Chit Chat Stocks - Investing Power Hour #80: Ozempic Losers; Juicy Details From FTX Trial; Analyzing CEO Resignations

Episode Date: October 15, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney Subscribe to our newsletter: https://chitchatmoney.substack.com/ ****************************** Chit Chat Money is presented by Interactive Brokers. Switch the best brokerage in investing today: ibkr.com/info ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. This is the Investing Power Hour number 80. We're starting five minutes late. A couple technical difficulties on either of our ends. So I have new headphones. Ryan is in a new location,

as you can tell by his beautiful white background there. But yeah, my name is Brett Schaefer. I am joined as always by Ryan Henderson. And on these episodes, we discuss anything we want in the investing world. So that could be earnings, could be the SBF trial, the FTX stuff. We could talk a lot of crypto, which we are going to be talking about today. Probably not the whole episode. This one, it looks like if we have our notes here, we have meta AR glasses, a little Disney update, birkenstock ipo ozempic fears very good slate uh if you want to watch these live they go thursday mornings 9 30 a.m pacific 12 30 eastern time you can watch the replays on youtube as well or listen wherever you get your podcasts all right i think that's a good intro ryan

maybe how are you doing you moved into a new spot and you're a little sick so pretty good week right yeah it's been rough it's been a little tough to get like all the prep done that i'd want to do like you know some for these shows we don't actually prep but there's always news out there and you kind of have to keep i don't know basically you got to read all your typical sources to find stuff and getting all that done has been a little tough so i'm a little bland on topics but the sbf trial has been kind of interesting at least in my opinion so i've got some stuff on that i'm going to talk about it yeah moving has been a pain i think anyone that has moved in their life probably knows that and the sad thing is it's like it's

only going to get worse moving from here because you just collect more things over the years so So, this is when it's supposed to be easy. Yeah, of course. I know. I know. In apartments that are under 1,000 square feet, yeah, once you have a house, I mean, that gets even worse. But I guess we're not at that stage yet. Anyways, so we've got Birkenstocks IPO.

We've got more Iger stuff. there was Microsoft being I don't know if they were sued or investigated by the IRS SEC something I should probably look into it a little more but allegedly they didn't pay $29 billion

in taxes from 2004 to 2013 oof sorry Steve Ballmer it's not a great look but they released an 8k which is basically I think like the SEC equivalent of a press release so i'll maybe dig into that a little bit but other than that i don't know what do you have

i have the ozempic stuff and i think that'll be fun to talk about and if we can get to it we have a chart on different savings trajectory excuse me spending trajectories among different demographics as is probably not a surprise given that the population in the united states is aging we're seeing a lot of growth from the older generations and maybe we can talk about any you know stuff around that all right we have some comments here some questions good to have some of the people joining i know we only have a couple usually but they're usually pretty active uh mr dapper says glad to be here uh we have a question here from tom saying what's up guys if possible can you touch on ally ceo announcing his departure any red flags maybe we'll just talk

about in general we could hit that i think that could be a fun one the yeah just kind of when a ceo departs when he makes you nervous when it doesn't make you nervous i think with ally specifically one thing that made me a bit worried about this as a something to watch out for something to be concerned about is that it's right before earnings uh on the other hand though he is staying on until early next year. So that's not, that's actually typically a good thing for me. It shows that it's more of an amicable departure. It's something that they may have been planning for a while.

I mean, you know, when you compare that to the Unity CEO leaving immediately, essentially getting fired after really making a lot of blunders over there, that's a big difference than the Ally one. But I'm curious, Ryan, your thoughts on, you know, management's important to us. And when a CEO leaves, how does that feel? because it's always uncertain well this is a good example of moving interrupting my news flow because i honestly had no idea that this came out yesterday but i'm seeing it for the first time so i haven't had a chance to really read it but obviously the cfo left last year on a kind of

precarious sticky not very good looking circumstances so i don't like that uh i I haven't read through this whole thing, but I'm hoping that it's a little more – sounds a little more planned. That way, it doesn't feel like it's kind of just random. Obviously, when your CFO and your CEO leave right after a period when there's a lot of investment concern around the asset side – I believe it's the asset side. No, yes, the asset side of the loan book with the loans. It kind of makes me wary. And it feels weird because, okay, we're investors, so my initial thought always is, okay, people at the company that are going to get big performance-based compensation want to be there because they have a good sense that things are going to turn up for them.

And when you see them leave, it makes you feel like they know something you don't. So honestly, it does concern me a little bit. Yeah. It's something to watch for sure. It's another note to have. I would say that this also could be the board or just the board of directors saying, hey, the stock's been underperforming a lot. Maybe it's time for a change here. You've been here for a while. It could be them being upset with the CEO as well. I think just important, The one that makes you really nervous is when it's an immediate firing, right? And it's, you know, the effective immediately, even if it's a resignation, it's a firing.

