Chit Chat Stocks - Buffett's Big Bet; Nike's Dismal Earnings; Why Are Mercadolibre and Nu Bank Winning? (NKE, BRK, STNE, MELI, NU)

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 in. This is the Chit Chat Stocks podcast. We are live on the Chit Chat Stocks podcast YouTube channel. My name is Brett Schaefer and typically joined by Ryan Henderson, but he is out on a great European vacation for the next two weeks. So we have a special guest joining us. It is Dave Ahern from the Investing for Beginners podcast. Dave, welcome to the

Starting point is 00:00:57 show and maybe a quick tease. What do you guys do over at Investing for Beginners? Well, we try to help simplify finance and investing for investors. We try to break down complicated things and make them a little less complicated. All right. Beautiful. And I know I've been doing a little bit of work with you guys, so I get some of the back end of there. But yeah, you guys are doing a lot of stuff. And for anyone that I would say, you know, listens to our show and potentially has some of the terms or some things feel a little bit too advanced for you and you want to learn more about the basics. I mean, these guys are just where you want to go. Um, but yeah, what, what, what are some

Starting point is 00:01:36 recent podcasts that you guys have done? Um, well, besides having you and Ryan on several times, uh, we recently talked about Alibaba, uh, last week we talked about how to estimate revenue growth. We broke down return on equity, all kinds of fun stuff. All right. Beautiful. And what are some of the topics, as for people that don't know, the investing power hour usually is Ryan, but sometimes we have guests filling in. We basically have any investing topics out there. We compile them before the show and we just go through as a free for all. And for anyone that wants to join live, you can ask questions along with us. What are some of the topics you have for us today. Well, I know you wanted to talk about Berkshire Energy, and I think that would be a lot

Starting point is 00:02:22 of fun to talk about. I would like to talk about NewBank and Brazil and the credit upgrade that they recently announced. And then I'm also curious your thoughts on kind of investing abroad and then how you feel about what is a comfortable level of knowledge you need to know. Do you need to know the owners, you know, the CEO's dog's name to invest in a company, or can you do it with a little less than that? Beautiful. And I have Nike earnings, as you mentioned, a little Berkshire Hathaway energy stuff. I think it'll be fun to talk about their big investments into the energy space. And then as always, even though Ryan usually does it, I filled in with our small cap of the week, but I won't tease it yet. You'll have to listen to the full episode for that.

Starting point is 00:03:09 But first, before we get into any topics, I want to talk about our sponsor, Public.com. Heads up, folks, interest rates are falling, but you can still lock in a 6% or higher yield with a bond account at Public.com. That's a pretty big deal because when rates drop, so can the interest you earn on your investment. A bond account allows you to lock in a 6% or higher yield with a diversified portfolio of high yield and investment grade corporate bonds. So while other people are watching their returns shrink, you can sit back with regular interest

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Starting point is 00:04:23 interest rate, it is not just an advertisement. It is a true thing. And they built a great product for everyone all right now let's get to the show why don't we talk about berkshire hathaway energy first does that sound good with you oh yeah absolutely i'm always i'm always up for talking about uncle warren yeah all right here's a quote from reuters berkshire hathaway will take full ownership of berkshire hathaway energy after warren buffett's conglomerate agreed to acquire the eight percent it did not already own from the family of late billionaire philanthropist walter Scott. Other notes I just found kind of with their energy investments slash oil investments, they own a full, excuse me, $16 billion in Occidental Petroleum as an outside stake.

Starting point is 00:05:08 And I think they own close to 30% of that stock. They own $18 billion in Chevron. And then they also own the BNSF Railway, which is likely worth, I think estimates say for about $100 billion. dollars uh so you have the energy company you have a huge bets on oil and gas two of their largest positions and then you have the railway what are your thoughts on going into energy oil and gas and industrials for berkshire hathaway as they take this next step as one of the largest companies in the world and try to deploy that cash pile well i think a lot of people don't understand what kind of uh what kind of beast berkshire energy is under the umbrella of berkshire Hathaway. I was doing a little research kind of prior on our friend Finchat.io, and they are

Starting point is 00:05:57 probably the second or third largest energy producer in the country. They trail Next Era Energy, and I believe it's PG&E in California. But the other ones, they're bigger than Duke Energy. They're bigger than Con Ed. They're bigger than Southern. They're bigger than Accel Energy, which is in Minnesota, my former home state. So it's a big, big, big part of their business. And years ago, I did some research trying to find something in the renewable space that would be worthwhile to invest. I'm kind of one of those boring investors that like companies that are profitable. And so it was a challenge to find those kinds of companies, but I found it in Berkshire Hathaway and I already owned it. And I was like, holy, I just didn't know. It's just,

Starting point is 00:06:43 you know occidental gets a lot of coverage chevron gets a lot of coverage bnsf gets a lot of coverage but berkshire energy does not i feel like it's it flies under the radar more so so i'm i'm super super excited to own berkshire because of that one asset just alone yeah exactly and what's interesting and some of the comments tyler here asks about it is the internal valuation they bought this out was actually 50% lower than what Greg Abel, I think, sold at in 2020. So they've had those liabilities with, I think, PG&E and stuff like that. Or Pete, not, you know, that's a separate company, but the similar type things with wildfires and all the insurance, whatever that stuff that hurts utilities. Maybe it's a good buying opportunity for Buffett. I think it's

Starting point is 00:07:35 interesting that he's doing this right when it seems like electricity demand is soaring because of the AI boom, the data center boom, the semiconductors returning to America with all these factories that are getting invested in. And besides that, you have the natural gas investments with Occidental Petroleum and Chevron, also generally just petroleum investments. I think that makes sense along with the electricity demand boom. And then you have the railway, which if we're talking about reshoring, that seems like a good asset to have as well. I guess, you know, when you talk about Buffett and Berkshire Hathaway, you always come away with saying, well, yeah, they're probably making a smart move

