Chit Chat Stocks - Big Tech Cash Flow Projections; The Current Macro Puzzle; Is $HIMS Flying Too Close to The Sun?

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. All right, everyone. Welcome in. This is the Investing Power Hour on Chit Chat Stocks. My name is Brett Schaefer. And if you're listening, usually Ryan does the intros. But today we have a special guest fill in for Ryan as he's away on work. It is Paul Cerro, lead investor slash founder slash writer over at the Cedar Grove Management Services.

Starting point is 00:00:58 Paul's been on the show before, covers a lot of different types of stocks. We're going to be talking hims and hers today, plus plenty of other things. But Paul, before I hit the rest of the intro, why don't you tell the listeners a little bit about yourself? Yeah, no, thanks, Brad. So my name is Paul Estero. I'm founder of Cedar Grove Capital Management, where I specialize in talking about or doing research and investing in consumer retail and basically consumer tech names um so a lot of the stuff that you either walk into a store and make a purchase that or online and make a purchase uh those are the companies i typically invest in and cover um so i've been doing this for a number of years i started off my career in wall street as well

Starting point is 00:01:39 as an investment banker so it's um it's been a very long process and and how things have materialized but always happy to chat with you guys yeah and yes yeah you have great perspective on those types of things is you always have opinions and aren't afraid to voice them. One of the frustrating things is when you have someone like a CEO or something on the show, it's great, but a lot of times they can be reserved. And we do like on these shows, giving away our investing takes. And we'll have any links in the show notes for all that. We're going to be talking hims and hers first, but maybe just a tease, what attracted you to the name yeah that actually goes back a while because when i left wall street

Starting point is 00:02:25 the first company that i worked at was a company called uh row roman and it's i say this loosely because they aren't the same but like they are the same it's essentially it's what him's and hers is except they're still private um so i already knew about this business i was already working for them i was already doing strategy for them and um i had equity by working there right because it is a tech company but then you know after i left in a few years on by and uh there was no real sign that bro was going to go public anytime soon i'm like you know what maybe let's get involved with him so i understand the business very very well i helped grow the business that they're in so it wouldn't be hard for me to understand so that's why i jumped in on this

Starting point is 00:03:09 name because i understood it very very well and when i finally did you know my homework on it many months ago to get to get brought up to get brought to speed um that's when i i hopped in and took a position and i've been following ever since yeah it's definitely an exciting company we're gonna get more details there we're probably gonna try just for anyone that does the typical power hour concept we'll probably do like maybe a third maybe 15 20 minutes on hims and hers and then we'll hit all the other topics and kind of news of the week, questions from the audience, all that good stuff. But first I need to talk about our presenting sponsor, Public. Are you paying too much to trade options? If you're not trading on public.com, the answer is yes. Public

Starting point is 00:03:51 is the only platform where you can earn a rebate on every option contract traded. And that's in addition to no commissions or per contract fees. There's no one else out there paying trading rebates so you won't find a better deal. Bottom line, if you're paying more than $0 to place an options trade, then you're paying too much. Switch to public and start getting rebates on every single contract traded only at public.com. Paid for by public investing, options not suitable for all investors and carry significant risk. Full disclosures in the podcast description. All right, let's run through it. First one I think that would be fun to discuss And it's a way it's an analogy of you've used before with hims and hers.

Starting point is 00:04:37 You said they may be flying too close to the sun. Why is that? Yeah, so back in May, they made the announcement that they were going to be going into the compounded GLP-1 market. For those who don't know, GLP-1s are the hottest, the newest and hottest drugs out there for weight loss that are FDA approved. However, when you switch into a compounded version, they are not FDA approved. And because there's a shortage going on of these drugs, compounded versions are allowed to be made while the shortages are going on. That does not negate any issues with how people perceive these drugs. It's just that they're technically allowed to do it.

Starting point is 00:05:22 So when I made the comment that HIMS and HERS might be flying too close to the sun, it mainly stemmed around what was said on the earnings call, the most recent earnings call, versus what other investors had widely determined would be the outcome of the future offering of these drugs. So what do I mean by that? So it was more or less understood that during the shortage of these medications, companies like HIMSS can compound these medications, sell them on their website to eligible patients after they've spoken to a doctor, etc. And once the shortage would go away, that means the compounding ability would go away, which would then mean naturally you would then just shift to selling the FDA-approved medication, the branded version of these medications. That's what many of us were just assuming, right? And there's a difference, right? Because the margins on compounding are going to be different from the margins on branded because you're actually buying from a manufacturer. So what ended up happening on that call, which when I was listening to it live, I was just shaking my head. I'm like, this is not what any of us were thinking was going to happen.

Starting point is 00:06:30 But essentially that management decided, hey, even after the shortage ends, we still feel confident we'll be able to compound this drug. And that alone just sent like the hairs on my back like up. Like that was not what was planned, essentially, in our minds. Right. And the problem with that is that even though the management can make a case that saying there's plenty of precedence for for this practice happening in the past. There's you're operating in a gray area. And when you operate in a gray area in health care, you do not want to piss off the wrong people because you really do not have any leverage when you're operating in a gray area. And you have to remember, too, they are an online telehealth company, right? Even though it's been around for since 2017, it's still a newer concept than you and me going to our primary care physician, speaking to them, getting our blood pressure taken,

Starting point is 00:07:30 et cetera, answering questions. It's still a very new concept. So when it comes to the leverage that these companies have, it's basically none. It's not COVID anymore where you're required to see someone. If the FDA want to drop the hammer on you, they can. If the government wants to drop a hammer on it, they can. If these companies like Eli Lilly and Novo Nordisk, who have an abundant amount of money, precedents, lawyers standing behind ready to go, you do not want to piss off the wrong

Starting point is 00:08:00 people. And them saying that pissed off a lot of people. And that's why I believe, in large part, the market sold off because you're adding risk to something that you didn't need to add risk to. and invest that's just we're just not comfortable with it okay so by going down this path what's the benefit why do you think they went down this path even if you from what you're saying like they should rather sell the i don't know we'll go v as a hymns branded thing if that's exactly what they're doing i know that's kind of what they do for other products where it's

Starting point is 00:08:35 essentially we're taking a copycat of viagra and we're putting our branding on it and selling it this innovative model, but what was their reasoning? Like if everyone is saying this is so risky, like what do they see as upside there? Okay. So to be very clear, I'm not against compounding. Compounding serves a purpose in the healthcare space. Again, for those who don't, you don't know, compounding is really what it sounds like. You're quite literally compounding something into something new or bits of pieces into something new. In this case, you are compounding different components into what would be a quote-unquote a new medication, new, for weight loss. There are reasons why compounding exists. Right now, it's because there's a shortage.

