Chit Chat Stocks - IPH #94: A Merger Arb Blow Up; Delta Air Earnings $DAL; Are You Buying $BABA or $BTC?

Episode Date: January 21, 2024

The Investing Power Hour is live-streamed every Thursday on YouTube. This week we discussed: - JetBlue Unable to Acquire Spirit Airlines - Delta's Q4 Earnings - Elon's new pay package - Reading some hedge fund quarterly letters - Funny finance memes from this week + much more ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatMoney/featured  Follow us on Twitter/X: https://twitter.com/chitchatmoney  Follow us on Substack: https://chitchatmoney.substack.com/  ********************************************************************* Chit Chat Money is brought to you by Public.com*. Sign up for a high-yield cash account today: ⁠https://public.com/chitchatmoney⁠ *A High-Yield Cash Account is a secondary brokerage account with Public Investing. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at ⁠https://public.com/disclosures/high-yield-account⁠ ********************************************************************* Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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yielded cash accounts are available for u.s members only with that said let's kick things off brett any news topics for this week we're starting earnings season so i thought delta airlines would be a fun one to discuss. I believe they're the largest, if not, they're pretty close to the largest airline in the United States, perhaps, and definitely one of the largest in the world as well. Got some funny topics. I have an interesting, perhaps the most painful investing question you could put on someone as a little tease. And I know you got news around Musk's new pay package or potential one and then other airline related stuff the breaking of the spirit and jet blue deal according to a court ruling which i saw some headlines on but my favorite part

is that our friend davy day trader global is back i don't know if you saw that right before we recorded and he is going along spirit airlines and funny enough uh this is a really rich guy So I don't think he's going to be too upset. But immediately after he put out his video that he was going long spirit air, there was a Wall Street Journal report that they are in talks about restructuring and concerns over paying off the debt and managing that after the deal didn't close. So the stock went down approximately 10%. Yeah, brutal. it's tough it's tough to invest in shit because there were a lot of

a lot of really smart people people that I respect investors that I respect investors that I follow and generate a lot of ideas from were long spirit and this broke the wrong way

just goes to show I think how unpredictable some of these things are and how courts can really rule anyway hey you know if you're merger arm and you win eight out of ten then you're probably still doing pretty well maybe even less depending on what ones you get into hey sometimes you lose got some questions though sorry you're going to get into it we have one any thoughts and spirit in jet blue this is from tyler who is always basically the sole source of our questions we really appreciate it tyler uh says any thoughts and spirits in jet blue ryan will have those

later thoughts on shorting hawaiian giving the jet blue break and then some other ones uh thoughts on buying spirit debt given that airplanes are worth more in the market than they are in their balance sheets and to more of a macro one we might hit later so do you want to hit seems like people are interested in this deal break why don't you go through your notes on that first and then we'll have a discussion yeah i guess i'm not an expert on the case but i'm usually not an expert on anything Merger Art related. However, basically, there was something called a hot doc in this case where essentially Spirits executives, or maybe it was JetBlue's, one of the executives basically talked about raising

prices after the merger closed. And that ended up, I think, probably being a concern. And ultimately, the judge ruled that they thought this was anti-competitive and that it would eliminate one of the only low-cost operators for customers. I don't know if I agree. There's been so much airline consolidation over the last 30 years that it seems weird to step in now to the one low-cost operator who obviously can't operate after this. They can't operate low-cost anymore. So, it feels like it is kind of ironic that I think Spirit will have to increase prices, probably, in order to try to stay afloat here. And that was the concern about the merger going through is that prices could increase.

So, it was kind of interesting to see everyone's reactions. A lot of the people, I think the typical response was that the judge got this wrong, which if you're an investor, it doesn't matter. You knew the risks that that was there. That's why the spread was so large. And so I think it's on you. And I don't think it's a very good look to just blame the judge because you didn't have to buy the stock. Um, but I, with that said, I don't know if this is the right choice. It seems like I'm, I'm a little bit opposed to any deal being considered anti-competitive

if the company can't operate on its own after the fact. Yeah. I saw you had a tweet about that with iRobot as well, where, yes, there can be some synergy considerations or local monopolies or whatever. With iRobot, I don't get it when people are concerned about Amazon mapping your home. What are they going to do with that information? robots already doing that on its own like okay they're doing someone mentioned that to me and i was like okay let's say the map their home what are they going to do next what are they going to do with that offer you a low cost advertise you a low cost rug that's the exact parameters

you're looking for and ship it to you for free yeah also i robots already doing that so if there's concerns about that okay like that company is already doing it and they're going to be doing it on their own and yeah i get i get what you mean where jet blue may end up being a beneficiary here because one they don't have to swallow this company anymore and it's a different operating environment and two if if spirit goes out of business yes they're gonna have to compete with some of these bidders but with the airline manufacturers remember we talked last week Boeing or excuse me, airplane manufacturers behind and having huge backlogs, specifically Boeing is struggling so much that these companies like Spirit, if they go bankrupt or decide

