Chit Chat Stocks - 9 Quality Stocks At Cheap Valuations; Buffett's Monster Cash Pile: Airbnb In Turmoil? (ABNB, CPNG)

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 and I am one of your hosts, Ryan Henderson, joined as always by Brett Schaefer. On this show, we talk all things financial markets and it appears, although it may have subsided a little bit, markets were in turmoil this week. So we're going to be discussing what happened, the bit of the

Starting point is 00:00:58 talk through a bit of the flash crash that was related to the Japanese interest rate hiking. And then it's earnings as well. We got tons of earnings. We got interesting comments from Brian Chesky, the CEO of Airbnb. We got Uber's quarter, a couple of companies we follow closely. But I guess I should let you speak a little here, Brett. What do you have on the docket for this week? Yeah, I was thinking of tricking the listeners and doing a title as markets in turmoil to get some clicks, but then not talking about that whatsoever, because I think it's quite boring. And there are tons of earnings to talk about. We have Coupang, Airbnb, Portillo's, GoGo, others, I think, that we like to follow. Uber is always interesting, one that we follow as well.

Starting point is 00:01:44 Plus, maybe my favorite news item of the week, something I've been predicting has no financial benefit but i've uh buffett did sell part of his apple position trimmed i should say still a huge position but trimmed by half trimmed by half quite large i think we can talk about that as well 277 billion dollars in cash and equivalents the interest income on that is larger than most countries now almost every other company though in the world so i'd like to talk about that as well All right. But before we do, we want to talk about our friends at Public. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first? At Public.com, there are no commissions or per contract fees. And more

Starting point is 00:02:36 importantly, it is the only platform where you can earn a rebate on every single contract traded. That means you can save on your options trading costs and keep more of your capital in play. Whenever you trade options on Public, your savings are automatically applied. So don't change your strategy change your platform and see the difference in your bottom line that's no commissions no per contract fees and it's the only options trading platform where you can earn a rebate on every contract traded public.com this is paid for by public investing options are not suitable for all investors and carry significant risk full disclosures are in the podcast description what do we want to start with brett i think buffett would be fun we got a lot of earnings

Starting point is 00:03:15 to hit. That's kind of the meat and potatoes. But the Buffett stuff, I think, is quite interesting. First question for you. I know I already mentioned the $277 billion. Were you surprised that he's raising cash? And are you surprised that he trimmed his Apple position by half after saying it was part of his never sell portfolio? Yeah, I was a little surprised by the news. Not that – I thought Apple was richly valued, very richly valued for a business that is unlikely to grow earnings that quickly and it's not a knock against Apple or anything like that. It's just a matter of the size of the company and how much they already earn. So relative to its valuation – or sorry, relative to its earnings growth, I thought the valuation was a little rich. So it surprised me in general that on one hand, it surprised me that Buffett owned it, continued to own it. But on the other hand, I've always seen him as someone who's willing to just hold through periods of overvaluation, doesn't want the press associated with him selling a stock, doesn't want to be seen as someone going in and out.

Starting point is 00:04:31 So yeah, I guess this kind of caught me off guard a little bit. He still does obviously own a ton of stock and $270 billion in cash. I think it speaks to how hard it has maybe become for him to make investments at a size that would actually impact the business. make reasonable, intelligent equity investments, not that he's only investing in equities, that would really impact the business. And so if he can't find anything, yeah, I think earning 5% interest on a $270 billion cash pile isn't anything too bad for him. Yeah. I think he's telling, well, he doesn't really tell people anything. He's telling his investors maybe or making a decision because he cares about his investors and optimizing the risk reward for them and preserving their capital while also trying to make it grow. He is saying that treasuries and the cash and equivalents they can hold at Berkshire Hathaway

Starting point is 00:05:37 are a much better risk reward than Apple right now. And I got to say, I do agree with him because that business, as we've seen last quarter, no growth, really slow growth. There's a lot of risk coming down the pipe potentially, which we even saw this week with the Google antitrust stuff. There's a next step there to maybe getting the elimination of 15% of their earnings from the Google payment. I actually think it's a fairly high likelihood that that happens now. And I'm not sure that was his reason for selling. He probably thinks it's still a strong brand. But when you have over 30 times earnings, low to no growth, perhaps stable earnings, and you can grow earnings per share by a small amount, that buyback, for one, doesn't really

Starting point is 00:06:21 make as much sense at 30 times earnings versus 10. And it does not juice earnings per share whatsoever, or sorry, by just a tiny amount. And he probably said, look, I'd much rather have the optionality of cash in case we go through a huge downturn, and I can be one of the lenders of last resort. And with $277 billion in cash, I think he's saying, you know, even after our insurance operations, if for some reason, there's a time period where people are selling distressed assets, distressed stakes in companies as in the stock market or distressed whole companies or whatever, I'll be there. And he'll, him and his team will be able to buy him. I guess he's, you know, heading for retirement slash, you know, is 93. So we don't need to talk about what's going

Starting point is 00:07:07 to happen at some point here soon but that is uh i think his strategy and it makes makes a lot of sense to me and if i was a berkshire hathaway shareholder i would be applauding this move yeah retirement is a interesting choice of words i i don't know if he'll ever retire but the uh it i think it just goes to show how patient he truly is and yeah maybe there have been opportunities here and there that are the size that would make sense for him but he really hasn't budged on that cash pile much since the largest investment he's made in the last 10 years was probably apple itself right yeah yeah anyway um yeah well someone someone is out there saying that the company is so big their portfolio is so big the cash pile is so big

Starting point is 00:08:02 that he essentially if this was a video game he really came to the end of it and over the last 60 70 years the track record has been so good that now he's much too large to buy all but a few companies out there all but a few stocks to make it relevant out there so hey it's kind of nice i think or almost a storybook ending for someone that's i believe 93 years old so coming to the end of things and feels just about right i think but he could yeah Yeah. I'd be curious if maybe there's – because we've got some questions in the chat here about whether or not we think we're entering a recession. I don't know. Yeah. Not sure. But if we are, I have to imagine that there's maybe some private businesses out there, maybe even public businesses that end up willing to sell all of themselves to a buyer.

