Chit Chat Stocks - Earnings Season Winners and Losers (MCD, MSFT, MTCH, SFM, And More!)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Stocks. This is our weekly power hour episode. This is our 122nd power hour. That number does not really mean anything, but we've been doing it for a while. And on this episode, we talk all things financial markets, anything that's going on in the world of investing, and we are at the heart of earnings season. So there is plenty to discuss.

Starting point is 00:00:54 A lot of the biggest companies have reported. I'd say we're right in the middle now. I know Meta's reporting after the bell today. Amazon's reporting tomorrow. So lots of companies still to report, but we've got plenty to discuss. I've got my small cap of the week. We've had a couple, I would say adverse reactions, a number of stocks that are down more than 20% on earnings. So stocks that have had high expectations going into this earnings season and not come out very well from it. Brett, any big events that you're talking about this week? I think it would be fun to talk about, well, the one that's got away, Sprouts Farmer's Market. It had quite an interesting report. I think there was some

Starting point is 00:01:37 fun dynamics there as their business is inflecting to the positive side. I think Match Group is always a fun one. They reported and there's a lot of numbers and it's perhaps turning into a battleground stock, but I think it's just one where people are debating whether the business is turning around or not. And then I also think Altria Group is interesting in our relation for the tobacco update, but there's plenty out there. I know we have a question on Microsoft on Twitter that we might want to get to first, but do you want to talk about our friends from Public and then we can get started? Sure thing. So if you trade options, you've got to ask yourself,

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Starting point is 00:02:52 significant risk full disclosures are in the podcast description lots of earnings to discuss where do we want to start i kind of want to talk about mcdonald's all right hit me with uh what's going on with uh the big mac yeah it's so they have this golden arches strategy um i guess everyone's got a strategy that has some pointless name and basically i think a couple quarters ago they came out and said our customers are being more discrimin i don't want to use the wrong word here uh it was like they're discriminating more with every dollar like so they're being more cost conscious essentially maybe yeah yeah um and basically they've gone from what looked like a market darling from total compounder doing a really good job on the digital side of things

Starting point is 00:03:53 making it very much an omni-channel ordering process to reporting negative comp sales and people concerned that this is a saturated business that's kind of lost a lot of customers in the process so they have been historically kind of raising prices um more so than they typically do And it's not necessarily – you maybe noticed if you go to McDonald's that the dollar menu isn't what it once was, whatever. But a lot of it is pricing mix as well. So they really try to drive people to the app because it allows them, I think, to have better control over like average ticket because they can give you the buy one, get one. the buy one, if you buy this, you get a dollar fry or whatever it is. And it really allows them to kind of add more and more items to the average ticket, which it seems like is starting to

Starting point is 00:04:50 impact customer transactions. I've got, I pulled it up here this week. I was looking at a chart. Let me just pull up the comp sales real quick, just to make sure I'm getting the exact number right um and it's it's interesting to kind of think is this a read through to the customer like the consumer in america overall so global comp sales for the last i think it's probably 10 quarters has been eight percent plus then over the last year it's gone from 8.8 percent to 3.4% to 1.9% to negative 1%. So they officially have declining comp sales. And it's just kind of – it raises the question of is this a McDonald's problem

Starting point is 00:05:39 or is this an American consumer? Obviously, this is kind of international now. But is this more of a consumer broadly issue? Because we're going to talk about it here. Starbucks has seen pressure from consumers as well. transactions across starbucks locations were down five percent year over year it seems like if you're extrapolating these results out wing stop seems to be an anomaly they had 29 cop sales so i guess they seem to be doing just fine but if you're extrapolating these results

Starting point is 00:06:14 out it feels like the consumers may be tightening their budgets a little bit on the discretionary purchases? I think this is a McDonald's and Starbucks problem. Yes, there is inflation that or excuse me, there was higher inflation, which led to better comp sales in 2022 and early 2023. Today, we don't have as high of inflation. So comp sales are going to be weaker. And that's not necessarily a good or bad thing. But you know, it is what it is that's going to affect that number. But if I look at Chipotle, look at Wingstop, Domino's was fine, although they're not really firing in all cylinders as of lately. They're doing much better. And I think I saw I'm stealing this from someone that I read. You can't and this is McDonald's fault. You can't charge

Starting point is 00:07:04 Chipotle prices and sell McDonald's. You have to sell McDonald's prices. And I'm looking at their it was at 30 and the i just don't understand why someone would buy mcdonald's a low growth very very mature from a unit count perspective around the globe i mean they have i think about 40 000 units why are you buying them at 30 times earnings because they're never gonna be able to compared to like a i guess luxury is the wrong word but something that has a lot of pricing power, that's not their game. They are supposed to be affordable. That's what they're supposed to do with their consumer base and how their customers are going to be loyal to them. And trying to trick people to go to the app or having it way more expensive or trying to inflect a lot of

Starting point is 00:07:51 pricing power is probably not working. And you can see it in the numbers here, because one, if you see a weakening consumer, typically that means people are going from and trading down from chipotle or an example you know something like that something a little bit more expensive to mcdonald's and we're not seeing that and i just think this is something that's definitely self-inflicted and if you look at all the other restaurants out there it's not across the board there are some that as you mentioned are doing quite well and seem to be executing and mcdonald's and starbucks seem to maybe be off their game or i wouldn't read into it as a macro thing is what i'm saying yeah that's probably fair

Starting point is 00:08:36 every quarter there's going to be restaurants that have better and worse quarters the thing i find funny about this is you can see just how much in the short term stuff is priced in where McDonald's goes from positive 8.8% comp sales last year to negative 1% this year, and the stock jumps the next day, or it's up. Wingstop reports 29% comp store sales, which is growth from last year, and the stock's down today. Yeah, I mean, Wingstop, wasn't it trading at a PE of over 100? I mean, maybe it deserves to have that if the comp sales are posting above 20%.

