Chit Chat Stocks - Index Funds vs. High Yield Savings; Another Small Cap Stock Up 10x; Would You Buy Airline Stocks?

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 i am one of your hosts ryan henderson and i am joined as always by the one and only brett schaefer this is actually take two we had a little bit of technical difficulties people on the podcast here might not care but if you're watching live on youtube uh you know this is our second take at it we had plenty of technical

Starting point is 00:00:55 difficulties but we are here now so if you are live on youtube please give us some feedback is the audio better we would like to know in the comments but with that said i guess i should i should mention here we do these shows every week on thursdays at 9 30 a.m pacific time 12 30 eastern time and uh we do these on youtube where you can ask any questions you might want you can also ask us questions throughout the week on Twitter over email, chitchatmoneypodcast at gmail.com or however you can get a hold of us. We're quite responsive on all socials and stuff like that. So definitely ask us some questions, but we've got a lot on the docket this week. I've got my small cap of the week, which I think probably has the most upside potential of the small caps that I

Starting point is 00:01:45 have discussed so far. And then I've mentioned this the first time around as well, but it's based in Omaha, Nebraska. And as we know, there is shareholder-friendly contaminants in the water over in Omaha. I don't know what it is, but for some reason, companies in Omaha tend to return or tend to benefit shareholders a lot over the long run. So maybe that's enough to entice people to stick around. But then we're also talking exponential fitnesses, new CEO. You've got some stuff on the S&P 500's highest earnings ratio in what, probably 10 years, maybe more. So it's inflecting and maybe concerning for the index investor. So we'll talk through that as well. I guess, Brett, welcome to the show. I should have let you speak a little earlier,

Starting point is 00:02:33 but any other topics you're excited to talk about this week? Yeah, I was going to say we should have gone two minutes and testing the mic at the start. I I believe we fixed it. We turned it down quite a bit. Something happened with the settings there, but the people in the comments will let us know. Hopefully we fixed it. We did go like eight minutes last time on that, but I have some fun topics again on the S&P 500, not the S&P 500 index fund, essentially just would you buy a broad market index fund right now, or would you store money in a high yield savings account, maybe a short-term bond fund, something like that. A little debate on that. It was a really fun one on Twitter. Although, as always, people get quite mad at that. We have some stuff and questions on Adyen, which I think was quite interesting. The stocks come down a bit. Could be an interesting evaluation here. I know a lot of people are discussing that one, as well as some other fun things from our good questions over at Twitter. And we have some people that are going to ask questions in the comments here.

Starting point is 00:03:31 So I think we got the mic figured out. Everyone says it sounds good, sounds much better. So thank you, everyone. Hit us up with any questions and let's get started, Ryan. Sure thing. Before we get into the topics for this week, we want to talk about our friends at Public. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first? At public.com, there are no commissions or per contract fees. And more importantly, it's the only platform where you can earn a rebate on every single contract traded. That means you can save on your options trading costs and keep more of your capital in play. Whenever you trade options on public, your savings are automatically applied.

Starting point is 00:04:07 So don't change your strategy, change your platform and see the difference in your bottom line. That's no commissions, no per contract fees. And it's the only options trading platform where you can earn a rebate on every contract traded public com. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. full disclosures will be in the podcast description i kind of want to talk about

Starting point is 00:04:32 exponential fitness to kick things off let's do it in place and for anyone that doesn't know exponential fitness is a franchisor of boutique investment low or not investment fitness locations so things like pure bar i'm forgetting what some of the other brands are as well but they have a number of different franchise concepts where it's not this capital intensive gym like business it's very it's investment classes you build a studio you teach whatever that investment class is i assume there's some sort of way you're having a brain fart here ryan you keep saying investment fitness classes think like boutique yoga studios maybe even strength studios pilates studios i forget the exact styles but they have like six of them and it's more for

Starting point is 00:05:17 those upscale things that the suburban moms want right that's kind of the marketing push yeah i don't think they're going for investment classes so fitness boutique fitness classes um but they had some i don't know i guess you would call it maybe an accounting scandal and the uh ceo was ousted there was a short report and the stock got sold off really hard um but the the concept has been growing it's been doing fairly well if you look out at it over multiple years some of that's probably inorganic growth as well but about a month ago they hired a new ceo which they had an interim ceo in place so this new ceo his name is mark king mark king was most recently the ceo of talk about he led the franchisor to positive same store sales growth in each quarter but one

Starting point is 00:06:13 under his leadership while simultaneously opening more than 1400 new franchise locations prior to Taco Bell. He was the president of Adidas North America. And then before that, he built a career at TaylorMade where he rose from territory sales representative to CEO. So I think the resume checks out. It's always kind of interesting to see where they've been in prior careers. I think the biggest thing with a franchisor, obviously you want them to have some sort of fitness experience because you want to really understand what are the drivers at the actual locations themselves. But at the same time, if you're running exponential fitness, you're not only need to know the fitness business and know the fitness customers, you need to know the

Starting point is 00:07:01 franchise customers. You've got to have a model that incentivizes more and more franchisees to join in. And you're basically selling to two customers. Brett is showing the total revenue here. It looks like revenues are up more than fivefold since 2018. It's gone from $59 million in revenue to $327 million over the last 12 months. Operating income is up to $48 million. So a little under $50 million in operating income last 12 months. Do we know what the market cap is on this spread i can check right now yeah shared screen is gone market cap 516 million dollars it says the ev is 940 million dollars but it always depends on what's going into that enterprise value so yeah do your own research on that looks like they do have a little bit of debt

Starting point is 00:07:49 most likely but what i like to see is that inflection from basically losing a little bit of money to break even to getting to positive operating income so they went from zero to 50 million while also still growing their sales. So it's showing that they're going to become a little bit more efficient with scale. The business model is actually working and the quote unquote unit economics that they probably are pitching to their investors are starting to show up on the bottom line. Yeah. I'm seeing an EV to EBIT here of just under 20. So 19.3 times, it's been much more expensive throughout its history. Look, I guess in general for this business, I like these concepts. I think investment classes and maybe it's just my age and I don't want to conflate like my life experience with what's happening because it seems like a bunch of guys at the age of like in their 20s and 30s all of a sudden get into golf and then they try to think like golf is a good place to invest and it never is.