Starting point is 00:09:00 um and i think that's probably where he's going to end up finding the most opportunities he's been buying occidental petroleum for like three years now and it's so hard for him to up his stake it seems because if he has to do it in just like bite sizes without moving it himself um but yeah do you think he will sell the rest of it apple of apple steak oh that is a good question I think if it got to... And he said, okay, let me go back to 1998. Coca-Cola was essentially the Apple of that time. For Berkshire Hathaway, it was a huge percentage of the portfolio, huge winner, and was about 30%, I think, of the equity portfolio or larger. So very similar to Apple today. And it was at 50 times earnings. He said like 10 years later that it was a mistake

Starting point is 00:09:56 not to sell Coca-Cola during that time period. So I think if Apple got even more expensive, I could see him selling all of it. But I doubt he would, unless it got extremely expensive, I doubt he would sell all of it. All right, we got some other questions. A lot of macro stuff. Maybe we can hit this quickly. If the Fed cuts rates and money market yields drop, where does that money flow? Bonds, stocks, etc. Is this return of TINA, which means there is no alternative and you can't really get a yield anywhere else except stocks. So people flow into stocks. I think that is overrated because we've seen the market right now is approaching 30 times earnings and bond yields are much, much higher than they were for the last 15 years. So

Starting point is 00:10:39 I don't ever like that. That sounds good in theory when you hear that. But the reality of the situation, we had market bubbles when there's high interest rates, lower interest rates. I think it's more of a, how would you call it? Animal spirits versus people acting rashly saying, well, interest rates are two and a half percent now versus five. I think some people might act like that, but the vast majority, no. Any thoughts there, Ryan, before I float through some of these other questions from the audience? No, I think I really kind of just have first order thinking here, which is if rates drop, maybe more people would feel inclined to sell their homes because they could buy something else at a lower rate. Maybe more people would

Starting point is 00:11:24 feel inclined to upgrade their car because they can buy at a lower rate. Just borrowing is a little easier. So I would suspect that maybe consumer spending in general would grow a little bit. But what impact would it have on equities? I don't know. Because oftentimes, I'm putting this in air quotes for anyone that's listening it's priced in like if everyone thinks rates are dropping it's already priced in on the forward estimates for a lot of these businesses so does it really ultimately impact the price of equities i i kind of well also we we've seen people for the last ever since the great financial crisis call things a zerp for not phenomenon which means zero interest rate policy and people are saying well this market's just a zerp phenomenon

Starting point is 00:12:13 or this stuff's trading at 40 times earnings. It's just a Zerp phenomenon. Well, Zerp is over and there's still a lot of the same stuff happening. So I don't necessarily think it has anything to do with the interest rates. Now, I think this is an interesting one. You talked about housing, Ryan. What do you guys think happens to real estate in a recessions? Do you think there won't be very many job losses, but mortgage rates will fall with Fed cuts, so prices will skyrocket? I think this is interesting where we've seen that friction in the housing market where people have stayed put. And my hot take that I don't have very high conviction on, and I wouldn't make any sort of investment decision on it, is that if interest

Starting point is 00:12:56 rates fall, that's going to make people much more comfortable to sell because they're not going to be afraid to get out of that low-cost mortgage. And then if we're in a recessionary period where people's incomes are down unemployment is rising the general people's say firepower to buy a house goes down i think that could really impact housing prices and would really help um you know affordability and someone asked about home builders i don't think that affects them there's still going to be a lot of supply that needs to come online especially with yeah just immigration all that stuff and the undersupply that happened which i do think the evidence is coming out more more that that is the case uh but i think it would definitely help in a weird way if

Starting point is 00:13:43 because people think if mortgage rates come down that housing prices will skyrocket and that makes sense because the affordability technically goes up you know it's it's a lot easier to finance a home but i think that there could be a flood of supply that's waiting to come on the market and i don't know there's a lot of variables at play i think this one's a unique situation yeah my we've spent i'd say two or three years since covid kind of talking about the housing market and our thoughts i think i've kind of come to the conclusion that i think it's maybe this is a hot take. It's in a fine spot. It's okay. Affordability is low relative to historicals, but there is a lot of people that are staying put in their homes. Homebuilders

Starting point is 00:14:40 have been largely unaffected by the rise in interest rates because there is the undersupply of available homes. I would not be optimistic that home prices are going to continue rising at nearly the rate they have, but I think some home apocalypse, some real estate apocalypse in America seems unlikely. Yeah. An apocalypse, prices could come down and be pretty negative from inflation, and that's not an apocalypse. But there's a big difference between saying people can afford a home, people can pay their mortgage, and there's more supply coming online and inventories normalizing, which is happening, versus the great financial crisis. That's an entirely different thing. And I would say it's a big

Starting point is 00:15:33 difference between having a home being an investment versus something you can afford, which is an entirely different matter. Another question before we get to the earnings slate this week. Why do you guys think Buffett is selling Bank of America? Simple. I believe he thinks it is overvalued and he would much rather sit in a riskless asset earning five and a half percent. Didn't he talk on an interview a while back? I think that was floating around this week when this cash pile update came out that every Monday they buy something like $5 billion in treasuries which it's got to feel cool to be one of that just to have your small little operation well quote unquote small from a people perspective buying so much of the treasury market each week

Starting point is 00:16:21 yeah i'm looking at looking at bank of america right now because i want to see what the net interest margins look like or and the book value maybe because i would imagine net interest margins have expanded right as they've been paying out i think most bank of america customers they're not really in a high yield savings account it's probably a moderate yield at most and they're oh i know that's why i keep no cash with them yeah uh i don't have a net net interest margin in front of me but what about that yeah i think i think it is probably pretty simple they he probably thinks there's better places to allocate his cash let's go price to book 1.1 yeah he probably thinks their roe is not going to be that good but it was you know