Starting point is 00:09:26 And in reality, compounding works because they labeled it very well, management did. They said that, for instance, right now, GLP-1s are injections. Perhaps you don't want to take medications that you have to inject yourself on a weekly basis because you don't like injections or maybe you just can't do it you're afraid of needles or whatever right so you can't participate in the current delivery system that's being used right now so what do you do you can compound a new system where um maybe it's an oral pill an oral an oral version of it right so now you put it under your tongue it dissolves you take it in that way right um perhaps there's there's versions where in the future it could be like a spray, right?

Starting point is 00:10:06 There's different reasons why compounding exists that can pull out the issues that you might have that are different than what I might have that would help us be able to take the medication. So compounding as a broader topic makes sense. Nothing against that. No problem. It's been happening.

Starting point is 00:10:28 It's been happening. There's precedence. The problem arises, in my opinion, that i've spoken to other people's opinions is that when you are compounding uh an fda approved drug that is still on patent for quite a while like you got was it six at the minimum you have six years left uh for at least wogobies um and then for just appetite i think it's 20 33 34 i always mix up these years there's too many years in my head my head the problem with that is that you still have two manufacturers who have spent a ton of money in R&D and the natural order of

Starting point is 00:11:09 things are the manufacturers who spend the billions of dollars to see if these drugs can become a success. It will typically reap the rewards for the rest of the patent life cycle and then generics pop up and you can do whatever you want. HIMSS has decided that they feel confident that they can continue doing it because of previous precedents that would be allowed them to, I say skirt because that's kind of what it is, skirt the way the natural order of things has been because the needs of the patients could be argued that a compounded version is necessary. That's what the issue is with compounding.

Starting point is 00:11:45 And that's why I had a problem with it. it. I want to make that clear because there's a difference between compounding in general versus compounding under what's going on right now. Yeah, it seems, I mean, we even had someone in the comments here saying, hey, interesting take. Management seems to say, I think there's a lot of precedent, which is before you said that. And when I hear a management team say that, it's almost like they're saying the same thing over and over, like, no, trust us. It's going to be fine when in reality like there are two different scenarios that could play out here where things could go really really poorly if they if it doesn't work out and yeah i could still go

Starting point is 00:12:24 it still could be fine but it introduces some risk here now i want to talk about someone asked this as well basically just a basic rundown of your thesis on hymns i know that part was a concern but in general you seem fairly optimistic about the risk reward here what is the basic overview of the thesis and how the company works and why you think it's an innovative business model yeah i think the business models it's honestly great um and i i don't say that from a biased point of view because i worked for their competitor i say because i when i took that job at row you know when i was learning about it and and deciding to eventually you know take the offer and join them i said to myself i'm like this is a this is a game changer like this this alone is a game i can see

Starting point is 00:13:09 this becoming something this isn't the the 12th cyber security firm to pop up or you know whatever the the benefit here for this model right because everybody asks oh people say like oh there's no moat oh no there is a moat oh wait well how wide is the moat okay well how deep is the moat you know the business model here is interesting because in the health care space the u.s health care space the u.s health care space sucks it is absolutely terrible so at the very tippy tippy tippy top of this pyramid, you have the value add of being able to speak to a provider very, very quickly, right? If you were to go and try to make an appointment with your physician right now, the odds of you being able to speak to them in the next 48 hours are slim to none.

Starting point is 00:13:54 If you needed to go talk to someone on HIMSS, again, for the conditions that they offer, you talk to somebody within 24 to 48 hours. That's how quickly you can talk to somebody. So right off the bat, the value proposition is being able to talk to a licensed provider from the comfort of your own home without needing to go. Again, this is for certain conditions because they don't offer everything, but without having to wait a few weeks, go drive out, talk, et cetera, et cetera. So time is an important one. Secondly, the health care industry really, for whatever reason, I truly don't understand this. lean heavily on insurance to provide these health care services and that means and for some people that could be very beneficial right if you can't afford to to do something that's where your

Starting point is 00:14:46 insurance comes into play um the problem with that is that it gets overly used because if you were to go to your physician right and you were looking for um some type of erectile dysfunction medication, right? Like you can get prescribed it, right? And maybe there's a copay with your insurance, again, depending on who it is. But there's always, in the healthcare space, there's always a cash pay option. That means literally you take the cash out of your pocket and you pay them and that's how you go about your day. There's no deductible, there's no copays, there's no insurance claims. It's just, oh, it's 20 bucks? All right, here's a 20. Done. Move. You're on. Now, the HIMSS model has allowed patients to go onto their platform, go see or go talk to a provider for the condition that they offer, right?

