Chit Chat Stocks - 6 Industry Leaders at 52 Week Lows; Bank and Brokerage Earnings; a Curious Stripe Investment

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 weekly power hour episode where i am one of your hosts ryan henderson and i am joined as always by the one and only brett schaefer and we are talking all things financial markets on this show it is the first week of earning season so we got plenty of content primarily financials related that's kind of the first week it's usually banks and

Starting point is 00:00:58 other brokerages that are reporting. But we're going to start to get into the tech earnings as well here in the not too distant future. I guess I should have let you speak a little bit here, Brett. How are you? Are you ready for earnings season? Well, apparently my portfolio is ready for earnings season. Some of the stocks we've owned, given, I don't know what happened that caused some small cap factor rotation, but hey, I'll take it. Some of the QQQ stuff has gone down. I think it's probably the inflation reading, but honestly, I don't pay too much attention to that. Either way, yes, I guess the expectations for some of my portfolio companies are rising

Starting point is 00:01:35 going into earnings. We just had one that we both follow closely. I don't own it, but you own an ally. That was another one that has risen a lot, and the expectations have increased going into earnings, and it seems like they somewhat just met their expectations. I think we'll talk about them a little bit today, but I'm very excited in general to talk about the banks and brokerage stocks because I think that's a good kickstarter for how earnings season may or may not unfold. Yep. And before we get to that, we do want to talk about our

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Starting point is 00:02:40 public.com. This is paid for by public investing options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. Let's kick things off. I know it's earnings season, but I've still got my small cap of the week. I've got six industry leaders that just hit 52-week lows, which I think might be interesting for some listeners. And then we have some news around one of the largest payments processors globally, although it's not a public company. But Stripe received – it wasn't really a new investment, but it basically got a new valuation essentially. So it kind of gives us a barometer. We follow Adyen closely, which is sort of primary competitor and the one that's in the public markets and one we've considered investing in in the past. So it gives us some sense of what the private markets, private investors seem to think Stripe is worth.

Starting point is 00:03:40 So maybe we can, it's not the private markets. It's nothing like the private markets, but maybe we can kind of use that as a benchmark or a measuring stick for Adyen as well. Where do you want to kick things off? Well, I have a fact for you, Ryan, that I wanted to kick things off. I was heading over on Twitter to tweet out the link. We talked Constellation Software this morning with the podcast that just got released with the founder of FinChat, full disclosure, also Ryan's boss. uh braden dennis great guy also the host of the canadian investor podcast his largest position is constellation software i ran some data ryan i don't know if you saw this tweet just tweeted out less than an hour ago the stock has never had a drawdown of over 25 percent and since inception in 2006 it has posted a 37 percent compound annual growth rate total return uh because they pay a small dividend. It's by far, I think, the best stock of this century so far. The easiest stock to own, probably. The thing that I find even more impressive about that

Starting point is 00:04:52 is sometimes you'll see that, that level of stability with a company where they have a large the capacity to buy back shares if the stock dropped you know where like let's say the stock dropped by 50 percent investors know they're going to buy back their own stock so it kind of leaves a floor there um and and it kind of provides a little more stability constellation software does not do that they do not buy back their own stock unless anything has changed but i remember mark leonard saying he was pretty much against it um and he's maintained i believe the same exact share account for quite a while. So I just find it that much more impressive. They're doing this without a buyback program in place. I could be wrong on that. Maybe something's changed,

Starting point is 00:05:41 but last I checked, the share buybacks were not a big part of their capital allocation strategy. Yeah, it's not a big one. I think with a good capital allocator at the helm, they're not going to buy back at the premium valuation that they're at. But I think I heard somewhere. I'm not an expert on the company, so go check it out yourself that they changed their tone a little bit and said that we're not totally banning it, but we may be open to it if our stock ever gets cheap. But it is pretty dang far from cheap at the moment. First topic, though, Ryan, I think let's talk Sequoia investing in Stripe. That's a fun one to kick things off short. Kind of look at this interesting deal here where a lot of people were maybe confused

Starting point is 00:06:25 based on what Sequoia was doing here? Yeah. So from what I can see, I think it was Monday of this week, Sequoia Capital announced that they were investing a little over $800 million in Stripe. Stripe is, I believe, one of the largest venture-backed private companies based on the private valuation um and one that people have thought should go public for quite a while but still has not they are a payments processor that competes directly with add-in they help their goal is to increase the gdp of the internet basically it helps companies on the internet facilitate payments um or process payments i should say the details of this this is non-dilutive so it's not equity issuance. They're just buying from existing shareholders, which I believe

Starting point is 00:07:23 were primarily other venture capital firms. So some of these venture capital firms were looking for liquidity. They invested in Stripe, whatever, five, six, seven years ago. I'm not sure if it was just one or it was multiple. But typically, when you invest in a private company, especially one that's been private for quite a while and growing quickly, you kind of invest in it with the hope that they will go public at some point. Stripe's not doing that. So you got to get your liquidity somehow. And typically that means passing on your shares to someone else. In this case, the buyer was Sequoia. Like I said, just under a billion dollars that they purchased. It valued the company at roughly $70 billion. For reference, Stripe processes a little over

Starting point is 00:08:10 a trillion dollars annually. And Addion, I believe, processes just over a trillion USD annually as well. So they're basically the same size and they're growing at similar rates to one another. The difference being that Addion has like 60% profit margins and Stripe reportedly has basically flat profit margins. They've elected to invest a lot into their workforce and kind of opted not to be profitable today. So here's kind of my takeaway that I find quite surprising. Adyen shares get purchased at, sorry, Stripe shares get purchased at a $70 billion valuation.