They just do that for the press release. In this case, it's a little less nerve, maybe nerve wracking or a little less concerning when they say, hey, the person's going to stay on for six months or something like that. In this case, I believe it's like four or five months. but either way it's never great when you have a ceo leaving that always adds some concerns uh and we have another question uh from mr dapper capper on top of golf calloway uh said brett you recently commented that you don't like it as much anymore can you elaborate i think i'm worried a bit or i don't have confidence in the returns they can get on the big

real estate and just basically, you know, all their facility investments that they make for the top golf stuff. I'm just concerned that you need a lot of volume to these places to get them really pumping and they have dynamic pricing because they use the, basically what everyone else uses similar to like a golf course or something like that. And I'm just concerned that they're not going to get the volume flows, or I guess maybe Maybe I'm not as... I don't know how to say it.

We just don't know yet how good the business is. It seems like a solid business, but we just don't know how popular it can be versus all the money they spend for these facilities. Robert Leonardus Yeah. Honestly, I haven't kept up with it enough, but I remember seeing some of the numbers come out during the merger prospectus that said basically we're getting, I think it was 40% or 50% cash on cash returns in year two or something on these new complexes. It just never seems to show up in cash flow. I remember looking and seeing it was like

cash flow was always lagging. There was always these adjusted numbers and there was big, and maybe you could chalk it up to CapEx on new places, but It just felt like it was kind of a heavy adjustments company that kind of turned me off. Yeah, I wonder how they're going to do during a recession. I think it's, yeah, I agree with that. If I remember correctly, they used adjusted EBITDA a lot, which for a very capital intensive, both manufacturing and basically real estate business, that's a pretty useless metric. Yeah, I used to like them a bit more.

It's been on the watch list. And one thing that has concerned me, probably the biggest concern is a slowdown in same store sales at Topgolf, which I thought had a long runway for most of their facilities to have very solid same store sales growth this decade. So it's been only one or two quarters, but that's something you really need for a business like this is solid same store sales growth. And well, they don't call it same store, but same venue, whatever it is. So that's been a concern for me.

Don't you think it's a business that would be tied to the economic cycle a little bit? It feels like one of the first expenses to probably go if budgets are tightening for consumers. Yeah, which is, I do have that feeling as well, which is why I'd like to see how they perform during a recession, which we haven't yet. So, all right, let's go to a topic. What do you want to hit first? Anything catching your eye?

Well, the SBF stuff is pretty entertaining, so. Chitchat Money is brought to you by Interactive Brokers, but we like to call them, by their ticker symbol, IBKR. Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 different currencies, charges USD margin loan rates from 5.83% to 6.83%, rated the lowest among margin fees, the ability to trade stocks, bonds, options, futures, commodities, and more with high interest

rates paid on instantly available cash balances, and the ability to lend your eligible stock shares to earn passive income all on one single unified platform. Restrictions may apply. For more information, visit IBKR.com. Member SIPC. Open an account with IBKR today. For those that don't know sam bankman freed former ceo founder of ftx he's currently on trial uh for criminal charges basically is he going to go to jail or not and caroline ellison who was his former lover and ceo of alameda research which was like the sister hedge fund company uh to ftx which is really just Sam's hedge fund is actually where they got the start. And that's kind of where he made a name in crypto.

And then they launched FTX and he made Caroline the CEO of it. She testified yesterday, I believe, maybe two days ago. And a lot of things were revealed that made it, I think, probably proved that, well, it's just what she's saying. But she said stuff that maybe confirmed what people already thought of Sam, which is that he has a bad moral compass, I guess, has a hard time determining right from wrong, or is willing to look past doing the wrong things because he believes it's in the greater good, which there were some interesting tidbits. Did you see all this? i saw some of it at least but there's a lot of information so yeah yeah i mean some of it was just you know he was directing her to make certain changes which basically if that's true convicts him of you know whatever it is securities manipulation or fraud in this case they were they

had two separate balance sheets they had one that they for external purposes and one for internal purposes and they would just cross off or basically eliminate a bunch of line items for the external reporting purposes, which is, it's kind of the, they are who we thought they were situation. There was also a bunch of fake accounts from ladies of the night in Thailand. Do you see that part? And it was a part of a scheme to bribe the Chinese government, something like that. don't know the full details but it sounded very interesting and then there was also they were

looking for a billion dollar not bailout but influx of capital from the saudi sovereign wealth fund which i i don't think that i don't think the saudis ever ended up investing if i'm not mistaken no that was just something she said they were considering and yeah it's i don't know how to describe it more of a to keep the party going maybe or to keep the to keep the ponzi going as you might describe it yeah it's interesting the other part is he made sure that no one messaged really on slack or anything public that wasn't encrypted which if you're requiring all your employees to message on encrypted platforms, it's probably like you're admitting wrongdoing, in my opinion. He's like, we don't want any of this stuff to show up in the news.