Starting point is 00:08:15 and they're probably making a, I know this term is overused, but an anti-fragile move. Because when I look at the energy stuff, the railway and the oil and gas investments, it's almost a hedge versus some of the other stuff that might get impacted by commodity prices increasing or inflation going up. Yeah, for sure. And I've been talking a lot with John Rotonti about how to invest in energy because I have felt for a few years that the growing demand for energy is just going to continue to skyrocket. And it just seems like it's a really hard place to try to invest, especially depending on what kind of investor you are. And again, I'm more of the boring, not necessarily air quote value investor, but

Starting point is 00:09:02 I like companies that have some stability and some profitability and it's, it's harder to find those companies. And it feels like you're making early bets on something like first solar or end phase. For example, when you compare those to the utilities, which those kind of leave you cold, when you look at the financials of those, or just the future growth product prospects of those companies, it makes you feel like, eh, where do I, where do I turn for all this demand for the data centers, the AI, the chips and all the stuff. And that's one of the things that I like about Berkshire. And I think, you know, Warren was way ahead of the curve again, with getting into natural gas and getting into wind and solar and doing it profitably. Yeah, I agree. We have

Starting point is 00:09:47 a question here. Do you guys think nat gas, so natural gas where we'll be, where the energy demand for data centers will be met as opposed to nuclear. Well, we've seen the talks around a nuclear renaissance. People are less opposed to it as they used to be. I think there was the big mention from Larry Ellison on a conference call. You know, he's very good at being a salesman. I think that thesis makes sense that nuclear is going to happen, but these projects take five to 10 years to build. So at least for the next five years, there isn't that pipeline. And people talk about the small modular reactors. I know there's a couple of stocks around that that were kind of hyped up a few years ago. Again, that's even a longer term time horizon. So the regulation around

Starting point is 00:10:31 that's so high, I think at least for the next five years, you have the energy demand coming from existing sources, you'll, you know, which is basically natural gas for these energy things, along with, I don't have the exact, I'm no renewable energy expert, but the renewables, I think, are about 20% if you exclude nuclear in the United States. So, small point, but the majority is going to be these traditional sources. All right. Well, I don't know if you, here's a question for you, Dave. I don't know if you have an answer to it, but does Dave have any opinions on carbon capture storage? It seems like Buffett likes it via Occidental Petroleum. What do you think?

Starting point is 00:11:12 I, to be honest with you, I have not done much research on that in particular. It would be something that I would probably be interested in looking into if, you know, not to follow Buffett, but at least to use what he's doing as a potential launching pad to learn more about it. I wouldn't necessarily buy Occidental just because he's buying it. Oil in particular is way beyond my scope. It's way outside of my circle of competence. Utilities, well, not utilities, but commodities in particular are above my pay grade. But the carbon catcher, what little I've read about it and seen from different studies and things I've done, it looks really intriguing. And I think it'll be interesting to see kind of how it plays out.

Starting point is 00:12:03 Yeah, I agree. And it's nice that it could be within a larger position where you're not betting on a company that's solely trying to build out this product, where you have Occidental Petroleum, their existing businesses generate a lot of cash flow. We have another comment that says regarding energy seems like oil and gas is really cheap. I don't invest in anything energy related though. I couldn't have said it better myself. I don't like to focus on that. I do think that oil and gas could be cheap. We've seen talks of people saying that oil could go back down to $50 a barrel. And who knows whether that will happen. It could be cheap in that regards, but there's so many different inputs into it. What happens

Starting point is 00:12:39 If we get a nuclear renaissance, what happens if electric vehicles take over and, you know, that part of the supply chain kind of gets broken for them and the supply goes up and you have OPEC making all these decisions? It's in the too hard pile. I think it is for Dave as well. Way, way, way too hard pile. You know, another company that's kind of outside of the Berkshire umbrella is Brookfield Asset Management or Brookfield Management. I'm still going to call it BAMS, force of habit. But that company has done a great job of buying a lot of resources and a lot of assets to kind of help transition and move people towards renewables, in particular hydro in Canada and in Brazil. And so that's a big reason why I've been a big fan of that company as well.

Starting point is 00:13:25 Yeah, they've made some very smart decisions within that market. All right. Next topic, we have your first new news item. And I didn't know this happened. So why don't you give some info for the listeners, the credit upgrade in Brazil, potential impacts for some of the investor favorites like Nubank. Yeah. So recently Reuters reported that Brazil has received a credit upgrade from Moody's. So they are now BA1, which is, for those of you unaware of the kind of the ratings, they're basically the highest level of junk bonds that you can receive. So it doesn't sound great, but the company, the country was downgraded, I believe it was 16 years ago. And so this is the first upgrade they've had in 16 years. And so it's one level below the, you know, investment grade level bonds.

Starting point is 00:14:20 And really what that tells us is that the company, the company, the country is seeing an upswing in their GDP and their overall economic growth. They've gone through their own, I guess, political turmoil with their recent election a few years ago. And so far, it looks like the not new guy, but the return guy is starting to turn things around with the company. And so Moody's decided that they would upgrade them. Now, how does this impact anybody that's investing in someplace like Brazil? What it does is it helps push down the cost of capital or the potential cost for any investments in a country like Brazil. They run a lot higher rates than we do here in the United States. And so the risk of investing there is it's higher. And when you're talking about a company, a country with a below investment grade level bond debt, their debt is running around 78% of their GDP, which is less than ours, but it is growing. And that is a concern from some analysts. But when you're investing in a company like NewBank or MercadoLibre, which is based in Argentina, but they also operate very heavily in Brazil, that can have a big impact on your investments. And so that's why something like this is it can be a big deal.