Starting point is 00:08:55 Adyen is a very close comp. They are selling the public markets today for like a $30 billion enterprise value. Yeah, I think that says more about Silicon Valley, the narrative around Stripe, how the expectations into this valuation on Stripe are higher versus whether Adyen is undervalued. I think Adyen may be fairly valued. It's kind of hard to tell, though. We don't really know what the growth is going to be. There are still high expectations on that stock as well.

Starting point is 00:09:31 but if you told me you had to go long one short the other i think the answer is pretty easy here's what i don't get it from everything i can see they are both very high quality businesses they are run by owner operators they one of them is a little more profitable than the other and by a little i mean a lot but they could at their core both be extremely profitable why would you invest in straight even if you're already a big investor here why would you i mean i know i assume sequoia just doesn't do public market investing i could be wrong on that but why wouldn't you just buy shares of adium right or i guess they've been what is this like round h for stripe i guess they've probably been

Starting point is 00:10:25 in the company since close to the beginning. They've probably made a ton of money on their marks. What's weird, though, is usually once you get to this point, you get a more hybrid public markets investors, people that might help them take Stripe public. And then someone like Sequoia might sell out at this time and kind of take their gains, return their capital to shareholders, or sorry, their limited partners after five to 10 years, whatever the time horizon it is. But this time they're pouring more money in. So usually they'd be the ones kind of selling out at this point because the IPO isn't happening. A lot of these companies are staying private for longer. I don't really know what they're doing. We'll see. I think given the fact that this

Starting point is 00:11:10 Adyen and Stripe, you know, have a long runway to grow if they continue on this march, they seem to be turning themselves into a bit of a duopoly, although Braintree is doing okay as well. you know, it's the, I don't know, it's hard to tell. But even if Braintree's there, you could have a nice trio of companies continuing to take market share. And there's really a small amount of market share. And, you know, it grows with global GDP and inflation. And these are good businesses. Wouldn't be surprised if we look back a decade, 15 years from now, and Stripe's doing $10 trillion in total payment volume. But, but it doesn't mean it's the right move to buy them at a $70 billion market cap today. It's strange. Maybe they want to maintain

Starting point is 00:11:54 that relationship. I didn't read the full tweet, but the Stripe founder slash CEO, one of them was saying that this is a great commitment by Sequoia. They locked in our relationship. And it's like, well, it's not necessarily about maintaining a relationship. I would think that the goal is everyone is to make money for the LPs, the investors. At the end of the day, those are part of your stakeholders as well i just don't know why why is stripe not going public do they just not want to it seems easy it seems like a very steady business you have long-term contracts right i i don't they would get a similar valuation i would think in the public markets given the u.s over european

Starting point is 00:12:39 um maybe they're bad maybe their earnings are way worse than we think but i don't know So it just – I think it goes to – it speaks to how much venture capital and Silicon Valley in general has to – like how much of that universe has to do with wanting to be a part of certain circles, want to have notoriety, want to invest in that company so that you can say you are, so that you can say you're one of the Stripe investors, all this stuff. Because you would think like they don't want to – my thought here is they don't want to go public because they don't want to face the music. They don't want to have investors say, we want earnings today. And you would think that like private market investors also want to make money. So they'd be like, yeah, actually, you know what? Maybe you should turn a buck sometime. It might be good for you to – like I know you love investing in your people.

Starting point is 00:13:41 but you don't need an entire like climate division you are a payments processor so i don't know i you would think that that vc firms would at least hold their feet to the fire especially after interest rates have risen and kind of the market has somewhat rationalized but that just doesn't seem to be the case i think people just want to be a part of the stripe story. Yeah. I hope they go public. It would be a fun one to follow in the public markets and getting all those full disclosures, especially because we watch Addion and it'd be good to have someone to compare it to because Braintree is kind of hidden as a subsidiary of PayPal. Let's see questions from the audience. Let's kind of go to that first, unless you have something

Starting point is 00:14:26 else on that, Ryan. No, I do want to talk to my 52-week lows list here at some point, But if there's any good questions, well, we got we got a lot. We got it looks like over 46 minutes, probably a little longer since we go a little over an hour for the ad. So let's hit some quick questions here. What are your thoughts about the momentum swing from profitable large caps to unprofitable small caps? I don't know why it's happening, but it's nice to see my portfolio go up and NVIDIA not up 100 percent and me going, huh? Well, my stocks aren't doing that. So it's nice psychologically, but I don't really think anything has changed.

Starting point is 00:15:02 other questions do you guys think the reasons for cutting rates that should actually hurt small caps which are generally leveraged to gdp growth rather than help them don't know and also that's more of a factor investing thing and i'm more of a looking at individual ones and i know ryan is too on the show and not all small caps are created equal some have terrible balance sheets some good balance sheets other one might be more interesting for you ryan did you see that match group got a second activist yeah i did and i will say i am happy to finally go into an earning season not owning match group because i think it'll feel good i never feel good about that no i listened to their uh one of the investment conferences they did recently and

Starting point is 00:15:49 it was just nice as a non-shareholder to listen and be like well you know what i don't have to pretend to care anymore i don't care uh because they just speak in generalities and they speak yeah yeah and they really like to round however they want like which in whichever way they can to benefit them so like three years ago they bragged about their mau growth we're approaching 100 million and most of that is tinder now tinder's since declined and they're starting to basically i think kind of have revisionist history where they're saying oh no we kind of maxed out around 55 million 56 ish i don't really know but it's at 50 now so it's not that bad and then and then they say we actually don't care that much about maus well you cared about it when things were