Starting point is 00:08:51 I worry that maybe boutique fitness classes might be the same here, where I'm experiencing a lot of friends, family that join these kind of concepts. And, you know, I mean, it's profitable. If you look at it purely just on like a well-run boutique fitness location, like a Pure Bar can be very profitable. You don't have that huge inventory depreciation like you have with the big weightlifting type gym. So I like the model. I think there's room for someone to kind of be the big franchisor. I'd like to see probably a couple quarters of commentary from the CEO and get a better understanding of who he is before I do any, I guess, deeper due diligence. exactly yeah and there was also that short report i believe where someone said there's something up with their accounting now we'll see what happens with that and i don't know what happened but there was that short report you would definitely want to investigate and maybe i think they were saying

Starting point is 00:09:53 something about how locations were thriving when they actually weren't which is difficult but two things i like about this one it's a franchise franchisor i can't remember the exact terms but they are taking the brands and the other people are operating them so they are capital light as Ryan talked about. And the second thing is, is they're not tied like a Peloton to a single fitness trend. So if say pure bar goes out of style for a little bit, cause I know a lot of these concepts are cyclical. It takes a lot of brand management and some things, you know, like an orange theory or something like that. It gets popular for a while and then it gets a little less popular, but I don't think they own orange theory, but a similar concept. Now that if you

Starting point is 00:10:32 multiple brands that can help, I think, work against that potential headwind or what could affect the financials, which I like as well. Seems like an interesting one. I see of the valuation numbers here or the earnings multiple, it's about an EB to EBIT of 20, which isn't crazy, not too bad. And like we said here, they do have some, it looks like some leverage in that EB to EBIT might be misleading if it's an operating lease thing that people are putting in there and you had to kind of come up with your own definition of the enterprise value compared to the aggregators. And that market cap is only $500 million versus $50 million in operating income. Hey, that could be pretty good, especially for a capital-wide business that could start

Starting point is 00:11:12 returning cash to shareholders. Yeah. I want to take this question from the audience here. James Goodwin, friend of the show says, what do you guys think about going for heroic returns while you're young? By this, I mean setting your hurdle rate at something like 30%, even if it means you're concentrated into less than five investments. I will foreshadow this by saying I do like the idea of going for heroic returns, but I am not old enough to have the scars from it quite yet. So if you ask somebody, it's probably better to ask somebody in their 30s or 40s who have kind of experienced it and maybe tried to do something like this uh because i think anytime

Starting point is 00:12:01 you're underwriting something for 30 plus returns there's going to be more risk like just maybe you found that one gem where it's just a flawless business and it can generate you 30 returns but i think more than likely there's going to be some hair on it it's going to be maybe a difficult type situation where things have to go right i have investments in my own portfolio that i think are like that we've talked about harbor diversified on the show before it's an ugly business uh this management team has not filed a public filing in six months and they're quite behind but it looks extremely cheap so you know if things go right yes i'm kind of going for those heroic returns i do like kind of the hunt for that searching for something where

Starting point is 00:12:54 it's heroic returns but at the same time i'm not going to do it with all my portfolio yeah i think it's always personal there are different situations where if someone has a smaller account they are not relying on providing for their family if this is something that's going to be stowed away until you're older. Something like that. And when I mean older, it's when you're in your 20s and 30s investing for when you're in your 60s and 70s in that retirement age. Yeah, sure. Maybe you could try that if that's something you want to do. It all depends on what your own financial situation is. I mean, you have to figure that out first and then figure out your investing style, which fits into that. Because if you're someone that's saying, hey, I want to save and

Starting point is 00:13:35 buy a house within the next five to 10 years, well, don't do this with that money, right? take care of that first and then do something else but that's more of a personal finance question i do like it a little bit but i like this strategy as more of and this is kind of the motley fool strategy is don't do it with five investments probably do it with 20 to 25 to 30 and then let those winners turn into the big concentration in your portfolio over time that's what they did with netflix and amazon and a few other companies like shopify but yeah i do agree with you what what what would you define as risk though let me like yeah let me put some context in here the going with five concentrated investments you're adding beyond the risk of the companies themselves

Starting point is 00:14:25 you're adding the portfolio risk right if multiple if several of them don't end up well you are kind of screwed and when we think about really the idea here is that when you're young you find a way to generate life-changing returns like you know like he said here heroic returns i really think life-changing returns heroic returns those are going to come from businesses that are good for a long time it's not going to come from special situations where you flip a buck and you turn a cigar butt into $1.20, you know, half dollar into a dollar and you have to go out and you got to find it again.

Starting point is 00:15:07 If you're running a fund, that's probably, it's a different discussion. But I think if you're really going to be able to generate life-changing returns, a lot of it's going to come from businesses that are true compounders over decades. It's, I know people think about like, oh, Buffett in the early days

Starting point is 00:15:24 or a lot of young fund managers in the early days. it's it's a very very active job i think you have to if you are going for special situations if you're going for things where you're you have a plan to sell them you have to do this full-time yeah i get that to a point that depends on your style i don't know if i would box someone and say that they only can buy and hold compounders and hit that life-changing return i think in In general, though, I don't really look at any investment as I want this specific hurdle rate. I just want to maximize the like what I think is the potential upside of something versus the downside. So if I see something like, for example, I've been looking at Rocket Lab recently. It's an