Starting point is 00:09:24 But yeah, those are high expectations. I mean, Chipotle, right? They did 11% comp sales, guided for six, which is quite strong. And their stock has come down because it was at a PE of like 60 to 70. We have a comment here that says, Starbucks, Lulu, Celsius, Ford, Stellantis, Tesla, Burberry, Nike, LVMH, and the watch groups, meaning like wristwatches, are all showing declines, and they're saying it has to be a consumer problem at some point. I'd say maybe. I think what we are finally potentially hitting is what everyone,

Starting point is 00:10:04 all the macro doomers were talking about in 2022, which is the depletion of the pandemic era savings. And maybe this is just a normalization around that, where almost everyone across the United states giving all the stimulus checks and the savings and you know no one's spending on travel no one's spending on nice out to dinner meals during the pandemic we had that excess savings we had those charts that people saw with trillions of dollars there maybe that's finally gone and now it's not as easy as it once was yeah i've i've got some loud background noise here so i'm gonna talk about it's back yeah let's uh let's talk this next question here we have one from tyler that says he would like us to talk

Starting point is 00:10:45 Microsoft and Match Group earnings with Microsoft first. And he says, I would be interested in your thoughts about how we are in a, quote, AI bubble, if any, hyperscaler. AWS, Microsoft, Google, Meta, that reports higher AI CapEx drops

Starting point is 00:10:59 on the report of spending more money to dominate AI. Okay, so saying that the market is not reacting too kindly to them, basically saying we're going for a higher level of spending. I think, and I don't follow Microsoft that well, at least compared to Google and Amazon, there's just a lot of, like the future outcomes here are extremely wide, the future potential outcomes. We could totally be in an AI bubble, or this could be totally normal

Starting point is 00:11:38 and everything that's priced in here, we might be underpricing the potential of it, right? I tend to think that the expectations are leaning from maybe two years ago, they weren't very high to the extremely high levels, given the prices of some of these stocks. If you look at Microsoft's PE, I'm guessing it's around 40. But let me kind of confirm that real quick.

Starting point is 00:12:03 Microsoft PE, 36. So I guess not as bad as I would think, but still PE of 36 for a $3 trillion plus company for one, that's not going to be a hyper grower. The expectations that AI leads to more growth across the cloud, which we saw, I think about 30% growth. I think the expectations are quite high that that's going to continue. And for me, these earnings show that for now it's good, but it's not something I would want to bet on.

Starting point is 00:12:33 No. Yeah. it's funny that you they put out phenomenal results right stock stock yeah they generated basically 30 constant currency growth at azure on a on a large revenue base huge band yeah tens of billions of dollars and they're like oh we were expecting 31 stock dropped seven percent It's just such an estimates game on these quarterly earnings, especially after hours and the next day. It kind of makes me think, and we're going to talk about this here in a second because I've got a list of stocks that might intrigue you. I saw someone this week say, whenever I see a company that has been known as a good business for a long time and it sells off really hard after an earnings report,

Starting point is 00:13:28 he said he picks up a little bit of just a few shares he just adds some even if he doesn't know it that well anonymous source here is do i know this person or i don't even remember who it was i just saw it on twitter okay i just kind of i don't know i kind of like that approach because so many times you see overreactions to short-term misses um now granted microsoft's still trading at quite the premium multiple, but yeah, these results are good here. Let me share my screen and I'll show Azure's, uh, the growth of Azure over the last, what is this? 20 quarters. It's gone from this time last year, it was growing 26%. Now it's growing 29% year over year. It's actually growing as fast as google cloud and off of a much larger base yeah maybe like twice the market share

Starting point is 00:14:25 right something like that and yet people reacted a lot more positively to google cloud's growth compared to yeah i think if you look at those charts there ryan we're seeing it's a slight difference and this is why the analyst game and stuff we don't necessarily care about it's fun to talk about but when i'm making an investment it's just all a bunch of nonsense to me it's like when people talk about the Fed. You know, I always ask, when is the Fed going to generate an earnings report? That's what I would care about, right? They don't generate earnings. I care about the earnings that my companies generate. Google Cloud is accelerating revenue growth. Azure's was a deceleration. That's all they care about. A lot of times, the short-term traders, and I think the

Starting point is 00:15:07 algos, all that stuff, it's kind of reading through the tea leaves, but it seems like they love accelerating top lines and they dislike decelerating top lines yeah that's exactly exactly okay a couple other earnings reports i did want to address starbucks kind of mentioned it here but transaction declines continue and it's kind of funny to see some of the similarities in what we've seen with starbucks and mcdonald's where they've both really pushed people to the app um probably more so at starbucks because starbucks starbucks makes you pre-load money onto your card so they can earn interest on that float and one of the ways that they encourage you to pre-load money onto an order with the app is they now give you a tipping option

Starting point is 00:15:55 in on uh in-person transactions so it kind of makes it uncomfortable it encourages you to purchase from the app because then you don't have to go through that at all But we're just seeing continuous declines in transactions at Starbucks. They recently got an activist investor. It looks like Elliot took a stake there. I'll be curious what comes of that and how long the existing CEO is able to stick around. Kind of a funny anecdote. They reported minus 5% comparable transactions this quarter.