Starting point is 00:17:14 i think it was a little higher than 1.1 when he started selling yeah i would guess that his selling might have been an impact to the valuation here um it yeah i don't know interest rates are will always be a puzzle to me what i will say is last time when interest rates rose my initial thought was well people are going to expect it he's they've said they're going to raise rates so it can't impact equities that much it did exactly what you think it would do and especially when they when he cut rates to zero not he but the organization the federal reserve as a whole yeah took rates to zero during covid once again it did exactly what you would think it would do it's sometimes the first order thinking there is right yeah i agree although it's

Starting point is 00:18:14 even hard to say like in that situation was it a correlation or causation like what is actually happening under the hood i will say i heard an interesting theory that 2022 and the downturn in the stock market was caused by the interest rate spike, not because people were adjusting their risk-free rate, but because of such a large percentage of invested assets are in quantitative 60, 40 portfolios and target date funds. And when the bond values came down, they had to buy more bonds to reallocate because when the yields go up, the value goes down. So you had to rebalance and sell out of equities. And then the market bottoms. What makes this theory interesting to me is that the market bottomed when they stopped raising interest rates. So I think that makes a little bit of sense. But again, I don't know. And that's not really what I care about. Let's go into earnings. First question here, Ryan, from Fake Alias. Is Celsius interesting here? I bought a tiny 1% position today. Did you read the earnings report? Or do you want me to go through the numbers?

Starting point is 00:19:21 Yeah, I read some of it. I thought it looked like a pretty good earnings report. Growth is still solid, obviously not nearly what it was, because it was growing triple digits, I think for like two or three years in a row. But for them to be growing on top of this already quite large base, and for them to be increasingly profitable, I think it's just becoming a more mature operation. it it's bound to lose its premium like i don't know what people were thinking having this at 70 80 times earnings or i forget what the sales multiple was like it's going to bring up the growth profit chart for the for the youtube audience right now it's going to be really hard to grow at the same rate they have and so it's just the price to ev to gross profit there has gone from what looks like 35 times to 12 times in a little a little under a year yeah like six months um i still think it's a good business and i think they can be increasingly profitable i'm sure there is some pricing power there as well the energy drink business to me it's honestly

Starting point is 00:20:39 kind of simple like people get hooked on it from soda and coffee yeah the category continues to grow take share from soda and coffee and people that are customers like celsius customers tend to stay celsius customers and they're well and they're the ones that they're expanding the category within people that like aren't switching from coffee and that people want the quote i don't know if i'd call a celsius drink healthy but maybe the they want something that's not really bad for you and laden with sugar which the classic red bulls and monsters had so you have basically two tail ones that i think can be pretty durable the overall category expansion and stealing share from other drinks and celsius taking share as the leader in healthy fitness based stuff and 12 times gross

Starting point is 00:21:27 profit now i people should confirm that number's right obviously sometimes people's definition of You know, the platforms are just kind of taking the quantitative approach. Do your own valuation work. Although I trust FinChat, obviously, one of our good friends and an indispensable platform during earnings season. I think 12 times gross profit is not crazy. I don't think it's that crazy for them. I think their operating margin can hit probably 25% to 30% at scale. kind of invert that into that gross profit multiple or into that whatever that revenue

Starting point is 00:22:03 multiple is. I forget the gross margin. I think it's about 50%. So it doesn't seem crazy to me. The growth is coming down because of that inventory buildup last year. So it looks pretty wonky, but I wouldn't be surprised if revenue re-accelerates a little bit. It's not going to get to 100 percent and then we have as fake alias says here the international expansion is the wild card that can put it over the edge i agree that's either gonna make or break the story over the next three to five years yeah trailing ev to ebit can you guess i'm not looking so i'm gonna say 35 27.9 wow what's the price today let me let me look at that it is wow below 40 that is interesting i got it down almost 60 from its highs the yeah i think it's i think it's a fine

Starting point is 00:23:07 business i'm glad fake alias actually mentioned that because i might start taking a deeper look i think these energy drink businesses can be extremely profitable and have very sticky customer bases let's talk uh coupon earnings wait do you want to talk about markets and turmoil we should mention this people are going to be one i want to if i put in the title i want us to and i'll make sure in the show notes to say that we actually aren't talking about that i want people I think we're going to do the yen carry trade the whole time, do CNBC nonsense. But, I mean, is there anything – I see QQQ at 12% off highs. Probably, you know, that's kind of a good proxy for growth stocks.

Starting point is 00:23:54 Anything in your mind, Ryan, that comes to mind that's worthwhile talking about here? I think there is something worthwhile talking about here. The brokerages went down. most of the brokerage platforms were not letting people log in when there was this flash crash monday morning not our good friends at public though correct online they were online i'll tell you who who was offline uh schwab which really really kind of pissed me off um yeah it is so frustrating the yeah who it just goes to show be very particular about who you choose as your broker it's important um and uh i think i might be switching in the not too distant future so

Starting point is 00:24:46 exciting exciting stuff yeah let that let that affect your schwab position as it may you're gonna be losing a huge account yeah exactly exactly uh i think it was fun to have this markets in turmoil quote unquote it seemed sort of real although i thought it was hilarious that it was mainly japan it's mostly recovered and stocks are in a very normal correction not to say that i think they're fairly valued i think the pe of the broad market feels i don't know i wouldn't be putting money into an s&p 500 index fund let's right now that's all i'm saying uh i thought it was hilarious that like various shows i follow that aren't investing related where there would be like a broader news one or uh some sort of whatever it is there was