Starting point is 00:15:37 In this case, we're using erectile dysfunction. And for a cash pay price, cash out of the door, they can get their medication for dollars and not having to go see someone and potentially go through the hoops of insurance. That value add now can lead to cost savings. And there's an example, and I wish maybe you could tag it in the show notes or something, but there's an example that I posted the other day about PDMs, pharmacy benefit managers, who I think are a disease to this healthcare industry. They essentially help inflate the cost of medication to everyday people like you and I, because that's the way the system works on an insurance coverage basis. whereas if it was from a cash pay basis it'd be much cheaper so that's what hems is doing it's like hey you like the condition you can talk to a doctor really really quickly you can if you're if you are eligible you can get prescribed the medication we're going to offer it to you at a

Starting point is 00:16:35 very attractive and affordable cash pay prices and we'll ship it to your door uh with with free shipping i think it's like 24 to 48 hours again depending on what it is and where you're located So it's it's speed. It's the streetness. It's the cost effectiveness. It keeps it keeps piling on. And the more you go down that food chain with conditions, the more advantageous it gets for people who have multiple conditions or for people who, again, don't have insurance for people who can can just benefit from being able to take a compounded version, which is what they've been doing. right? So on a business model basis, there's a lot to like, but I'll pause there because I know I was rambling for a little bit. No, I mean, that's a fantastic overview. What's interesting is that given how frustrating it is to work with the insurance part of the industry as a consumer, and I'm sure as the providers as well, the bar is so low and they can still be at a higher price

Starting point is 00:17:35 point, at least from what I remember researching it earlier this year, I haven't kept up with them that closely, but they can, say, offer something that might be more expensive than you would have if you were dealing with insurance. But the time saved and the headache saved, it seems like the overall value proposition is there. I'm going to share a slide here from our friends at FinChat. Oops, one sec. And it's basically showing the gross profit growth since, I don't know, I think it's 2017, 2018. Essentially, then they weren't really earning any gross profit, But still, the revenue has grown at a similar rate. And since 2018, until the last 12 months, gross profits have grown from under $10 million to closing in on a billion dollars.

Starting point is 00:18:19 Compact annual growth rate 136%. I mean, this is one of the most impressive growth stories out there, perhaps still underappreciated. I think the question everyone would ask when looking at this is, okay, can this continue? Have they hit the easy, because I know people talk about them really just offering a lot of, you know, like erectile dysfunction stuff and ADHD medication and stuff like that. And maybe has that market been saturated or, you know. I will correct one point. They don't sell ADHD medication. I will correct you on that point.

Starting point is 00:18:56 Okay. That's a, that's a, that's an area where even I have issues with, but to your, to your point is the insurance, the healthcare industry is, is there's probably gonna be people who are disagree with me on this, but the healthcare industry is set up in a way to disguise itself as helping the everyday person who has insurance. but it's set up to not be the most advantageous for patients and the example there is i gave with the pharmacy benefit managers who hike up the prices because that's the way the natural order of flow works between drug pricing and manufacturers and pharmacies etc etc um so when you're looking at what they're disrupting it's that that entire that entire flow is we can get more affordable access to healthcare to people who need it without having the need to go through insurance. And again, the more you use insurance, the more premiums go up, right? The more unhealthy

Starting point is 00:19:59 you are, the more health insurance premiums go up. So that's what they're disrupting. That's what's making them successful. The second that they probably go into insurance is the day I will probably dump my entire position. I have zero interest in backing a company who wants to go into the health into the insurance business if they take insurance as a form of payment honestly i'm out there's there that that defeats the entire purpose of this business model um that's number one so when it comes to the future though to answer your question when you when you're when you're making this startup from the beginning if you if you don't take insurance and you take cash pay you have to go for conditions that are

Starting point is 00:20:41 large whale size that has a huge market that you can penetrate into. They did a very excellent job in picking condition that has very high stigma attached to it. So if you talk about erectile dysfunction, that's a very touchy subject to a man. If you tell a guy, hey man, I can't get it up, that's a very self-esteem hitter to you. So what do you need? You want to make sure you get help discreetly which is exactly what they were doing right you see someone online you don't go to the doctor's office and be like hey doc um i drove all the way here and i can't i can't get my uh can't get my john up you know it's it's it's it's kind of depending on who you are right it's the meaning um so there's a highly stigmatized highly stigmatized conditions that can be cash

Starting point is 00:21:25 pay that can be done online right it's not everything can be done online um and you start from the biggest and you work your way down right so you have erectile dysfunction then you have premature ejaculation then you have hair loss right then you have um um for like women it might be like your eyelashes with the teeth it'd be like skincare maybe you have uh eczema or some type of acne um you can get your birth control prescribed online right you keep going down the list because you start from the biggest you keep going down the list of other conditions that might actually be a side condition of a primary condition right so like people who are now it's people who are overweight have problems with erectile dysfunction so you can be treating

Starting point is 00:22:06 you know two things with one or one thing with two things you know i'm saying so it's a combination of things now so like the more you keep adding onto these conditions strategically you create this platform effect where i'm came in for one thing initially but in two years you've launched three different things that now i can apply to right i can get my hair taken care of i can get my erectile dysfunction taken care of i can you know get my weight loss taken care of that's how it keeps it keeps going but there is a limit to how successful that can be yeah totally makes sense i mean and you're not going to grow at 100 forever we have a couple more questions like you know revenue growth the the rate of revenue growth is going to be going to slow down eventually i

Starting point is 00:22:46 have a couple of follow-ups here for some people that i think make a lot of sense to ask about here's one that i think is interesting would hymns have been better off skipping glp ones maybe i'll say right now no no that at this point at this point the the news that came out yesterday with eli lily 94 it dropped it dropped the um the conversion rate of pre-type 2 diabetes patients by 94 of crossing the diabetes is insanity you've never seen numbers like that for for a drug to have that effect is crazy good, crazy good. So do you think about how successful these drugs have been? It would be irresponsible not to go into that market, right? I think, depending on who you ask, I think there's a difference between staying the compounded route versus going with

Starting point is 00:23:45 the branded products, right? The branded Wagovi, the branded Zepion, the branded Manjaro, the branded Ozepic, but it's tables faked to be, if you're in healthcare right now and you're offering these drugs, or you're trying to help these conditions, you need to be in this market. That's just what it is. And hopefully you're doing it in a responsible way. Makes sense. Yeah. And what do you think about their marketing leverage? I know when I looked at them, they weren't burning a lot of money at the time. I think they're pretty close to break even actually, but the biggest expense line was marketing. They said they were going to keep growing them because they believe that they're acquiring really, really valuable

Starting point is 00:24:22 customers and that given their scale, they can kind of push out a lot of the startups that don't have the firepower they do. What do you think about that strategy and their talk about, you know, customer lifetime value values? No, it makes sense, right? So in the very beginning, you know, it's very questionable because when you're trying to prove a new concept, marketing is going to get very, very expensive, right? Telehealth was a new concept back then.