Starting point is 00:16:29 that day i got a little starbucks notification that's like buy one get one right now from 12 to 6 bring your friends yeah exactly those transaction numbers up let's get transactions up with a very uneconomical promotion i i think i saw or i had a dm i think last year from someone that said that the starbucks ceo somehow this anonymous person knew him personally i had no idea the validity of this dm and he said he does not like the new management team whatsoever and it turns out i think looked quite right they have the what triple shot double pump strategy that's entirely meaningless they have this thing where they're launching starbucks studios which is some sort of marketing thing where they're going to produce their own i don't even

Starting point is 00:17:22 know what they're doing with that starbucks studios starbucks studios yeah check look it up and they're talking about doing like pickup only places yeah june 7 2024 announcing starbucks studios it seems like they're getting beyond what they were you don't need to at least i think try to become like luck and coffee in china where it's super efficient low cost pickup only stuff, you have to differentiate yourself. That's why you were a premium brand for so long. And if you're just going to try to go for efficiency, I think you're going to lose some of those core customers because at the end of the day, coffee is a highly competitive business that is in some ways a commodity. Yeah. I've talked about this on the show before and it'll

Starting point is 00:18:13 be interesting. Obviously the brand still has a lot of value. People still go there and pay exorbitant prices for coffee and they come away happy when they do it which is i don't know for me a black coffee drinker doesn't make any sense but people love their kind of you know craft handcrafted cock uh not cocktails uh coffees so my thought here is that in a world where they become basically drive-through coffee places they lose some brand value 100 i agree you like walking in you like the aroma you like kind of the bustle of people going through and getting their coffee and studying at the or whatever working from the starbucks it's kind of a nice environment i wonder if they lose some of that brand value and yeah doing interviews they're

Starting point is 00:19:00 doing meetings they're working there right that was part of their their push i mean that's really one of the key ways i ever went to a starbucks is that and that's me it's not a regular customer i know the the the daily customers are much more important what other earnings do you want to talk ryan or do you want to talk one of your segments here that you've teased six stocks that have dropped on earnings so far is that uh you want to do that one we can do this i'll just do a little gut check with you yeah i looked up stocks that have dropped by more than 15 on earnings and i found these six ones there were a lot more but i found six that were uh kind of known as higher quality so i'll let you kind of take a stab at these first one is dexcom they are the from what

Starting point is 00:19:48 i remember uh glucose monitoring and there was a lot of concerns about them you know losing a lot of customers with these new glp-1 drugs and less need for glucose monitoring less you know less of an addressable market if you will so dexcom dropped 30 on earnings universal music group which is owned i think believe largely by bill ackman i don't know if it's like majority owned by bill ackman i think that's just an investment i don't think it's majority owned wasn't there like a point where they were considering taking it public via spac like am i remembering yeah i'm not sure if he even owns it but I know they own it in their fund.

Starting point is 00:20:32 Anyways, minus 25% after earnings. ASML, minus 15%. Caring, which is the luxury company, minus 16%. Lamb Weston, which I'd be lying if I told you I knew exactly what they did, minus 32%. And then Burberry Group, minus 20% after earnings. So some huge drawdowns, especially in luxury. We saw this – I think some of the luxury companies that you would maybe categorize as more aspirational luxury where it's people that are paying for something they probably shouldn't be, they are being pinched right now it looks like. we saw this with LVMH. LVMH has seen particular weakness in Asia, excluding Japan. And then

Starting point is 00:21:21 they also saw some, they talked about weakness in the North American market as well. Carain had tough results. Burberry Group had negative 21% comp sales. Not sure they're considered really like true luxury. The true, true luxury businesses like Hermes, Ferrari, i'm willing to bet they'll be largely unaffected but well our man has already reported and they were pretty much unaffected um i don't know do any of these stand out to you anything excites you here so to follow up lamb weston is a maker of frozen uh french fries and frozen potato products and other potato products for restaurants it's a big bulk stuff big business right yeah hey potatoes are a big business in america i think that one especially because of that sharp drop

Starting point is 00:22:12 it was a 30 drop looks like year to date's down 43 percent now pe of 12 according to just i don't know do your own math on that right the aggregators sometimes have it maybe calculated differently than you would ford or trailing or whatever that one stands out the most to me burberry no caring know asml still pretty expensive and i actually just checked it's up seven percent today probably on that microsoft news so they're still pretty expensive but i think universal music group also interests me at the right price you can see that youtube and spotify are driving tons of new subscribers and raising prices on music subscriptions which right that flows directly to universal music's bottom line yeah finchette tracks just like the revenue by segment and

Starting point is 00:23:07 the streaming revenue just continues to grow i don't suspect that will decline at all in the next 10 years on any annual basis you've got the music if you're universal music group you've got the rights to it streaming will continue to grow subscribers and it will continue to grow prices which will trickle through to you as the rights holder, most likely, unless there's any change in the contracts there. But I suspect they will continue to get good economics from those deals. So yeah, Universal Music attracts me. Dexcom, I am curious if this ends up being an overreaction because there is a lot of concern. Basically, they pulled in their full year guidance. And I think a lot of it is concern from the investment community that this is the GLP-1 drugs causing this problem.

Starting point is 00:23:58 And so to be clear, they're glucose monitoring for diabetes and other stuff. I guess that means glucose monitoring. So the idea is this is a very simple idea from Wall Street. Sometimes these narratives take hold. GLP-1s are going to make people have not have diabetes. Well, Dexcom is going to struggle. I don't know. Yeah, that might be an overreaction for sure.

Starting point is 00:24:19 I mean, if the stock's collapsing on that narrative, I don't think the U.S. is going to get rid of diabetes anytime soon. Highly unlikely, I would say. Should we hit my small cap of the week and then we can hop back to – Well, why don't I give you – yeah, why don't I talk about one and give you a break and then you can lead on that one. actually though let me switch around to you of those six stocks what one are you the most interested in on a snap judgment universal music group probably yeah yeah that one makes sense to me it's still 24 times ev to ebit trailing um but at the right price yeah that would definitely it's a business i understand and it's a business that i think has a lot of tailwinds so i definitely

Starting point is 00:25:11 like where they are positioned in that industry yeah i agree and if you think the the revenue growth is extremely predictable well 24 times might make sense i will say though we did one of the the labels as a research episode i think last year and i came away a bit disappointed on the the really bad working capital disadvantage where the streamers like spotify have a big working capital advantage and these ones you know it's a slight thing but i think that does give it a little bit of a knock to the to the business and i would want to all else equal a little bit of a discount on that valuation but yeah let's move to another one let's talk match group what did you well let me let me just go first maybe i can give out some numbers let me let me pull up