There's no, if that's your thought going in, there's no way what you're doing is right. Yeah. It's kind of interesting because if I was maybe at a larger company, I would get annoyed because you get these leaked emails sometimes. And I don't know if I would enjoy that very much. Even if it's not incriminating things, it could just be, you know, you get at the big tech companies, leaks and stuff like that. Maybe I would try to be fairly secure around that, but saying that you can't have any communications on Slack for the quote unquote things you don't want to show up in the news. Yeah, that's incriminating. I mean, Binance has done the same thing i think the one thing that's clear from this though is i feel very bad for ellison

she's had a rough go of it she got taken advantage of and yeah it's feel bad for yeah to some extent i do feel bad because people are like well right now people are kind of mocking her for a lot of the wrong reasons but she did get paid a $20 million bonus in 2021. She was making a hefty salary, 200 grand a year. She knew she was doing some of the wrong stuff, but I think probably the co-mingling of your work relationship with your love relationship probably wasn't a good idea. And I imagine that kind of made it a sticky position for her. But here's some of the... So Tracy Wang, I believe this is a reporter to the Rolling Stone, I guess, previously at Coindesk.

She says she was at the trial. She says Caroline doctored different internal and external versions of Alameda's balance sheet that remove certain line items. Line items like Alameda's loans to insiders or open term loans. Even Alameda's balance sheet had seven alts, basically. Eliminations. There was Chinese bribe to withdraw a billion dollar funds stuck on OKEx. Alameda used wallets of Thai prostitutes on the exchange. This just goes on and on. Eventually, it seems like they were just filling holes with worse and worse things. And the idea from the outside looking in that, I mean,

from from what i understand sam's legal team is basically saying it got lost in the chaos he was not overseeing the decisions made at alameda he was the ceo of ftx he was very busy he didn't know what was going on from this testimony from ellison that that is so far from the truth i mean it sounded like he was basically just reporting directly to him she was reporting directly to him there's no way that she was making a lot of these decisions solely on her own yeah and i guess yeah no one was forcing her hand she can she probably knew what she was doing and she could have quit at any time maybe this money will come up hey maybe testimony will come up yeah so i guess we shouldn't have too much sympathy for but it looks

Looks like, I think, if there was betting markets, maybe if it was like, okay, is SPF guilty of the crimes they're alleging? I would say it would be at like 98%. It looks like he's guilty. And I don't know what anyone else is looking at. The confirmation is there. He is guilty. He did these crimes. He's going to go to jail.

I don't think we need any other information. Yeah. yeah we'll see Michael Lewis book is gonna age is really poorly I think which is funny because Todd Combs had such high praise for him that was interesting timing because I bet that was recorded before the recent stuff so I don't know if you would have brought it up just because it's kind of weird timing at the moment but during that interview yeah which came out which is nice I wish they would go into more details on the thing it just was a big name drop fest unfortunately but some some decently just interesting anecdotes from that interview and yeah he said michael

lewis one of the smartest guys i've ever met so i guess it's an example of and i've i've thought about this quote from munger the last few weeks with spf a lot of stuff where he basically says it's terrible if you have an iq of 150 and think it's 160 it's actually better if you have an iq of one 30 and thing it's one 20. So I think there, I worry that everyone's trying to overthink this thing. He's guilty. He stole customer funds. He should go to jail. Yeah, I agree. I had to, all right. We, the, I wanted to, this just came to mind. I didn't have a jotted down or anything like that but last week i saw a tweet from andrew friedman who uh follows the tech media telecom industries tmt very closely he's a good analyst and he said it was like a i can't remember what

word for word but it's like bold prediction match group is not a public company next year oh what do you think about private equity or something private equity amount or even acquired by another public company. Yeah. What are we looking at as a market? Originally, I didn't think. Originally, I thought, it doesn't seem realistic,

but you look at BK's experience, right? Came into Zynga, basically readied it for an acquisition, got acquired by Take-Two. You look at, obviously, the results have been lackluster, you could say,

and it seems like they are righting some of the wrongs, but the stock is obviously very depressed right now. Feels like there's maybe, it's hard to tell today, but it feels at least looking back a year ago, it felt like there was some much needed management changes. It seems like that's kind of coming to place, but I don't know, it makes sense.

If you can really harness, I guess, the earnings power of that business, it's worth a lot more than what it's trading for in public markets. Yeah, I think it might be a little, did he say within a year? Yeah, I think. Well, here's what I think the executive team wants is to see momentum in their turnaround story before getting bought out, because I don't think they want to get bought out right now, right before.

They want to see if their turnaround strategy works. And if it does, then the stock price will probably be significantly higher, and then they'd maybe go for a buyout. I don't think they're going to do it before the turnaround strategy gets into play because they already brought in the new executive team. The new CEO just bought a bunch of stock. I'm sure a lot of people have a bunch of options here. And I think they'd rather wait a few quarters or something like that. So maybe I would say within two years, I'd be more confident there.

But I'm just kind of trying to think of the incentives there. If there was an acquirer, who do you think it'd be? You think it'd go private equity? Yeah, I think private. It's kind of hard to see who would want to buy this. I don't think they'd allow meta to do it. Right. None of the big tech are going to get allowed, especially meta.