Starting point is 00:16:13 extremely risky company. It's got a small market cap. It's burning money, but they're the they're doing quite well in executing on their strategy so far. And if they're successful with these two or three key things over the next, say, three to five years, I think the stock's a 10-bagger fairly easily under that scenario. But the downside there is also quite high. So is that a good risk reward to go after? What position should I size that at? I don't know. That would probably have a 30% return hurdle. But to evaluate more than, say, on the opposite end of the spectrum, something like British American Tobacco or Philip Morris International, where you get cash coming in today, all you're betting on is durability of the existing operations, plus some potential upside

Starting point is 00:16:57 with these new nicotine categories. Is that a better risk reward? I think maybe. So I don't look at it as, okay, I want to have this X percent hurdle. It's, yeah, at some point, you know, I kind of have, you get to that level where it's like, okay, if you don't expect more than 10%, well, what are you doing? But if I can get a guaranteed 12% versus a high risk 30%, I'm going to go for that guaranteed 10 to 12% or say reliable 10, 12%. And then hopefully wait a couple of times in my life, I'll find something that I think is low risk and has 20% plus compound returns. And that's the big lesson I think people should take away from Buffett with his maybe five or six investments over his life as he got into the compound buy and hold,

Starting point is 00:17:41 never sell stuff, Apple, American Express, Coca-Cola. He found those and there's only going to be a few of them but in the time being he was kind of playing around with you know maximizing his his risk reward and other activities i yeah i think trying to emulate young buffett is probably not great for investors today because i i you know you look back at the old buffett partnership letters like the the ones from the what was it 55 to like 64 or whatever it is um it maybe it was just what he was finding but i think the opportunity set was much better in i think there was less people looking at um smaller caps um there was just more to exploit if you were in that position than there is today it's much more competitive and i know

Starting point is 00:18:37 a lot of people kind of use that as a cop-out but it does feel like more and more you're finding a lot of fair pricings even if even as you look down kind of into the small cap range yeah potentially potentially i'd say maybe international there's always some opportunities there but keep looking and as you know the late monger said go where the fish are not where the fish have been so just because there's a certain strategy that has worked i think you should have people should try to learn about various investment strategies that fit their style and then try to say, okay, well, in 2011, there was a lot of opportunity in, say, compounders. In 2000, there was a ton of opportunity in small cap value and large cap quality was just way overpriced. Maybe that's

Starting point is 00:19:25 happening today too. You just have to be flexible and say, all right, I'm going to run the numbers. What makes sense here? Is it a good risk reward? And regardless of whatever the strategy is, that's where you're going to start searching for stuff. Another question here. Let's see. Let's go to, I know we got some interesting questions here in the comments, but let's go to the one that someone in the live chat asked about it too. But we have this good tweet I had on index funds versus a high yield savings account. And I will say, check out our friends at Public, our presenting sponsor. I believe they have. Let's actually just check what their high yield savings account is right now. Or I don't know if it's a high yield savings account, but essentially

Starting point is 00:20:10 it's equivalent to high yield savings account. It's 5.1. You got it loaded up. Wow. That's pretty good. That's pretty good. Should we just use that? Cause I use four and a half percent on my number just to be conservative, but let's go through the question. So I look at the S&P 500 trailing PE ratio, just standard one. I don't think this is Shiller or whatever it is. Let's do any sort of average. It's about 29. Now, if you invert that, that's a 3.4% earnings yield. If I, or if you, Ryan, have excess cash flying around, say you have fully funded your Roth IRA, it's just kind of anything, you know, 401k is fully funded. This is just extra stuff that you're saving up. You might spend it you might save it you might not would you rather buy s&p 500 index fund or hold

Starting point is 00:21:05 it in the public 5.1 interest rate account right now this is feeling like an advertisement for public but i'm curious your answer yeah i don't know i mean maybe i would skew more towards the high-yield cash account i wouldn't pick one obviously i know that's not i think that the point of the question is to pick one but i wouldn't i wouldn't i also i go back to okay i had a friend in college where we i think it was 20 must have been 2018 maybe it was 2019 and it felt like a lot of the discussion going on at the time is, you know, tech was all the rage. S&P was kind of at sort of a higher multiple relative to what it had in the past. And there was all this, all these worries about

Starting point is 00:21:54 concentration too. And I, I told a friend who he wasn't involved in investing at all. I was pretty much a novice, but from everything I'd read, it was just dollar cost, dollar cost average into an index fund. That's all he did. And despite all the highs and lows, COVID, all the extreme valuations, all the extreme concentration for the S&P 500. I know we're at an all-time high concentration among the MAG-7. It worked. It just continuously worked. And that doesn't mean it's going to work in the future, but I think the S&P 500 index fund is still a wonderful vehicle because it is doing the selection for you and you're not betting. You are betting to some degree on microsoft apple amazon nvidia but i also do think those are the best businesses in

Starting point is 00:22:47 the world and have the ability to skate where the puck is going as the future progresses yeah i mean i get the argument that these are good businesses i just look at something where one there's a lot of flexibility in a high yield savings account Now, if you find another opportunity, let's say, for example, stocks go into a drawdown. I have no idea whether this is going to happen over the next year or two, but let's say they go into a 20%, 30% drawdown. Well, if you have the index fund and you find some other opportunity in an individual stock that you want to buy, I know it's a different scenario than someone that's just buying and

Starting point is 00:23:29 holding index funds their entire life, but that would make more sense to me to buy a high-yield savings account. And when I look at it, yes, they can change the saving rate on you anytime they want. And that can indicate whatever, you know, that's a downside. But how many years is it going to take for this 3.4% earnings yield on your cost basis that you're buying right now to catch up to 5%? I can't run the math in my head, but I would think it's going to take, at the current, it's going to take, this is excluding dividend payments you're getting. which is i think like 1.3 percent right now so you know not much take it maybe a decade to catch up yeah so that's that's something you have to like are you buying ahead