to file for bankruptcy, well, hey, there's going to be, you know, a potential to buy these airplanes for, you know, kind of an auction deal, but they'll probably be competing with other other companies in that one as well yeah we saw the question there look i don't know much about the steel um but i would go read andrew walker's right up on it yeah he's covered it well and it's well here's here's the question i was gonna ask is thoughts on buying i don't know anything about spirits debt but it makes sense that maybe buying the deck could be interesting if there's going to be a lot of strategic value out there for these other airlines yeah potentially that would be something i've never done before so it i'd have to look into

it more obviously but the it does make sense i mean airline airplanes are tough to come by right now, given the supply constraints with Boeing. So it seems like those would be worth a lot to a lot of other airlines. Maybe there's some salvage value there, but it's a very different type of investment than what I typically go for. So I'd be concerned. The other thing I find interesting, Hawaiian Airlines didn't trade down that much on this. And it really seems like it should have, assuming that this is the new precedent for airline consolidation.

There's obviously some nuances, some differences, less flight overlap, but at the same time, they talk about less overlapping routes. That's what Alaska mentions, but there's less routes to begin with. So, assuming that, I guess the only other difference is that Hawaiian's not really a low-cost operator. Yeah, that could be the difference where, I don't know. But you can't expect the judge to act rationally because the concern is, okay, well, Spirit, yes, is the low-cost operator, and they're getting absorbed by a company that's a different one and could reduce that.

But they're now not able to be the low-cost operator because they're going to go bankrupt. So I think the way to preserve that would have been to let them get bought out by someone, and then I don't know how you maybe can't restrict that. But I don't think there should be unless it's someone that absolutely dominates an airport or route paths or whatever and maybe you can even do some concessions i do not think the airline industry

is i mean what these things are hyper competitive these things are as we'll maybe talk about commodities for the core part you're buying but i have on these add-ons you know like the credit cards and stuff like that i don't uh every time i know what the answer is yeah every time i every single time i book a flight i just look up the lowest cost flight on google yeah well it's because you're not uh no i am you're on the travel credit card team so i'm on the alaska card team well if there's one flight that's like the good thing is that alaska in most cases is the cheapest provider from where we're going from from seattle it's often the cheapest provider but i price compare anyways yeah but you got to think of these point right well we don't need to go 10 minutes on

you to maximizing your your points generation but if you book on alaska you get three times points so whatever um yeah so then i don't know i don't have any let's say that okay i don't like i mean i don't like hawaiian either maybe maybe to get short alaska is a well-run airline uh even with this thing that happened with the door blowout i mean it's one of the only ones that's actually grown significantly and generated good returns on invested capital over the last 25 years but it's an airline so i don't know but you're contradicting yourself here because on the one hand it's these are super competitive it's an airline industry that's hyper competitive and someone could come in and do the same thing but now you've got lock-in with all these credit

points and it's like these customers are locked in but let's say they're locked in is it still as competitive i don't think it's as competitive as it used to yeah yeah that's fair that's fair but so maybe it is the right time for someone to step in now it doesn't need to i'd be more concerned if it was one of the big four that was buying this but it does feel weird to block the fifth and sixth or seventh and eighth largest players from combining yeah i agree with that yeah i mean from an investing perspective i don't like the hawaiian any anything to do with the hawaiian deal i think one of the reasons i like merger are or excuse me one of the criteria i need for merger

are is uh that i would want to own the business at somewhat close to the price i'm paying and i think i'm not losing money or i think it's kind of a fair value for example activision blizzard it's had lost its way the culture was tough for the last five seven years but it seemed fairly cheap if that deal didn't go through and i think with these airline companies with irobot yes the spread is so wide but man you might the downside as we saw with spirit is incredible and if the hawaiian one doesn't go through what's interesting is it's it's the same thing where okay well they might have to do a restructuring and okay who's gonna have the these assets um like the downside there is incredible i mean the stock what was it a 200

premium to where they were trading i think it was almost hawaiian hawaiian oh the buyout yeah more more 270 they were trading at like five dollars and i think the buyout was for like 16 so like 270 maybe and it is yeah murder arb I thought I liked it

because all the cases were going as I expected but the one time you lose money I'm like maybe I don't like murder arb so much and I wasn't in on this but I was definitely thinking about taking a flyer on spirit and all the investors I listened to

it seemed reasonable that the deal go through. So yeah, I think if I am doing merger ARB, I would rather own something where bankruptcy risk isn't that high if the deal doesn't go through. And obviously the spread is not going to be quite as wide, but to me, it's a little more sense of security there. We do have some other questions though. I don't want to talk merger ARB all day. I want to take this one from Tyler. He says, do you guys think you found another Sprouts in your portfolio? That one has had every part of your thesis play out perfectly. Thank you.