Starting point is 00:16:48 doing well uh and when it's just like these little things where it's like we almost we generated almost 10 billion dollars and whatever or two billion dollars in revenue something like that and it'll be like 1.7 it's like why don't you just give us the actual number you're you're off on your rounding and it's i don't know it just irks me yeah i think looking at this act these activists though you know you could i could see someone going with a thesis today and saying hey the stock you know they might get bought out here at a 20 premium couldn't get a nice little boost the valuation isn't demanding but that's just not how we invest and i'm not trying to make any sort of thesis on what these activists or any sort of buyout firm would do whether that's smart

Starting point is 00:17:36 for them you know and if it's a good investment for starboard or elliot that's a different story because we're not them. We're small-time individual investors. But I think that's enough on them. We had a lot of topics I think are fun today. And Ryan, I think we should hit your, I don't want to call it, your listicle segment, your charting segment, your FinChat research segment that you do for their Twitter account as well. Six industry leaders that just hit 52-week lows. Let's get all six. What are they? Yeah, I do like doing this. It's fun. threads get a lot of engagement but also people like lists it's just you know it gives people options so i'm gonna go speed baby that's how that first of all yeah 52 week lows doesn't really

Starting point is 00:18:22 matter it's kind of just an arbitrary level but it's kind of a fun place to look through and i found last week six companies that i think are basically leaders in their category and trading So number one here, and feel free to screen share as much as you want here, Brett. John Deere and Company, it's actually titled Deere & Co. We had Leandro on our show not that long ago, and he went through the Deere thesis. Very comprehensive. They're the leading manufacturer of precision agricultural equipment, and they distribute through this massive dealership network. It's currently trading at 11 times EBIT, traded at its 52-week low last week.

Starting point is 00:19:11 10-year return, 372%. And if you are interested in John Deere, I do honestly recommend listening to that episode with Leandro because he goes through some of the reasons why maybe it's not quite as cyclical as people believe. Everyone's concerned about the cycle affecting them. I don't know, kind of maybe temporary expectations on that. I think there could be some value there. Second one. This one surprised me to see on the 52-week low list. McDonald's. They're the global

Starting point is 00:19:43 leader, one of the global leaders in fast food. I think it's up to like 42,000 locations now around the world, either operator franchise. And the reason this surprised me is I knew it was at north of 20 times earnings, but it's still at its 52-week lows. So it's just kind of crazy to think that it was hitting more than 30 times earnings. This is a business that's not going to grow that quickly. I do think it can grow mid single digits for quite a long time, both through pricing mix and maybe some volume increases as well. I do like McDonald's mostly as an investor. i mean maybe mildly as a consumer but mostly as an investor and i do think there is room for operating margin improvement they've done a really good job with the automated technology

Starting point is 00:20:38 and this like self-ordering so that you don't need as many people at the kiosk um or at the kind of front checkout area so it does seem like they've done a really good job streamlining their operations. I just worry that buying a business like this where trees don't grow to the sky, it's hard for them to grow that quick. It's going to be tough for them to fulfill the valuation of 20 times earnings. Let me let you get a rest there. Take a breath. For anyone that could see the shared screen there, they are about 22 times earnings right now. I think I agree with you on the trees can't grow to the sky thing, where if you're looking at a mature global business like McDonald's, I do not find them attractive as a stock unless they're closer

Starting point is 00:21:35 to 10 times earnings, probably the 12 to 13 times range, given what that means on the earnings yield when you flip that around. And that can work really well at that low valuation if they have a good capital returns program if you think they can still grow at the single digit level with operating margin expansion because you get that slow single digit revenue growth, a little bit of operating margin expansion, and then they buy back stock or return capital to shareholders. But at 22 times earnings, that's a big difference. And it's such a big difference compared to a stock that, well, it doesn't trade at 20

Starting point is 00:22:11 times earnings, but it trades at 60 times earnings. Something like Chipotle that has such a long runaway left to grow. Yeah, I agree completely. Third one here, third on the list, and there was no particular order to these either. Paycom. I'm going to share my screen here. We've talked about Paycom a little bit. You're interested in Paycom. You like Paycom a little bit. Well, let me share my screen and show you why. This is the recurring revenue. And I will say there's some hair on this one. And when I say that, I just mean it's not a perfect buy today type of situation. But they have grown their recurring revenue at 32% annually for 11 years.

Starting point is 00:23:00 In 2012, they were doing $75 million in recurring revenue. Last 12 months, they've done $1.7 billion. Look, human capital management software, especially with SMBs, it's competitive. Paycom is a leader, but it's competitive. But clearly, there is a formula here for growth that works for them. And if I go to earnings per share, they have improved as well. So let me just pull that up. And they've been profitable during this growth period, right?

Starting point is 00:23:34 Sorry? Yeah. Yeah, they are profitable. Let me just pull up the actual operating income figures here. on 1.7 billion dollars in revenue over the last 12 months they've done 577 million in operating income they trade at 13 times ev to ebit my concern here is that you've got all of this looking attractive trading at its lowest valuation ever and it's a leader in small medium-sized business hcm software insiders are just selling every single day and i know i put

Starting point is 00:24:14 something out there that the ceo has is basically selling i think it's like half a million dollars worth of stock every single day and people are like oh well it's it's scheduled so he was you know he's been doing this for a long time you can stop like you don't have to sell it just because it was planned you can stop selling it and i would think at all-time lows on the valuation if you have any sort of belief that your business is going to continue to grow you would stop selling that's true or he doesn't care he's just doing his sort of retirement plan or whatever it is and it's creating indiscriminate selling pressure on the stock and you can get it for a little cheaper yeah if this wasn't in software i think i would be interested