Starting point is 00:25:42 like three of them out there uh that were podcasts that were like markets in turmoil or this market crash. What investors need to know. Emergency podcast market crash. I was like, I don't understand what the big deal is, guys. I think people are searching for a little bit of a story there. Yeah, this would probably be one of, if I were, if I would have been allowed to buy it, if there were companies on my watch list that I was maybe waiting for them to drop a little bit, this maybe would have been one of the easiest flash crashes to buy because unless I'm getting this wrong japan rises interest rates a bunch of funds that are levered to it where they're shorting it and buying in higher interest assets are forced sellers of equities i take it and

Starting point is 00:26:30 yeah most of the businesses that i follow are largely unaffected by japan's interest rates yeah there was a comment here from tyler that says i was in the real world on monday didn't Even though the market was down until 8 p.m., nobody in the real world cared. Yeah, nobody really cares until it happens for multiple months. Or is it a giant crash like March of 2020? And especially because at that time, it was a pandemic. So people were stuck. That was when the first time people were stuck at home.

Starting point is 00:26:59 Black Monday. I totally agree. I like that. It was Black Monday. Yeah, no, this is, there's only so many days of the week that can be like a Black Monday. Or sorry, like there's only five days of the week that it can be in history. so i don't think this nearly qualifies 1987 definitely qualifies but come on august 5th 2024 no no one's gonna remember this day i do like though one of my favorite things is

Starting point is 00:27:26 when cnbc or the news people or whatever talk about an unwind of a of an investment trade or something like that where like the yen carry trade is getting unwound and it's just a weird visualization but let's talk we got a lot of people how about airbnb let's start airbnb yeah we got a comment on airbnb you go on that one you got some notes on it i read it as well okay let me share my screen i know podcast listeners i will describe this to you what i'm looking at here going to airbnb's financial results and sorry i'm not even sharing my screen here we go going to their financial results segments and kpis i'm on fin chat so shameless plug if you use our code finchat.io slash chit chat you get 15 off any paid plans and as brett said

Starting point is 00:28:21 it's indispensable yeah it is indispensable and kpis updated probably by the next day within 24 hours when the earnings report gets released all right what are the numbers ryan because i see the stock's down i think what are we 15 today it's the only thing down on my watch list here's the chart i wanted to show all right so total nights and experiences booked keep in mind airbnb is still i would say in growth mode and they grew total nights and experiences booked 8.7 percent That has been in steady decline from basically 25% growth down to 8.7% over the last two years, and they guided for slowing travel demand basically. That was really what kind of weighed the stock down. Investors were very concerned that – and booking holdings kind of had the same concerns that travel demand, especially in the US, is slowing.

Starting point is 00:29:23 I was going to say that's what they said. They said it was specifically North America, a slight change from the last few quarters, and they are seeing a little bit worsening in lead times, which means that people are not as confident, I guess, that they're going to do a vacation in six months, 12 months, 18 months. Because what I think is interesting and is probably the biggest question is you look at that growth rate chart. I don't think anyone expected 25% growth forever because they came out of the pandemic. There was a bit of a catalyst and the comp was a lot easier. But what is the bottom here? What is the normal growth rate? I think maybe high single digits makes sense. Something around 10% seems like a good target for them. But it seems like, and given the stock, we're at a market cap of, well, kind of depends on what gets updated here. I mean, the PE seems to be down to 25. So I think, you know, using that as a rough framework, that seems like people are pricing in further deceleration. Yeah, let me just, I will say, Brian Chesky might disagree with you, Brett. Low single digit or high single digit might not be good enough for him. Here was his comment from the conference call. He says, I look at Apple, I look at Amazon. Apple at one point was selling iMacs. Amazon was only selling books. We've gotten bigger than either of those companies just selling short-term rentals, but we're ready to go beyond short-term rentals.

Starting point is 00:30:52 So the new Airbnb, to answer your question, Ron, will be about a lot more than short-term rentals. If he believes that they're going to enter a whole bunch of different adjacent markets, I suspect that means he thinks they can grow at a higher clip than high single digits. The other part, and this is maybe Brian Chesky might be my loser of the week after this one. uh on a post on twitter he posted something about the the barbie house which is on airbnb now and then some uh someone in the reply said how about them earnings though because the stock dropped whatever 15 after earnings brian chesky responded said i am confident it's a good time to buy that is red flag waving for me why he's buying back stock is he buying stock well the company's buying back stock so his stake is going up so technically i think if you go out and publicly

Starting point is 00:31:53 say this it's a loser move that's my opinion anytime a ceo says it and i know you like brian chesky but if jack dorsey did this with block you'd be calling it the loser of the week move i don't know if it's a loser of the week i'd say it's pretty neutral given the fact like i mean reed hastings did this when there was the short report on them back in 2011 no he basically said no he did not he said i never respond to these but because you contribute to the same charity that i do i will go ahead and refute the the points that you mentioned so it's a lot yeah he said it wasn't short so it's a long but going out and saying i think it's a good time to buy to a bunch of people, a bunch of individual investors is different than refuting a short

Starting point is 00:32:37 report. I don't know. This is a red flag to me. I think Airbnb does well here. Yeah, they certainly could, but it's still, I think you could do just, if you really want this buyback to work, if you really care about adding a shareholder value over time, you should care less whether or not it's a good time to buy for individual investors. Well, I don't. I mean, if it's a good time to buy, he's going to buy back stock. He shouldn't try to drive it down and convince people and just don't say anything. Yeah. I mean, that's probably better than this, but I don't think this is the worst thing in the world. I mean, if like if Jack Dorsey said this, this would be not in the top 10 of his red flags or if any other CEO did this. right i i want to i want this guy to be confident in his company he is i want him to be efficient

Starting point is 00:33:32 with the spending they are i want them to have ambitions to be a larger company they do and there's the there's the i think hold up that i have with a lot of companies for example block when they had ambitions to be big but they didn't care about shareholders where they've never had good returns they wasted all that money on afterpay and all these other things And they have these goals to expand their business. But I like Airbnb because they have, one, ambitions to be big, but two, are – and ever since the pandemic scare, have focused on being very, very efficient as well. I think he might be drinking the Brian Chesky Kool-Aid. I know he's a good CEO.