Yes, pat on the back for us. I think it's a good question. I was revisiting Sprouts today, and I want to talk about the Sprouts investment because we might have some listeners who don't know what Sprouts Farmer's Market is, don't know what our thesis was, don't know when we bought it, that kind of stuff. So I'm just going to rehash it. In 2020, I believe, you first wrote it up. I don't know if I wrote it up. Found it. during the spring 2020 yeah right now at the time they had been going through some i would call it a

rough patch prior they had a management team that grew quickly kind of grew so fast that they turned it into a bit of a shit go more or less it was not earning a whole lot of money it was highly levered a lot of the quality at some of the stores was poor uh in terms of produce quality uh i mean two i think two things are wrong there one they weren't highly levered they're like one times or one whatever one times even uh second it wasn't the quality it was the promotions so they had good produce as they they're trying to improve it even further. But the problem was they were doing insane coupons and discounts that were driving down margins. They went from $150 million in debt to $550 million in debt and earnings

didn't change. I think that would qualify as leverage. I mean, and their earning, but their EBITDA is like 400 something million. So I mean, it's not a concern. Yeah. Maybe bankruptcy wasn't of concern, but the quality of the business certainly changed, you could say, from the time when it was under private equity. Honestly, I think it was smart. I mean, it's super low cost debt. And I was really unhappy that they paid it back. This was prior to 2019.

Yeah, I was unhappy when they paid it down. Honestly, they should have used, there was no need. It was super low cost. And their cost of debt, if I don't remember, it was sub 5% fixed. and their free cash flow yield is over 10%. So just buy back. And you're generating enough money to pay up and down the principal every year.

Yeah, but they were generating... Maybe, I think it was smart. I think Sinclair probably realized that there were a lot of underperforming stores and that maybe the EBITDA wasn't... He knew that they were going to take away the coupon clippers and struggle with EBITDA at some of the stores. I think paying down the debt was probably the right move

in a super competitive industry where it's not certainty. This isn't software. Hindsight, though. Hindsight. It's not EBITDA. EBITDA is not earnings. Yeah, but they're paying down the...

We can look at our friends over at FinChat if I can bring it up. I know this because I've followed them since 2019, briefly. Trust me. They did not need to pay down this debt. Share count could be lower. Stock price...

Like, they could have created shareholder value. Hindsight's obviously perfect, but they didn't need to pay down the debt. They would have had no liquidity concerns. All right, go through the thesis. What was your thesis? Well, one, the stock was insanely cheap. So the free cash flow was above 10%.

And probably in spring 2020, everything was really cheap, but it's probably 13%, 14% free cash flow yield. And the new management team had come in and they had decided in 2019 when they arrived that they wanted to get rid of this coupon clipping strategy. And that strategy had led to deteriorating operating margins for multiple years, even though revenue and comp sales were going up. So they got rid of that. But during spring of 2020, grocery stores did extremely well just because everyone was going for that type of stuff, less restaurants, more to that.

Comp sales were doing fantastic. But once we lapped that, they had lapped the pandemic catalyst, the one-time bump, and they got rid of these coupon clippers, which really, really hurt comp sales. So comp sales looked ugly for a few years. And when you have negative comp sales with retail, I mean, we were even debating it internally. If you remember, Ryan, we were like, man, like these comp sales keep going negative. It's not good. But margins were getting better. Earnings were actually growing.

And what they were saying, I mean, gross margins, operating margins declined, lapping 2020. Sure, from 2020, but I'm saying from 2019. um like they basically went down slightly from 2020 i mean for all intents i mean it's like barely below 2020 but from compared to 2019 and 2018 significantly higher and people thought that wasn't sustainable i've seen the barricades on that but we were talking internally the comp sales were ugly but we trusted management on the strategy of they got rid of the coupon clippers Those were low-margin customers. And then once we lapped that, we were growing comp sales again.

And I think part of the thesis was, well, it's so undervalued, and they have decent returns on invested capital. It was probably like 12%, 15%. And there was just a ginormous runway to the gross store count across the United States. We thought, you know, they had about 300 stores at the time, and we think they can get to 1,000. And pretty much sums it up.

And the management team, Sinclair, who came over from Walmart, is really sharp, so we liked him. i think that's about it right and honest seemed honest candid yeah maybe it's just maybe it's just he's scottish but he seemed very candid and when problems were facing the business he was pretty straightforward about it it was a very clean thesis that i haven't really come across since well i remember at the time or go sorry go sorry yeah it was the it's a store it's it's a unique concept health enthusiasts is who they were targeting it took a while for them to really kind of get that messaging across i think because they had to

go through getting rid of the coupon clippers but 70 of the items sold in store are attribute-based items, diet-specific, vegan, paleo, that kind of thing. In my opinion, if margins are sustainable, if that's who you continue to target and you continue to attract them, they had a clean balance sheet. They were buying back. It was cheap. They weren't able to grow store count that quickly because of all the supply chain issues around the time, but now they're in a position where they can certainly grow. They added distribution centers, so it seemed like the supply chain was improving for Sprouts. They made it one of their big targets to keep every store within a 250-mile radius. Prior, they had grown store count a little quickly, and some of