Starting point is 00:15:51 Yeah. And for someone like NewBank, I don't know exactly. I'm no expert on the company, but I think they operate in Brazil and Argentina. Well, that can be helpful. Yeah. Yeah. They're in Brazil, Colombia and Mexico. Oh, OK. So not Argentina. maybe that's smart because of that hyperinflation so if that gets solved i guess uh they might enter that market but yeah i i think obviously that's a good thing for brazil it's one of the largest markets down there it has so much potential them and argentina have so much potential just given

Starting point is 00:16:21 the population figures and what we'll call maybe historical mismanagement or maybe just bad luck however you want to describe it. Either way, I guess I haven't focused much on that market. I focused a lot more on Mexico and a little bit of Colombia, just because Mexico specifically seems a bit more understandable for me, given its closer relationship to the US market. But if Brazil stocks have similar earnings ratios, seem similarly cheap, and U.S. stocks of equivalent levels are much more expensive or you don't find that opportunity over there, like, yeah, Brazil stocks would be attractive,

Starting point is 00:17:03 but it would definitely have to be something that's trading at maybe five to ten times earnings. That's not one of those, like, excluding the Mercado Libres and the new banks of the world that are almost, you know, are listed in the U.S. and seem to be run by a lot of, how do I say it? It's almost like a Silicon Valley company, whereas the local ones i might want to trade at you know five to seven times earnings or 15 times

Starting point is 00:17:26 earnings might seem wildly expensive but i don't know do you invest any internationally or or yeah yeah absolutely um i own i own both new bank and ricardo libre um my fiance is brazilian and i am attempting to learn uh portuguese and i was lucky enough to go with her about a year and a half ago to visit her family in southern brazil and it was very telling first of all the mercado libre or the mercado pago payment terminals were everywhere and the purple card which is new bank's card was also everywhere and her cousin works for one of the local banks in the city that she lives in or is from and i was talking to him a little bit about new bank and he said it was a beast of a bank and he said if he didn't work for uh if he had the opportunity for work for them you would

Starting point is 00:18:19 um it's just and the other thing that's interesting is when you go to brazil it's it's a it's a developed country but it's kind of not and so certain things about it like they've embraced technology way more than we have here in the united states for example uh everybody pays on their cards or on their phones they use their cards on their phones to pay for everything and so we were at the beach one day and this guy pulled up with a coconut cart selling coconuts on the beach and the only way he would accept the payment was with a card on your phone you couldn't hand him a debit card and you couldn't hand him cash and so and that's the way all these people were coming up and they they basically just walk up to the terminal blink their phone on there make

Starting point is 00:19:03 the payment and walk away and i was like oh that's brilliant why don't we have that here and so i just i was i was blown away so when i got home i did a whole lot of research and a whole lot of reading and i was like yeah i'm gonna buy new bank so nice nice yeah and if we look at i guess i i didn't pull up new bank this is mercado libre when some of these companies that i guess i don't want to call it the silicon valley bug but they have a characteristics of a really well-run technology company they can do phenomenally well in latin america just given there are a lot of people down there. The countries are much more developed than people think, as you just mentioned, and the propensity to use mobile devices even more than the United States or Canada or Western Europe or

Starting point is 00:19:50 other Western markets. If you look at this revenue for MercadoLibre, it has not slowed down whatsoever. 2014 revenue of $556 million. Last 12 months, $17 billion. I think that's in USD. Yep. Yeah. And USD. And that's even with big foreign exchange headwinds in places like Argentina, 44% compound annual growth rate since 2014, which is basically, I think maybe a little over 10 years. Quite impressive. Quite, quite impressive. And we have another question on a different market that might even have cheaper stocks. I've heard, I've seen a few pictures around there and that's argentina uh tyler asked does dave have any thoughts on argentina uh i guess yeah i did to be honest with you no at this point uh i have stayed away from argentina

Starting point is 00:20:45 simply because of the economic conditions there have been not great uh the new president that has taken charge it sounds like he's starting to turn things around but i think it's still really early innings in some of those things. And so I guess I have chosen to stay away. And the fact that NewBank is expanding into Colombia and Mexico tells me that Argentina is not there yet. I think if the Argentinian market was open to a company like NewBank, they'd be there in like two and a half seconds. But I think because it's not quite there yet, to me, that just means that you know i need to kind of bide my time right yeah they're almost saying look we're neighbors with argentina but colombia and mexico look much more attractive to us yeah i think that's maybe a

Starting point is 00:21:39 positive for their management team too that is smartly looking at mexico and colombia that are fast growing any what what else attracts you to new bank is it just the execution the competitive said? Are they in an innovator's dilemma? I could see them definitely being an innovator's dilemma company on the right side of the innovator's dilemma. What excites you about them? Why do you think they're winning? I think it's a multifold, I guess, approach. So number one, the incumbent banks that they're competing against are dinosaurs. And to open a bank account in Brazil it's like it's probably four or five times level harder than it is here in the United States here you walk into Wells Fargo you show them your ID you can walk out of the bank and half an hour

Starting point is 00:22:31 maybe with a checking account a savings account open and a debit card ordered for you bank you know your online banking there sometimes you have to make two or three appointments and come back several days later just to open the account. And a big reason why NewBank started the way they started was because the owner, David Velez, he went through that whole experience when he moved to Brazil to try to open a bank on his own. So they get that they need to make it easier. Number two, Brazil, they caught Brazil at the right time. Most of the people, the country is is much poorer than the united states and so people's first computers are their phones and for many of them and the the cell phone has exploded in latin america and particularly in