Starting point is 00:24:18 much ahead of the current growth price and unnormalized interest rates that's my concern yeah i think it's a fair question to ask i don't technically own bonds or an index fund at the moment so i don't think either one of those are quite as fun uh which is kind of how i view a lot of the investment beyond trying to save for the future is i think it's intellectually stimulating so i like doing it um yeah probably treasuries or high yield cash account whatever you want to call it yeah i'd probably take that and it does the good thing about with a high yield cash account relative to treasuries even if it's short term is like you said the flexibility the fact that you can

Starting point is 00:25:06 or the liquidity i should say where you can easily withdraw so yeah and we are kind of at a time where high yield cash accounts there's disruption going on you know like you said with our friends at public like 5.1 i think that's pretty maybe there's been times in history where it's been like that but i wouldn't imagine that they've it's ever been so competitive with pure treasury rates yeah and it's much more accessible well i think you had the options to buy the treasuries in the past and you could get that rate but it's much more accessible in a really easy to use mobile app or website and if you look at the legacy institutions you got bank of america i mean i I had a friend that had, it's not a crazy amount, but $10,000 maybe in a high-yield

Starting point is 00:25:57 savings account, quote, unquote, high-yield savings account at a legacy bank earning absolutely nothing. And I was like, you can just connect it to a different account, like public, and you can just transfer it over there pretty quickly. It takes one day. Usually, it's free, all that good stuff. And you can start earning $500 a year instead of zero. So that's kind of a little bit of a tangent there.

Starting point is 00:26:18 but i like one one do you use one of these neobanks what do you use one of these fintechs neobanks high-yield cash accounts i use american express which is 4.6 it's about the same as i don't want to say some of the public competitors out there but there's there's there's ones uh if you're going to use public does have some of the highest ones for storing accounts but i do use american express from for my bank uh if i wanted to really optimize it you obviously we go to someone like public yeah um and i would recommend that i make fun of other people or i make fun of people for sticking in these like legacy bank accounts where they get paid nothing i think like you know what are they doing i do it well you can easily have two i mean i have the legacy bank

Starting point is 00:27:05 account open at bank of america and i have minimal amount of cash in there all the extra cash gets transferred over to the high yield one and you can transfer it within a day so it doesn't really seem like too much to manage and one of the downsides or not the downsides the critiques when i tweeted this out was that well they're like hey well in six months that high yield payment could be two percent but my counterpoint to that is if interest rates collapse that probably means we're in a recession and the economy is not doing that well i doubt that the s&p 500 would be the best investment out of that i'd much rather have the optionality and the flexibility of taking that cash and buying some cheaper stocks as you potentially had during a recession

Starting point is 00:27:51 do we want to do my small cap of the week let's do it yeah do the small cap of the week and then maybe after that we'll hit the mid-roll ads on old finchette and public what is the ticker rand before before i do the small cap of the week i want to talk about some anecdotal evidence i had this week okay two companies that we've looked at a number of times in the past first of all portillos i own it there we go oh you do okay so i was at a fourth of july barbecue bonfire kind of thing and one of the people that was there was from chicago and actually two of them were and all they could talk about was we we've got someone's got to put a portillos out here and we live in seattle so it's you know there aren't any portillo's locations but i asked they were

Starting point is 00:28:44 like yeah that is the it was like a cult following like they said they'd ordered stuff online before from portillo's oh yeah we talked about that during the episode ran re-listen i got a research report out there for anyone it's it made me very optimistic about for one i think the chicago or the midwest transplants that are elsewhere will drive some early adoption when a portillo's location pops up obviously that's not going to be enough to maintain the same average unit values that they have in their core locations but it will build some sort of fan base pretty much anywhere would be my guess so and what's the general age of this person he i would guess was in his 30s 30s yeah that's good i don't know

Starting point is 00:29:35 could be younger people that are in their 30s is probably the good crowd to just you know yeah they're not going to move to seattle anytime soon according to their plans that sunbelt only basically focused on arizona texas and florida for the time being but hey there's a lot of room for expansion. We're researching Peter Lynch for our next, what we're calling the Legendary Investor Series. One of the first things he says in his book is that when you're looking at a retail concept, which he was very good at looking at and had some very successful retail concept investments, you have to look at, is it successful in 10% of the country? And are they only in 10% of the country? Well, then maybe there's a long runway for growth versus someone like today,

Starting point is 00:30:17 a i don't know a walmart i guess would be a good example are you super mature and how does that affect your valuation work i mean that that's just such a big difference on the potential upside over the long term and that's what gets me attracted to portillo's full disclosure do you want it right now and if you want any of the full details we did an hour long research report released earlier this year i wish i thought it was a good one all right second anecdotal evidence for the week ulta beauty girlfriend came back with a bag instantly i obviously had to ask questions as a uh inquisitive potential shareholder you could maybe call it i'm not a shareholder yet but i'm constantly constantly uh considering it here's the thing that i really didn't appreciate

Starting point is 00:31:08 and there's because there's always been a couple questions for me with ulta first of all once you've figured out the lotion you want you want to try it on whatever it is makeup cosmetics hairspray you try it you go there because it's you want some level of like an in-person you want to feel it that kind of thing why wouldn't you just buy it online after that so that was my first question she said well it's a consulted visit more or less like you go there and you don't actually know exactly what you want some of the i i can't remember what they call them but the in-store attendants more or less give you some sort of a diagnosis and just say hey oh you know like what does your skin feel like is it oily is it you know do you have a lot of collagen whatever

Starting point is 00:31:58 here's what i recommend and you so a lot of women seem to go there for the recommendations of the in-store attendant so it is to some degree kind of consulted visit also the needs for skin cosmetics hairspray whatever it is perfume fragrances changes over time like as you know as you change as the seasons change what you want might change as well so you're really going in there for part like part discovery every time it's not always i know i know us guys are like We just buy the same shampoo every single time. It doesn't matter, buy the same deodorant, whatever. But for women, it's constantly evolving and changing.