And that's the one that maybe makes sense. But these things are so differentiated because like we've talked about before, one of the reasons why these apps don't really get competition except for the peer plays is that most people want to separate their dating life from their social life. So the social media companies are really not. There's no way they can compete. I don't know who the buyer would be. That's the question. I think that's maybe one of the problems. Yeah, could be.

Now, did you hear about this Disney activist news? I did, but I want to hit a question here first from John. Says, good morning, love listening. What's one of your thoughts on Oak Tree Specialty Lending Corporation getting an 11% yield with Howard Marks book field fund? Thanks. just wanted to hit this and say, Hey, we don't know anything about this. And I would love to DM maybe about that because that is an interesting high yield there. But besides that, I don't know

anything. And then we also have one on Ally and American Express on forward earnings. Maybe we can hit that after this. So whoever asked that. Well, I'll just say, John, thank you for listening, But I'm sorry, with the specialty lending, unfortunately, you're asking the wrong people. Yeah, we'd love to learn more, though. So if you want to hit us up on Twitter or something, we can talk. Okay, yeah. I say we take this question here. Rogue CPA says, for some of the depression in multiples on names like Ally and American Express, do you believe the forward earnings don't quite reflect the risk of loan losses rising or asymmetric risk of going to zero?

I would say for both those companies, the risk of going to zero is very low. Yeah. For one, they're well covered now because they've kind of been building up capital on the balance sheet. I'm thinking mostly of Ally. But with American Express, it would probably require a very, very bad economy in general because of where their loans are placed. And not to mention the loans, it's not their entire business.

It's actually quite small as a percentage of the revenue. 100% is interest revenue. Yeah, might go a little higher as we normalize, but yeah, most of it is payment revenue. I guess unless a bunch of high-income earners suddenly are unable to pay their bills, which seems unlikely to me, which is who American Express really targets. It's pretty much the highly affluent. I don't think they're going to zero. And I think it'd take more than just

higher loss rates. For Ally, I mean, this was kind of our thought in initially buying, which is that auto loans are one of the first things to get paid. Even in the worst possible scenario, let's say it was between your home loan and your auto loan, you could live in your car. And there are people that end up doing that. I know that's like the worst possible scenario, but you need your car to earn the income to pay off your other loans oftentimes. And so, yes, loss rates can still go higher, but they've jumped relative to the last two years. They're in line with the normal averages. And frankly, I think the market kind of reflects that expectation that they're going to go higher. I agree. And then one thing, they're facing headwinds on the rising interest rates. It seems like, and the Fed obviously can change their mind, it seems like the Fed is going to keep rates flat and their plan is to maybe lower them slightly for the next two years or so, which would help Ally. So I think generally the thought about, yeah, okay, here's another question. Is the concern then that they can't grow their car loan assets? I would say that maybe that is a concern because they have pulled back a tiny bit and we'll

see what the numbers look like next week. So this could age poorly. Their earnings are fairly early in the earning season calendar, along with the other banks. We did get a question about thoughts on bank earnings. Maybe we can talk about them in a couple of weeks, but we really only follow a couple and we're not experts at all in financials. So I don't know if we could have any crazy takes, but maybe it'll be fun to talk about some of the results.

I would say that's one of the other benefits real quick here is that maybe they're not able to grow their car loan volume as quick as they're hoping, but it's not like a home. It's not quite a cyclical, like people need cars. They, what is it? The average people turn over their cars once every like seven years on average or something like that, there is demand for it by default, as opposed to it just being opportunistic.

But yes, I think relative to previous years, volumes will likely decline, but they don't have to lend in the automotive segment. If they can get higher earnings just buying, I mean, there's a spread right now between their savings accounts and three-month treasuries. Yeah, it's small. It's very small, but they could technically do that and they would be definitely not earning as much as they are right now. But I think what attracts us to Ally is that we think the downside is low because of how well capitalized they are, the over 90% FDIC insured deposits, the fact that the car loans are very steady. they have a hundred year history of making loans in the car business. The reason they went bankrupt at GM is because they got into the mortgage stuff that everyone got into. And I think the upside is that, and I think, have we done, I don't know if we've done a full podcast on Ally. Maybe we could

do one of those in the future, but we had some interviews on Ally, which maybe someone could listen to for a fuller look. But the upside I think is that a lot of downside is being priced in by investors right now. They're not any optimistic scenario. The stock probably works very, very well. And the company itself is already pricing in for significant declines in used car prices and a significant increase in, what's the exact term? Loss, just losses on their loans, right? Write-offs, I should say. Write-offs. That's the term.