Starting point is 00:23:20 brazil and because of that new bank has enabled their features they're a mobile bank they don't have branches and so it's just a lot easier to do all your business on your phone and they were able to capture a lot of that. They also offered credit to people that were never offered credit, never had bank accounts before and offered them credit. And something that's a little different in Brazil, and I'll try to get this done quickly, but when they use credit there, when you go to the grocery store, for example, traditionally Brazilians would pay on credit. So they would go to their local grocery store, they would buy something and then it would be put on a tab. and then two or three weeks later they would get a bill and then they would pay that bill and it

Starting point is 00:24:05 was a revolving credit now new bank is doing the exact same thing with their credit cards so when you open a credit card in brazil or a card in with new bank they if you have a hundred dollars in your checking account they may give you twenty dollars of credit and as you use that credit and pay it off they'll allow the they'll build the credit up gradually it's kind of like a secured credit card here in the united states but they're doing it without having the deposit and so it's just a revolutionary way to to offer credit and make money easier for brazilians than it was in the past and it's just those kinds of things plus their technology is just light years ahead again i had my fiancee open an account just so i could see what it was like to open an account

Starting point is 00:24:50 with new bank because i can't i'm not a brazilian citizen and it was super super simple like it rivaled something here in the United States. And so those things in the execution to me are big reasons why I like it. Yeah. And that's so important for me when looking at an international stock. It can change on whatever market you're in. If you live in Poland, you'd have great anecdotal evidence and boots on the ground research for Polish companies, but you wouldn't know much about the ones that are only in the United States. For me, for something like this, seeing that boots on the ground when you visited Brazil, you see that new banks everywhere and people are using and then you had someone open an account

Starting point is 00:25:30 and it was seamless and you can see here for this chart here of from our friends at finchat.io i should say use our link finchat.io slash chitchat give these kpis uh for i you know they're they're so so useful stuff like this when we look at this chart here active customers uh december 2017 of 3 million in the last 12 months, 104.5 million growing at 73% over this timeframe. That's insane growth. And what's great about it is in Latin America, I don't know what the total population of Mexico, Colombia, and Brazil is, but there's still really a lot of room to run here just within those three markets. They're quite populated. And again, yeah, go check out finchat.io slash chitchat, get 15% off any paid plan, go check them out. But yeah, NewBank,

Starting point is 00:26:18 super fascinating uh i think honestly didn't one of the buffalo lieutenants bought that or was that a different latin america fintech no no well they bought two they bought uh they bought new bank and they bought stone which is a payments company stone i remember stone cow lost uh luckily i didn't buy it i lost a little money or i would have lost a little money but oh yeah yeah right for sure you know it's it's crazy it's trading at like a seven or eight pe now really it's actually yeah it's very profitable 50 60 gross margins 15 20 net income margins it's it's you know the financials are doing great but it's just when you look at a stock chart it's like you know it's ugly because it it got a huge run up and then during the pandemic and then you know like a lot of them

Starting point is 00:27:05 lost 70 80 percent of its value wow all right maybe something to watch uh or research over here at chit chat stocks stone co forgotten yeah i remember looking another one i'll throw out there for that is Pogsaguro. That's another one that's trading roughly the same price range, same PE levels, profitability and everything. Another great payment company. All right. You want to talk Nike? Yeah, let's talk Nike. All right. I got a few notes here. Earnings yesterday. Luckily, they blessed us with an off-season earnings so we can talk about something before earnings season starts in about two weeks, I think, from this recording. It was a pretty simple quarter. Revenue declined by 10%. I think I was kind of in line with expectations since

Starting point is 00:27:50 they've been struggling so much. All geographies had declining sales, including the way they break it out as China and then other Asia Pacific, Europe, I think like EMEA and then North America and South America. I can't remember. Maybe they separate out Latin America. Either way, all geographies had declining sales, operating margin keeps slipping, trailing PE. Now this is potentially on depressed earnings. So you can kind of look at this glass half full or glass half empty. It's still only at 24. So it's not as cheap as you might think, given that they've had this huge drawdown. But the company keeps buying back stock. They're bringing in a new CEO. They They got the old one out who was kind of a mercenary that came in as from like a consulting type role to come in.

Starting point is 00:28:42 But now they brought in a new person who has been with Nike ever since he was an intern. That's probably a positive sign. Seems to be well loved. There's a lot of positive, you know, writing, people talking about this new CEO. They think he can really help the company make a turnaround. Do you have any interest in Nike after these earnings? Nope. Yeah, me neither.

Starting point is 00:29:05 nope me neither no too hard pile for me anything related to fashion footwear any of those kinds of things it's just i if you see how i dress on an average daily basis you would understand why i'm saying that it's just very very low on my priority list and i have zero skills when it comes to that kind of stuff i do as well i also you know as a reminder we have a rule at chit chat stocks that is potentially, I don't know if we would ever break it, but it's never invest in apparel companies. They are impossible. We have a question here, though, from Tyler. I think it's a good one. At current valuations, would you rather own Lululemon or Nike? Let me pull up on Finchat the old PE for Lulu here, which I think actually might be cheaper than Nike

Starting point is 00:29:56 or at least similar uh trailing p of 20 for lululemon i think i gotta go with lululemon just given smaller more room to grow market share and the cheaper earnings ratio but what what are your thoughts um do i have to pick one of them um yeah i probably i probably would i probably would agree with you i probably think that lululemon has more upside potential than nike does and i guess i just feel like that would probably be if i had to choose one or the other i would probably go with them yeah yeah makes sense and i should be clear i thank you as well i don't own any of these stocks and they're nowhere near the top of my watch list just because And this earnings is an example as well. It's too hard to predict what these companies will do