Starting point is 00:32:41 So I do think that kind of bodes well for sustaining that in-person presence and not having too much go online. However, on the flip side, I've been listening to a lot of the commentary from their conference calls and recent investment conferences. and I do not love the management team, to be honest. So kind of a bummer. What don't you like about the management team? Just vibes? Vibes. The vibes are all off.

Starting point is 00:33:12 That sucks. Well, we had a question here that you logged from the comments is, do either of you think you have the next O'Reilly in your portfolio? And I was going to say consulted visits, retail strategy, that's going to be cheap because of the narrative, and a company buying back stock. That smells like O'Reilly, which is what Ulta Beauty is doing as well. But if the management team doesn't click with O'Reilly with that same sort of culture, maybe it's tough.

Starting point is 00:33:41 I don't know. It just felt like something fell off. I couldn't tell what it was. They were talking through the P&L, as they do at all these investment conferences, and they get super granular and all this stuff. And it felt like they were punting a little bit. like, no, we're looking for margin. We're going to have margin expansion in the back half of the year. It's like, why? Well, I mean, there'll be some deleverage at the stores because the sales are expected to be down, but we, we just do a good job managing some, some cost and our supply

Starting point is 00:34:14 chain is better. So costs will go down there too. And it was like, no additional context around like what, where were the cost improvements in the supply chain? Which first of all, I'm pretty sure it's just because like fuel prices have been down so yeah okay there's some deleveraging there i guess uh but it just like wasn't granular at all and it felt like a lot of guesswork from the management team's perspective and on the flip side they're also more or less losing market share to lots of competitors i think sephora has been kind of eating share as well yeah it is interesting and i pulled up on the chart there the ev to ebit has gone to close to an all-time low of about 12 so attractive valuation if you think the business stays

Starting point is 00:34:59 any what's stable and can grow and they are buying back a lot of stock and what you saw from that shared screen is our good friends at finchat.io recently added as i'll say here a huge database of etfs that you can check out all the holdings across etfs i thought it was quite fun of look some of the active funds, like it's stuff like QQQ, which for example, Costco is actually surprisingly the ninth largest holding in there. So it's interesting, you know, you can kind of look at all this stuff. They have the good bar charts, the visualizations, all that good stuff. We love using them and it really helps upgrade our investment process with the visualization, KPIs and data management for all our holdings and watch lists and go to finchat.io slash chitchat

Starting point is 00:35:42 and you get 15% off any paid plan. That's finchat.io slash chitchat. The link is in the show notes. Help yourself out. Help us out. Ryan, do you want to hit your small cap of the week and maybe talk about our good friends at Public again? Yeah, real quick.

Starting point is 00:35:59 Earlier in the show, you heard us talk about the investing platform, public.com. We've actually been talking about them all throughout the show. That is where you can trade options with no commissions or for contract fees, and you get a rebate of up to 18 cents per contract traded nerd wallet recently gave public five out of five stars for options trading if you want to see why go to public.com and start getting a rebate of up to 18 cents per contract

Starting point is 00:36:22 traded paid for by public investing options are not suitable for all investors and carry significant risk full disclosures are in the podcast description okay small cap of the week i said hi upside so i'll try to uh fulfill that little tease here i got you i got some charts loaded up too so i'll share them whatever you need what chart do you want first ryan as you start describing this hmm let's go uh let's go revenue to start just annual revenue last uh whatever, 10 years or so. So the company is FitLife Brands. This is another one that I found through a, it's actually, I think it's like a small cap hedge fund called Smoke Capital, but he does a lot of good kind of brief four or five paragraph write-ups on companies as well

Starting point is 00:37:16 throughout his letters. And he says, just kind of just the description of the company in one of his letters, he says, FitLife Brands is a nutritional supplements company that has made significant strides since near bankruptcy in 2017. FitLife's management team orchestrated an impressive turnaround through significant cost reductions, focus on core high margin products and development of a high growth, high margin e-commerce channel. So it's been sort of this, I don't know if I'd call it necessarily a serial acquirer. It's got a number of different supplement brands in its portfolio and then it also has uh it acquires some throughout so uh in 2023 they acquired i think it's like mimi's rocks or something like

Starting point is 00:38:02 that i can't remember exactly what the name is it was a bit bizarre um but mimi's rocks uh muscle farm is maybe one people are a little more familiar with beautiful and they they're able to buy these basically it sounds like at five to six times ebit most of the time and what you get usually with a lot of these smaller brands is management teams that are running these brands pretty much for themselves they want you know they're compensating themselves really well and so it actually kind of misleads the pnl so you get once you strip out that management compensation and I think they bought MusclePharm out of bankruptcy. So typically you've got legal fees associated with it as well.

Starting point is 00:38:50 And you're able to put it into the FitLife portfolio. You get a pretty nice lift in profits. Not to mention the FitLife actual website and their direct-to-consumer strategy seems to be going pretty well. So ads traffic there. They have good wholesale partnerships. The main one is probably GNC since that tends to be kind of the predominant nutrition retail store base. Do they work with a lot of those Instagram, TikTok, YouTube influencers?