Starting point is 00:34:15 I think he's a good capital allocator. But you put any other CEO in these comments after the stock drops 13% because you went out and said the U.S. consumer is slowing, like I think it's a bad move. But let's move on. I do have some support here in the comments. Do you think it's cheap? Is it moving up your watch list? It's moving up my watch list. It's probably still a ways away from where I would feel.

Starting point is 00:34:44 What earnings ratio would you buy that? it's a good question it's probably like 20 honestly i haven't done the numbers i know i can't really do it live but trailing yeah i think their earnings per share is like 7.7 it's at 20 times now or that's when you would buy i'm saying it is now and i think i would buy now depending on if if i have cash and there's other opportunities obviously price to earnings right now is and this is unaffected by the working capital stuff wow can you guess i think they had some non-cash thing too yeah okay it dropped from 40 to 17 in like two days so something tells me they had some inflated something inflated there let me go

Starting point is 00:35:41 EV-EBIT because I think that might be able to strip it out. EV-EBIT trailing 45.8. I think we're almost away from where I'd feel comfortable about it. The earnings ratio might actually be lower. Maybe it is farther away.

Starting point is 00:35:59 I'd have to run the numbers because it is a bit confusing, especially with their working capital stuff, that non-cash charge. I don't trust what I said on 20 times earnings there. I think that might be incorrect. If you think they're growing at the highest single digit spread 45 45 doesn't make sense from where i would want to buy yeah yeah i agree on that but i i don't think it's i think 45 times is probably higher than it actually is i don't think

Starting point is 00:36:25 there you got to run kind of your own numbers on this one um we had some comments here saying you know chesky is a promoter uh their icons feature seems desperate i don't know if it's desperate it as much as it's kind of they like trying to keep themselves in the news cycle and it's not going to move the needle whatsoever but i think it's a good quasi marketing thing that someone like booking doesn't really do and people like in the people in the investment community value investors people on wall street are going to be like well this is dumb but trust me the women in the united states think this is uh you know they like this and guess who drives the spending in the households that so yeah it it to me i think it's a more creative way of marketing than

Starting point is 00:37:12 shoveling all your money to google ad sense i think doing stuff like this is really just a way to stay relevant and he's talked about that on calls before he just wants to do stuff that's more creative so it stays in the news that kind of thing i like it i don't mind it at all um but it's still a ways away from where i would want to buy it i think it's a wonderful business and Chesky might be a little promotional, but that's okay. Like you said, it's a bit of a marketing shtick. They care about return on invested capital. They're buying back stock and he cares about his free cashflow and earnings margins. I think he's showing that he cares about shareholders. Let's talk real quickly about our sponsor again, our friends at Public. Earlier in

Starting point is 00:37:58 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 was paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description, U.S. members only. I will say, as a reminder, finchat.io slash chitchat. Use that link at 15% off. We shared those charts in earnings season. They have just the wonderful KPIs to help chart

Starting point is 00:38:40 all the stuff that you're looking for. It saves me tons of time for the companies that I follow. All right. What do you want to talk now, Ryan? And we have people asking about Coupang. Let's do Coupang. All right. I do want to, I've got a thread that I think I'll go quickly through it after this that I want to run by you, which is nine genuinely high quality companies trading at their lowest valuation in 10 years. So I will get to that. But coupon earnings, just quickly, thought it was a good quarter. The core business seems to continue making progress. It's becoming more profitable. The true profitability here is being masked by a bunch of stuff. And two of these I think are, you could maybe call them temporary or fine things. So the growth investments being

Starting point is 00:39:27 made in Taiwan, I've got no issue with them continuing to do that and them hampering profitability there. The fine they received from the Korean regulatory department, I'm not sure what the official name is, that's temporary. And then it's also profitability is being masked by their acquisition of Farfetch. However, until they prove otherwise, and I know they've said that they're on track to improve the profitability there, that is something that could hamper profitability for a while. I agree. Yeah. Or am I on mute? No, I'm not on mute. No, you're on. I agree. Farfetch is uncertain for them, but I did think the quarter was great as well. The a legacy, you might call it product commerce business, which is essentially just South

Starting point is 00:40:18 Korean e-commerce. That's doing well, just steady growth. They're getting more mature in the market, but there's still a long runway to grow. And I think they're providing great value and have a moat that widens really every quarter. And if not every quarter, every few years, and they're focused on the right things. What excites me is this developing offerings. And I have the chart here. They hit $2 billion in revenue. Some of that's from the Farfetch acquisition, but they did get that revenue on the cheap. Losses are going to continue because of the expansion in Taiwan. You need a lot of upfront spending to build a vertically integrated e-commerce platform, but they said that they've learned a ton from Korea. We all know how this works in every market

Starting point is 00:41:01 that has the consumer spending, Amazon, MercadoLibre, Coupang, Amazon in Europe, Amazon in Japan. I have high confidence that they can make it work here. Yeah, Taiwan is tough because of the China thing, if they actually get to scale and it's a meaningful part of the operations. But when you see the potential here and you see the cash flow, they're still generating the cash piling up on the balance sheet. The stock's at about $40 billion market cap, and I think they can do about probably $5 billion in free cash flow within a few years if they want to.

