting point is 01:04:21 and follow more of your work twitter mainly twitter yeah i published a article recently on seven investing with 55 of my favorite quote from joel tilling gas's book big money thinks small which is i think my favorite not not i think it's my favorite book on stock picking all right beautiful yeah well let me hit the disclosure uh or anything else nope all right let me hit the disclosure we have a comment here ryan that says tweet it uh i'm assuming that means the wag stuff so maybe someone's looking for those charts on the old Twitter machine as a reference there. But yeah, let me hit the

Starting point is 01:04:57 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. We go live every Thursday for the investing power hour, maybe changing the time a bit because of Ryan's, the maintenance at his apartment. So think in maybe 1030 AM Pacific time, 1.30 p.m. Eastern Time, but we'll let everyone know. And you can also, as always, watch the replay on YouTube or listen to the replays on Spotify, Apple Podcasts, wherever you get your podcasts. Thank you, everyone, for joining the live stream and asking these wonderful questions.

Starting point is 01:05:34 Thank you to John for joining, and we'll see you all next time. Thank you.

Chit Chat Stocks - 5 SPACs With Positive Returns; The Best Types of Moats; Lessons From Fund Mangers With John Rotonti

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