them were out of reach of distribution centers or not within that 250-mile distance. It seemed very clean maybe wasn't the best like performing business on the comp sales line but profitable better than a lot of its peers on the margin side and it was buying back a ton of stock and it was cheap but here do you everything seems perfect now right because stocks more than doubled but ryan do you remember how concerned you were with these quarterly reports in 2021 yes you were do you remember this i think everyone was that's why the stock sold off the but what like how do you how do you like i think listeners would be helpful in understanding of

having those concerns but then weighing it versus like okay well when does it turn into a sell decision well it was a little easier for us because the multiple doubled essentially it went from 20 to 30 we made a 10 position in the portfolio and it went from 20 to 30 without earning significantly improving because the comp sales were coming down it was lapping so for us it was kind of easy we sold it around 32 i think came back down to 20 and we ended up buying again. So at the time, I don't know, it's hard to read between the lines, especially with a grocer that has negative comp sales. The good thing was we were seeing similar trends out of some other grocers. So I got the sense that, okay, they're not alone. And margins weren't

deteriorating that much. And every time I listened to the conference call, I got a little bit of a sense of surety that okay, it's not the end of the world. Earnings were stable. Earnings per share were going up. Yeah. We did sell it though. Around $30

and ended up buying it back. Yes, we did do that and then we sold it. Yeah, that's true. We ended up selling around low $30s, bought it back I think around $30

in 2023, early 2022. Can't remember, but it was a very volatile stock, which was also not fun. But I guess it's, maybe it can be fun if you time it correctly, but it's not fun

if you're just holding that one. And it was a frustrating one to hold for many years because you go down a lot in earnings reports because everyone hated the comp sales, but earnings look fine. They're buying back stock.

There's no risk of bankruptcy. And you had to have some extreme patience. And now I really don't know why it's going up so much but yeah that's the other thing i'm gonna say is i'm starting to realize how hard it is to i think hold your winners where this was a winner but a lot of it came from multiple expansion which maybe that's all maybe it deserves nvr from 1997 to 2003 was a six-packer and the multiple didn't change that's an exception i know we had that on the show that

discovered that's an exception to the rule most hunter beggars remember yeah multiple expansion is huge yeah the and maybe it deserves a more expensive multiple but it makes it harder to own because you don't feel the margin of safety as much they're not able to buy back as much stock but i think the lesson for me is that if you find a unique business where it seems like it has a replicable model don't haggle over pennies and just hold it and don't don't try to get in and out because it's way too hard at time oh yeah yeah i say just keep owning it it's a little easier to do in personal accounts but when things are going right for you don't i'd say don't mess with unless this the valuation becomes extreme which would be typically unless it's just an absolute

absurd getting better like the business is growing like gangbusters it probably means like triples or quadruples within a short time span at least from my perspective because if you bought it it probably wasn't i mean if you're underwriting 100 irr find me those stocks but i think the key is if the business is good and the quality is improving you will almost always be benefited by listening to david gardner in this case now i know there's people out there that aren't the biggest fans of the motley fool but david gardner i think undisputably is one of the best investors of this generation and the key reason is because he never uh trims the flowers and i think again and he adds to his winners yeah that's even harder i think that's the next

step maybe that's the next step we got to take is to be able to do that but the reason you sell is when the i think yes if the valuation gets absolutely extreme like something's got in 2021 sure but only sell if you're very concerned about the the business quality or changing the business cares if you wouldn't buy sprouts at 50 if you were holding from 20 you're gonna be happy over the long term i think yeah you're frozen looks like ryan froze uh hopefully oh oh there you might be on your end yep i saw it i saw it yeah you froze on my end okay looks like we're back all right next topic let's see if we got any other questions have you guys seen the pitches around multi-family housing REITs at unusually high cap rates any

thoughts on those nope do not like any I don't care uh sorry don't pay attention to those at all Ryan I'm assuming you haven't either no I have not no the thing about real estate is I get so bored that i can't do it these type of things i just fall asleep it's like healthcare companies i've grown more like i think something that i have a problem with is i see so many people make money in real estate that it feels like unoriginal or that it's too easy that everyone's doing it that doesn't make sense and it's there are probably a lot of ways to make money in real estate the only thing i don't really like is unless you're like just buying like literal wreaths uh like securities it's it's pretty hands-on if it's an investment property like you can hire someone to

manage it or whatever but when you're getting started i think for the most part you're gonna to have to work on that property a lot. So it's just not my cup of tea, not my style of investment that I prefer. But Discover Financial is, we got a question here. Did you read Discover's earnings? I have not. It's on the top of my list to read next. But why don't we go to another topic? Because we're about halfway through here, Ryan. Yeah, let me go through. I like yours. Yeah, go go to yours so well we can talk about the elon pay package in a little bit but i was reading a shareholder or not a shareholder a hedge fund letter this week from bonsai partners it's run by andrew rosenblum he is on twitter so uh great follow highly recommend it uh he mentions in the