Starting point is 00:24:59 if you get what i mean it's just not it's tough it's tough i think there's a i think when you have a business where there's that much momentum in the go-to-market and the sales with a software team and maybe it's maybe there's a lot of smbs where they just join and it's self-serve they just think paycom is kind of the leader they join for whatever reason. I think it's easy for that to continue. Yeah, it makes sense to me. I don't know. It's somehow become a battleground stock, but I think this could really work out well for a lot of investors. All right. I'll go through these last few here quickly. Fourth,

Starting point is 00:25:44 Nike, they are a leader in footwear globally. However, I'll just say it right off the bat, I'm not very interested in this. I'm not interested in most apparel businesses either. 10 year return 10 year total return on nike just 107 i would have expected more i don't know why and i know it's coming off of a sell-off but for some reason i just assumed they were doing better i think a lot of people did um but yeah the the performance for the business really hasn't been stellar it's been okay at best um any thoughts on nike i see 16 and a half times ebit you get ebit what ebit ebit are you buying them 10 i'm just not interested at any well what about five times there's a price sure yeah there's a price i'd be interested yeah yeah five times assuming

Starting point is 00:26:43 that they pay it all back in dividends or share purchases sure yeah but they they would really have to up their willingness to return capital because it's kind of a measly dividend if i remember correct like it's okay i think so too um yeah they haven't been known for their capital return strategy but they have traded a really expensive multiple for a long time i think 10 times earnings i would be somewhat interested but again we want big discounts for apparel i think we've talked about that plenty of times this year and there's been plenty of examples of all the landmines that come and go across that industry. All right. Fifth one, Ryan, Winnebago. Yeah. If you've traveled at all on US roads, you've probably seen a Winnebago

Starting point is 00:27:33 recreational vehicle. They are the largest manufacturer and distributor of RVs in the United States. They delivered roughly 31,000 RVs. Now, RVs, I did not realize this is a fairly cyclical industry it seems um so this might be kind of peak earnings potentially i don't think it was but maybe you're buying on on earnings that are going to be down for a couple years but roughly 11 times ev to ebit i don't know what the industry looks like maybe there's i don't i don't think rvs are a secular growth story but maybe they are i would kind of need to dig into this a little bit more but i don't know it's a leader i i would have to guess there are some level of economies of scale here and i'd be curious to kind of look at the competitive

Starting point is 00:28:21 landscape and see is there anyone that's like competing against them that can get to their size if not maybe there's maybe it's worth a deeper look i know norbert lou this was one of his positions punch card capital in the 13f he still files correct i think he still owns it let me double check hey maybe he likes the management team maybe i i think this one's somewhat interesting but in general this is just going to be a tough business to run given the inventory stuff the working capital the fact that it's cyclical they definitely went through a pandemic boom and bust which were probably over now but i don't know for sure because during the pandemic there was a huge boom for these vehicles but it's not one that i would be too excited to own just because of the

Starting point is 00:29:20 like the inventory stuff can bite you in the butt and that makes you nervous going into every quarter you don't know when a downturn is going to come and you don't know when the balance sheet's going to look pretty i don't know you got to have a lot of trust and management on something like this yeah 100 and the norbert lou i just checked he still owns three percent of winnebago so i don't know if you believe in him which we did a show on him a while ago pretty impressive very concentrated investor um maybe it's worth a look and yes on fin chat i was trying to pull it up but i didn't pull it up in time you can see the rv units sold and it was like just skyrocketed during covid i guess everyone yeah it makes sense needed an rv yeah um okay sixth one here last one brown

Starting point is 00:30:17 Foreman. This is one of the largest hard alcohol distributors globally. They are home to brands like Jack Daniels, El Jimidor, and plenty more. A bunch of them I didn't really know. Maybe they're bigger globally. Not a very good return over the last 10 years, 31%. But EV to EBIT basically 20 times i don't know you i read your write-up about molson cores and i wonder if maybe the thought that alcohol is in this like secular decline is maybe wrong like maybe this is just kind of a temporary situation where people have skewed to other uh what do they call them vices cannabis yeah yeah i don't know i look at this trading 52 week lows still trades at 20 times earnings maybe

Starting point is 00:31:12 there's been some like earnings pressure or margin pressure that has made it look worse than it is but i just don't know if it really interests me why would i why would i own this over diageo which is significantly cheaper significantly cheaper yeah maybe people i remember we looked at diageo and we didn't have much confidence in that management team but i think so there's this there's this narrative well the data has shown that spirits are taking market share over beer over the last 20 years but i have no confidence of whether that will be true 10 or 20 years from now right so that makes me a bit nervous about these companies. I don't think the relative valuations make too much sense over the long

Starting point is 00:31:59 term where you need this huge premium for these spirit companies. Although I would think a decent premium to the beer companies makes sense. One question I would have for this one is the EV to EBIT of 20 times, like how different is that from two, three years from now? Are they suppressed? If they are suppressed, maybe it makes sense here, but at 20 times it doesn't. It doesn't excite me too much for something I think is going to just grow at the pace of the spirits market. Yeah, which might not be very quick in its own right. So yeah, I would say from this list, the two that attract me the most are probably Deere and Paycom. Maybe Winnebago, but probably pretty far down that list.

Starting point is 00:32:49 I will say now, plug, you saw us use some charts from FinChat. If you are interested in FinChat, it is something we use literally every day. It's a very comprehensive research terminal. A number of our listeners seem to be liking it as well because they've signed up using our code. It's FinChat.io slash chitchat. It gets you 15% off any paid plans. If you sign up, you get a two-week free trial, so you can at least check it out on your own and figure out whether or not you like it. But with that said, you want to talk earnings for our brokerages, Schwab, IBKR, literally our brokerages, if I'm not mistaken?