Starting point is 00:24:48 See a doctor online? No, scam. Over time, though, what really juiced things was COVID. If COVID didn't happen, we would not have seen the pull forward and adoption of telehealth that we did. So when you think about what the future can be with the marketing leverage, they're in a very good position because they've had the years and the reps to build up the platform to almost 2 million subscribers. So that when it comes to adding in a new condition, they're spending an aggregate they're spending less because they probably already have somebody on the platform who suffers from that new condition so it's not spending a hundred dollars to acquire two new people it might be spending fifty dollars to acquire one person because one

Starting point is 00:25:33 person's already on your platform you know but what's interesting and i tried pointing this out on twitter before everyone starts ripping me apart is that it's such a competitive space that the bidding for the keyword searches, whether you're bidding for the weight loss keywords, GOP1s, Zipout, whatever, it's gotten more expensive because it's such a hot market right now that so many companies are being involved

Starting point is 00:26:02 that it's just getting more expensive. And I brought up a very important fact that if you look at the aggregate total spend on a quarterly basis for marketing and the net subscribers that are added on a quarterly basis, it's actually getting much more expensive for them over the last five quarters than it was the previous five quarters,

Starting point is 00:26:19 which if that trend continues, is not a good trend. That means their customer acquisition costs are going up. So even though broader marketing expense as a percent of revenue is going down, that does not mean that it's getting cheaper to acquire customers. It just means that the dynamics have shifted about where that revenue is coming from

Starting point is 00:26:36 and how the marketing is being spent. All right. Two final questions, because we can't talk about HIMSS for this entire show. We'll get some other topics here. But for anyone, we're not going to talk valuation much, but for anyone interested, definitely go check out Paul's Substack and then the Twitter slash X account as well. All the links will be there and I'll have them in the show notes. You're pretty active on Twitter, so you have all the links there and on Substack as well. the questions are what are the biggest risks for hymns or maybe the one biggest risk and does it have a competitive advantage or are you thinking it will build one over the next however many years uh you mean competitive advantage in just kind of any competitive just any competitive moat that investors can bank on yeah yeah so to answer your first question the biggest risk that i see right now there always is always lurking in the background so i'll give you two there's always lurking in the background which is regulation

Starting point is 00:27:33 right if you if you take a concept and you do wrong by it like i said you don't have any leverage the government will come down and drop a hammer on you and they have right if you look at done um done and cerebral who are both that's essentially pill mills for adhd medication the dea when the dea raids your offices you are not doing right by patients you're doing right by your business yeah yeah so regulation was always a thing right bad apples create bad outcomes for everybody especially when it comes to health care because people's people's lives are at stake you don't mess with that um that's always in the background but the real risk that i have now which i wrote about in my reports everybody is that if you're going to continue operating in a

Starting point is 00:28:16 gray area you better have certainty that you can get away with operating in a gray area because otherwise, like I said before, you're going to have armies of lawyers who have mounds of cash behind them to sue you into oblivion. Even if they lose, they can still sue you for a very, very long time and keep you tied up in litigation. Or if you screw up a little bit, government entities, the FDA will come in and be like, no, you need to stop cease and desist. It doesn't matter if you own pharmacies. It doesn't matter. We've had complaints. We've had risk to patient health outcomes, you're done. That is now the problem. I'm not saying they're not doing a good job at all. I'm just saying that that is now the dark cloud that is over

Starting point is 00:29:05 the company at the moment. All right. And what about the moat? I know it's a young company. Oh, right. Sorry. Yeah. So the moat. No, they have a moat. No. I think it's silly to say that they don't have a moat. I know there's people who come in here and say, why wouldn't another company just come in and spend you know tens of billions of dollars or tens or tens of millions of dollars on marketing and you know win it's like it's it's not it's not that easy right because then when you think about current existing players they already take insurance when you're mixing an insurance business versus a cash pay business those two don't mesh you know it's it's they're they're it's like trying to grind two rocks together and you know trying to get some type

Starting point is 00:29:48 of outcome other than sparks um so when it comes to a competitive competitive moat their ability to be in a market where they have built up again almost two million subscribers treating various different conditions for a long time now they've built trust they've built uh they've they've established that the treatments that they offer for their conditions are efficacious right they've offered that quick turnaround time of seeing a provider they've offered a quick turnaround time of getting a prescription medication sent to you, you know, and they've shown that over time they will continue to add new conditions. So even if you can only factor in for one today, that does not mean it's going to stay one tomorrow. So there's a lot of things going for it. I'm very

Starting point is 00:30:31 excited to see what the future holds, but no, they have, they have a moat. And if anyone tries to go into that, it's going to be a very costly one to like defund them. Right. It's not something you can replicate overnight. You could replicate the marketing, but you couldn't, you couldn't replicate everything else they have in it. What's interesting and what I got kind of got excited about looking at them this spring is the fact that there's a lot of potential to expand that moat over the next five to 10 years. But yeah, that was a fantastic discussion. We're going to move on. If anyone is interested in the live chat, I put the link to the Cedar Grove Asset Management Substack, and then I'll put that in the show notes as well. You can definitely find

Starting point is 00:31:08 any of these write-ups across the newsletter website. But the best place, and I should say, for finding all sorts of write-ups across the internet is our second sponsor of today's episode, and that is Yellowbrick. This episode is brought to you by our friends at Yellowbrick Investing. It is an aggregator of the best stock pitches across the internet. They track thousands of blogs, newsletters, fund letters, podcasts, and more. They collect and summarize the best stock pitches and bring them to you in a single place. Think of it like a modern value investors club, but much better. We genuinely use Yellow Brick over every single week really at Chitchat Stocks to discover new small cap ideas, especially ones that are undiscovered that people have written