Starting point is 00:30:57 just because it's so finicky and how fashion trends change. I mean, look at Abercrombie and Fitch's stock. Maybe you could have made a bet on that after seeing some traffic growth or something like that, but that's not the bet I'm trying to make. And people are talking about Nike like, oh, okay, the China decrease has been a little bit slower than it was. Maybe it's bottoming there. I have no clue like who knows who knows if this is the bottom or they're going to turn around or if the brand is going to turn into Under Armour in a you know over the next 10 years I have no clue no none whatsoever and the other thing is that the company there's a I feel like there's a lot more competition now than there has been and that is that is an outsider saying that so it just

Starting point is 00:31:41 feels like there's just more competition and and there's a harder road to get back to where they were because expectations are going to be higher for something like nike than they are for lululemon because lululemon is a newer company nike's been around forever yeah and nike's brand has been rock solid for so many years but i think i do agree there is slowly more of a competitive push from these upstarts including you have in running shoes hoka uh running but also a bit others there's i think it's called on yeah i've seen those before yeah when you see people wearing those it's kind of hard to say like okay look nike and adidas may lock down like the professional sports the big professional team sports in the united states and that might lead to you know

Starting point is 00:32:35 uh soccer cleat revenue well that's more veditas but you know basketball shoe revenue and football cleat revenue but that's not the whole business is getting normal people to wear those because the you know the athletes wear them and i i would just be nervous owning this one and when it again the stock doesn't look that cheap pe of 24 used to trade it like a pe of 40 back on the peak of the bubble and that's just not one i i want to own no me me either no too hard pile all right uh let's do the small cap of the week have you ever heard of this company gen restaurant group i am not familiar with them all right well let's take a look i haven't really looked at them too much although i should say for anyone that's interested in more deep analysis

Starting point is 00:33:29 Paul Serra over at Cedar Grove, who's come on the show before. He's done some deep research on the stock. And the reason I found it is because his report was from our small cap of the week presenting sponsor, Yellow Brick Investing. You can check out joinyellowbrick.com slash, I believe it's chitchat. Yes, joinyellowbrick.com slash chitchat. Let me get a little ad pitch for them for us. I know Dave uses them as well. It is a beautiful, beautiful product. Yellowbrick 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. You can try it for free or upgrade to a paid plan

Starting point is 00:34:10 and see investor returns and the latest stock pitches on Yellowbrick. As I said, I used it before. I used it for this segment and you can try it for yourself. Go to yellowbrick.com slash chitchat excuse me that is join yellowbrick.com slash chitchat the link is in the show notes all right gen restaurant group we looked at the finchack co-pilot they say it is a company that operates restaurants specializing in various flavored meats from korean barbecue i think that's the ai way of saying it's korean barbecue restaurant that has an all-you-can-eat style if anyone doesn't know they have the circular tables and they kind to cook it at the table. The company was founded in 2011, based in California and operates in

Starting point is 00:34:53 several states, including California, Arizona, Hawaii, Nevada, New York, and Texas. So West Coast focused, but a little bit of New York as well. Give some financials here. Market cap of just $41 million. Stock is in a 60% drawdown since going public in 2023, $195 million in trailing revenue, growing 12.7% year over year. They have positive operating income, but it's just over break even. So not really that profitable, but I think that's something to dive into further because they could be investing for growth. The restaurant level margins might be fine. They might be investing in a lot of new stores, stuff like that. One concerning thing I saw was that comp sales decreased by 5.6% last quarter. I think that's something definitely investors

Starting point is 00:35:37 should look at. They have 40 restaurants total right now and plans for more growth. Clearly, there's a lot of room for expansion. They have close to $30 million in cash and $135 million in operating lease liabilities. So that makes on the aggregators and places like FinChat who include the lease liabilities in the enterprise value calculation, that's going to make it seem much more expanded than it actually is. We look at a price to sales and a price to gross profit trading at a measly 0.2 times sales and 1.2 times gross profit. I don't know if you dabble in micro caps, but does this look interesting to you at all? Um, so I don't know if you know this about me, but I worked in the restaurant business for 20 some years and I literally did everything

Starting point is 00:36:25 from wash dishes to run the place. And so I am very picky about investing in restaurants. Um, I know how hard it is to make money in the restaurant. And I also know how hard they are to run. And so when I see that the market cap is only 41 million, one of the last restaurants I ran did five and a half million dollars in revenue a year. And so this tells me that these stores are small and that i think can be an okay thing but i wonder you know if you're seeing comp sales decreasing 5.6 for the last quarter does finchat tell us if it's been if that's been a gradual or is that a one-off that they felt uh i checked and they're too small to have the finchat kpis but you know i don't think there's too many people looking looking at them but i i think they've

Starting point is 00:37:26 only been public since 2023 and i'm assuming it's trended in the wrong direction but it's the one huge holdup i'd have because if you look at that that probably means traffic is going down and you have to ask why like did they do a densification that you know that were an existing restaurant and an existing market stole or sorry seeded some share to a new restaurant that they opened i'd like to look for an explanation there because that continues i mean this could go out of uh i don't know the the leverage there as you mentioned it's really hard to run a business well a restaurant business well that leverage there can turn in the wrong direction um maybe given your experience in the industry what what do you think is the best run publicly traded

Starting point is 00:38:13 restaurant oh that's probably a good question um i would say probably the two that spring to mine would be Texas Roadhouse and Chipotle. Okay. Everyone, I think most people are aware of Chipotle, at least we've talked about it on the show, but what makes Texas Roadhouse, why are they so well run? They figured out a niche. They figured out a growth strategy that works for them. And they figured out a method of operating that allows them to consistently be profitable. And because they kind of sit, they sit kind of between expensive and cheap and they're more moderate priced because of that, that allows them to be a little more flexible, if you will. I hate the word anti-fragile, like you said, it's overused, but