Starting point is 00:33:32 Yeah, well, I will say we can give a quick plug to our friends at Public, too, with some of the interest rates that Schwab is paying depositors. you can do a lot better over at our friends at public but let me we had some comments here on um someone asked about lamb weston lw is the ticker frozen potato manufacturer at 10 times eb to ebit never looked at them probably something that deserves to trade at 10 times eb to ebit so if you think it's a growth story if you think frozen potatoes are a growth story maybe that makes sense if they got to get capital allocator at the home at the helm maybe that makes sense We have Fuhat saying Brown and Diageo still struggling in places like Latin America, etc. And then Tyler says, I think brands, assuming he means spirits, are just having a tougher time in the age of the Internet influencer.

Starting point is 00:34:21 It's easier to launch a startup brand than ever in history and fewer people watch TV ads. Well, it could work for apparel, too. With the spirit ones we saw with Diageo, they bought out that I believe it was the George Clooney one that was doing well. and they bought out for a huge premium, but they've grown into it and they've done well as a partnership under that. But if you have to spend a billion dollars or $500 million on that constantly, yes, that is a headwind to your operations and it makes the industry much more competitive. All right. I think that's all the questions for now. We got a big... I guess we still have... We can probably finish all the topics here. First one is brokerages. I wanted

Starting point is 00:35:01 to compare orion go ahead i have a chart i want to show you for interactive brokers versus charles schwab so i'll let you talk first yeah i do have some charts i will be sharing as well uh potentially but yes big day for brokerages they report early with the banks i think the one takeaway i have and we just looked at really the two big ones that are public charles schwab and interactive brokers. Schwab is stable, I would say is a good way to put it, but still has a headwind from lower interest rate items on the balance sheet. And IBKR, Interactive Brokers, is taking a lot of share. Now, if we look at Schwab's balance sheet, they have $155 billion in held to maturity securities, earning, Ryan, 1.7%. That is still stuck in the balance sheet, and that is only down

Starting point is 00:35:55 from $167 billion a year ago. So I would think this is going to be an issue for multiple years going forward. Now, unlike a year ago, when people are panicking over this stuff with the Silicon Valley bank collapse and the other two bank collapses, I don't think this is where people are panicking and saying it's going to destroy the balance sheet and bankrupt the business. But it's going to be an earnings headwind for a while. Luckily, though, they have $258 billion in deposits that are only paying they are only paying 1.3 percent to a quick bsa to any of the listeners get your cash earning more than four percent and if you go to our friends at public you can get over five percent right now which is subject to change what's uh your shared screen

Starting point is 00:36:40 here ryan this is i believe interestingly interest rates hit their low kind of at sometime around 2022 correct late 2021 somewhere around there um yeah i can't remember i think they started getting raised in mid 2022 but i can confirm so this is charles schwab's net interest income change the the growth of its net interest income versus interactive brokers net interest income. Charles Schwab, since the end of 2021, is up 1% because they chose to take longer duration assets, purchase longer duration assets in exchange for a little bit of higher interest rates during what was, in hindsight, the bottom in federal interest rates. Interactive Brokers, on the other hand, decided we're going to do, I think it was like three

Starting point is 00:37:44 month rolling treasuries, just super short term. They didn't want to get hamstrung with a situation just like Schwab. And since the end of 2021, their net interest income is up 168%. So their willingness to wait has completely benefited them. And I think this is a good example. I would love to go into the proxies and see how much Charles Schwab was incentivized. Executives were incentivized to grow interest income in the short term because interactive brokers, they've got, I think, a founder still at the helm who is willing to wait. He can afford to wait.

Starting point is 00:38:30 He owns a ton of the company. He does not get compensated on short-term interest gains. So it just kind of goes to show how important incentives can be. I would assume Charles Schwab was compensated because of that. Yeah, and either way, they made a big mistake doing that. It's not – I don't even know if they got greedy. It's honestly hindsight, very, very dumb by that treasury department. Other data on these two companies, if we look at Schwab, it's not like they're not making money.

Starting point is 00:39:00 you know, $2.40 in earnings per share over the last 12 months. That is slightly down from 2018 at $2.50. So at the right price, you know, maybe they've been stable and stuff like that, but the PE hasn't been great. I think you have to still be betting here on a profit inflection, which could show up. No expert on the company. Brokerage counts have been, I think, honestly solid maybe this is a good one i could share too actually we don't really need to share it so they had the td merger and they bumped up to say this would have been march 2021 which is maybe the peak of the bubble and the crazy trading uh they had 31.9 million total active brokerage accounts and last quarter they had 35.6 million it's kind of steadily climbed just kind of slowly um so that's

Starting point is 00:39:53 good, I guess, right? They're not hemorrhaging to other people. They've had asset management revenue growth of a CAGR of 11.8% in the last couple of years. But IBKR has been a pure compounder on attracting accounts over to their platform. They have grown active accounts at 38% annually since 2019, going from $700,000 to $2.9 million, which is quite good. And earnings per share has grown at a 24% CAGR since 2014 when Schwab's has absolutely stagnated. So IBKR continues to do quite well. Our friend Luis Sanchez, we haven't had in a while, we should have him on back soon, I believe talked to us about IBKR a while back, that's done quite well go listen to that to kind of get some more details on the company but

Starting point is 00:40:47 their strategies worked and it seems like they continue to be uh would you call it a sneaky underrated compounder because i would assume the compounder bros like i say us are sort of in that camp should love this company but doesn't seem like it's talked about too much no it doesn't which is weird because yeah they have grown active accounts i believe it like just under 40% annually over the last four and a half years. And I can tell you from experience, anecdotally, they do a lot of things that customers care about. They are great for... If you're an investor that wants to trade international stocks, they do a really good job of just executing on that and making everything available. I will say the tech

Starting point is 00:41:37 seems a little ancient sometimes, but it's functional. Yeah, this is a well-run business and it's run by an owner-operator. Let me just pull up the ownership table just to double check. Thomas Pederphy owns, let me double check it here. It says 1.6% of the combined shares, but I believe it's dual class share structure. So I think he owns a lot more of the voting power. He's an old guy, but he's done an incredible job executing on this company. Oh yeah, I agree.