Starting point is 00:25:59 the numbers that i will say i did see that maybe because of our complaining online but i doubt it was actually our complaining it was probably the activists that actually talked to them they produced somewhat the monthly active user number or didn't they love giving out charts on monthly active users but not having really clear axes on them which i think is fantastic and quite hilarious but they said and here's the quote because tinder is the whole the biggest part of the thesis here tinder made solid progress in q2 but monthly active users continue to decline year over year and are down nine percent year over year but they say seem to claim i'm going to show the chart here i'm going to really zoom in ryan because you have to squint to see the improvement

Starting point is 00:26:49 they they were bragging about a i i don't want to call it a sequential increase from april to june of this year in tinder's global monthly active users is this a bit misleading because i would guess june has a seasonal bump as a lot more people date you know heading into the summer months. Yeah. I got a feeling this is, I got a feeling we're not going to see this same chart next quarter. Yeah. I love, I love this chart. Look at that axis. Doesn't really tell us much, does it? It doesn't tell us anything and it could very easily be seasonal. There are more people on the app in June than January. Hmm. I wonder why. Uh, maybe because it's a time where you can actually go outside um yeah i would imagine there's a lot of seasonality to it although the

Starting point is 00:27:45 fact is they don't really report it enough for us to know for sure their seasonality um that is a chart crime that is a chart crime of the highest degree if they choose not to reshare the mau numbers next quarter yep i agree tinder is in tinder struggling there's really no way to slice it yeah let me read out through the headline numbers here ryan and then maybe you can give your analysis total revenue up four percent uh up wait yeah on a foreign exchange basis up eight percent so foreign exchange neutral up eight percent that's probably the best number there tinder direct revenue up one percent four percent foreign exchange neutral hinge direct revenue at 48 percent payers declined five percent year over year revenue per pair up

Starting point is 00:28:33 9% operating income, down 5% operating margin of 24%, continuing to buy back stock. I guess I don't have to read much more there. Just know that the share count is going to continue to come down. Pretty big mixed bag, I would say. Yeah. I'm happy to no longer be a shareholder here. There are too many times where I've been frustrated by the charts they choose to share, frustrated by management's commentary frustrated by the headline numbers and i just don't have to deal with that anymore although it's ironic because we sold and one quarter later they report better than expected results and it's up eight percent or whatever on their earnings report yep all right we had a comment here well one person on the lamb west and one i will say these

Starting point is 00:29:25 are snap judgments so we don't know much about lamb west and i didn't even know that they were doing potatoes before I saw it. They say, you seriously like commoditized potatoes over the most beautifully structured businesses in the world like McDonald's. McDonald's pushes lamb west and around like a bully. I wouldn't doubt that, but price matters. Remember that and market maturity matters. Other comment here on dating. I would rather invest in technology, consumer staples, or residential real estate, I'm saying. I think that's what they mean. than people's dating lives seems easier to see trends just my two cents worth yeah maybe there are stuff that hops around the trends on the online dating world but i don't know if it's

Starting point is 00:30:06 that hard to predict because the big players have stayed the big players as we've talked about ad nauseum and we've had maybe even multiple at least one full episode discussed discussing the match group business and really going into it in details which you can find on wherever you're listening to this or if you're watching on YouTube, the usage of dating apps is fairly steady and continues to grow, at least outside of the developed world. It really came down to poor execution at Tinder and a stale product that materialized maybe one or two years ago, but had minimal product updates and improvements for seven or eight years. And they're trying to work through that. I don't think that means the industry is dead, but it means that the prior

Starting point is 00:30:56 management team and I'm seeing now with this management team don't really have much trust in them. Someone says here, I think Facebook and Instagram are killing match more than other dating apps. Maybe, but they work in tandem most of the time. Sources tell me. What are your thoughts right yeah it's possible that facebook and instagram are killing them but i i tend to agree i think a lot of people kind of separate those two divisions of their life the social plus the dating um it match group kind of seems like it's in a place where it doesn't know what to do Like, Tinder is in decline, and they can try to revamp it as much as they want. But I think there's just such brand baggage there that it might be hard to regain a lot of the customers it once had.

Starting point is 00:31:55 Hinge is in a great spot, but it's going to take some time to replace the revenue from Tinder that it's lost. Yeah, and you'll never guess, Ryan, but in the letter here, they say, we expect further improvement in tinder's year-over-year monthly active user and payer trends in q3 well they've been saying that for about six quarters now so i've put them on maybe we can call it the boy who cried wolf category like this is a group of management teams that we're just going to call the boy who cried wolves uh or the boys who cried wolves the management teams like cry wolf and i don't really believe them yeah there's no reason i should believe them just wait till q4 this year when they say second half 2025 we expect re-acceleration

Starting point is 00:32:43 yeah let's let's just push this problem further down the road where we don't have to deal with it until then yeah we have a comment from palier that says further improvements from minus nine to minus eight percent yeah it's it's off a pretty low bar at this point so i mean literally just keeping your existing users would be a major improvement yeah and the stock probably does quite well and the expectations on the stock are quite low wouldn't be surprised if it works from here if they kind of fix some of these things they finally fix things or if hinge really takes off and replaces a lot of this revenue and it doesn't matter and that's why the stock's up today on a poor earnings report. The expectations are low, but as we talked about, maybe on the

Starting point is 00:33:28 podcast, but we don't own the stock anymore. It was a big loser for us. One of the biggest. Probably one of the biggest. And I'm not, as you mentioned at the start of this segment, I'm not upset that I don't own it either. There's just no reason to like this business right now. and if you can bet on that transition from an MAU and payer improvement and say the second half of this year, the stock will do well. But I don't know about this management team over the long term. And it's cheap, but it isn't crazy cheap when you include the stock-based comp. Like on a true underlying earnings basis,