letter that he really likes the it services industry and he lays out a pretty good case for So here's a quote from the letter. He says, the image below presents a selection of leading IT engineering companies and their aggregate performance from 2010 to 2022. Note that these businesses profitably grew revenues 20X to 40X over the past 12 years. I know a lot of people just listen to the show, so I'm describing an image that you can't see, but basically it goes through four businesses, Lobent, EPAM, Endava, and Nagaro. And like he said, all of them either grew revenues somewhere between 20X and 40X over 12 years. And they all trade somewhat expensive. So EPAM, last 12-month price-to-earnings ratio is 28.4. Endava is 27.9. Nagaro,

which has a little more hair on it, is 14.3 times, but it's also grown 36.5% over the last 12 years. And then Globin is way more expensive at 57.4 times. But all these businesses have grown rapidly. And for us who are kind of consulting haters and maybe less so in the IT space, I've always wondered, and I've never really worked with, never really had like an IT services provider come and help me in a business. So I've never had that experience. So he actually asked the question, he says, why outsource to an IT services company in the first place, which I think is a question we've asked here multiple times. And he lays out some good reasoning around why these businesses are so important. He says, as you likely know, there is a persistent shortage of software engineering talent in North America and Western Europe, leading to the high cost of these employees.

For people that don't think this is true, go to a big bank's careers website and look how many, just look up the term developer or engineer, look how many job openings there are. It is really hard for a lot of these Fortune 500 businesses like a Hershey or kind of a generic company that doesn't specialize in technology to attract these developers. He says, most software engineers prefer to work directly inside technology companies instead of more traditional Fortune 500 type businesses. Since the need for engineering ebbs and flows around technology projects, staffing needs are volatile, which means an employee hired for a specific project might be repurposed on a new task or be let go after the project is finished. It's far more interesting, prestigious, and job secure for an engineer to gain exposure

to multiple companies by working at an IT services firm. It makes a lot of sense. If you are a developer going to a company that doesn't specialize in anything tech related where developers aren't kind of a core employee component of the business, you're probably hired for certain projects where all of a sudden you're questioning whether you're valued at the company after the project is done. It's so much easier to just work at an IT services or an IT consulting business and have that consistent job security and be moved from project to project. So it makes a lot of sense. And I know specifically for EPAM and Nagaro, they have cost advantages because they hire talent from Eastern Europe and India. So curious your thoughts here. Are these companies that would interest you? i think potentially i get and people might be like well who cares if it's boring as long as

it makes money i honestly think it's not being bored with an investment is important because then you actually pay attention to what matters i find these businesses boring but clearly they're good ones i think it's yeah it's it's fairly durable it's much more i'd say durable and useful than executive suite consulting business consulting you know the mckinsey style stuff compensation consultants get on my high horse there uh it's much much different because this they might describe them as consultants but really this is contract work and as someone who worked briefly in the mechanical engineering space i mean it's very very common to the mechanic the giant mechanical contracting firms which are generally private um they do stuff that's similar

where you have a smaller company, they go to you for a project, they contract you on that, and you do it for them. I think these do make sense, for sure. Yeah. And I've always... I remember looking at EPAM a year ago

because a big chunk of their employee base is in Ukraine, or was in Ukraine. And so the stock just dropped some absurd amount after the the news was announced between russia and ukraine sorry i'm stuttering but the i looked at it i thought what the hell is so special about this business like why has it performed so well and it seems like well first of all this describes it well there's constant need for these types of services and a growing need, especially since they specialize in a certain vertical, which is pretty much engineering type projects.

If you're Accenture, software engineering type projects, if you're Accenture or one of these big consulting firms, there's so many verticals that I don't think the revenue upside is quite as clear as just being like a tech specific consulting firm. So I like it. i think epm is pretty interesting they have a good ceo i remember looking at um difficulties with their staff right now given that they've had to relocate a lot of them but i thought it was a really good shareholder letter if you want to check it out just like a bond site partners they write a good letter or follow andrew rosenblum on twitter you have the link or you want to talk

no i didn't include it here but yeah i can i can throw it in the chat all right i wanted to start doing these discussion questions because someone dm'd me before the show and he said you should you know have you listened to the barstool podcast i was like yes and we've tried to incorporate this stuff before but i want to start doing this more zeros and heroes from the week and i know you didn't see this before i don't think or you did no no you didn't anyway yeah zeros and heroes from the week who had who in financial markets had a great week and who had a rough week i think that'd be a fun way to start these shows from now on all right do you have any in mind who are the heroes and zeros from the week oh well i have your i mean we talked uh spirit i think that's clearly

the the one there there's a lot of people owning that one read a couple zeros shareholders are the zeros for the week yeah uh heroes i guess people that are going to accumulate some fees on these bitcoin atfs i'm stealing your notes here but yeah i don't know elon elon yeah well he's gonna he needs to get more 100 billion more dollars of tesla shares if he's going to be properly incentivized isn't it on this thing yeah i mean he's a gas lighter it's okay the matt levine wrote about it which i'm happy he did and he's like this he's more or less called extortion because it's like he's saying well that money you used to give me is gone now i own twitter with that money so for me to be properly incentivized i'm gonna for me to