Starting point is 00:42:19 I agree. And now I think that's it for the two brokerages. Ryan, do you want to talk about our friends, our presenting sponsor Public again, where I should say, although it's not part of our ad rate where we're talking about options trading, that you have, you have, there's $250 billion in cash in deposits that Schwab earning one point,

Starting point is 00:42:39 I think it was 1.3%. Get that out of there. If it's not your checking account and go to somewhere like public, but Ryan, why don't you go through that read? Yeah. Earlier in the show, you heard us talk about the investing platform, public.com. That's where you can trade options with no commissions or per contract fees. And you get a rebate of up to 18 cents per contract traded nerd wallet 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,

Starting point is 00:43:15 US members only. Should we do my small cap of the week? Let's do it. Okay. I will say last week, we talked about one that i thought could become a compounder potentially had a lot of upside could maybe one day be in the never sell camp the kind of thing that you want to own for a long time this is not that this is i would guess this is kind of more of a 50 cent cigar but trying to flip it into a dollar uh sort of a special situation type of thing so the company is called isea worldwide we actually visited this a while ago i can't remember why i think back when we had our friend ian gray on the show he may have pitched this but yeah we did a research we did a podcast episode on them and i remember it because the name isea worldwide sounds

Starting point is 00:44:14 like the stepbrothers company uh from that mooney movie uh what is it prestige worldwide so whenever that you say the name and that their little song goes off in my head yeah and i'll give a quick shout out to our sponsor i found this idea on yellow brick if you don't know what yellow brick is it's basically sort of a modern value investors club it's an aggregator of kind of the best stock pitches all across the internet and this one came from toff cap on twitter it's not a account i'm super familiar with but i was looking through and found a lot of good ideas in there and so just what does IZEA do? IZEA operates online marketplaces that connect marketers and content creators. Its solutions enable the management of content workflow, creator search and targeting,

Starting point is 00:45:01 bidding, analytics, and payment processing. Basically, it helps brands find influencers to market with. The stock is down 91% from its highs. It has a market cap of, and sorry to uh ian for mentioning that he did seem optimistic on it a while ago and then saying it was down 91 percent um he's done i've talked to him recently and he did plenty well on other investments so ignore that but market cap 38.7 million dollars net cash of 56 million dollars so negative enterprise value i think it's around negative 20 million dollar enterprise value it is losing money as you would expect. Over the last 12 months, it's burned through $10 million in operating income or operating earnings. The free cash flow is like negative $5 million over the last 12

Starting point is 00:45:55 months. Here's a snippet from Toff Capital's pitch. He says, revenue is pressured by market headwinds and the platform transition, but second half growth is inflecting positively. Here's the other part. He says, GP Investments, which is roughly a 20% owner, continues to back up the truck as much as possible in the open market at this net cash negative enterprise value online marketing company. Also, IZEA recently announced a $5 million buyback, which is roughly equivalent to 13% of the market cap.

Starting point is 00:46:29 I don't know a ton about GP Investments. I tried to look. I would assume they're a micro cap hedge fund kind of thing. I do kind of like the setup here. I think influencer marketing in general, there is a need for platforms like this. I imagine it's become more competitive over the years as it's become more commonplace. But if they can get to a point where they're just simply not burning cash and I don't know what it's going to take to get there. I got to read through the conference calls to see whether or not they can actually make it and they can buy back 5 million, maybe more of their shares outstanding.

Starting point is 00:47:06 It's hard to see this staying at a market cap of $38 million. I agree. Sounds interesting. High risk, high reward. So full disclosure, don't think this is some guaranteed thing. This would be something I would make a small position personally. I think, though, this would definitely take private Canada, too. There's some company out there that would want this.

Starting point is 00:47:31 You don't have to pay the public market fees anymore. you don't have to pay whatever all this stuff and someone can take this cash this negative enterprise value try to build a viable business you don't have to do full disclosures you can really get more aggressive with it yeah makes a lot of sense to me i could see how this could work but the fact that influencer marketing has been on you know steadily grown in the last 10, 15 years and the fact that they can't be profitable and maybe revenue has grown, but like, why isn't revenue higher? I'm looking at annual revenue of $34.4 million. That's off from $41 million in 2022. Maybe 2022 is a cyclical high, but before that, revenue growth

Starting point is 00:48:22 was really inconsistent. I guess I would have to know if they have any acquisitions that they did impacted this or divestments that impacted this but it was inconsistent going to that so i don't know if this is really good operating team i remember looking at them and not really liking the management team which you might expect for a company called isia worldwide that's supposed to be in uh internet whatever marketing stuff it's almost like energy drink ceos you can't expect a warren buffett to be running those uh but yeah no it's it's interesting for sure at a cheap price anything's anything's a buy at some level i'd love to get a hold of the gp investments somehow just talk to them if i were interested i assume they're accessible in some way try to learn more

Starting point is 00:49:07 about what they plan to do because maybe they are going to go activist i assume they already could so yeah we definitely want to learn more about them as kind of the largest shareholder I mentioned that I found this idea on Yellowbrick. If you go to yellowbrick.com slash chitchat, it is an aggregator of stock pitches across the internet. And there's tons of free features. You get basically every recommendation or every pitch from the internet 30 days delayed on the free version and then all the real-time ones on the paid as well. So certainly worth checking out. That's joinyellowbrick.com slash chitchat.