Starting point is 00:31:53 about that we wouldn't find anywhere else. Try it for yourself. Go to yellowbrick.com, excuse me join yellowbrick.com slash chitchat and search a company or ticker you're interested in that's join yellowbrick.com slash chitchat all right paul what do you want to talk about any earnings that seemed exciting to you i know we're pretty much done with earnings nvidia is kind of a i don't like that they're a three trillion dollar company that reports on on august like 28th but any earnings that found you know positive or negatively that were interesting to you this uh core um you know because it's funny it's not so much that because there were ones that i was that i was um shocked just for my own purposes because i have a position in them

Starting point is 00:32:47 which they've worked out so far but what's interesting is that like peloton is coming up um tomorrow actually i think and that is one i know i know you and i have chatted about it or you it's the very least you see me tweet about it quite often um and i think that if we don't get good if you don't get positive outcomes there uh tomorrow i i really don't know what the future of this company is um but if we're talking about like companies that have reported like even like Macy's today like Macy's was interesting um I think it's getting sold off what was it like 10% 12% right now something something dumb Home Depot Lowe's not doing so great you know it's kind of like a warning sign hey people people aren't going to be um doing home improvement as a home

Starting point is 00:33:34 improvement project as much uh you know there's only so much you could blame the weather for right so it's like what's really happening and you get the labor you get the labor stuff going on right now put the revisions this morning there's a bunch of stuff and honestly it gets more confusing day by day yeah because if you look at those ones on the the negative side you have then target posting pretty good numbers walmart posting pretty good numbers amazon posting pretty good numbers maybe those are i think the perma bears might argue that oh well people are just trading down and that then the recession is going to hit after but i've come to learn that we should maybe just look at those as almost a 50 50 coin flip because these same people have been calling

Starting point is 00:34:19 for recession since the end of 2021 or basically when interest rates started going up and maybe they'll be right over the next year but they've been wrong so far so it's like okay i don't know add that because for context yeah you know this like i was bearish in 2022 i was like you know what this time is running out right there's only so much that consumers can handle and you know what i was i will i will eat my words i was wrong on that it's seeing that the excess savings did not dwindle the way that everybody thought they were going to dwindle um the pullback in spending did not occur everybody thought it was going to occur and that's why you have but now but now you see in 2024 are the hits and misses for these companies right you had you had walmart doing

Starting point is 00:35:01 great you had target finally reversing after how many declines uh over the last couple of It was a pretty easy comp, yeah. Yeah, okay, there's that, right? But then you have certain companies that still don't make sense to me, right? If you're looking at Kava's valuation, who is bidding up Mediterranean bulls this much? It's a $14, $15 bull. Why are you paying $33 million per store when it only generates less than $3 million in revenue? What are we doing here, you know?

Starting point is 00:35:31 and then you have um uh ceos getting getting shot left and right you know like the starbucks getting out and then pulling pulling chipotle ceo like no one saw that coming right um so you're just seeing you're seeing cracks in places and you i think everyone's still trying to determine is that because there's a broader fundamental problem in the consumer or because you know the the what's the expression the rooster has come the crow has come home in a roost i don't know some some farm analogy where like the day of reckoning has finally come to these companies who have just poorly managed right we don't know that because there's so much noise going on between companies are doing well companies that are doing bad and companies that are just alive

Starting point is 00:36:12 right um and i think that's the problem and i think if anyone has any confidence one way or another i feel like they're just trying to sell you something but you know that's that's my that's that's that's my opinion from a former bear turned not fair turn yeah turn neutral the neutral then yeah yeah it's funny enough we did have a question on macroeconomic stuff uh tyler does ask these questions usually ryan and i don't follow that that much so we don't have much comments but i know you follow it a little bit more here's the question you kind of talked about a little bit does he think we are entering a recession given the triggering of the psalm rule i can't say i know what that is uh the slowing labor market and the inverted yield curve one thing i'll say

Starting point is 00:36:55 before you start the inverted yield curve i find interesting because it's been the longest in recorded history yeah actually i think if i can pull up the spreads i think the three the three uh the 10 year three month is still inverted by a lot i think recently the i think the two tens uh became uninverted for like a minute um but no to his question it's like yeah so i i wrote i wrote a report on the som rule um except i broke it down a little bit more right so the som rule is based on a national level about the moving averages of unemployment over time yeah it got triggered this past month and historically speaking yeah i think it's had like maybe like it's had one false positive but the thing is it wasn't false because the recession

Starting point is 00:37:42 came two months later um um so it was like a delayed reaction i guess so on a national level what i mentioned in the report is that yeah some got triggered which would then mean okay we're entering recession the problem here's the problem though when you look at the fundamentals of how an employment has changed in this cycle versus previous cycles it's actually pretty dramatic And what I mean by that is due to immigration. If you look at state level data, there has been a ton of states that have seen a very sharp rise in immigration, which has been skewing unemployment figures. Right. Because you're getting a surge in manpower that otherwise would have been sending things the opposite way. But because they're keeping things afloat and adding to the economy in one way, shape or another. On a state level, it doesn't look bad. That's what Claudia said to Claudia, who's the person who came up with the sum rule.

Starting point is 00:38:41 She said, listen, I know it's being triggered, but you need to not treat that as a binary outcome because of what's happening underneath. that has not really happened in previous situations. I am nervous about a slowing labor market. Don't get me wrong. I think the numbers that came out this morning kind of allude to that. But it's nervous because I talked to my friends. Some of my friends have been without a job

Starting point is 00:39:07 for sadly like six months, seven months, some are even longer than that, you know? And I feel bad for them. It's not they're unqualified. I mean, these are my friends, ex-Wall Street friends, current Wall Street friends, MBA friends, you know? it's tough and um you hope that the dominoes don't continue falling as if they do you know i just i don't know if the outcome is going to be a good one so i am i am nervous about that but i

Starting point is 00:39:31 just don't think the psalm rule right now is the cleanest indicator and that's mainly just because of what's happening underneath the hood all right yeah just with all those things there's so many variables i mean we just had the last two years the introduction of ai that could potentially lead to people or to companies, not any as many back office workers, stuff like that. And there's also just a bunch of other things on top of that that could impact all these things. But I will say, I don't know why I have this feeling, but compared to 2022 or 2023, I guess I would be way less confident proclaiming that a recession won't arrive because it seems