Starting point is 00:39:26 Because I feel like that would be a big market opportunity for them. Maybe that's a question you don't have for – or an answer you don't have for us yet. Yeah, I'm not sure. They've got – it looks like 12 different brands in the portfolio at the moment. and I assume they would probably do fitness influencers since that seems to be the way that the industry has trended. And my guess here is that I don't know if there'll be influencer-specific brands

Starting point is 00:39:51 that are willing to sell, but I would guess that the industry has shifted that way a lot where we talked about how influencers were launching their own tequila brands, influencers were launching their own fragrance brands, makeup brands, whatever it is. fitness influencers launch supplement brands tons of them and they actually grow in popularity they

Starting point is 00:40:13 seem to be quite uh quite popular at least among just like friends and people i've i've noticed that follow stuff like that i wonder if those are acquisition targets for fit life how's the balance sheet did you check that out i guess we should i believe it was around 13 million dollars in net debt okay so fine and i as what i thought was interesting is again so for anyone that gets watched the shared screen there i can describe it quickly for the audio listeners stocks up a thousand percent in the last five years and all that happened i mean revenue grew a little bit but all that happened this is i think another example we looked at this plenty of times this year operating income went from basically zero to ten million dollars over a couple year period

Starting point is 00:40:58 that's all you need you want to show that you can actually generate a profit and that multiple expansion can be huge after that stocks up a thousand percent eb to ebits it was it was super low on a depressed valuation or excuse me on a depressed earnings multiple now it's up to about 15 according to our friends at finchat so another recipe another example of that recipe of accelerating revenue growth low starting valuation and basically going from uh you know close to break even or really depressed operating margins and expanding that through operating leverage over a couple year period yeah they recently uh uplisted to the nasdaq so nice more liquidity there they i believe i'm double checking right now on the ownership table own insiders apparently

Starting point is 00:41:52 own 50 of the company um but i'm double checking right now uh which by the way fin chat recently of added full ownership tables as well so yeah 45 is owned by sudbury capital management which i assume is just associated with one of the executives and then robert dayton uh owns another 11 so yeah they own more than 50 insiders feels like one of the incentives are aligned they seem to have a genuine eye on the ball for what's most important the market caps 150 million ev 160 you mentioned 10 and a half million dollars in operating income so ev to operating income of around 16 times i don't know i think there's a lot of room for these little bolt-on acquisitions where it's just

Starting point is 00:42:49 supplement companies ran for the executives you can buy them immediately strip out the executive comp and a lot oftentimes these are distressed companies and they're small businesses they're not going to be that profitable right you're going to have that i know this is the thesis for the the amazon roll-ups but that's probably didn't work hopefully this would be a little bit different but yeah it makes sense there's a lot of brands out there i get that this industry can be tough it's very trendy but if you can get it right cpg roll-ups some of the best performers of all time yeah it's i don't want to say it is an amazon roll-up because unfortunately there there is some amazon like i think that is probably a big sales channel for them but there's other

Starting point is 00:43:42 sales channels as well and it's if you're looking at it from a small business perspective to really build a supplement brand just on your own it's you can generate five six million dollars in revenue and still be struggling for profitability as a small business owner so you can take them out for three four million dollars really cheap revenue multiple and hopefully yeah roll that up that makes makes a lot of sense to me here's my question for you ryan we're investigating a lot of these that have gone up where what do you do as a screener as a reach search item as anything besides the Buffett A through Z method, which none of us, I think, are crazy enough to do,

Starting point is 00:44:25 how do you find these before they go up 1,000%? I think that's the biggest question. For me, I think it's a screener on, we talked about the inflection from break-even to $10 million in operating earnings. I think a gross profit screener makes sense to me. Yeah, I think a lot of it too is, it's hard to screen for these things because most of the time you the returns come from a

Starting point is 00:44:56 turnaround so the initial screening will be it probably will exclude them especially if you have any sort of like a profit criteria in there i think a lot of the best small cap investors just build themselves a network of places and people that generate other good ideas and And I'll give this a chance to shout out a friend of the show, which is Yellow Brick. Upcoming, yeah, going to be an official sponsor soon, or is that too? Maybe a TBD, not quite sure yet. But I've been looking at this site, and it basically just aggregates a bunch of pitches from across the internet, investment pitches.

Starting point is 00:45:40 And you can filter through some of these by market cap. So I just put max market cap on here, $500 million, and I'm scrolling through and I'm just seeing all these different pitches from all across the internet. And you can go through and you can look and if it's one that piques your interest, it's got like a little one-liner company info thing. So you can tell pretty quickly whether or not it's something you'll be able to understand. And then you go off the website, right, to say wherever it was written a lot of times, Substack or something like that, Seeking Alpha. and i guess some of them are like they're probably paid right so you might not know or public ones okay i think he's only yeah he's not doing anything that's behind a paywall from what i understand but like gotcha tons of good ideas here or or it maybe will direct you to it but

Starting point is 00:46:29 you can't see it unless you pay kind of thing but it'll be right like a little one-liner on the company info and stuff like that so aggregating all these potential potentially good small cap investment pitches in one place that does make yeah it makes a lot of sense because value investors club hasn't evolved in 20 years i think from reading about a little bit of the history of that website and since you know that website can still be helpful but there's so much research across the wide swath of the internet from the investing internet twitter sub stack seeking alpha value investors club wherever just you know people just tweeting stuff now that you have the unlimited uh characters if you have a premium account aggregating that does make a lot of sense

Starting point is 00:47:12 and hopefully we just gave them a free advertisement and i think we're gonna lock it in sponsorship there either way even if they don't want to do a deal with us go check them out it's quite fun and quite interesting i do like this one consumer brands make sense to me and it's something that i think is within my circle of competence would you say this is a top small cap from the ones we've done so far yeah that this and nobility homes make sense to me okay yeah and just to rehash the ones we've done hammond which is like the electrical racks it's like that it's that company in canada that for some reason is really cheap and it's done well good heart wilcox we've done which is the one that like barely files and has it's really hard

Starting point is 00:47:57 to get their public filings wag which was the dog walking marketplace rave restaurant group fitlife brands and nobility homes so we've done six now all right okay time for another topic i don't think we have any more advertisements to say we have one question here that i think you'll be able to answer quickly here ryan jonathan weiser says on twitter enjoy the episode on o'reilly i'm curious though what is the case for o'reilly auto parts over autozone they seem to have the same advantages with scale and autozone is training at a more attractive valuation even if o'reilly grows a little faster it'll take a decade or two to catch up to well yeah i think o'reilly