Starting point is 00:49:47 yep exactly if you like perusing value investors club think of this as a improvement on value investors club because it's a much much better product out there someone says damn you guys have a lot of advertisements well we have four in one hour so i don't think that's that many and we have to make money so here's the other thing i know we don't want to just be an ad pawn that's not we're trying to do a lot of these i genuinely do believe listeners would benefit from using so it feels very supplemental hopefully it seems supplemental sorry if it doesn't that's uh we can do a better job of that but yes we want to take advertisements that we wouldn't use ourself two minutes of advertisements in an hour-long episode i think you can put up with it uh so

Starting point is 00:50:41 Yeah. All right. What do we want to talk about now? I got, let's see, maybe some Twitter questions or bank earnings. I know bank earnings are people, you know, it's important to the economy, but it's kind of boring. We have a Philip Morris International update. We have Celsius with potential scandal. Ryan, you can pick. I have a couple other items here. Any you want to go into? How about ally earnings? All right. That's part of the, I guess, banks, although it's a smaller one. It doesn't impact the full economy too much. One thing I saw, it does impact your portfolio. It seems like the expectations were rising because the stock, not to toot your horn there, had done quite well over the last, say, three quarters. But this report, I'd say, was pretty average. The stock was down a little bit. One chart I thought was interesting on this KPI chart here is that automotive finance pre-tax income was $407 million. This is the main driver of earnings

Starting point is 00:51:49 for this business. That's up from $294 million in December, but still down year over year from June of 2023 when it was $501 million. I saw that they have the seasonal outflow of deposits because of taxes. That seemed normal, I guess. There was some different reporting, I think, because the CEO has changed. So I'd have to look into that to kind of get that stuff

Starting point is 00:52:16 all looked at. I think the net charge-off seemed in line. Everything, no surprises, nothing crazy. I think that was fine. But if we look at maybe, well, okay, what are your comments on Ally? Then we'll go into the big banks in general. I think I have some charts that could show that they're fine now. The banking collapse of last year did not materialize. No, and neither did Carmageddon, which is good. People were concerned about Carmageddon and basically people not being able to pay their car loans. That doesn't seem to be the case. There has been two consecutive

Starting point is 00:52:56 quarters now of declines in their net charge off rate, which is good. If you're just looking at the current results, it's not going to seem super attractive. I think the reason that it's been bid up quite a lot is because banks are relatively easy to telegraph. You can get a pretty good grasp on their earnings over the next 12 months. So the inflection is really what investors are looking for. And net interest margins have begun, I believe, to kind of turn around again. And you can see that on – I don't know if you're going to share some of these charts, but there's the net interest spread. It's expanded just a little bit. Net charge-offs have come down. Just keep in mind, the majority of their loan book, they offer auto loans and it's

Starting point is 00:53:52 mostly used auto loans. And during COVID and the low interest rate environment, I think they were probably generating around 5% roughly, maybe a little higher on some of these auto loans, 5% interest. Now, they still have some of those old loans, but it takes about five years for five to seven years for auto loans to get paid back. A lot of them have moved into the higher interest rate bracket. So you're going to be getting kind of this inflection. Yep. You can see it just this most recent quarter, it's gone from 2.8% to 3% on the net interest spread. Hopefully that continues to climb. And then that's the direct impact to earnings per share. However, Ally feels like they're in a good place. They've also continued to grow the deposits business. They offer a fairly competitive rate. So they do a good job as a digital bank. And it seems like the loan book is intact. I would like to hear more from the conference call about what management expects.

Starting point is 00:54:54 The biggest hiccup, and I think why people hated this stock for so long, was that there was tons of management turnover and there was no insider buys. Maybe this just goes to show that sometimes that can be overrated, where even a business where it doesn't check every single box at the right price, it's worth it. yeah even executives have personal lives and they can it might just be time for them to go and they might have an offer in a different industry or like for example the the ally ceo that left went to i think the biggest used car dealership like roll up i don't even know what it was but it was within an industry he's been in for a while and he said it was the one job he's been looking to go after as kind of his next journey that doesn't mean allies in shambles or anything. I will say, looking at that net interest spread chart is nice. It's nice to see

Starting point is 00:55:53 it, say, flatline and take up a little bit. That was part of, unfortunately for me, I haven't owned it yet. I've owned some other stuff that has done fine, but maybe not as fine as Ally. You know, that was part of the thesis six months ago is that we're going to see a bottom of the net interest margin. And then it's going to start continually over the next two to three years, climb higher. And the stock wasn't really pricing that in. We've seen the stock react to that, and it looks like they've made some good progress on that so far. But there's still, I mean, not to use the baseball innings term that gets overused in

Starting point is 00:56:27 investing, but we're still probably in the second inning, third inning of that transition where we're going to need to see a lot of progress of that going forward. Let's talk big banks, though, Ryan. When looking at those reports, there's so many numbers, and it's hard to talk about on a podcast i'm sure i might miss some things there's just when looking at these financial companies they're just all all these different data points but when looking at the big banks and i have three of them here all right sorry so you have something to say i was just saying they're enormous it's it's hard to analyze there's always one part of their loan portfolio

Starting point is 00:57:02 that's doing well and one part one part where you're concerned and then ultimately it just grows like two to three percent book value every year yeah but if we look at say i think these are the three biggest Bank of America, JPMorgan Chase and Wells Fargo. If we look at their overall net interest income, and this is something all three of them report, and almost every bank reports, I would think Bank of America's $13.7 billion last quarter, it's been fairly stable over the last six quarters down a little bit. JPMorgan Chase, net interest income of $22.7 billion, dollars fairly stable up a tiny bit wells fargo hasn't done as well 11.9 billion dollars uh down from behind about 13.4 billion i wanted to give this out because last year there was this idea