Starting point is 00:34:11 it's not the cheapest business in the world. Let's talk my small cap of the week though, And I will say, I didn't find this one on Yellowbrick, but it will be up on Yellowbrick, I imagine, for paid subscribers. For anyone that doesn't know, Yellowbrick, they're just an aggregator of the best stock pitches across the internet. So they pull from blogs, newsletters, fun letters, podcasts like ours. And they pull them into one single destination where free users, paid users, you can get access to all these ideas and it'll direct you right to them. Think of it kind of like a modern value investors club. if you use our code joinyellowbrick.com slash chitchat you get a discount um but yes go ahead

Starting point is 00:34:55 check it out it's free and it's literally just tons of great stock pitches you can just scroll yes brett oh sorry sorry i thought you'd finished i was gonna say disclosure there is a free tier so you can try it out for free but there's a free and a paid tier and you can use our code or link excuse me, in the show notes to go check that out. And I will say personally, we've both been using this product regularly. It is fantastic for idea generation. I'd say maybe, I don't know, want to toot their horn too hard, Ryan, the best way to generate small cap, micro cap ideas that we've come across in a long time. I mean, lots of turning over rocks and they're helping you do it for you. Yeah. There was a point, I think a couple of podcasts ago where you asked like,

Starting point is 00:35:41 how do you find small cap ideas on a regular basis? And I honestly don't have an answer because they're scattered across hedge fund letters. They're scattered across blogs, tweets. And it's hard to like find a single funnel. This is just a directory. Like it's pulling them all into one place. So very nice.

Starting point is 00:35:58 Anyway, the one from this week, last week I had a friend of ours from returns send over his latest research report. I already know the idea. I'm going to talk about it next week. although I haven't read his full report, so I'm saving that one. So a little tease there, that was probably one of the best pitches I've heard in a while. I'm talking about a different one. This is from probably one of the best small cap fund managers I follow, maybe out there today.

Starting point is 00:36:27 He has been running his fund since 2018 and he's annualized 45% returns versus 14% in the S&P 500. Do you want me to toss the letter in the comments here, Ryan? Sure. The name of the hedge fund is Smoke Capital, and he does a really good job. He writes investor letters. And in each investor letter, there's typically a stock pitch at the bottom about a company that he bought. One that he bought recently is Leon's Furniture. Now, beware, the stock is up 12% since he announced that he owns it. But Leon's Furniture is the largest furniture retailer in Canada. I actually didn't even check if this is really considered a small cap, but I assume it's somewhere in the small cap realm. It was founded over a hundred

Starting point is 00:37:11 years ago. It says, despite being the market leader and generating strong earnings and free cashflow nearly every year since 2002, Leon's only trades at about 11 times 2024 expected earnings. I'll be honest, furniture retailer at 11 times next year's earnings doesn't really get me that hooked, but there's some interesting stuff happening under the hood here that could unlock a lot of value. So for starters, they own a ton of real estate that they plan to spin out into a REIT. Keep in mind, right now, the real estate is just sitting at cost on the balance sheet, not really earning anything for Leon's. Second thing, Leon's owns apparently 40 acres of land near downtown Toronto, which they recently had rezoned and they intend to develop a master

Starting point is 00:37:56 planned community of 4,000 residential units along with retail and other mixed use space. I kind of got a little bit worried thinking, okay, this is a furniture retailer that's pivoting into maybe like a community developer. But we've actually seen this done before, especially where you turn the land you own into a REIT. Think about the big Las Vegas casino properties. A lot of them do this. And it does unlock a lot of value. You retain ownership in the REIT. Yes, you end up having to pay for a lease, but you collect dividends from the REIT as well, which more than offset the lease costs. Here's the part that kind of got me attracted to it. In 2021, Leon's hired their first ever non-family member CEO named Michael Walsh. Michael Walsh from

Starting point is 00:38:43 2012 to 2015 worked for a company called Canadian Tire who implemented this exact same playbook. In 2013, they transitioned their real estate into a REIT. It unlocked a ton of value. So it appears they've basically brought him in to do the same thing. It seems like one of those where it's reasonably priced, reasonably priced with a ton of upside and kind of a catalyst right in front of it. Yeah. And I'm reading Peter Lynch's stuff right now. And you might be surprised to hear this, anyone that hasn't read his stuff lately, but one of his favorite ideas is real estate spin-outs or getting unlocked real estate, or maybe even just a hidden gem within a company, a hidden asset within a company, unlocking that and creating value for shareholders.

Starting point is 00:39:31 That's one of his favorite things. And it looks like this is a classic example of that. If you have something that's trading at what he says at 11 times earnings as of that writing, so maybe a little bit higher now after he posted that, you have something that might not be too exciting at 11 times earnings, but probably is trading at a fair value, maybe even a discount. depending on what your forward return estimates need to be, depending on how much capital they're returning to shareholders. And then you have this real estate play, which could be quite interesting and could be quite the catalyst.

Starting point is 00:40:05 They could bring in a ton of cash, something like that. And then they could buy back a ton of stock, do a special dividend, stuff like that. These one-time events for these small companies that are trading at a discounted valuation seem quite interesting. I kind of like it. Smoke Capital is very good too, so I'm excited to read the letter. Yeah, it's one of those where you read the letter and every time you kind of think like just that take my money meme where he's just done such a good job.