Starting point is 00:40:11 like there's been a lot more weakening from the company's perspectives this year, although it doesn't look absolutely terrible. I mean, we still see things like, for example, I think a good indicator would be or good indicators are Booking.com, Airbnb, MasterCard, Visa, American Express. They have really, really good indicators on the full economy and they're all slowing down. Now they're still growing, but it's not as good as they were one or two years ago. Some of that's inflation. I mean, this is why these can kind of get circular because like, OK, well, how much is it is inflation coming down? how much of it is actual consumer the the health of the economy it all seems like a mess to me but

Starting point is 00:40:52 twitter's twitter's filled with opinions on it right because people will show car delinquencies they'll show credit card delinquencies but then you zoom out they'll be like okay but which age groups right which regions right um how about an aggregate right there's always a counter argument to an argument whether you're a bull or a bear and and it's tough because like there was oh i forget i forget who it was but he's he's dead on accurate there is more satisfaction in being right to a downside than there is being right to the upside even though the reward is usually not as advantageous because it because again a broken clock is right two times a day but what did it take you to get there you know what i'm saying so um it's it's one of those things where i think

Starting point is 00:41:41 there's gonna be there's so many people who want to be like yeah i'm right this is the inflection we're heading lower okay and if you're wrong which i was wrong in 2022 you know you can miss out on an epic run right and to kind of prove my point i could i could be cautiously optimistic on the economy right now and i have my worries right with labor but a lot of my portfolio is discretionary names it requires people like you and me buying things so if i'm holding those names i either a don't understand the risks that are happening right now and i'm completely wrong or b i'm comfortable that if there is any type of event that these companies are well structured enough that they will recover and i'll be fine right um lululemon being one of them so um

Starting point is 00:42:28 expectations on that one have come down so much so yeah i mean that's that's its own pandora's box but you know it's i wouldn't be in those names and i didn't feel like the long-term success of them was a very viable outcome. And that's a point because in recessions, you want to stay as far away as you can from discretionary. Okay. I'm going to share this chart here. It was tweeted by Modest Proposal, anonymous account on Twitter. And I believe it's from some sort of investment banking deck. For the listeners, it lists, I think it's probably something on Amazon just because they're highlighting Amazon here. And it lists their peers. They include DoorDash and Uber in here, which may be a bit aggressive, but they basically

Starting point is 00:43:10 have Apple, Microsoft, Google, Meta, Uber, DoorDash, Netflix, Walmart, Costco, and they do an estimate on 2026 free cash flow per share. They do an estimate on 2024 through 2026. So I guess that'd be a three-year free cash flow per share growth or essentially earnings per share growth. And then they have their estimate for 2026, or I think it is 2026 free cash flow multiple based on today's price. I think that's right. And then they compared it to Amazon. Now there's a lot of numbers on here. I think what's interesting is the only company they predicted less than 10% free cash flow per share growth is Walmart at 9% when buybacks aren't really even going to help these uh stocks that much but i'm curious what you think of this table and anything stands out

Starting point is 00:44:02 to you as too extreme or makes a lot of sense i mean walmart's getting hit because of the rising cost associated with running their stores um you know they tried they tried doing those like those self-checkout lanes and stuff like that it's not working out you know you keep seeing all those ghetto videos of people doing things in walmart whatever but like walmart's still a great business Costco that one's that one's always been interesting to me because we keep bidding it up and I think it's for so long people were anticipating the the the hike in membership prices and then it finally came even though it was so minuscule it was kind of like a nothing burger um you know Netflix killing the game and streaming Dash I still don't know how Dash is a thing you

Starting point is 00:44:45 know I I I shared a I shared a post about like how much extra it would cost you to order from dash if you notice you just picked it up and it's 100 like how many how many people can continuously do that on a regular basis but at least for the top at least for the top four like so apple microsoft google meta it's one of the situations where like yeah they're spending a ton of money on r&d for ai mainly because they have to it's table stakes at this point and if you're looking at some large cap managers large cap funds they need to be in those names right i mean you you You can't be a fund, a large cap fund, and not be in those names. Because then how else are you going to explain to your investors, oh, you know what?

Starting point is 00:45:30 We missed out on market moves because we didn't hold enough of the top five companies. People are afraid of losing AUM, right? They'd rather chase than lose AUM. That's the game. And the thing is, that's why the passive investing has become a thing. I can't get in trouble for missing out on something if I didn't miss out on it, right? If Apple goes down, you know, hey, that's the broader market. That's the whole market coming down because Apple makes up such a large portion of it, right?

Starting point is 00:45:58 The top five make up, what is it, 27% or something like that? It's a massive number. So that's just what I see on that. But I don't know. I don't believe in Apple or Team Android. Yeah, I wish I was Team Android, but blue messages apparently from the person that wants that. But yeah, it's interesting. I think my first reaction looking at that chart is I guess I'm always more pessimistic on Apple than the average person.

Starting point is 00:46:24 And 15% free cash flow per share growth for Apple doesn't seems very optimistic to me. And I think if you look at that, you have to be optimistic on the economy because or just the stock market in general. because if the if apple grows its free cash flow per share by 15 and then google and meta which are basically like you know digital advertising for all of retail spending and whatever it's a big barrier basis on uh or it's an indicator for e-commerce spend stuff like that that if they're growing at double digit rates for the next three years the economy has to be fine And I think Apple, if we're thinking about consumer discretionary spending, I don't know, it just seems to me like those are pretty aggressive numbers, unless you really think that you have some sort of macro take that the economy is going to keep growing so much. If you look at Apple, right, I mean, India is the next biggest market.