spend time on this project you have to make it worth my while which is a good threat that is a good threat if you're a tesla board because well you're gonna lose your stock premium if he's not as involved if he stops showing up on the conference calls and if he doesn't talk about it as much yeah all right i got another uh zero and the stock is off 78 from all-time highs i hope you haven't seen this meme you may have because it kind of went viral and i did retweet it but i know you're not on twitter all the time so then we don't see everything but i'm going to share this one i didn't include it because well i just wanted to see your reaction live so i'm going to share my screen here i think some of the people watching on the video

will be able to see it too did you see this one uh no i've seen some seen the mean format like that but not that one specifically describe it for people that are listening yeah so it's the the one i think it makes sense where it's it's a pregnant uh woman drinking and smoking and it's like no it doesn't affect my baby and then there's 12 years later and this kid is looking at a computer screen and he says alibaba is a 23 free cash flow yield at some point it has to be a buy I don't know why, but this one, it made me laugh so hard. I mean, I was laughing for a solid minute. It was a good one.

Whoever did it, W2I Realist, so thank you for that one. But I think that's a zero for the week because the stock's down 80%. It keeps falling. And look, you could have argued it's cheap at 10% free cash flow yield. You could have argued it was cheap at a 15% free cash flow yield. And now, hey, at some point it has to be a buy. And that leads to relates to my other topic, which is a poll I did that would probably I honestly don't know how to answer this one because it seems so hard. You have $50,000 and you're forced to put it into one of two places.

So, again, no other options. You can either put it into Alibaba or Bitcoin. Where are you putting it? Oh, gosh. Maybe Bitcoin. I did the see results. I did see results for the third one. Some people can, you know, just see if they don't want to answer.

And some guys said, I'm putting mine in see results. Yeah. I think I'm going to choose Bitcoin. I think I might choose Bitcoin. 44% of people chose. We almost had a thousand people answer this. 44% chose Bitcoin. 38% chose Alibaba.

So which do you think has the most margin of safety? Oh, God. Bob, it probably, I don't know. I don't know. No, probably Bitcoin. Bitcoin is so, it's so universally like talked about. It seems like you're going to have buyers for a long time, no matter what. I could be wrong, but I would have thought people would get bored of it after two years of not really doing much.

But people still swear by it. people love it i don't think the utility has changed a whole lot but i can see this being in like the same place in 20 years and people are talking about like the next leg up whereas alibaba it does seem like it could get nationalized or something tomorrow yeah the ccp could say bye-bye your your money's gone see ya and they can do that in any country but i think the stock price is telling you that the risk in china if you're reading the news is uh much much higher got a comment here i know what franklin templeton is going on on that poll um all right but before we get to another serious topic um i will have one more funny joke this is kind of an inside one

where did you see that uh the secretary of state for the united states uh got stranded in davos waiting to get our invites sorry i was kind of shocked uh for the world economic forum this week which is a wild event i recommend watching the strange stuff that goes on there but apparently it was stranded after his boeing plane broke down in switzerland and good anonymous account i think it's anonymous doug ott said this would not have happened to jeff emmelt do you get that reference who is who is emote again those the general like the general electric ceo that had the the second private jet tailing him just in case the one that he was using broke down that was another funny one people were funny online this week i started reading a book this

week called it's the one from jeff graham called dear chairman where it kind of talks about the evolution of like shareholder activism and how it's become more commonplace and it's a really good book interesting what's it called again dear chairman okay by jeff graham it's graham g-r-a-m-m i think warren buffett's talked about it a couple times or he's recommended it before and some of the executive egregiousness or expenses are so crazy going through that I love it. I love it. I love hate it. I hate love it. I don't know how to say it. I should have brought up this one for today's show and found the excerpt, but this one's not that crazy in terms of executive egregiousness. But in 1928, I believe, it might've been 1929, Ben Graham, first of all, it's such a different

period in time in terms of financial reporting because companies did not financially report. So Ben Graham, who I've always kind of thought of as just like a great investment teacher, but he was really like a lot more. He was literally like a pioneer in terms of value investing, like literally looking at – it was unthought of to go look at a company's financials. Yeah, if you read the – who is it? The Jesse Livermore stuff, it's people just reading the tape and trying to be some mystic watching these stock prices. No one did any of this fundamental analysis. It was a lot more about who else is buying.

Like, is there somebody that's going to be buying up shares? You should get in front of it. A lot of rumors going on. And Ben Graham was one of the first ones to be like, no, the stocks are worth something, actually. And so he went, he found that there was, I can't remember what it was called, but there was some organization, some national organization that all companies had to report to. They had to give their financial reports there and they had to physically deliver them.