Starting point is 00:40:34 And it seems like he finds a lot of ideas, like despite gaining more and more money in AUM and his fund, he seems to be ripe with tons of ideas, despite having to move up kind of the market cap and liquidity ladder that some small cap investors tend to struggle with. Yeah, it's an interesting one for sure. Again, you can find ideas like that on Yellow Brick. It's a really good directory for it. I do want to talk about Sprouts Farmer's Market though, because to pat you on the back, I believe you first recommended this around $20 a share. You can go find the write-up. I think it's still online. Maybe I'll post it on Twitter today or something. But you wrote, I think a 10 page write-up just describing Sprouts Farmer's Market. You thought it could be, frankly,

Starting point is 00:41:25 a multi-bagger because you thought it had a good formula for store count growth and it had a unique customer base. And it has played out perfectly so far. I think it's probably more than a four bagger since you recommended it. Stock price $100 a share today. So would that be, is it four or five? I can never know or remember if it's either way. It doesn't matter. If it doubles, is that a one bagger or is that yeah i i always forget anyway but yeah unfortunately don't own it right now wish i had held on it was one of those that again we held in the old investment funder in and then when we transitioned to the personal accounts it didn't really get included in the personal account unfortunately uh go through the numbers here too yeah i was gonna go through the

Starting point is 00:42:17 numbers. I will say for the write-up, the first one was in 2021, and then we did an updated podcast in September of 2023, both kind of go through the business in full detail. I think the two highlights from the quarter and why the stock even soared after it soared so much this year, 6.7% comparable sales growth, which is basically a double from the prior five or six quarters, and then 6.7% operating margins, which again is a huge improvement from say 5% to 5.5% over the last few years. Remember, 6.7% versus 5.5% might not seem that big,

Starting point is 00:42:58 but the gap when you're running a very low margin retailer, that is a ton of operating leverage that can show up on the bottom line. I think that's really it, Ryan. They continue to buy back shares. The reinvestment runway is still there. We're at about a $10 billion market cap. Well, let me put it a different way. They're at about $100 a share. And they're guiding for at least, say, $3.30 in earnings per share this year. So we're at a PE of around 30. Forward PE. Has the stock officially reached fair value, given the reinvestment runway? What are your thoughts? Yeah, I would say it's at fair value. The difficulty with – people talk about hundred baggers and stuff like that where you get these huge multi-baggers. It's really hard to have a hundred bagger or more or even just a stock that doubles, triples, quadruples where it doesn't at some point start to feel overvalued.

Starting point is 00:44:03 You have to kind of hold through those overvaluations. I think every huge multi-bagger has probably gone through that at some point in time. It seems like this is probably one of those points in time for Sprouts Farmer's Market. The thing I like about Sprouts is it – I remember in 2020, profit margins kind of got elevated more so than they had been. Gross margins jumped, and it has higher gross margins than most grocers because it's targeting health enthusiasts. It's not your typical bargain grocer. And they're not negotiating with Coca-Cola. Yeah, exactly. And people said there's no way these margins are sustainable online. That was most of the feedback that we got was earnings are overstated because these margins aren't sustainable. Operating margins have improved since that point in time. So they really are targeting a different customer, which lends itself really well to better economics than your bargain grocer.

Starting point is 00:45:08 Because like Brett said, you don't have to negotiate with the Coca-Colas. You are getting a lot of local suppliers. The health enthusiasts are not targeting the lowest possible prices. They're targeting the items that are good for their diets. I think it was 70% or something of customers are some sort of a diet restriction, if I'm not mistaken. Yeah, or some sort of adjustment to their diet, which makes sense. I would also note that the average salary of their shoppers, I think $112,000. I know for a fact it's above $100,000 a year, so well above the national average. That allows them to, especially because they have a

Starting point is 00:45:50 big price disadvantage versus Whole Foods. They have that gap where they're much cheaper than someplace like Whole Foods. They have plenty of room to raise prices to counter any input costs. And as we've seen here, lead to some better operating margin. And one of the things we talked about in our updated podcast in September 2023 was that traffic was weak and it had been weak coming out of the pandemic. And that was one of our biggest holdups. And it was keeping comp sales low. It was honestly below inflation for a little while. Comparable sales were below inflation, although margins were staying intact. So I don't know if their inflation was as high as the stated CPI in the United States. And our big thing was, hey, if traffic turns around,

Starting point is 00:46:36 this thing is going to start humming again, and it ended up working. That's really it. That's all there is to it. I think the lesson here is when you find a stock that has low expectations and then you have better expectations from that and then they even beat your expectations that's the anatomy of a multi-bagger

Starting point is 00:46:59 because you're going to go from you're going to get multiple expansion yeah exactly we've got a couple comments in the YouTube chat here do you want to maybe talk about our friends first uh what talk about our friends public our public yeah i don't have the ad read so maybe yeah okay

Starting point is 00:47:22 it's uh yeah so early in the show you heard us talk about the investing platform public.com that's where you can trade options with no commissions or per contract fees and you get a rebate of up to 18 cents per contract traded nerd wallet recently gave public five out of five stars for options trading if you want to see why go to public.com and start getting a rebate of up to $0.18 per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk.

Starting point is 00:47:48 Full disclosures are in the podcast description. U.S. members only. All right, what do you want to touch on next? There's a couple other earnings reports. You want to go through some of them? Sure, yeah. Hit whatever you want. Let's talk PayPal.

Starting point is 00:48:03 Did you read this report? Glanced at it. Seemed okay. Kind of the same as usual, but users are improving a little bit. It's a bit like match, though, where the decline is not as bad as it used to be, but it seems like they're getting rid of low, maybe less profitable users, and they're retaining the ones that are more profitable

Starting point is 00:48:25 because the spend per user seems to be going up. And stock's working. Yeah, they're buying back as well. It seems like they have improved, kind of stabilized the business. active users finally increased again um which is good to see and it is kind of deep value here i guess it's a bit of a battleground stock as well um i don't know if i guess i'd call it deep value but it's one where i think if they're able to maintain their existing like some of the users that they have now tend to transact more and more on the service they've got some super users

Starting point is 00:49:08 but I guess everything in my mind would seem to point to PayPal is going to lose market share and yet they seem to be treading water, which is okay, or stabilizing market share. They're maintaining it, yeah. And I guess there's another example of the expectations where the expectations on the stock have come down quite a bit. I think it went into an 80% drawdown. When that happens, the trailing earnings ratio has gone down. People are saying, hey, look, these users are going to continue to decline.