Net charge-offs, delinquency rates. Right. So it's, they still have a lot of room for that and their deposits are growing. So I think it's, it's a very interesting situation. I think it's harder for an automotive lending company to go for their loans to go bad than for someone in the home lending space. I know it's kind of obvious, but. yeah i guess if you make it well if you make bad enough under yeah anything go wrong yeah all right all right uh we have questions or what do you want to hit there's more comments but do we want to hit any of our planned topics uh yeah we can hit the planned topics we have a question though i want to hit take 10 seconds here thoughts on lvmh uh we are going to be doing a December theme of luxury companies and LVMH is one of those. So don't really follow the

industry closely, but I think month of December will be very fun, very timely holiday season as well. We'll be hitting LVMH, Ferrari, Hermes, and a TBD. So yeah, thank you for all the questions. Let's hit one of the topics, Ryan. The Disney update, did you want to hit or what did you want to do yeah we can talk about that there's an activist investor i'm not really familiar with the guy but a lot of talk about that this week who has accumulated a sizable stake and wants to enact some changes i think it's not too surprising that someone's trying to step in here and do something the only thing and there were some rumors that the activist wanted disney to buy a gaming company the problem for me is that i don't think it's not like a mismanagement issue

in my opinion i think it's just a hard i think disney's in a difficult spot so just walking in and saying eiger's done it poorly which whatever i i mean i'm not that fond of bob eiger but just walking in and saying no we're gonna buy a big video gaming company that seems like maybe the wrong strategy and there's there's things that are hard for them to solve like disney's place in the streaming universe that doesn't just change on a whim because you fix management right right so i don't know yeah they have major headwinds and huge competition from people that were not there 15 years ago netflix amazon prime apple and youtube those Those are formidable competitors who are taking market share and doing it in a big way.

And specifically with the sports stuff, which is just looking like a big, big, huge, huge concern for the company. The rumor is they wanted to buy Electronic Arts, which technically makes sense because of the sports aspect, the Star Wars aspect, the Marvel aspect. But that's already a big, bloated company. adding them to disney would not what's that going to solve from a linear media aspect you're all you already have a very deep relationship with this company it's not gonna yeah i guess they're actually generating profits maybe that would help right but i don't see what i don't see how much

that changes here yeah there was also news a headline that came out this week said bob eiger found disney in worse shape than he expected now overwhelmed and exhausted this is hilarious he's leaked by bob eiger he never left he had an office the whole time wouldn't give up his office to bob chapek he was involved and now he's like oh my gosh it was no chapek guy he really he left this place and shame on him who hired that guy like he wasn't there for the last 20 years and he just walked in and was so surprised it's uh he does love he loves leaking stuff to the media that according to sources bob eiger is saying well we know the sources uh it's you he loves to point fingers as well yeah they got him on the the number like the the direct line at the

wall street journal it's just it's just oh that's bob that's who's that line one that's bob he's got something to leak to us all right let's put it on page two yeah i so i don't know this is a good example like disney this seems like further proof to me that it's too tough of a problem to solve as an investor there are simpler investments to make yeah and the park they're also hiking prices more on parks right now there was a recent article about that but i think the underlying assumption should just be that prices are going up every day there and the funny thing is there's like so many ways for them to increase prices across the parks like you could do the ticket like that the the theme park ticket you do the five-day ticket you could do hotel prices you

could do the multi park pass you could do food you could do the skip the line passes it's just there's so many levers for them to pull and they certainly have been pulling them so i don't know what i don't think it covers the losses for straight man do you think yeah well do you think you would buy disney especially because they're investing more in the parks and seems like they have a good pathway to get good returns on all that investment would you buy them at 10 times parks earnings operating income 10 times parks operating income like just if i could buy just the parks no no the entire the entire bit yeah also have to take everything else at the moment no no you think there's better options out there cleaner options

as you mentioned well it could like here's the thing it could it could work it could work it's just it's just it's just a hard it's a hard business to invest in right like it still could work but i mean okay how much does parks earn do you know i don't i could maybe try to pull up the numbers but we'll maybe do an update as they have their full year numbers coming out my thought is like i don't know when long term let's say that their position in the new form of media consumption is worsened right so they're like the fifth stream the fifth whatever most important streaming player in the streaming universe and their linear assets don't mean a lot doesn't that harm parks over time or at least the price and power of parks yeah and especially if kids are going on youtube roblox

right i think that hurts them as well because the brands aren't getting as much love which you make the money on that from people going to the parks i got a comment here you guys sleep on disney cruises maybe but i would listen to our royal caribbean episode that is a tough industry that is that's all i'll say it's a tough industry and there's also a question on ea has jet a fallen order and that's made by respawn the people that made apex legends yes but i believe and i haven't followed them closely i believe the leader that quit so gaming's tough it's very hard to retain talent i'd maybe listen to that recent strass zelenik episode on invest like the best on how to actually retain talent in the industry and it's quite it's a pesky industry and if you are

retaining talent it's probably not the most profitable operation either well i mean take two has crushed the market but sure let's see about that over the last five ah oh maybe not last five but since they've taken over yeah let's go take two five stock is up stock is up nine percent in the last five years well i bet they're retaining talent though i i mean you can't it's you can't like you can't get on their track record over the last 10 years they're up 707 i mean come on you can't you can't bash their track record ryan it's phenomenal I won't have that it's a one hit

they've been so unprofitable for so long not one hit wonder Ryan not one hit wonder one franchise wonder no where are they without GTA come on they have Red Dead Redemption the second most popular individual title ever