Starting point is 00:48:40 well for one i think autozone can be a good investment from here too they're going to benefit from largely the same tailwinds or headwinds you know they'll face a lot of the same problems and benefits um but o'reilly's pros business is a lot better and that does help grow sales significantly quicker the they are catching up on the market share front as well they've been growing store count basically a little i think it's one percent faster for the last decade so adding a little more stores but yeah i like both autozone and o'reilly it's kind of hard for me to pick one between the two i just like the fact that o'reilly's a little more catered to the pros as well and they have such

Starting point is 00:49:29 large exposure to the do it for me segment both of them are good though and you you know you read through the calls autozone's investing a lot into that pro supply chain they're just haven't been able to succeed quite as much there. It's a Lowe's Home Depot. Probably not the worst idea of both. And that's actually an example that Peter Lynch gave in his book with the growing retail concepts. He was like, hey, Lowe's and Home Depot are two boring areas and there's plenty of room to grow. And Noam gave him crazy valuation for the longest time. Let's go through some more Twitter questions. We have someone asking again about the real brokerage, which did seem very interesting from that little small cap series i did last week maybe that's a fun one to research

Starting point is 00:50:14 we have someone talking about something called danos corporation it's one of the world's largest independent owners of container ships and they say has contracted cash revenues of three billion dollars uh earnings visibility 100 for 2024 80 for 2025 minimal debt and trades at a 1.5 billion dollar market cap or 0.5 times book value that could be a fun one but i don't think it's really a good one to research live on the podcast uh how far out of our circle yeah that might be a longer form research one but we do have one that i think was is fun maybe two here what do you want to hit first brian there's if you had to buy an airline not harvard diversified yeah i think i've researched the industry a little bit because i find it quite

Starting point is 00:51:08 interesting i think it's a good indicator on some of the other travel stuff that we like to look at like booking holdings and airbnb that are on our watch list i think delta and alaska are run quite well i still don't think i'd touch any airlines but probably ryanair for me right yeah that's good one as well i think yeah that that's also one that would be i like those three i think those three all run well i believe alaska and ryanair are the only ones with really strong return on invested capital over the last decade i think we looked at that on that ryanair episode um and also there was or maybe it was looking at that in relation to a company called copa but which dominates panama city yeah none of them stand out too much though but there are questions we had i

Starting point is 00:51:56 I think someone asked it, I think it was Tyler on Twitter or even here in the comments, said something along the lines of, well, there's been a shortage of plane deliveries from Boeing and Airbus, and maybe that's restricting supply and helping these airlines not have to discount so much. And you probably see that with Spirit Air, Frontier, and Southwest struggling. I think that makes a little bit of sense, but who knows whether that will get solved over the next five to ten years, right? I don't know if that's a thesis I would like to make or thesis that I like to bet on, but I do think the travel credit cards do help these businesses a lot because people do the points game. I do the points game as well, and the spending on these cards, especially at Delta, is quite high and gives them more, I think, better revenue streams and locks in your customers. Yeah, that's very true. Yeah, I just don't love airlines in general. It's so competitive.

Starting point is 00:52:50 i know it locks in the competitor or that locks in the customers with the credit cards but you just look at the margins and it's so unpredictable for all these airlines and we got a question recently which is it was like does all these uh bowen and airbus supply issues is it going to lead to elevated margins for the major airlines and my initial thought was yeah that would make sense right your lower cap x not getting as much new planes in there maybe you're forfeiting some top line growth because you can't add new capacity but you're raising the prices on your existing seats because people have to pay in order to travel and then i looked at the margins and that's just not the case i looked the margins across the board

Starting point is 00:53:44 it is not the case from 2022 and on it's been hovering i think around like seven to nine percent for the four major airlines and then from 2015 to 2019 it was even higher so in a period where things were actually operating quite well for the airline industry margins were higher than when it was constrained today so i just it's it's one of those industries for me that I'll never be able to properly analyze. Yeah, I'm going to pull up Alaska Air Group here. One of the ones that has had a lot of success over the last 10 years.

Starting point is 00:54:22 Not one of the big four, but probably similar. I think I've seen these numbers before. From December 2014 to 2019, so pre-pandemic, we were at 16.9%, 24, 24, 16.8%, 9.6%, 12.2% for operating margin. Obviously, we had the pandemic, so two years kind of off. And in the last, say, 2022 and 2023, in the last 12 months, it's been 8% and a half percent. So, yeah, not as great.

Starting point is 00:54:50 Not as great. And I think maybe that narrative's a bit off. What? You would think the margins are higher. Exactly. Exactly. And it's not like these businesses are doing bad currently, but if there is a downturn in the economy, I mean, that's unpredictable, and it would definitely hit these businesses quite hard. One thing is I will say on the credit card stuff.

Starting point is 00:55:10 I'd say that's a positive on the businesses, right? It's made them better, but it doesn't make them good. It's just a nice little bump and it helps them, but it doesn't make them the best business in the world. I would think Airbnb and booking holdings and probably those franchises that run the hotels are a much better way to bet on travel. Another question for you here, Ryan.

Starting point is 00:55:33 Probably the last question as we're wrapping up here. and this is i think it's just a simple question from phs invest is addy in a buy right now yeah probably the i can't remember what the proper valuation metric is because if you use the enterprise value it encapsulates a lot of the customer funds so it's not quite accurate right so maybe we'll let me just do uh let's just do price to earnings yeah let's just two price to earnings price to earnings interest income is real there so you can't do either so price to earnings what do you have i'm sharing it right now it's not as good as you think yeah one of those things where it's a little hard to value in the well okay the metrics aren't

Starting point is 00:56:22 a little under 50 times it's about 50 but remember that the margins have been that they believe artificially not artificially purposefully depressed in the near term so the forward earnings the forward margin should be higher it's like what their forward pe says looking at about 39 on the forward pe and according to the estimates here fiscal year 2027 so one two three years from now forward pe of 20 would you buy this business i know we both think it's a high quality business for 2027 pe of 21 go to the go to the segments and KPIs. Let's do the total

Starting point is 00:57:04 transaction volume. Wow, that's a beautiful chart. We're going to pull that one up right here. Man, it doesn't get much better than that. Yeah, it does not. They're a European company, so I don't think we don't have anything updated fully since they do the first half here, and that'll be

Starting point is 00:57:20 updated shortly. Yeah, 53% CAGR from 32 billion euros to basically a billion euros from 2015 to 2023. Not bad at all. Trillion euros, yeah. Trillion, excuse me. Yes, thank you.