And the only way to go see those financial reports was to drive down or train down to Washington, DC and get your hands on the copy. So he did that. And he found, what is it? I can't remember the railway. It was some railway. And it was a part of, I'm going to blank on this, but it was some railway. And they had – the stock price was $64 a share. They were doing about $6 in earnings, which that was what they would show investors is they're like, we did $6 in earnings this year. So whatever, a little over 10 times earnings. They had $90 in cash, in net cash, just sitting on it. And they would call them investments. There were some investments, mostly US treasuries. yeah and he's like he so he started an activist campaign he's like first of all he wrote a letter

i'm just like can you guys distribute this and the shareholder or the executives were like you have no idea the complications of running a rail a railroad we need the money he's like it doesn't affect your business you have 90 in cash a share these u.s treasuries where i'm just asking for some of the excess capital back. You don't need this. You guys are profitable. And he finally got all the other shareholders. He would go one by one and get the shareholders and be like, look, they could special dividend us out more than we paid for the shares tomorrow. And he got them, got two board seats, and they gave him a special dividend of more than the entire share price. So it goes to show that if you were able and willing to go be an activist

back in the day, there was plenty of alpha to be had. But with that said, it's a lot harder than just publishing a letter on the internet. You had to literally go place by place and find the shareholders and convince them, which would have been quite tough. But that was kind of the first one Graham talks about Jeff Graham talks about as the evolution of an activist investor all right sounds like a book recommendation for everyone I'd also recommend the fund that we did talk about in another podcast related to activism and related to Boeing who we've kind of been on ever since that debacle in the supply chain and these quality control issues someone said that they basically need an activist in there and to get rid of the cultural stuff that came on with

that who was that company that they merged with that kind of they moved the company that spurred the move to chicago and the shareholder stuff i forget the name of the company but it was the late 90s merger that kind of ruined everything um or a lot of people argue yeah but who they said they need an activist in there douglas something douglas yeah douglas douglas yeah uh gosh why I can't remember, but someone was saying they need an activist and that they would be a national hero, at least for the United States, obviously. Could anyone reasonably do this? I don't know if there's anyone with the size.

McDonnell Douglas. McDonnell, right, right, right. No, I don't think so. I'm not sure you want. Listen, I don't think Dave, it's Dave Calhoun, right? No, that's different. That's the basketball coach. I always get the Syracuse coach.

That's Jim Boeheim. No, isn't there like a Calhoun? Yeah, but I think it's Dave Calhoun. I don't think he's the right guy, but I worry about Boeing having some very profit-motivated shareholder making important decisions for the safety of flyers.

So it feels like there would be some corner cutting, I imagine. I don't know an activist investor. I don't think that's the best scenario. Bezos. Then they merge with Blue Origin. He takes it over. I don't think Bezos has any interest. I know, I know.

He doesn't, but I think he could do it. Okay. Serious topic, Delta earnings. Did you look at these at all? i know it's it's a pretty important company on they got if you're talking about kind of the economy and stuff but i'll sum it up uh let's see just get some numbers here for context for the listeners 2023 operating income 5.5 billion two billion dollars in free cash flow so capital intensive business and they're investing a lot uh 2024 guide for three billion to four billion

in free cash flow, full year, can never say this word, remuneration, I don't know why I can't say this word, money they got from American Express, remuneration from American Express in their credit card partnership of $6.8 billion. That was up 22% year over year. I say that because that's kind of the higher margin loyalty program stuff that maybe is a bit more durable than the cyclical uh airline prices that you know gets less affected by oil prices and stuff like that now you got that number okay market caps 24 billion stock went down after this report they got about 20 billion dollars in debt and they have a decent amount of assets and have an ev of around 37 billion dollars or wait yeah yeah if we add it all together yeah the math is correct

So, EV to free cash flow between 9 and 12, depending on whether you use the $3 billion in free cash flow or the 4. Does the stock interest you at all at these prices? Because I think the only thing that attracts me to a company like this is the durability. I think they're a very durable asset. The brand will be around in 20 years, I think. That's what I'm saying.

I think you'd be confident saying that now. Obviously, airlines are kind of notorious for being commonly bankrupt. They go bankrupt all the time, reemerge out of bankruptcy, that kind of thing. But I think it's a very different business today than it was 15 years ago. So it's so lumpy. The earnings are so lumpy for these major airlines. It's like Michael O'Leary, the CEO of Ryanair said, they are always three or four years away from the next crisis. And there's just no predictability in terms of free cashflow, in my opinion. And so maybe that's an opportunity for a lot of people. But we're talking about 20 times, 15 times legit free cash flow.

I'm not sure I'd want to pay that for an airline. Yeah. How much of it's being returned? Dividend yield, I don't think there are any buybacks right now because they're using it to pay down the debt. They have some expensive debts, so it's honestly good. They're going to reduce their interest expense. Dividend yield is only 1%.