Starting point is 00:39:07 they tend to be flexible when the economy is not great. So during the pandemic, for example, they ended up actually doing quite well because they were open and they were safe and people could go and eat there and feel like they were getting an expensive night out without having to spend a lot of money and the quality of the food is really good and that's always really really important and i i just think that those things like they kind of built themselves on the kind of the applebee's model from the 80s and 90s where they offer really good food for a decent price in a comfortable place and they've figured out a way to grow without you know to your point earlier about saturating like putting putting restaurants too close to each other and sabotaging from each

Starting point is 00:39:53 other that's a that's a very real thing and so they've they've to me they've figured out how to do that the right way okay so it's almost like a little bit higher quality than applebee's and different a little bit different focus but it's it's the affordable meal that a family can go out to or you can go out for a date or something like that yep last question on restaurants just because i forgot that you have all this experience in the industry what is the most important kpi because we always focus on comp sales and traffic is it is that the most important thing or are there other things you're caring about well the three things i'm caring about is foot traffic is comp sales and what kind of margins are they looking at what are their what are their net net margins

Starting point is 00:40:40 the the margins will tell you a lot about how well the company slash manager can keep a keep control of their costs because when inflation is hitting it's it's also hitting the restaurants because they're buying vegetables and meat from local distributors and sometimes they have control over the cost sometimes they don't but how well they manage the waste and and theft and um price increases will go a long ways towards telling you you know if they have those things under control and if they don't then you'll see company you'll see a company slip into negative earnings or kind of fly all over the place as as uh the price of meat for example you know adjusts all over the place the last restaurant i worked at we had we had long-term contracts that we established for

Starting point is 00:41:33 the meats and seafoods that we bought and the produce was local. And so I was bonused as a manager on controlling our food costs. So two of those weren't really in my control unless I raised my prices or did other things to try to control portion sizes. And those were the things I paid attention to. So when I'm looking at companies, I'm looking at comp sales, foot traffic, and also the margins. Okay. And we have a follow-up from a commenter here that says, do you care about store margins or company margins or maybe both? Yeah, both. I mean, it really depends on what you're investing in. If you're investing in a small business, a local business, I'm looking at obviously the store. But if I'm looking at

Starting point is 00:42:19 something like Olive Garden or Texas Roadhouse or McDonald's, then I'm paying attention to the company margins right because they're already scaled up enough it's important for maybe an early stage one like gen restaurant group or portillo's or kava even portillo's yeah portillo's is a good one too yeah so yeah that does make sense yeah that restaurant margin can be important but i i've seen some companies also brag about that and then they never actually generate real profits so you got to match that up eventually i guess well i lied we have one more question and a good one from the comments. And I think it'll be a fun one. I have some thoughts on this as well. Does Dave have any thoughts on the general fast food market? It seems like companies

Starting point is 00:43:01 such as Jack in the Box are cheap statistically. I'm assuming he's saying the stock, but they have real headwinds because of a price and value mismatch. What do you think? Yeah, I totally agree with the question. There is huge headwinds in the fast food market. And it seems like every time you turn around, there's a new fast food restaurant opening in your local neighborhood that's competing against, uh, my daughter lives in Columbia, South Carolina. And I noticed the other day that there were two new restaurants that I had never heard of. I frankly don't remember the names of them, but there were one was one was on, they were both on opposite sides of McDonald's and they were kind of like a, um, um, oh gosh, what's the, what's the, what's the

Starting point is 00:43:45 big in-and-out burger they were similar to the in-and-out burger kind of you know style of food and they're on each side of a McDonald's and I thought to myself a that was going to be really hard for the restaurants the new ones and also it's going to be hard for McDonald's because people are naturally going to go try something different and I think that you know if they can't capitalize on that then I just think it's to me fast food is really really hard place to to try to invest in mcdonald's is a different beast because it's been around for so long and it's a very established brand but some of the other ones uh what's the other burger joint that's in new york i'm blanking on the name of it now um but uh shake shack yeah shake shack um to me

Starting point is 00:44:31 i mean it's a great concept and whatnot but i just that's a hard that's a hard hard way to make money because that one yeah shake shack uh we have comment that says five guys i feel like those are much harder especially because you're going to be way more expensive on a per meal basis than the uh the mcdonald's or burger kings of the world and i think what also would concern me about fast food and why i think it's a lot different than it was a couple decades ago is the price taking these companies have implemented where it's not the dollar menu anymore you might be spending 10 bucks at mcdonald's and the difference between that And at Chipotle and why I think that Chipotle is the Cavas of the world are succeeding so much is that price gap is really not that big anymore.

Starting point is 00:45:15 And people go, well, I can get higher quality food for that much more. Right. Exactly. And, you know, we're seeing we're seeing an impact from the rising of prices. You're also seeing the impact of rising of payroll for companies. When I was the last restaurant I was working in, we were having to pay 15, 16, 17 bucks an hour for kitchen people. where, you know, a few years before that it was 11 or 12 because the fast food restaurants in the area were, were, were paying that. And so to be competitive, we had to do the same. And I'm not saying those people weren't worth it. They, they certainly were, but it just makes it, it just makes it harder. It's harder to make, you either have to raise your prices or you have to take a

Starting point is 00:45:57 hit on the, on, on the margins. I agree. I agree. Tough business. And one that comes to mind that given their input costs are so cheap can weather the storm is a dominoes where bread tomatoes flour or whatever the cheese those those ingredients don't change in price that much especially the basic ingredients and there's a reason why they do so well all right we have some other topics that i think can be fun but first i want to hit our sponsor again public.com you heard at the beginning of the episode that interest rates are falling but you can still lock in a 6% or higher yield with a diversified portfolio of high yield and investment-grade corporate bonds on public.com. You might want to act fast because your yield isn't locked in