Starting point is 00:49:46 I'm not sure about payment volume growth. I'm not sure about the profitability of this new payment volume coming from Denmo and Braintree. They've beat those expectations by just doing okay, and now they're returning a ton of cash to shareholders at a cheap price. I don't know if it's one that I'd want to own for the long term. I don't know if I'm confident in this business over the long term, but this new management team that's come in seems to have improved things quite a bit because the old manager, well, they seemed to, how do we even put it? It was pretty similar to the match group management team. It seems okay when they're there, but then a new management team makes them look pretty bad. well yeah it's almost like they're putting band-aids on problems when they're trying to

Starting point is 00:50:36 distract you from any problems and that's not the type of manager team i management team i want i would rather have someone that embraces issues and says look these are the problems facing our business we're going to try to fix them and then hey look we're doing some stuff well as you know That's not our focus, though. But a lot of these management teams, and I know the incentive is there to try to make your business look good. They want to talk about what's going well and not share with you what's going poorly. And PayPal, especially when some of these new numbers came out, when they were talking about how profitable their users were, their users declined, whatever it was, or where their payment volume was coming from, whether it was super low margin ones or super high margin ones. that's uh it's changed with this new management team which is definitely a positive sign

Starting point is 00:51:32 all right we forgot to do the second advertisement for fin chat so why don't we let me let me just talk about them real quick we haven't shared much from them although ryan had a few screenshots there where they're one of our favorite platforms you get so many kpis i mean during an earning season i'm on it every single day and it has all these kpis for example the starbucks transactions the Starbucks comp sales, the McDonald's comp sales, the Sprouts comp sales. They put all these KPIs in there for you, and you can chart, visualize, show the improvements or declines in a business, and it just helps so much. It saves me so much time, presides so much value, and I think it's well, well worth the

Starting point is 00:52:11 money. You can try it for free, and you can go to our link, finchat.io slash chitchat, sign up for free, or get one of the paid plans, help yourself out, get 15% off, and help us out as well. okay questions in the chat here ryan yeah these are kind of long so let me read them off here do you like to invest a smaller amount evenly across a couple of stock ideas you're interested in or all in one idea you like the best how do you decide how to spread out your investments i think he means maybe at one time and for me i'm more of a okay what's my best idea let's say i got

Starting point is 00:52:49 to deposit this month. I'm more of a, what's my best idea this month? I'm going to buy that one. Then the next month I kind of reevaluate. What are yours? What's your philosophy? I do it the same way. It's just, maybe it's just the friction involved with buying multiple, but I, when I get some income coming in, I deposit it to the brokerage account. I have my portfolio and yes, I like everything in there, but there's things in my existing portfolio that I like better than other opportunities. So, and sometimes it's, you know, the stocks come down a bit. Sometimes it reports a great earnings season and a great earnings report, and I feel more optimistic about it. But I have my set group of ideas, and then I'm usually adding

Starting point is 00:53:38 to one at a time as the one or two at a time as the deposits come in. I'm not just distributing it equally across all the holdings yeah and i will say we still worry about or not worry about we care about having a diversified portfolio with over time building out probably at least 10 stocks if not more that's the other thing i'll say is i just had sort of a well maybe we can call it a scarring lesson with over concentrating um with a company that both brett and i both follow and it just reminds me that like even the best opportunity even the like you've done all the work the business seems fine it seems really cheap seems like a great valuation the future is uncertain and you can always be wrong. So I think I'm probably going to start putting,

Starting point is 00:54:40 especially at cost, I think I'm going to have like a maximum threshold in terms of what I'm willing to make a position at cost. So whether it's 10%, I think that was what we implemented in the fund. And that's probably what I'll use here. 10% is the most of the portfolio I'm willing to put into one position purely based on the cost. If it grows, if it's a business that earns a higher place in my portfolio, I think I'm fine to let it ride. But yeah, building positions in your portfolio that are 30, 40%, you're taking some huge risk. Yeah, that's for sure. And this would maybe be a full episode on portfolio management, but I like to have a couple of tiers where you mentioned the 10%,

Starting point is 00:55:30 that's for maybe the lowest risk stuff. And then I could have a lower tier of 5% at cost and then go down to 2.5% and maybe even lower for something that's extremely risky. I think that makes sense for me and kind of having those barriers and those step changes can help you build out your portfolio at cost and really not make it formulaic,

Starting point is 00:55:50 but as be a little bit of ground rules for your portfolio. But we have one more question in the chat here. And then I want to talk about Andrew Left, which I think will be a fun one to close things out on. Here's the question. Have either of you guys looked into Align Technology, maker of Invisalign? 80% market share and clear aligners, 20% operating margin, consistent buyback, path to returning to 20% sales growth. I haven't followed it in a while. I know that there was Smile Direct Club that was supposed to be the competitor, and they basically went out of business.

Starting point is 00:56:25 or I think they may have actually gone out of business. I'm seeing market cap of $17.5 billion for Align technology. PE says 40, but I'm not sure if that's accurate. It would interest me, but I don't know if healthcare is my favorite. This is, I think, one I can understand. It's just, it's not my wheelhouse. It's not something I really like to focus on.

Starting point is 00:56:53 Yeah, if I remember correctly, Align has really good returns on invested capital. Yeah, for sure. Like you, there are some complications to healthcare industries. And I know this is more selling into dentist's office and stuff like that or not orthodontist's office. But there's always extra moving parts as well. I don't necessarily understand the competitive set that well. I don't know if Invisalign has any true competitors, but I remember, yeah, really strong returns on invested capital. Yeah, I'd love to kind of dig in a little more here because from what I understand, it's a bit of a monopoly in the clear aligner space.