Starting point is 00:57:55 that banks net interest income was going to collapse because of these health maturity things this problem that blow up silicon valley bank and all that stuff and that narrative sounded smart but as we've seen, it has impacted these companies. Their earnings haven't really grown that much a lot of the times that I know. They have different segments, so maybe wealth management and investment banking has helped maybe grow the earnings. I'd have to look at those separate charts for all these companies. But it was not nearly as bad as the perma bears, the doomers made it out to be. I think it's a lesson in when people are talking about doom scenarios this year, next year, the year after

Starting point is 00:58:34 for the stock market they can be true but they may not have as impact and as big of impact as people think where they're going off of i would say even in somewhat recent history now of the great financial crisis and you know lehman and bear stearns that was a once in a century type situation and that doesn't happen in every downturn the you know the silicon valley bank and uh what was it signature and first republic those were maybe normal things that happened like you know it impacted the industry it impacted the market and that's that's a normal thing to happen the downturn great financial crisis is more more of a you know uh a perfect storm type situation that's not going to happen every time yeah i think people love to search through these incredibly

Starting point is 00:59:25 long boring reports to try to find some sort of nugget that you think is going to blow up the bank these things are very well run now there's a lot of regulation around them that prevent the sort of thing that happened in 2008 and they all have much better capital ratios if i'm not mistaken because of that regulation so less concern there yeah like what was it who was the first one that blew up, Silicon Valley Bank. That was really poor management and way worse capital ratios. They literally had all their depositors be basically one group, which I think it was Matt Levine that said, I don't know if there's any other area that's as much of a herd animal as venture capitalists. One person starts withdrawing money, every venture capital firm has

Starting point is 01:00:20 to do it. JP Morgan's depositor base, I think it's a little more diverse. Like if 10 depositors from New York pulled their money, that's not really going to impact most of the other depositors. So that's where you get the run on the banks. It's on the, what is that? The liability side where it's people's deposits. If those fly out, then you've got an issue. You can take on some losses on the assets, but you just don't want severe concentration as a bank with your deposits. I agree. As I close out this segment, I still think the big banks face a headwind over the next 10, 20 years with basically how consumer banking is going to turn digital and the interest rate competitiveness is going to change and it's going to create a headwind on what they have to

Starting point is 01:01:16 pan depositors and that makes me like companies such as ally who already pay a high rate uh even even so far i know a lot of people think that they're uh quote unquote uh i guess i don't want to say that say the term but everyone knows it is a bad company a terrible company you know or something like that one that's just been unprofitable or something like american express which pays over four percent on their uh savings accounts as well i think these companies will face a headwind, but it's not going to just going to be a slow trickle where we're seeing that in the deposit growth at SoFi, at Ally, at American Express even. And we're seeing that at Schwab where even though I said that they were paying 1.3% on their deposits, that has gone up.

Starting point is 01:02:03 And I think all these banks have had to pay more and it's not going to be overnight. It's not going to kill their business, but it's a headwind by definition. That's a headwind on your costs. yeah i might have missed it what did you say about sofi i basically didn't want to say like the i don't want to swear and say the the term that was in my head people call it a you know something co oh yeah but it's i mean it's a legitimate operation oh yeah but it's just not been that profitable it's what people correct yeah correct but it's yeah i mean banks at their core especially big banks it is you make money with money it's quite simple should be very profitable or at least marginally profitable but sort of safe profitability

Starting point is 01:02:56 assuming you can lend well assuming you lend well yeah exactly exactly all right we're a little over time people are asking about the quote-unquote celsius scandal that i teased uh did you see this Ryan maybe we can save it for another day was this the Wall Street Journal article that came out about Celsius not being yeah young women using it to try to lose weight yeah my gut says that if this really impacts the stock like if Celsius got into a range where I thought it was an attractive valuation and it's because of this, I would probably feel compelled to buy it. I agree. It could present a buying opportunity, especially with the inventory build. Here's the quote from the article. I think this is less

Starting point is 01:03:44 jewel and more just classic energy drink stuff. Quote, at Cleveland Clinic's Children's, about a third of the hospital eating disorder patients consume energy drinks, estimates LA and Rome, head of adolescent medicine, teen and adult. Patients frequently arrive for appointments with celsius cans in hand she says well don't a third of all teenagers probably drink energy drinks i mean i don't know yeah stock let's see ryan i think it's probably in a 50 percent drawdown now 47 percent drawdown could be getting cheaper it's still pretty expensive though it's still pretty expensive uh but one to keep an eye on i'd say one to keep an eye on all right anything else before we close out ryan no netflix reports tomorrow that'll be fun to watch and i believe

Starting point is 01:04:32 big tech's next week yeah at least some of them at least some of them it usually goes bank some of big tech and then we roll right through we got a couple you know the next month or so gonna have plenty of things to discuss let me hit the disclosure before we close things out or anything else no no no go for it all right let me hit the disclosure we are not financial advisors Anything we say on this 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. Thank you to the live audience for joining in.

Starting point is 01:05:06 We are doing these. We changed officially, which is just a decision between the two of us, to Wednesdays at 10.30 a.m. Pacific Time, 1.30 p.m. Eastern Time. That is Wednesdays live on YouTube. You can listen to the recordings on YouTube. you can join us live and ask questions or you can listen on sunday mornings on your podcast player of choice spotify apple podcast overcast wherever thank you again everyone and we'll see you next time

Chit Chat Stocks - 6 Industry Leaders at 52 Week Lows; Bank and Brokerage Earnings; a Curious Stripe Investment

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