Starting point is 00:57:35 It's such a well-run company. And especially like the more and more that you analyze a lot of these payments providers. And I went through and basically looked at the whole payments ecosystem recently. Maybe I can actually pull up this chart that I built that basically just shows what the transaction lifecycle looks like. If I can find it. Um, and it is so convoluted with like serial acquirers, bad acquisitions, stuff like that. So, okay. Yeah.

Starting point is 00:58:08 I'm pulling this up here. I'm going to blow this up so that people can see it. Screen transfer socials. Pull this up real quick. Can you see this, Brett? Oh, shoot. Yeah. Well, yeah.

Starting point is 00:58:25 Try to zoom in. Do a little control plus thing or whatever it is. yeah it's pretty good well either way it's so complicated that yeah so many of them are subsidiaries of bigger companies old legacy tech stacks you've got uh these uh what is it i think world pay global payments pfizer very like a patchwork of just different acquisitions that have gone through over time visa and mastercard obviously very well run same with amex but add-in is one of the few that's really built from scratch didn't acquire to put any tech together and it just helps troubleshoot and add new things without

Starting point is 00:59:10 having to go through and be like okay why did someone do this 20 years ago in the tech stack like what am i supposed to do here i gotta go find some ex-employee and figure out what the hell this is add-in can do it all from scratch it's just so much easier um anyway and they're vertically integrating a lot of those processes which is not bad yeah to help simplify it for bigger customers and that's why you see that payment volume cagger and why they can uh charge more yeah it's the same with stripe in a way where the uh they're a full payment service provider so they i can't remember what the various stages are but there's the you got to have the gateways the payments processors the payments i don't know there's a bunch of different steps

Starting point is 00:59:55 in the payments life cycle and they encapsulate most of them so it really helps merchants just consolidate it all into one provider yep makes sense okay people talking about expedia in the comments here i guess i don't have much on that guys someone said is square a buy nope it is not I just saw a press release from them talking about their Bitcoin mining hardware chips. So I would say it's not a buy for me. Other question. Okay.

Starting point is 01:00:26 Yeah. Here's how the questions go. Is square a buy? Is Jack Dorsey, the CEO? If the answer is yes, the answer to is square buy is no. Exactly.

Starting point is 01:00:34 He doesn't care about you. You are sure if you, he doesn't care about you. If you're a shareholder, this is the truth. Why do you think it's in such a bad drawdown? So all business though, I mean,

Starting point is 01:00:44 We talked about payment processors, point of sale solutions have very high switching costs. And if you're a good one, that's sticky revenue. Other questions. I know we can't do everything and keep going here because we're on an hour after your video about John Deere. Did you guys dig any deeper into it? Wonderful business and strong brand valuation looks pretty cheap. Curious to see the future returns. No, I mean, Best Anchor Stocks, Leandro from Best Anchor Stocks, who was actually doing a lot more podcasts now, which everyone should go check out. I mean, great job great pitch i think it makes a lot of sense as a durable holding as what makes sense in the best anchor stocks one and it's definitely on the watch list for me i don't know well enough

Starting point is 01:01:20 but i'd like to follow it kind of check it out um let's see another one says i saw global payments on that chart have you checked that company out yes and it's the antithesis to add yen which is why i like adding a lot more i would just wait it's not guaranteed to happen but given that you with stocks in a 30% drawdown for Addian. As we saw there, forward earnings are about 38. I think I would need, we've talked about this offline.

Starting point is 01:01:52 I think I might have tweeted it, maybe 15%, 20% more drawdown. And then I liked Addian, but I'm just not going to buy any business. Maybe 2021 is speaking to me too much, but I'm not going to buy any business at an extreme multiple. Just why?

Starting point is 01:02:09 Why? Why would I do that? You're taking on a lot of risk, a lot of execution risk there, even though I think it's one of the best run new businesses of the 21st century. Yeah, I agree. With global payments, I haven't looked at them in depth, but I think with a lot of these incumbent payments businesses, they're going to grow just naturally because it's kind of a pain to switch off of them for their existing customers. and digital payments just grows. Inflation helps these businesses grow their top line as well. So it could probably do fine, but I think they will continuously seed share to some of these newer payments processors. Yep. Yep. All right.

Starting point is 01:02:52 That's a good way to wrap things up. Thank you for the people that joined. Thank you for the people that waited for take two on the live stream here. I know the podcast didn't work. Hopefully the microphones are stable. we had some big technical difficulties on that but we solved it i guess let's say to the disclosure we are not financial advisors anything we say on this show is not formal advice or recommendation

Starting point is 01:03:14 ryan i or any podcast guests may hold securities discussed in this podcast may have held them in the past and may buy sell or hold them in the future we are changing these to do live every wednesday not thursday this works better for our schedule works better for that leaf blower that seems to show up on Thursdays at Ryan's apartment. We appreciate everyone that listens. We'll tweet out the links every week. But yes, I think Wednesday, midday Eastern, we're going to lock in on a certain time here,

Starting point is 01:03:43 depending on all our schedules. But Wednesdays going forward. And as always, listen, YouTube, Spotify, Apple, wherever you get your podcasts coming out Sunday morning. All right. Thank you, everyone. And we'll see you next time. We'll see you next time.

Chit Chat Stocks - Index Funds vs. High Yield Savings; Another Small Cap Stock Up 10x; Would You Buy Airline Stocks?

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.