Starting point is 00:47:27 Granted, it's not as flourishing as China, but there's a reason why they're moving manufacturing, not en masse, but they're starting to move manufacturing from China to India, right? You don't have the risks associated with being a part of the Communist Party over there. And India is so ripe for disruption, right, which eventually I can imagine, you know, Africa be the next one down the road, right? So you have like these effects here because you look at the American markets, they've raised prices as much as they could. They've tried to launch new iPhones as much as they could. I think you're starting to see this expansion of people holding their iPhones for longer than normal, right? It's slowing down. It's not every year now.

Starting point is 00:48:02 It's every like 1.46 or something. You know, it's getting longer because people can't afford this stuff anymore. Again, it's all noise because we actually don't know what's happening. Yeah, and I mean, the Vision Pro has been a flop. Yeah, I would think maybe that could be someone's thesis for that India and other markets will be somewhere where Apple can take a lot of share. But given the uncertainty of that, I would think that the stock deserves a lower multiple. I do want to talk more about Lululemon. We had multiple people in the comments asking about more thoughts on the Lululemon thesis.

Starting point is 00:48:36 But before we do that, I want a reminder on our friends at Public. Let me go find this here. Why can't I find the ad read? oh yep all right here we go dead air yeah yeah all right earlier in the show you heard us talking 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 paid for by public

Starting point is 00:49:18 investing options, not suitable for all investors and carry significant risk, full disclosures and podcast description, us members only. All right. Let's talk Lou lemon to close things out. I think we got a little over 10 minutes here. I'm going to pull up Finchat and get so many, some charts up here anything i guess on the thesis you know people seem to think that the woman's business in the u.s is struggling i don't know do you disagree is it more of a just temporary slowdown or is it kind of you have any kind of unique thoughts on the company so lulu lemon has done a really good job at changing the game of yoga pants and athleisure for the last 20 something years um 20 no almost 20 years anyway they make a very good product a long time they make a very good

Starting point is 00:50:11 product a lot of almost all of my workout gear exclusively is lemon because it's good it lasts it lasts me a long time and i just like it um the problem now is that you know with so much easy success i the recent designs have not been stellar and jp morgan pointed this out like some of the stuff they come out with is very unflattering the colors that they've picked are very uneventful you know and when you're comparing it to an aloe or you're comparing it to a viore which i know is what everybody keeps talking about they have some pretty hot like designs you know so when you're talking about what's slowing down i'm i'm on i'm in i'm of the camp that it's more so design poor design choices not quality issues right it's not like

Starting point is 00:51:00 fatigue from Lululemon it's like if if you if you make something and it doesn't look good it's a fact of life no one's gonna buy it you know so um even though like yeah even using your chart they've been they've been doing great but I think they're hitting a point where it's like the creative director left um was it earlier this year it won't be for another few cycles that all the purchase orders from previous maybe bad decisions get run out until new stuff can flow in and hopefully they can reinvigorate interest again. Yeah, it makes sense to me. I really have a hard rule with myself that I don't invest in apparel companies, but Lululemon is making it very hard to follow. I think the stock is going to, it makes a lot of sense why it's going to

Starting point is 00:51:47 work from here. People are really worried about just the next few quarters. And if you have a time horizon of really just a couple years it can it seems like given their durability over the last 15 to 20 years they've established themselves and not a flash in the pan it's been durable growth of the last i think decade i know they had a weak spot maybe in 2015 2016 and if you look at the numbers they've grown i'm sharing the chart here for the listeners that are watching i should know that you can get a discount on FinChat using our link finchat.io slash chitchat link in the show notes. Definitely check them out. You get charts like this. If we look at their different geographic KPIs, you have America's revenue. It's grown at 6% since February 2020. That might not be the

Starting point is 00:52:36 best comp because I think we should probably use trailing there because of just the seasonality of apparel. So if we look at trailing for America's revenue, it's 25% growth. And there's been a slowdown in recent quarters. Yes, women's in North America was probably flat or maybe down year over year last quarter. But if you look at outside of North America, it's been an absolute home run, 47% revenue growth and a really, really long runway to continue that growth. I mean, the Chinese market is growing fabulously for them and that economy is doing not great right now. it's definitely not firing on all cylinders yeah it's um i would have a different feeling if i know they still if they didn't make a good product anymore but their products are still very well

Starting point is 00:53:26 made right it's not like high quality the material and stuff yes yes it's not like oh you know they've changed fabrics and now it's ripping much easier no it's like no it's still high quality stuff right yeah arguably it's still expensive but you know you pay for higher quality that's just that's what it is yeah and is the thesis just hey look stocks down i think like 60 maybe maybe it's 50 percent earnings ratio is pretty cheap and they maybe even have some depressed margins right now and we're going to get a revenue re-acceleration once they fix these uh design problems over the next couple of years is it is it kind of come down to just a simple thesis like that i'm hoping so um i think i'd be more concerned if they didn't still make a good product this is that the designs

Starting point is 00:54:18 just suck you walk into a store i even asked the person i went to the store i'm like i feel like i'm kind of just like in a very plain box of crayola crayons you know it's there's nothing like whoa where's the wow factor you know you walk into an aloe store and you're like damn these are these are some really cool designs so you just hope to get into that level right you know um so that's i'm hoping to get back on track yeah you go to a little lemon store it's still pretty crowded people share that all the time i would say there's still traffic to all these places and maybe the throughput is not going as high because as you said it's not as exciting as designs right now but yeah i think that i think it makes sense it's a weirdly simple thesis but

Starting point is 00:55:01 one that gets discussed and has almost turned into a battleground stock on Twitter. Although you can find, you can turn every stock into a battleground one if you want. We have one question. I know I've been asking you a lot of questions, but I think it's kind of happens like this when we have a fill-in guest for Ryan. What's your favorite company, excuse me, what's the favorite company that Paul owns and why does he like it? Tyler is asking that. Oh, you know, it's funny. it's so simple there's a company that i i bought into it's called mama's creations ticker is m-a-m-a and it's just it's grocery it's deli it's deli it's fresh deli foods um and they were founded off of um uh meatballs italian meatballs and it's such a simple business model and

Starting point is 00:55:55 the management team has been executing like crazy and i think it's probably the company that i worry about the least but i'm most excited about because there's just so much more runway for them to go and i think they're up they're up how much in the yeah like we like i mean granted some of that was an acquisition that's why you see the large increase okay but they just for something as Simple as fresh deli food. They have been killing it. Yeah, still small. I'm seeing $100 million in revenue, market cap $300 million.