I mean, the earnings ratio is like 5%, but I would look at cash flow when looking at an airline. I don't think they'll have much trouble. Oil prices? Yeah, like, okay, I was going to mention, I was thinking while you were talking, you mentioned the volatility. They could easily generate zero in free cash flow in 2024,

just a few variables change just a little bit so yeah but when we covered Ryanair when we were doing you know back when we're doing the not so deep dives which little teaser this week we had another one of the special episodes covering an investor but next week and the next three weeks we will be covering specific stocks one for me one for my Ryan and then one in an interview we're recording next week so don't you worry we're still doing stock research episodes that'll be like an hour long and comprehensive but after we covered ryanair i like the business a lot at least from compared to other airlines you seem to like it a lot is that still the airline that most attracts you as a potential investment yeah definitely it seems the most like

most well positioned to grow just given the cost advantage some of those uh quotes that i hear about 20 flights that's insane yeah but the thing is anything extra like remember half of the revenue come from the upcharges so if you want any bag pay a little bit extra you know all that stuff which it still makes sense and it makes sense for specific people that are trying to be the cheap traveler. And yeah, and it works because as we talked about on that episode, it's much easier to run Ryanair in Europe than Frontier Spirit in the United States

because the geography is just not nearly as dense. I mean, you get the Midwest and the Rocky Mountains and all that good stuff. It's a different business. It's a very different thesis. It's just the distance, yeah. Yeah, it's a very different thesis than if I were betting on Delta.

so i think yeah it's much easier that's probably the one i'd be most excited by i mean i do own an airline that's true we do well it's trading a whole bunch of different reasons that one is trading at a zero dollar enterprise value related to that airline though they said that their labor shortages are dissipating pilot shortages are going down and i think that's good for i don't the costs coming in there because the the bonuses they've had to pay to these pilots which it's fair to the pilots but from an investment perspective it's been quite the headwind also interesting now i don't know how much delta knows about this and whether how precise this guidance is but they predict or guiding american express revenue which i'm assuming is correlated

to spending volume to grow on their delta cards by 10 next year so i think that's a good see-through to annex okay one minutes one minute left two minutes left roughly yeah do we want to you did the ad at the start do we want to maybe not cheat maybe we do an extra yeah just so as as we're doing those yeah discussion questions to wrap things up have you made any changes to your portfolio this week if so what are they follow up anything on your watch list right now that could see yourself buying soon okay first no last thing i bought was coupon uh in what would it be it was either the first week of january or the last week of december but the thing that is interesting me is ally financial they the stock's below 32 again so

So it's getting a little bit cheaper after they went through. The stock just kind of zoomed higher after the interest rate pause stuff and the sentiment around that since it's kind of a hot potato around the Fed decisions. And I'm concerned about the executive suite because of the change in management. That's really my only concern here. I'm not honestly concerned about the balance sheet, but maybe that'll age really poorly. But yeah, I could see myself buying that one once I get some cash coming in here. And that is in coupon as well.

I'd say those are the two. at the moment so i could see myself but i don't own ally right now uh mainly because it had shot up to 35 and i don't know but i think right now it's a decent price we're below book value should be able to generate pretty solid returns on equity going forward i think yeah i fomo bought ally at 35 oh right right you've had a tough start to 2024 it's okay and And these are small buys and it's going to be like, there are things that I imagine I will add to over time this week, portfolio changes.

I did buy a little coupon. It's down a lot. So added to that position, it was down 8% after a downgrade and then 4% the next day. So well below my original cost basis. And I bought a little bit more on my watch list. I got to say booking holdings. It's up there.

it's shot up my watch list quite quickly biggest travel company in the world and i'll be talking about it next week on an episode so well that episode won't come out for a while but i think it'll come out in two weeks maybe three tbd okay that's up there for me all right i'm excited to listen to your report uh yeah that's one i had never really looked at but it is much cheaper than airbnb uh let's see okay i'm gonna read off some look at stuff on my watch list spotify is above 200 again it's a tough one uh that is so disappointing okay okay we got the tobacco companies british american tobacco is at 29 bill morris international is at 92.5 altria is at 40 uh i believe british american tobacco and

altria are both basically at a 10 dividend yield and if i look at philip morris here we are at 5.6 do those interest you at these prices yeah philip morris does i like i don't know with british american and altrio we've we've gone over this like a million times but just some of the positioning in what we call kind of the modern nicotine world i don't think they're that well positioned you still might be able to make a good amount of money just purely based on that dividend but i certainly wouldn't be reinvesting it i would And if anything, I'm taking that and putting it somewhere else. Philip Morris, 5%, almost 6% dividend yield.

There's nothing to shrug at. And volumes are growing in that business. And they're potentially higher margin than their core cigarette business. And cigarettes themselves are not declining that much because they're in better geographies. So I think there's a lot more to like there. You're just paying a little more. All right. I think that's a great way to wrap things up.

Thank you for everyone that joined us live. For anyone listening on the podcast, these go live every Thursday, 1230 p.m. Eastern, 930 a.m. Pacific, and do the math for the rest of the world. If you enjoyed listening to this episode, give us a review on Spotify or Apple Podcast. And if you think that someone else that you know would enjoy listening to this show, click that share button, send it over to them. We'd greatly appreciate it. Let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I and any podcast guests may hold securities discussed in this podcast. We may have held them

in the past and we may buy, sell or hold any of these securities in the future. Thank you, everyone. We'll see you next time. Thank you.