Starting point is 00:46:44 until the time of purchase and lock in a 6% or higher yield with a bond account only at public.com forward slash chitchat stocks. Again, brought to you by public investing member FINRA plus SIPC. The full disclosure we talked about at the beginning as well. And I'll mention we, again, the interest rates are falling. The Fed is saying, you know, we're going to cut rates and that high yield savings account, it's not going to pay that much anymore. If you're saving, and the perfect thing for this is if you don't want to put money in the stock market because you have a three to five year time horizon and you're looking to save money for a down payment or something like that for a house, you want something that's going to have a consistent

Starting point is 00:47:24 return on that. And that is the bond account at public.com. All right. That's enough for the advertisers do you want to talk the port strike i know we had a question on twitter on that did you see that this is happening i did yeah actually i i didn't know about it until i saw you tweet about it and you were you made a comment about the um i don't remember the exact numbers but you were talking about how much the they were getting paid um in relation to what they were striking for i thought that was kind of interesting yeah they uh what was the number i and i think it was specifically in new york city and new jersey so the cost of living there is higher but i think it was half or more of these workers uh at the docks make 150k a year and i was thinking that's

Starting point is 00:48:12 pretty good not bad uh but yeah that so the poor workers on the east coast went on strike i think goes all the way from New Orleans up to Maine. So basically the Gulf of Mexico and the Eastern Seaboard, they are asking for a 77% raise over six years, and they already rejected a 50% wage increase over six years offer. What do you think here? Could be inflationary. I know this is kind of just macro stuff and it's kind of a fun news item, but it seems like this could cause another supply chain crunch if they don't resolve it soon. Yeah. I think there was no question that it will cause a supply uh the supply chain crunch it's i don't know if they did this on purpose but it's wise for them i mean it gives them a lot of leverage to do this right before

Starting point is 00:48:59 the holidays so that puts extra pressure on the businesses as well as us the consumers and it would you would think that that would put more pressure on the companies running the docs to give the you know to give in or at least you know figure out some way that they could negotiate a better a better outcome for both sides uh i don't think there's any question that's if it does continue for a long period of time i saw in the news today every day that there's a strike it puts it puts supply chains a week behind and it costs the economy five billion dollars wow that's even worse than the boeing one where we've talked about the boeing strike on a couple of episodes here and that's costing them, I think, $500 million a week. And again, could be inflationary because

Starting point is 00:49:48 they're not getting that stuff out to market, which they were already struggling with to begin with. But airlines can't get the planes that they want and they have on that backlog. I think looking at these pay raise increases, and we do have a funny comment that said, should I take a longshoreman position over my private equity offer? And hey, maybe you should. maybe it's a good offer if they get this raise. That's not a bad gig. So we look at this, 77% over six years. That's what they're asking. They are going to get at least 50% over six years because that's what they already rejected. And they can come back to if they want. Boeing's asking for, I think, 40% over four years. So kind of a similar number on a per

Starting point is 00:50:31 year increase. I feel like, you know, you mentioned the supply chain stuff and that could impact some businesses, especially retailers in the United States in the short term. But I think over the long term, the biggest concern from an investor perspective, and look, again, this could be good for society if people are making more money. But from an investor perspective, that wage inflation, that could be not necessarily scary, but it's something that can really entrench inflation at a higher rate that we haven't seen for multiple decades. yeah totally it it it will totally feedback loop into the system when you have we were just talking about restaurants and that's something that you've seen you're seeing from restaurants when you go to

Starting point is 00:51:16 mcdonald's now you can't get a happy meal for less than five or six bucks you can't you know there is no dollar meals on the menu anymore and it's because it's because those price increases for the employees are filtering back into what the customer is paying and so we're paying more you know dinner for two at mcdonald's is 22 23 now here and here in the southeast and that's unheard of a few years ago so when you think about this with the with the port strike i i think that will definitely feed back into you know like you're saying the companies as they're bringing in products across the world and are selling them to us they're gonna they're gonna they're paying more. So they're going to have to pass that on to us. Yeah. And here's another incentive it gives

Starting point is 00:52:04 out. I think it's a 77% increase on the incentive for automation because it makes that return on invested capital much more attractive. Just as an example for the listeners, I think Boeing is a much more specific one where the longshoreman is a broad one that can affect everything throughout the US economy. But Boeing specifically, okay, let's say they get this raise. It's a 50% raise. Let's say just in general, and it's not going to be as extreme, Boeing's entire costs go up by 50%. Well, then in order to make money, they have to sell their planes at 50% higher prices, which means the airlines have to sell you a ticket at a 50% higher cost. So it might be right that these people deserve that pay raise, but there is going to be an impact inflationary on the industry that they are selling into. Right.

Starting point is 00:52:53 Yeah. All right. Let's see. Speaking of Boeing, we got a question here that says, any thoughts on the potential Boeing credit downgrade and equity raise? And I saw that while you were talking, Dave. So I looked it up. Didn't see it until I looked it up on Google here. It says Boeing is considering raising at least $10 billion in an equity sale. Bloomberg News is reporting. I think that could be a good idea the stock is not totally hammered i know they probably should have done this a while ago

Starting point is 00:53:28 but if you look at their balance sheet you look at the strike you look at i think given their repurchase history the shares outstanding are down by half from like 15 to 20 years ago i don't i think this is a smart move to shore up your balance sheet because if you get on the right footing you'll make this money back you'll be able to return capital to shareholders, but I don't know. And maybe if I was the government and I had this power, I would say, look, before we give you any bailout money, you got to raise equity yourself. And I don't know, it seems smart to me, but what do you think? Do you follow Boeing at all? Or is it? No, no more than hearing you guys talk about it. It's not a company I invest in and it's kind of

Starting point is 00:54:12 in my too hard pile but the i agree with you the the equity raise especially if there is a consideration that they could get a downgrade in credit that would make it harder and more expensive for them to to do any sort of money raise and if they have the ability to do the equity raise instead of using debt i think that's probably a good way for them to go at the moment especially if they've been able to reduce their share count by almost half, I think it's probably a smart way to go about doing it. I mean, either way, I'm not investing in this company in any way, shape, or form, but for them to stay alive, I think that's probably the best way for them to do it.