Red Dead Redemption 2 at least I don't think that drives enough performance for it I mean we kind of sold it for a reason I think we sold it for a reason, which was the spend is unpredictable in terms of what's required to generate a real hit AAA title these days. We're seeing it with EA. We're seeing it with Take-Two. They spend so much on talent and R&D, and it's ultra competitive today.

yeah i'd also say that 2k basketball or whatever you call it also a hit so it's definitely not a one hit one to run i think that is incorrect but i agree it accounts for like 60 of their revenue doesn't it what does gta franchise i don't know if they break that out but i don't think that's correct except for on the launch here but i don't think that's correct i'm more of a hater i think it's been well shareholders have done quite well from from like gta5 for the first five years of that yes they did well last five what have you done for me lately take to it well i mean the the price was pretty if you bought five years ago that price is pretty aggressive

let's check that come on handy old wide charts let's see what that let's call it maybe ev to ebit that's a that's a fair metric for them huh right sure sure yeah good as any oh my gosh okay well let's scrap out let's go to 2020 sometimes they don't earn anything so it's gonna yeah the chart's gonna look funky this is a funky chart okay um let's go 10 years oh my gosh come on white shorts you're embarrassing me here uh horrible audio but in general the yeah like i think people were pricing in probably a new gta

game and it just got delayed and they were really investing into that for a longer time than people thought and after the big success there and the big success of online the insane profitability at the 2k franchise the nba 2k franchise and then the success of red dead redemption 2 which i believe came out in 2019 but i forget the exact timing on that like five years ago the optimism on this business was so high and they're like okay they're just gonna keep generating generating but then they have a longer term time horizon i wouldn't be surprised if they continue to outperform yes it's probably not at as cheap a price and zynga is very very uncertain right i don't know about that uncertain is generous i think that was we can i think pretty much everyone

can look at that and say it was a bad acquisition especially after the that was coming right during the idfa changes which was like sure to impact the business yeah i think almost assuredly it would have been the price of that business would have been much cheaper here's the thing here's my my quibble we look at Bob Iger and we say wow transformative acquisitions with Marvel

and my Star Wars Pixar and then we say did the did the Fox deal ruin his track record and we kind of think it does because they made this huge splash with Zelnick

Why do we give them a pass on Zynga? Well, I don't think we give them a pass. I'm just trying to say that they have crushed the market and the track record is great, but I do agree. I mean, it is a big concern. And one thing that concerned me listening to that interview, as I think that the business still interests me and I potentially want to buy it at the right price, they talked a lot about the size of the company and how they want to be the biggest gaming company

in the world. And I don't know if that, I think he could have some incentive there as an empire builder, which could be a concern for me. That's fair. All right. Any other topics? There's a lot of comments. Yeah. How about Microsoft?

GTA says, yeah, interesting stuff there. There was a quote tweet of it, you know, what do they call it? you know those those clickbait headlines increase your earnings per share with this one simple trick yeah so they probably just had their numbers to hit uh i don't know what's interesting is that it's irrelevant for the business today unless they come it comes out that they owe even more but there's always i think it's an example of no matter how good the business is one of the performing stocks ever. There's going to be things that go wrong. There's going to be people that do things that are illegal, especially as the companies get larger. I'm curious what your

thoughts on it are. Trey Lockerbie Yeah. I mean, if there's a huge fine, it's not going to be trivial, especially if they have to close on this acquisition. Let's say they have to pay $29 billion dollars in back taxes and they close on a 75 what was it 70 67 billion dollar acquisition of activision blizzard 100 billion dollars in cash out the window is you know although they they earn incredible amounts i mean it's not not inconsequential for them i'm trying to is there anything else to this is there anything any takeaway from this irs story i don't know but maybe it's like a even a further slash on uh steve ballmer's reputation

that's right they were i guess they were earning even less during that time period do you have a comment here that says microsoft is the best gaming company to be honest i disagree with that a lot i think they're the worst they're this activision blizzard acquisition is a big overpay uh bobby kodak is very good at selling his assets and he's very or buying are buying them and yeah sony and nintendo run circles around them i think it's been clear for years the division we don't have exact numbers on it but is likely very unprofitable for them will probably become profitable because they have all this content from activision blizzard who generates i think probably around two to three billion in cash a year but they're not they're

they're clearly not sony and nintendo are much better in my opinion what are your thoughts on that yeah i'm not sure about microsoft's own internal titles like what would have been hits and what haven't you could say what is it minecraft but they acquired that you know it wasn't yeah that's probably their one success yeah but it's an acquired success and they've probably done well with it over the years but they are

not the largest gaming company in terms of platform Sony and Nintendo are both larger on a hardware base and it it feels like this game pass has been kind of

a nothing burger like there's not a lot to show for it and they have basically unlimited resources so i would say it's i don't know maybe it's a testament to how hard the gaming industry is because they they can spend a ton of money and it's hard for them to get it right but we we don't actually have any segment profitability numbers so it's just a guess that they're unprofitable right because yeah and there's a lot of stories out about the out there about them selling things below cost, kind of looking at the Sony numbers as well, trying to parse through things there, but it is a bunch of guesses. All right. Do you want to talk Ozempic?

