Chit Chat Stocks - Nike In Turmoil; 5 Small Cap Stocks Up 100% This Year; What Is Your Circle of Competence? (NKE)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Stocks. This is our weekly power hour episode. I am one of your hosts, Ryan Henderson, and I am joined as always by the one and only Brett Schaefer. And today we are talking all things financial markets as we always do. We got a couple of interesting items on the agenda. I've got my small cap of the week and a little spoiler alert here.

Starting point is 00:00:55 it is the most interesting small cap i have looked at thus far while doing this segment i think we started this segment a little over a month ago so done four companies this will be the fifth company today and it is pretty interesting i think brett you'll be hopefully interested to hear about it brett is also going to be talking about nike's i don't want to say disastrous but maybe underwhelming quarter uh the stock dropped 20 and there's some news we can discuss there and maybe whether or not we will ever invest in apparel kind of remains uncertain for the time being, but a little housekeeping items before we get to any of that, we go live on YouTube, typically Thursdays at 10 30 AM Pacific time, 1 30 PM Eastern time. We are doing this on a

Starting point is 00:01:41 Wednesday this week because tomorrow is the 4th of July. So we want to give each other a little bit of time off for that. So anyways, if you want to ask questions, go ahead, look up chit chat Stocks on YouTube. And you can check us out on Thursdays live at 10.30 a.m. Pacific time. But we also record this and put it up for the podcast player of choice. So Spotify, Apple, wherever you get your podcasts. And before we get to any other topics, I want to talk about our friends at Public. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first? At Public.com, there are no commissions or per contract fees. And more importantly, it's the only platform where you

Starting point is 00:02:20 can earn a rebate on every single contract traded. That means you can save on your option trading costs and keep more of your capital in play. Whenever you trade options on public, your savings are automatically applied. So don't change your strategy, change your platform and see the difference in your bottom line. That's no commissions, no per contract fees. And it's the only options trading platform where you can earn a rebate on every contract traded. Public.com. This is paid for by public investing options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. Where do we want to start this week, Brett? Nike's disastrous or underwhelming quarter? Yeah, let's start there.

Starting point is 00:02:58 I think that'll be quite fun. I'd say welcome in everyone. Maybe another housekeeping item as a 4th of July special. I did a stock research report on Coors Light, or no, not Coors Light, Molson Coors, owner of Coors Light and Miller Light and a few other brands. So go check that out as you're drinking some nice beers on this 4th of July Independence Day as you're listening to this. Let's see. First name, blah, blah, blah, blah. Yeah. Let's talk about Nike. Get some people in the comments here asking questions and we'll get right to it. Yeah. We already have a comment here that says, I thought Brett loved investing in apparel companies. So if you're new to the show, I'll just say, Brett is not a fan of investing in

Starting point is 00:03:42 apparel companies. They can be fickle, sometimes difficult to telegraph. It's hard to know what the future is going to look like for apparel since trends and habits can change so quickly. And we kind of saw that this quarter with one of the most popular, well-known apparel companies in the world, Nike. Do you want to go through some of the numbers or do you want me to highlight some of them? I mean, I can go through, give you a little break here. Let's look at Nike here. I mean, I think the big thing is that sales declined year over year. And we're supposed to be getting through this COVID bullwhip. There was some good charts that FinChat puts up for all the different geographical and product segments that they have. And essentially everywhere for

Starting point is 00:04:35 Nike, the sales are trending in the same direction, which is down by low single digits year of a year. And it has been looking like that for the last few quarters. And the other thing I remember, I can't remember their exact guide, but I think they believe or they're guiding for fiscal year 25, which I think started in the first quarter here, or excuse me, the second quarter of this year, this calendar year, they're guiding for a drop again. So maybe it wasn't smart to buy this thing at 50 times earnings back in 2021 yeah sorry i'm just sharing my screen here we're looking at some of the numbers this is annual but if i click over to quarterly real quick you can see yeah it's been really ever since 2022 it's been a pretty difficult go of it for

Starting point is 00:05:30 nike sales are down i think it was a little over one percent year over year across the board I mean, this is a business that largely has just been kind of treading water for five years now. And I remember we looked at this, the science of hitting that sub stack. Our friend Alex Morris writes it, and he covers Nike really thoroughly. And he basically went through some of the old analyst day projections, and they missed across the board on all their growth projections. And then people tend to just kind of sweep that under the rug and forget about it. But then they put out another set of optimistic projections and it looks like they're going to miss those again. So it's like – I think people don't necessarily hold companies' feet to the fire when it comes to those analyst day estimates. And especially for a company like Nike where you almost have this like, oh, well, it's so stable.

Starting point is 00:06:33 It's such a good business purely because you – it has been. There isn't – it's been an onslaught of competition. There has been, I don't know if I'd call it brand deterioration, but they've certainly lost, they've made this push to direct to consumer and try to cut out a lot of the wholesalers in the process. And I wonder if that's ultimately hurting the business, hurting distribution. Yeah, that could be a part of it. I also think there's new competitors. You got Hoka, you got On, or what is it, right? Isn't it called On?