Starting point is 00:41:41 Now, they might be reinvesting at that point. I mean, you got a cheap valuation, in my opinion, and a long runway for reinvestment, wide moat. Like, what else do you need? Yeah, and if you strip out Farfetch, the developing offerings were growing, I believe, 177% year over year. Still strong. So really strong growth, especially in the Taiwan business. I think it's, yeah, I like where Coupang's at. It's a huge chunk of my portfolio and I'm very comfortable with not really adding here,

Starting point is 00:42:12 but I would be if I did, if I, if I'm comfortable as well. Yeah. It is my second largest position and see no reason to change it. Hopefully we'll become a more expensive and a never sell position over the next few years. But yeah, this is one I will, I'm hoping to buy and hold for the longterm. Okay. Someone says, Taiwan people may have more cash with TMC growing, but maybe a material increase. Yeah, I mean, it's a richer market than I think some people assume.

Starting point is 00:42:43 That GDP per capita, income per capita is pretty good. And I think there's no concerns there about consumer spending. Okay, nine stocks that just hit their cheapest valuation in a decade. I'm going to go through all of them. and I'll just mention whatever valuation metric I think is relevant and you can chime back with what interests you. Number one, Amazon, EV to trailing EBIT 33.7 times. That is the lowest in a decade. Number two, Salesforce, EV to EBIT 35.2 times, EV to operating cashflow 19 times. so still fairly expensive three company we've discussed before here nike ev to ebit 16 and a

Starting point is 00:43:28 half number four i bet this one's piquing your interest block ev to i mean they're not very profitable so it's kind of hard to choose a metric here but gross profit ev to gross profit is four times number five lululemon ev to evit 13 times this one continues to drop which shocks me um number six evolution the one that has all the gaming uh like uh the iGaming casino operations that it powers a bunch of the other apps yeah the back end for online casinos right yeah and it's still a 20 billion dollar market cap business i believe it's based in sweden and it is very very profitable i remember looking at that like 70 operating margins or something like that um ev to ebit 14.6 so if you believe in the future of this business it seems like a very

Starting point is 00:44:29 attractive price number seven ulta beauty number eight wise and number nine veil resorts are you familiar with veil at all yeah owners of stevens bass in the seattle in washington state did you know that ryan i did i did yeah they uh decent business but the skiing skiing's tough the mountain resorts are tough just because of the each year you don't know i don't know you're the whim of the weather, I think, which seems like something that I would not want to be a part of. Yeah, it does make it

Starting point is 00:45:06 very difficult on any given year. Great physical mode, though. Yeah, very much a physical mode. It's hard to develop your own mountains. Exactly. Saudi Arabia tries, but that might be the only competitors

Starting point is 00:45:22 in there in the middle of the desert. I'll tell you what makes... I mean, I got three that interest me. one shouldn't interest me but it does one amazon two wise um although i saw their fees seemed high for a transfer we were trying to do and i hope they keep lowering those because you know you're supposed to be the anti-paypal not increase your fees to match them but the third one and this is one that's getting harder and harder to resist is lululemon i feel like it's gonna work here but i just don't i have a hard rule to not invest in apparel

Starting point is 00:45:59 yeah it's i think it'll work here as well it's it's very tempting but god feel yeah so far my no apparel rule has served me well and i think i might stick with it i yeah i think if it goes if it goes below 10 times i'm in i i'm gonna say it right now how about ulta 11 times 10.8 times ev to ebit i think it probably works but i'm a little bit more worried shockingly now they've done a little more research about competition i think online might they just have a lot more work to do to reinforce the customer i don't want to say flywheel but just customer retention and building any sort of mode i think it's kind of even weaker than lululemon's mode which if they have either of them have any uh and i think lululemon's yeah it's a brand mode i think it's

Starting point is 00:46:56 a good brand but brand modes are weak in my opinion any other earnings we want to get to or can i discuss my uh small cap of the week well i do have portillo's but why don't we save that for the end if we have time i think we will have time let's do your small cap of the week uh looks like an interesting one and maybe talk about our sponsor after as well Yeah, this was sent to us by a listener. He sent the ticker, he or she sent the ticker, EGHSF, and it's Eng House Systems, E-N-G House Systems. It's a group of small businesses organized into two different segments. I'm reading this off of something from online. The two segments are Interactive Management Group and Asset Management Group. The former, so Interactive Management, focuses on software for contact centers, customer service, and video solutions for different applications. And then the latter provides operations business support systems for telecom, media, and utility organizations, among others.

Starting point is 00:48:03 If you're able to share the revenue chart that I've got here in the document, it's actually grown pretty quick. This is a Canadian business. It's gone from $220 million in total revenue to $480 million of the last decade. However, as you would imagine with remote contact centers, growth skyrocketed in 2020 and 2021, but it's since kind of dwindled away and it's starting to grow again. And the difficulty here is that, and here's what kind of worries me. So two things. First of all, they're in the process of a SaaS transition. They are going from a traditional licensing model to a subscription or software as a service. And it's been okay. It's been added some pressure to sales.

Starting point is 00:48:55 But at this point, SaaS is like 70% of the business. So it should help them over the long run. The other part that concerns me is they are a, quote, serial acquirer. it just makes it hard to value. And I especially with small caps, and I'm kind of learning this now working in a software business. You are disadvantaged as a smaller software company, like in the contact center business. If when you are the premier player, those are the ones that those will be able to grow faster. I think I can't remember who it was, but someone came on her show and we were talking about the three big cloud providers and he said the big get bigger in

Starting point is 00:49:37 tech that's just really the way it works and i kind of didn't understand it at first but yeah you have so much more resources there's a lot of social proof as well in the buying decisions for a lot of these companies like they'll ask who are your other customers and they really want okay for some they don't care they they care about are your other customers competitors of ours because if they're using it then we'll use it and it's just it's easier for big companies to get bigger um so having kind of this hodgepodge of uh smaller assets scares me a little bit however they do pay consistent dividend the dividend has grown consistently since 2008 it's a nice chart very nice did you share that one as well it might be worth sharing i didn't