We have about 15 minutes left. And I thought, I guess it was Ozempic plus Pepsi. Yeah. We're going to do a full episode on Ozempic just to get the bubble really started, or maybe just the market theme. People said that Ozempic is the next thing after AI to become an investing topic, which i think could kind of be fun because in that category the people the companies that are getting impacted could actually create some really good value opportunities which i will talk about here are some potential things that you know there's more stuff in our wheelhouse instead of just cloud flare and stuff we have no idea what's going on but earning season kicks off with pepsi they have a little bit of a pro rated than on the standard calendar i want to

to talk about them, Ozempic, and the big CPG drawdown. So if we look at their numbers, organic revenue growth is up 12% year to date. But if we look at the quarterly numbers, most of the growth, or in fact, maybe all of the growth is from pricing power. So volumes looked fairly weak across the board, except for a couple of segments. If you looked at like LATAM beverages, it was 5% volume growth, but we'll see. I mean, that could be an anomaly. it's maybe a faster growing market. But if you look at their most important one, which is Frito-Lay North America, revenue grew 7% year over year with flat volumes. And then on the conference call, the CEO said, when asked about the new weight loss drugs,

he said, so far, the impact has been negligible on our business, which I think maybe people could take as a good thing or a bad thing, right? But in contrast, we've seen retailers like Walmart, some other ones, maybe they're making excuses, but they say they've seen data of people that they know are on these weight loss drugs, buying less food at their stores. And then the other thing I want to look at here, I'll probably just share the screen because it's kind of a good visual, but I'll describe it. I pulled up the charts. I think it's a three-year chart of Hershey, Pepsi, and Coca-Cola. Yeah, we should be able to see that. And all three, I think this is an example of the CPG category, are in sharp drawdowns. Hershey, down about 32%. In a few months,

pepsi and coke down about 20 ryan maybe else we can get your thoughts first the cpg drawdown does it interest you at all no i mean we actually did that cpg the theme for our not so deep dives what was it kind of i want to say like six months ago and we looked at Hershey's, Pepsi, there was another one. I think we might've looked at Philip Morris at that time as well, but they were all trading at ridiculous multiples. So I don't think it's like necessarily results driven.

And I would say it's going to take a lit, like quite a bigger drawdown before I actually get interested. I remember we looked at it and said like, in a 50% drawdown or half the multiple, maybe it would be interested, but it was like Hershey at like 25 times. Yeah.

And right now I think it's just below 20, but I'd have to confirm. So I would be interested in Hershey at a cheaper earnings multiple, but I would, I think it's a really, really good business. Yeah. But it's not going to grow that fast.

Right. What are your thoughts about the Ozempic fears around these things? I think for me, it's wait and see. Everyone's going to have their comments. It's Hershey's, obviously, or Pepsi's probably inclined to say they're not seeing anything. But I would say- Let me pull the chart here.

Go ahead. What's the chart? Can you explain this? Yeah, I will. I will. What am I looking at? So it is basically comparing, it's got a lot of data here, but I'll just describe it because most people are just listening.

So it confirms, it's a study, I believe it was from JP Morgan, it was getting passed around on Twitter. It looks at consumption of the weight loss drug users versus the total US population and then looking at the difference. So the worst five performers and 20% less consumption or more for the weight loss drug users are chips, crackers, popcorn, snacks, seeds, nuts, and trail mix and meat snacks. And then there's also packaged portable sweet snacks, packaged cookies, soft drinks, baking and cooking all seeing significant declines as well um here's here's what i think would

concern me from the cpg companies is that their consumption how did they get this stuff seriously they're powerful they're running a lot of studies from there they got a lot of cash they got a lot of stuff a lot of people working there and i'm grateful for the leaks onto the internet that we can use for free really appreciate that everyone i think the biggest concern is that the consumption of these products is not evenly spread around the population you have what you may call the i'm just trying to say this nicely the 10 power users the obese people who may be the ones a lot of people are going on these drugs who are the consuming a lot more of these products That would be the thing that concerns – they're having a lot more of these products today, and that would be the thing that concerns me.

Who benefits the most? If Ozempic, let's say, has this actual massive impact and that data – I mean, I usually am a little reluctant to take any action on some of those charts. Because it feels like if you're looking for certain data and you have unlimited resources to conduct these studies, you can find data that supports your belief. Yeah, it's just one data point. One data point. Kind of fade that. But if Ozempic really does shrink consumption for, let's call it, salty and savory snacks and maybe soda, obviously Pepsi is harmed. Obviously, I don't know if Coca-Cola really has that much of a business in salty and savory snacks.