Starting point is 00:57:40 80% market share and taking share from traditional braces, I believe. I don't know if that trend's continued over the last five years. I wonder why the stock's down. It's kind of my thing. yeah yeah i'll do more looking into it maybe we can have a little research report on it next next week all right that's beautiful and as as a tease uh next week on the full podcast episodes or the stock research episodes on wednesday i will be doing a nintendo update as we hopefully get the new console coming out here soon it should be an interesting time for the business and the stock

Starting point is 00:58:15 hopefully. And Ryan, what one are you doing, which will be, I think, two, maybe three weeks from now? I'm looking at two different companies. I haven't decided on one. A month ago, I said I was going to do Ulta. I'm scratching that. I don't love the management team there. I'm looking at Paycom and SEMrush. One of those two will be my research report. All right. Software and more software we're also doing a study as that you probably heard throughout or talk about it a couple times now on peter lynch so i think that'll be fun perhaps even underrated in a lot of his philosophy even though he's so popular there's so many people that have copied his philosophy and done well over the last couple of decades but i want to do we have a couple of minutes here ryan

Starting point is 00:59:07 we had a question of if we talked about andrew left and citron research last week we did not I think it came out either the day of or right after we recorded this episode. So for any listeners, the prominent, let's say, research house investment fund, although I guess it was just his own money, according to the SEC and DOJ indictment, or I might be using the wrong terms, but if you're a lawyer and I'm using the wrong terms, do not hate me for it. They would do, say sensational is probably the right term. research reports, a lot of the time shorts, a lot of times on frauds, a lot of times on stuff that

Starting point is 00:59:47 ended up being frauds, and they were right about. But when they would promote stuff, stocks would move. And according to the Department of Justice and the Securities and Exchange Commission, they are alleging that left and Citron Research misled readers, misled investors by, for example, saying they were long a stock at $20 a share, saying their price target was $100, and then when it jumped to $28, they would immediately sell on the day of their report, stuff like that. Or I don't know if they've proved this, and this will have to come out in court, the courts will decide, but they think that he was basically intentionally lying about stuff to move stocks and things that he didn't believe. I'm curious what you thought about this. It's

Starting point is 01:00:38 supposed to be a very large fine, I think $20 million in potentially actual prison time. So what did you think when you saw this come down the news pipeline? Yeah. Look, if you're a short seller in general, it's even more important than a typical investor that you have good ethics because it's not like you're necessarily benefiting some of these companies. People's jobs are at risk if they're compensated with stock and it's whatever. It's not that I'm totally against short selling, but there are ways that you can actually impact people's lives at the companies if you have a negative impact on the stock.

Starting point is 01:01:27 The other thing here is if you are large enough to impact the price of a security, if your influence is wide enough to do that, there are – I don't know if there's actual like specific legal rules around this. But there are – there's an ethics component to it and I saw you write about this as well where you should have some sort of an internal barometer of I'm going to hold this for a certain amount of time because you know that as soon as you talk about it and you affect the price, you're – I don't want to say cheating. Like you are cheating in some degree and you're – depending on your size, you can impact whoever bought or whoever followed you or whoever trusted you. So yeah, you have sort of a moral obligation or moral responsibility to not leave a bag with the people that trust you. Yeah, I agree. And now what you're saying there is not – at least I don't think should be illegal. There are plenty of people, both long and short side. I mean, for example, Kathy Wood does what a lot of people argue is the opposite for

Starting point is 01:02:44 the long side, although it's not the exact same, but people say that she intentionally misleads. I'm not making that allegation, but what we talk about and what we try to do as people who talk about our own portfolios is never buy before you're about to talk about a stock or say like do a research report on a company. always do that after and have a multiple day grace period on that. And then the same thing for selling. So don't sell a stock and then do a whole research report shorting it or don't go in shorting it and then do a whole research report shorting it, publish it. And then if

Starting point is 01:03:17 the stock's down immediately sell. You basically have a grace period on both ends. If you already own a company, like for example, say I've owned XYZ stock for six months and then we do a research report episode on them. I sound very bullish. Somehow we don't have this influence. So it's really not actually a problem, the stock goes up like 10%. Even if it goes past my estimate of fair value, I would wait. We have a multiple day grace period, I would say probably even longer. It's just immoral to do that. But the thing that's actually illegal, apparently, and this is from what I'm reading is you take a position, knowingly lie about it in public, and then people have to prove that it's a lie so that's going to be the toughest thing and then profit from the lie and

Starting point is 01:04:04 then collude with other people in that lie so i think the key distinction is that jordan belfort was a criminal because this is basically what he did but the amc apes are not because they're actually sincere in their beliefs you know what i mean yeah the funny thing about this and i guess this is you know why the sec exists this is how markets used to operate for the most part like you look back in the early 1900s you were buying purely on speculation there weren't any stated financials for most companies so you're doing it largely based on whatever someone said someone with influence said about a certain stock or said i know this many people are also going to buy you should get in now that kind of thing markets largely function like that for a long time

Starting point is 01:04:53 and it's good to have a watchdog like patrolling that because markets don't function yeah yeah i don't think that's a hot take yeah i i don't know if i believe someone should go to prison for doing a pump and dump unless they're deliberately lying over and over and over and over again but i do not respect people that pump and do pump and dumps whatsoever no absolutely not and or i don't respect people that i believe are purposefully misleading with their analysis either long or short to try to move a stock yeah and like frankly if you move if you know that you can move a stock with your research you probably shouldn't do it either be a research house where you make money by selling research or be a fund that's discreet about your holdings yeah i don't

Starting point is 01:05:52 think unless you're a super long term and you have a stated mandate that you're going to hold everything for more than three months whatever right if you if you buy something and they're like perfect let's let's buy it let's do our research report let's get out it's unethical yeah i think that's fair that's fair i hope we have this problem one day because that means our audience is bigger and we have a much better business on our hands but luckily i mean you know we get a decent amount of people that listen but we're nowhere near that influential as someone like andrew left all right we're going long ryan anything else before i hit the disclosure and we get out of here no i think that's it all right let's hit the disclosure thank you to all our

Starting point is 01:06:30 sponsors, FinChat, Yellowbrick, and Public. Go check out all those. Tons of value for our listeners across all three of those services. As a reminder, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hope security is discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, and we'll see you next time. Thanks for watching!

Chit Chat Stocks - Earnings Season Winners and Losers (MCD, MSFT, MTCH, SFM, And More!)

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