Starting point is 00:50:22 but let's just say it goes up and to the right i think people can understand that one it's at about a 3.6 dividend yield current ev to ebit is 15 times it i think you can get a solid return from here especially with there's the stability provided by the dividend here but i wouldn't say it's my favorite small cap that we've looked at yet yeah i or go ahead i was just gonna say and if you want to find reports on any of these companies like let's say someone pitches you a new stock, I'm telling you, just go to joinyellowbrick.com and just look up the ticker. You'll find some high quality report from someone that has written a report or discussed it on a podcast, whatever, across the internet. It's just like a really, really useful directory for high

Starting point is 00:51:10 quality stock pitches. Oh yeah. And hop on that email newsletter they have too. It's fantastic. I get one every day. They update the database and you can search for small and micro caps, which are so hard to look at and find. And again, it's all about saving time and helping you turn over as many rocks as possible. Yellowbrick definitely helps you do that. And it's yellowbrick.com. Link is in the show notes, which you can find at yellowbrick.com slash chitchat. We had a question here, have margins gone up or down? They've actually gone down. Gross margin was a peak of 72 down to 66 now, and operating margin was at 24 down to 19% now. some people might look at that as a bad thing but honestly that could be a good thing if you

Starting point is 00:51:51 think markets are gonna revert higher because the stock doesn't look that expensive on a trailing basis but yeah i can agree this one doesn't really excite me that much i like small caps and micro caps that are either huge growth potential or at a extremely cheap valuation and this one doesn't really seem to fit what those two criteria no it isn't all right you want to talk portillo's your chipote the next chipotle yeah that uh title i guess some under the hood stuff is one that actually worked quite well unsurprisingly on the youtube seo we get like 30 views every i think like 50 new views every week on that one and it was released six months ago. But yeah, Portillo's, people don't know, Chicago style food. It's been in Chicago for

Starting point is 00:52:42 multiple decades and now is trying to expand to new markets, specifically Texas, Florida, Arizona, and the Sunbelt space. And eventually all over, they have less than 100 stores. So it's still early in this. And there's a lot of things to say, prove out. And the stock is cheap because of that. I'd say it was a fairly boring quarter, 7.5% revenue growth, negative 0.6% comp sales. so they're facing a tough slowdown like a lot of other restaurants are. They said things have been choppy in 2024 and a bit unpredictable, which restaurants have said as well. They still think there's plenty of capacity to grow their stores. Margins are solid at their restaurants. And one key thing I saw in the earnings report that, not necessarily a surprise, but kind of a nice

Starting point is 00:53:27 little check, is that they have positive $41.6 million in operating cash flow so far this year. And I'm looking closely at that every quarter and making sure to track that because they need to have the internal capacity for CapEx spending. Two things I thought were interesting. I'll read these quotes from the conference call. They have been trying to improve their operations because they essentially went from like a small business almost or like a medium sized business. and now they're trying to set up their operations to be really prepared to go from 50 stores a few years ago to 500 stores 10 to 15 years from now. And that takes a lot of work. So one thing is they're talking about their managers and the bonuses they pay them. Here's the quote they say

Starting point is 00:54:12 on the conference call. Store managers at Portels are bonused on sales and the way it's communicated to them is the old Texas Roadhouse model. Not too proud to steal a great concept. They get a percentage of the incremental profit that they generate for the company. Texas Roadhouse has done quite well. So I think that's a good sign. And I like that they simplified the bonus model to say, look, your restaurant hits X number. We're going to give you a bonus. You get another one. We'll give you even more. They also talked about this is a negative, but maybe they tried to spin it into a positive as they said their customer experience at the drive-thrus has deteriorated. So on a positive note, it means a lot of people are visiting their restaurants,

Starting point is 00:54:53 right? It's a popular restaurant, but on the second, you know, you got to take care of your customers and not have them sitting in that line. So they said, quote, in 2019, we were almost a minute faster in our drive-thrus than we were in the past trailing 12 month period. And in a very quick period of time, we've carved back 15 seconds of that time and they see more opportunity in drive-thru improvement. So they think that can help comp sales. They think their new marketing stuff can help comp sales as well. AUVs are fine. They're sticking around 9 million, which is good. They haven't grown, but it's still best in class. And they've confirmed that the new stores are going to have lower square footage is the right term for it. So 20% less square footage, but

Starting point is 00:55:36 similar AUVs and the CapEx guide came down, even though store count is supposed to grow at the same amount which i thought was a good sign as well hopefully that can help with return on invested capital say all around not really any surprises in this quarter and i still think the stock stock is a good risk reward it's definitely a riskier one though i should say don't if you only like blue chip stuff do not invest in this one no it does feel like a concept that has legs and could scale nationally but kind of remains to be seen they are sort of employing the model already uh we just got a comment in here from andrew a friend of the show says what's up guys coupon earnings were great yes i agree and i believe the market agrees today as well brett isn't that

Starting point is 00:56:26 correct i think yeah they were down after hours but i think it's up about six percent last i checking out andrew is a part of the capital mind that's the right term right uh yes capital mindset or mindset capital i can't no no it's capital mindset capital mindset i believe maybe andrew quite good stuff uh uh very similar to us i know there's a lot of youtube channels out there that are very promotional and so yeah they do quality work and i like watching their stuff. So Ryan, back to Portillo's. What'd you think? It was fine. It was kind of a lackluster quarter. Like they added one restaurant. AUVs didn't move a whole lot. They're lapping difficult comps. So kind of hard to tell. I do want to talk about Uber earnings real quick. This business,

Starting point is 00:57:18 it's becoming a monopoly i think it's working at this point and it's becoming increasingly profitable this was a business i always wanted to hate but they've done a very good job executing and really i've only i've i've hated them just because of the adjusted ebitda metrics that they choose to use segment segment level adjusted ebitda which just is basically revenue the The CEO wears turtlenecks like Steve Jobs, which is a little bit of a turnoff, I've got to say, but that's not a serious turnoff. I just think it's kind of funny. He is a disciple of Barry Diller. Yeah.