Hershey's is probably harmed. There's a lot of businesses that would hurt, but who would benefit? Well, hard to think on the spot. Yeah, of course. Everything benefits Sprouts Farmer's Market. It's a Sprouts market. We're just living in it, right? That was a little bit of a pun.

but i i think you'd have to look at it and say what do healthier skinnier people do in general that fat people don't i don't know exercise the gym is that really gonna but i think the whole point is that they don't do that well they're taking this drug like in in replace of right isn't that kind of the yeah but you might be in more inclined i think here here's one fitness clothes nike little women true you look because because if you're overweight you generally don't you know you don't you don't want to wear the tight-fitting clothing running shoes i think that could benefit hard to think on the top of my head but here's here's a couple categories well actually there's one but there's some things that the ozempic weight loss drug users had more of

And one thing that popped out, alcoholic beverages up 5%, the difference. Now, it's not a huge boost, but I think from an investor perspective, you could look at it, and I don't know if it's alcohol for this thing, like solely spirits or alcohol, wine, or wine, beer, and spirits. i think there could be an opportunity here if you kind of look at study some of these alcohol businesses and they get jumped you know looped in uh or lumped in with a lot of these other you know ozempic losers there could be some buying opportunities if this data proves true i'd like to look more into other studies about alcohol consumption and uh and ozempic i'm curious how many people are actually like taking ozempic because if it's all day it's a lot there's like four million people really people are on the weight loss drugs it was in the millions um

okay and it says half uh i'm not gonna just google and find the answers but i did see it's in the millions it surprised me when i saw the chart it's a lot higher than people think got a comment here uh from big pharma shill which is funny in this segment tattooed chef benefits the most that's a good one oh nice little nice little joke there r.i.p to that stock yeah no i i find that kind of hard to establish any real beneficiaries or maybe yeah you could say maybe the alcohol brands five percent doesn't really the difference i think yeah yeah kind of maybe it makes sense because you're in better shape you're not as tired you're willing to do more social activities

honestly it kind of makes sense to me that it's good it's not seeing a hit like some people might get hit because they're not maybe if you're an alcoholic it breaks your addiction and you're not drinking 10 beers a day by yourself every day but maybe it spurs more social activity for people that aren't novo nordisk huh that's the notice yep there are yeah they that's basically the taylor swift of the netherlands they have driven gdp in a significant way that the central banks or the government had to like they had to do i think it was gdp growth or something x novo nordisk and i think that could be them i think it's that company but yeah there's novo nordisk and someone else but yeah i believe are they netherlands uh it's hard to get the name yeah

so denmark's gp not netherlands denmark yeah so denmark's gdp is 400 billion and novo nordisk market cap is 340 billion yeah exactly it's all just one kind of one country all working at the same place yeah we're going to drive the economy yeah apologies to them not netherlands denmark sorry i got confused close though uh someone said i'm scared selling online pepsi and mcdonald's mcdonald's is another good one you know the fast food companies i don't know if i'd want to own those stocks right now and it just so happens that they trade at ridiculous multiples still like yeah i i would say if i mean we're looking at these it's like okay you're maybe getting two percent volume growth pricing growth you could i mean for pepsi over the last couple years it's

it's been it's drastically outpaced what they were typically doing like they were raising prices in in the teens. They don't typically do that. I think the assumption should have been mid to high single digits revenue growth, which if you're paying 10 times, I think that's a good return there, assuming that margins are steady, but you're not paying 25 times for that. That's what a lot of these were trading at. I mean, McDonald's, I think was at one point above 30 times earnings recently. And I don't it's just such a mature business. Why would you ever pay that? Yeah. I don't get that. Yeah. Especially when you compare some of these lower growers

with short-term treasuries at five and a half. Right now, okay, let's say you like these businesses. They're not, okay, you can be betting on them at these sort of earnings multiples and you get a very small return. That's probably equivalent to treasuries. Or you're betting on more multiple expansion, which seems irrational, or you can sit in short-term treasuries, earn essentially the same that you would be in these stocks. And if you still like the businesses, you can wait for a potential buying opportunity when it's 10 to 15 times earnings. It doesn't make much sense to me to buy them today over treasuries. It's a whole different ball game when I can earn five and a half percent risk-free. Yeah. I think initially it was more of a flight

to safety like we were i remember we were discussing that is basically just trading at north of 20 times above market multiples and it felt like a lot of people had gotten burned by tech investments at the time it was also coincided with like google being torn down with ai like the stock was down significantly due to chat gpt concerns along with some other stuff amazon was down felt like everything tech related was kind of down and people were like okay what's what's a business that for sure is going to be around and people just flew to consumer goods yeah i guess that's probably i think that's probably what happened all right well i think that's a good way to end it we're at the one hour mark here thank you for everyone who joined a lot

of comments i'm glad that people were having discussions in there but yeah a lot of jokes here from everyone but we appreciate the comments and appreciate the questions uh we go live every Thursday morning. Let's hit the disclosure here. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you everyone for tuning in. Had a lot of topics. I wanted to discuss threads. Had a little bit of a bounce back there, which everyone should go follow us on there. Threads, Twitter's going to die. let's go on threads uh but yeah we'll see you next time