Starting point is 00:54:56 Yeah. Ryan and I talk about them a good amount, especially recently, just because there's been so much news around them and it's interesting, but I think it maybe is unproductive because there's nowhere not any scenario where we're buying this stock anytime soon uh we have one question here and then maybe we can hit any of your other topics before we get out of here uh there was the gogo and stratcom acquisition it's almost a merger but gogo is swallowing stratcom i think there people are asking this because i did a stock research report on gogo that was a uh put out i think this spring either way you can go listen to that full episode i think

Starting point is 00:55:34 it still applies to the business today. It's an interesting acquisition. I think there are a few concerns around it, given why they're acquiring a geostationary orbit satellite internet provider when they thought or were claiming that they're going to put these companies out of business. On the other hand, they're not actually, I think from reading the Stratcom stuff, all their details and how the business works, and it's only been a day or two, so I can't really say I'm an expert on the company yet, but I don't think they actually own the satellites they're just a reseller and it's almost a way to get a global relationship from a sales perspective to the plane oems the manufacturers and getting their products getting

Starting point is 00:56:16 their equipment within these plans because that's one of the biggest hurdles for satellite internet on business jets is just okay do you have the equipment in or not we don't want our plane down so that's the rationale for the acquisition i think they also apparently got them for an extremely cheap price because I get, you know, all right, that's not bad. We'll see. We'll see what happens, but I'm in a big TBD mode. We'll see what people say. We'll see what the numbers look like. We'll see if the business, if the transaction closes, but I'll just give a quick update there because people were asking about it. All right. Did you have anything else, Dave, before we get out of here? Got about five minutes left. Yeah. I wanted to give you and Ryan a victory lap for Spotify.

Starting point is 00:56:59 All right. Investing, my business partner, Andrew, and I have talked about this many times. Investing is kind of a lonely gig. And people on social media usually just see you either have to brag yourself about how well you do, or if you talk about how you don't do well, then everybody piles on and, you know, you're an idiot for buying Uber. You know, what were you thinking? Um, so, uh, I know you guys won't pat yourself on the back. So I wanted to give you guys a pat on the back because I know you both invested at Spotify

Starting point is 00:57:35 and you've done well with that investment and you've held it through the hard times when it wasn't doing well. And there was lots of negativity about the company. And so I just wanted to give you guys a kudos for, for that. Appreciate it. And I will say we, uh, neither of us owns it today. So we haven't felt the full returns, unfortunately, because the stock, I think, is approaching all time highs. They've had a I don't know if it's an AI narrative.

Starting point is 00:58:02 I really don't know why the stock is ripping, but it's been a long time or a lot of gains since that's below $100 a share. That's $75, $80 a share they were at. And yeah, the business has it's a classic example of how price drives sentiment, because i don't think the business model has changed that much over the last few years but a couple years ago when it was at 80 a share the pessimism was crazy and you had to have some conviction to hold that stock because people were telling you you were an idiot like what i was definitely down right down uh quite a bit on the position at that point and you that's the one that people focus on or the as you mentioned those losses are the ones people

Starting point is 00:58:51 focus on and that's just the way it's going to be but now people are like oh yeah they might have a lot of pricing power oh yeah that churn is really down maybe this is a good business maybe the margins don't matter and it's crazy how that's that switch uh flips there but yeah hopefully you know the stock gets a little cheaper uh so i can re-enter it because right now i kind of looked it up on fin chat market caps about 75 billion dollars using ev to maybe gross profit just because they maybe that's the best one it's 16 it's not not too cheap but hey you know for people that are holding on i think uh they should be able to keep growing i would say yeah i agree all right before we close out why don't you tell the listeners and i think you are going to be on

Starting point is 00:59:43 next week as well so hit them up with any questions we did have a comment that said uh they want a restaurant overview on what makes a good restaurant so maybe we could do that as a segment could be fun uh but but yeah before we get out of here tell us about ifb investing for beginners and where people can find more of your work okay well thanks um you can find us on any podcast player whether it's apple spotify wherever it's uh investing for beginners podcast and we have about 480 episodes. So there's probably one or two that could work for you if you want. And I'm also very active on Twitter. You can follow me at IFB underscore podcast. And I'm also on, we're also on YouTube as well and investing for beginners. So those are three

Starting point is 01:00:28 places. If you want to learn more about us and see if there's things we can help you with, check us out. All right. Beautiful. Hit a lot of stuff today. Hope everyone enjoyed it. Make sure to follow us on Twitter and give us any questions for any of the topics you want to talk on for any of us to talk on for future investing power hours. These go live Wednesday, 1.30 p.m. Eastern Time, 10.30 a.m. Pacific Time on the Chit Chat Stocks Podcast YouTube channel. And you can listen to any of the replays on YouTube, Spotify, Apple Podcasts, wherever you get your podcast. So whatever method you choose, we don't care. We just hope you enjoy listening. Let me hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice

Starting point is 01:01:09 or recommendation. Ryan or Dave or any podcast guest may hold securities discussed in this podcast. They've held it in the past and may buy, sell or hold them in the future. Thank you everyone for tuning in and we'll see you next time. Bye.

Chit Chat Stocks - Buffett's Big Bet; Nike's Dismal Earnings; Why Are Mercadolibre and Nu Bank Winning? (NKE, BRK, STNE, MELI, NU)

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