Starting point is 00:56:30 Stock is done. I'll do total return. I mean, even they had a big, really flat period when they went public in 2013 or 2014. The most important part is there's a management shift in the middle of 2022, I think. I believe. I thought you're right. So when you look at the chart from 2022 onwards, you're like, okay, great. I see where the inflection happened. Yeah. And we've seen an earnings inflections too. It's quite interesting. I never heard of this one before. Could be a small cap that Ryan can look into. He does a small cap of the week. Yeah. That's fascinating. Super easy to understand.

Starting point is 00:57:06 Yeah. It seems like, yeah, it's a consumer goods product. I mean, what's led to the success, you think? Just the fact that it's fresh? Have they gotten any good distribution deals? They keep growing at their store counts. They keep growth by acquisition. So they're launching into new product categories from acquisitions. So they do the meatballs, the prepackaged deli foods, olives, salads, et cetera, et cetera. so um as as the category in in grocery stores continues to expand they're they're a pretty decent player and they're just continuing to grow and i think uh under adam the ceo who was he was brought in um has done an excellent job in the past of turning around companies and i think he's done a very good job so far and i'm happy to back him all right definitely an interesting story yeah And I guess maybe this is more of a feeling on my part, but it seems to me like specialty healthy grocery stores like Whole Foods, I guess Trader Joe's is in that mix, but Sprouts Farmer's Market, I'm forgetting about others.

Starting point is 00:58:13 Killer deal on you guys. You guys did great on that one. Yeah, that has done well, but I was thinking that this is a perfect one that would go into these niche players where they're focused on basically healthier foods and kind of the anti-Kroger stuff. Yeah, I think it's going to actually move that way, right? It's like the people who keep pitching HelloFresh, right? Because of the pre-made meals, the healthy pre-made meals. There's a market for something, always. all right we got let me see the time here a couple minutes left here's one that lululemon kind of inspired me to talk about and it's one that i kind of categorize a little bit uh in the

Starting point is 00:58:56 same i don't know stock it's not the same sector but it feels similar to lululemon and it's one i know you follow or at least are aware of and it's celsius the energy grant i know the there's a lot of i mean it's kind of a crazy stock and some people have done extremely well owning it and there's some people that are extreme bulls on it kind of similar to a tesla fashion so ignoring that do you do you like the the company uh why or why not it would have been actually you know it's really funny when i was working in banking my vp at the time sorry my associate at the time introduced this is in 2018 he's like i read this company it's called Celsius I'm like I've never heard of this energy drink and he's like he's like I'm trying

Starting point is 00:59:46 to get them to be our client because I can get a nice bonus check if I do and it was like a few hundred thousand dollars or something like that I don't know I don't think he got it because it didn't come over but I think in 2018 I think it was trading at like I don't even know like single digits and um you know fast forward to like peak COVID I'm like damn I should I should have just taking a flyer on that one but no i tried doing due diligence on it and i got i got different cans and i was tasting them and i'm not gonna lie to you i thought they tasted like crap i did not like them one bit um really yeah what was it it was can you go back to 2018 i'm actually curious to know what the price was um okay i can get the the actual price oh my god like i guess we can go

Starting point is 01:00:29 back to 2019 it was at a dollar maybe they did a split but yeah i mean it's been i think a hundred bagger since 2018 oh my god yeah yeah oh basically almost a 50 bagger yeah so anyway but no i didn't like it and i was like it just kept going up and up and up on distribution so in my mind i'm like okay there's definitely there's definitely a top to this you you you can't go that far that quick without something slowing down and something slows down you get cut at the legs which which ended up happening it was it was enough conviction for me to short it i definitely was not going to shortened to that but i just felt like you know what i'm happy to stay on the sidelines on that one glad i did um maybe if i did it in 2018 different story but yeah yeah i guess i think

Starting point is 01:01:17 it's definitely an acquired taste because everyone that tries red bull and monster they're like this isn't good either but they're some of the best businesses in the world and monster is one of the best performing stocks ever i think celsius is going to be stay on my radar just because of that i think the category is just really strong you have pricing power you have energy drinks are taking share and celsius in itself has been taking share in that category so it's like a trifecta of tailwinds i think that's going to do it though we're at over an hour thank you everyone for asking questions on a live chat anything we missed maybe today that you want to hit uh or just maybe tell the listeners where they can find you yeah i think like one parting thought i would say is

Starting point is 01:02:00 there's there's a lot of uncertainty right now and i and i go back to the previous example i gave you people want to be right on the contrarian side of things but it does not pay out the way you think it would so never bet against optimism in the long term right as long as you know your stuff um and i think that um there are still plenty of opportunities out there that are not in the widely covered names you know like the apples and stuff like that is too many people covering stuff like that um and they all trade 30 times earnings so it's not too exciting so if you just you spend a little bit more time just to find stuff you know i think you could find some some real winners i mean i'm up over 60 on my mama position in like a couple

Starting point is 01:02:45 months you know um there's other names in there as well but uh that's what i would leave with and then you know if you need to find me i'm very active on twitter always feel free to message me on twitter um if not you can just go to um to uh my research online at cedargrovecm.com you can see everything there yep and i will have the links in the show notes for that for anyone interested i will say yeah there's plenty of other mama's creations out there hundreds in the u.s thousands if you go to other countries around the world and that can be i think much more exciting than chasing NVIDIA. I think that's going to do it. Thank you to our sponsors, Public.com, Yellowbrick, and FinChat. Check out those links in the show notes. Really helps us out if you

Starting point is 01:03:35 guys use our links there. And we really think we only have advertisers that we think will actually our listeners would like. So we think people provide value or get some value by checking those out. Let me hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Paul, I, or any podcast guest may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future.

Starting point is 01:04:00 Thank you everyone for tuning in and we'll see you next week. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siyaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out.

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