Starting point is 00:58:00 Is that a good thing or a bad thing now with how bad IAC companies and their spin-offs have been doing? But no, I mean, he's done a good job. He has a great track record. Yeah. I don't know if there's too much to discuss here. I think the thing that's maybe an interesting development is that Uber has catered more and more to the affluent over time, it appears. I think initially when it came out, it started as a service that was meant to be solely for the affluent, exclusive black car services, get picked up from an app, very simple, felt luxurious. Then it kind of said, let's be the ride-hailing service for everywhere and kind of enter at a low price.

Starting point is 00:58:51 And now it's beginning to price out a lot of customers. And they even said like our consumer wasn't nearly as affected as a lot of the other businesses have described. Amazon on their earnings call this quarter said the consumer, especially in the US, is being more discerning with their spending. We've seen that for a number. Yep. We've seen it from a number of other companies as well. McDonald's, for what it's worth. McDonald's, Starbucks. Consumer spending is tightening. And Uber basically said they're unaffected. yeah and for any of the listeners you can hear the pleasant sounds of seattle and ryan's background there but now that that always goes away quite quickly uber is a good business and i think i would be very attracted to it maybe more attracted than even an airbnb

Starting point is 00:59:42 but i do like airbnb more for one reason that's because i'm pretty bullish on waymo sorry i was on mute there the do you remember a bit yeah the airbnb versus uber one it's kind of like one of those races that's going like back and forth where i was a i was at airbnb one uh winning uh airbnb was winning and now uber's winning and then like if you go back it was it's kind of flip-flops for for each year for context for all the listeners i believe in 28 no 2019 2018 or 2019 brett and i made a bet and i guess the bet is since over but it was who do you think would have the larger market cap in three years i think is what it was three yeah it could have been three maybe five and it was uber or airbnb i said uber brett said airbnb

Starting point is 01:00:35 i think they were like close to tied it was really close yeah now uber's pulled away a lot but yeah Uber is at $139 billion. And I believe, let's see, Airbnb, $70 billion. So about twice the size. So I don't know if I can take a victory lap on this since it's a little longer than our – Well, yeah, it could be a perpetual bet, almost like a psychological long, psychological short. It could be fun to have the update. And I think they're both fascinating businesses either way.

Starting point is 01:01:08 um but yeah someone said here if autonomous driving didn't exist i would be all in on uber i sort of agree i think that's a big uncertainty there that doesn't exist and waymo is sneakily expanding to a lot of surface area in some of these cities now so i i just if you like uber i would just make sure you have your eye on that maybe it won't matter but something to watch out for we have one question here i want to hit though ryan as we go over a little bit someone asked this on twitter and in here so i want to hit it they say hey brett and ryan how should we measure a company's capabilities and management's willingness to do buyback in the context of free cash flow and stock-based compensation which metric uh do you prefer the most buyback equals

Starting point is 01:01:52 do buyback if it's buyback divided by free cash flow buyback divided by free cash flow minus spc buyback minus spc divided by free cash flow buyback minus spc divided by free cash flow minus SBC. This is great audio, bro. Yeah. Sorry, I was just reading the question there. I would simplify things and just say, talk about the earnings yield without the stock-based compensation. But when you're looking at a buyback program, I like to think of it as you have a headwind coming in from the stock-based compensation and maybe look at the historical dilution rate. So say the historical dilution rate is 2%. But they're at a free cash flow yield or a earnings yield of 8%. And they're going to spend the majority of that on buybacks. So let's

Starting point is 01:02:42 say they can reduce share count by 6% a year, something like that. Just net that out. Take the 6 minus the 2 and say, I think that they can reduce shares outstanding by 4% a year, and then add that to your earnings per share and free cash flow per share growth targets. I like to do it like that because that's earnings per share growth and free cash flow per share growth are what is going to matter over the long run. It's not a perfect formula. And really, I don't know if there would be a perfect formula. You could do like buybacks minus stock-based compensation, but that's not perfect either. So because of the way, I mean, stock-based compensation isn't always exact in terms of like how much it's going to dilute

Starting point is 01:03:28 because there's and you don't know where the stock price is and you don't know where what how many options are going to be able to be vested right right sometimes it's forward assuming it kind of depends i'm not exactly well versed in the accounting for stock-based comp but it's not a direct correlation to dilution so i i agree with brett take the historical dilution rate so So share count has – you can literally just go on FinChat and just look at the share count and see the annual growth rate. If the share count has grown at 2% a year and you think they could buy back 6% of their stock, the comfortable assumption there is that the share count could decline by 4%. Now, the one caveat is if they're already buying back stock, you can have a situation where they are someone that dilutes, but they also buy back stock. well, then they've done the math for you because unless the valuation has changed materially,

Starting point is 01:04:21 now if the stock's gotten more expensive, maybe you should lower that buyback impact. But if it gets more cheap, you should increase the buyback impact. They'll already have a declining share count for you. And that'll kind of tell you like, look, if the valuation hasn't changed, if the buyback framework hasn't changed and the SBC hasn't changed, well, I think that's what they should be able to reduce their shares outstanding at the same rate as they did historically. Hope that makes sense. Hope that helps. It's always nice to do maybe a little more of an educational segment as well, instead of just riffing on the world of financial news. But I think that's going to do it here. So I will take us out. Brett and I are not financial

Starting point is 01:05:00 advisors. Anything we say or discuss here on Chit Chat Stocks is not formal advice or recommendation. Brett or I may buy, sell, or hold any of the securities discussed in this podcast. Thank you for tuning in, and we will see you next time.

Chit Chat Stocks - 9 Quality Stocks At Cheap Valuations; Buffett's Monster Cash Pile: Airbnb In Turmoil? (ABNB, CPNG)

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