Starting point is 00:07:08 The Tigger, O-N-O-N. people seem to be liking those it's really hard to tell i think we have one comment here that makes sense a bit as well um so from ryan says re lulu and nike is the replacement cycle for shoes and workout clothes increasing giving quality improvements think iphone life extending possibly i also think how big can this business really get right it grew for 30 straight years almost it was such a powerhouse you have the embracing of the jordan shoes and how much of a hit those were and then using that across a variety of different sports to attract athletes be the ones that pay up for

Starting point is 00:07:51 these top athletes get the deals with the teams get the deals with the athletes and use that as your advertising and create a moat but i think the internet some of the stuff might be changing that especially with the continued rise of the youtube instagram whatever influencers right the you know lululemon's done well with that and i think with nike shopping yeah the social shopping type stuff but for me i i kind of go when looking at these and this is why i don't like apparel in general is i go why is nike struggling i have no clue i have no idea and it seems so uncertain to me that that's what makes me scared about it um exactly i did see even another one there was a lot of smart people pitching this company called delta apparel i forget what brands they own i think it

Starting point is 00:08:35 was the salt life brand and a couple other ones that was more southeast focus and that was i think they were pitching it over the last few years it's kind of a small cap apparel play they just filed for bankruptcy so it's it's tough out there uh it's hyper competitive you have there's an Interesting. I think it was from a Stratechery interview. There were some screenshots posted about that from a while back where when you have on an online marketplace, say you're on an Amazon style one. I know they're all slightly different, but you have the blocks or the squares of say 12 things you're looking at and you searched black running shoes. you get 12 listings they look very similar you can look at the reviews and if you have a similar review for something that costs thirty dollars less well if you don't really care about the brand that much you know you might be switching and that's the power of these online marketplaces and yeah i don't think they have much power in their supply chain versus customers suppliers

Starting point is 00:09:37 whoever how they have to sell through i remember apple and nike i think apple still does this because they're they're so large but i think they they both made a push not to sell on amazon because they didn't want to get commodified back in i think it was 2017 2018 i forget the exact details of the story nike i think is getting hurt and having to maybe go back to that apple's been fine but i think that shows that amazon places like that have a lot of power yeah i i worry for the same reason you do and i avoid apparel for this reason is it's so hard to diagnose the actual underlying issues you look at a business like nike okay clearly there's some struggles going on the sales haven't grown for the last two years and the question you know anytime you look at a

Starting point is 00:10:34 business that's struggling i i love setups where it's like oh okay it's trading at like the cheapest multiple that it ever has what's wrong and you you try to get to like the root of the problem and for like a paycom or a snowflake or you know some sort of software business you can typically get to the reasoning maybe it's multiple reasons whatever it is and you can kind of parse through okay do i think this is going to impact the business long term is this something they can fix is this something they can turn around can a new management team or new strategic directions kind of help profitability whatever it is with a retail business no one knows like you just don't know what exactly is going wrong and so yeah they are sorry not retail but apparel specifically so

Starting point is 00:11:19 for the same reason as you i don't love it the other thing is nike still is not that cheap i was surprised yeah what are they in a 60 drawdown and maybe you have thin chat uploaded but i think it's still like a pe of 20 right something like that i mean i think it was around 20 which is pull it up one sec yeah and with the market at a pe of close to 30 people can say well it's cheaper than the market you know what i think that's a little dangerous game to play uh it's still yielding i believe less than short-term treasuries which is part of the yeah what do you got there for us? EV to EBIT is still 18.2 times.

Starting point is 00:12:10 Yeah, so actually probably right around short-term treasury. So do you think there's growth there? Do you think there's uncertainty there? You have to weigh that versus the risk-free rate you get with that short-term treasury, at least right now. You know what else? the day after nike had its report stock dropped 20 percent one of the board members bought 227 000 worth of stock his name's bob swan he's like a prior ceo of intel

Starting point is 00:12:42 you know it's a decent increase in the position size for him like i think he increased his stake in nike by 14 but sometimes i swear i think like the board gets together and go all right one of us is going to have to do like uh kind of a signal by like who wants to take it this quarter yeah to stem the bleeding yeah i i don't unless a ceo that is or a founder is is loading up or something like that or the ceo is taking a huge position i don't think those are much of an indicator at all yeah and i don't know i think a lot of the almost most of the time especially when it's something like this where he's former ceo of intel this person's rich he's on like four boards and he bought two hundred thousand dollars worth of stock come on like that that feels like

Starting point is 00:13:32 a signal buy more than uh okay i truly believe in this business yeah and i think it's an example here you look at that earnings ratio when we look at apparel yeah i really don't like investing in them. I had a tweet that a lot of people agreed, a lot of people disagreed that I said never invest in apparel. Yeah, people talk about, hey, don't be absolutist. Sometimes there might be an opportunity out there, but I think it's a good rule of thumb where I want a big, big discount of what I think the earnings multiple might be or what the trailing one is or what I think it can be in one to two years if things go right. With apparel, I probably need something like a 10 times earnings ratio with a good chance if they succeed for strong revenue growth over the next

Starting point is 00:14:16 three to five years. An example of that might be Lululemon if it gets a little cheaper. It might be that today. Honestly, the forward multiple might, you know, it depends. We'll see how they do. They seem a little bit more attractive than Nike given the growth potential since Nike is so big. Another one that interested me a while back was Revolve Group, which seemed that it was trading at a very cheap multiple but again very uncertain with the apparel industry and how they to do the online uh play the online game with uh basically a millennial in gen z women's clothes anything else on nike ryan are you out are you in are you interested at all in the stock i'm out i'm out i'm not interested i mean it's just one that's hard to like

Starting point is 00:15:05 growth will never be that fast for this business again i mean it's just a mature business it's in an industry that i don't love actually probably one of the industries i hate the most and i just have no sense of where this company is going like like if you have truly no sense of what growth this business can generate you probably shouldn't be in it and that is me in this case maybe there's better better apparel analysts out there but it is not me i want to what about you any interest yeah okay figured the i knew you wouldn't like it as much the uh let's go my small cap of the week how about that sure let's do that yeah and i also have a good segment uh for people as a little tease here it's what did i call it five small caps that are up 100

Starting point is 00:15:59 year to date some good interesting lessons from that i think but yeah let's hit yours first a little small cab week earning season i think is this the the bottom of the trough between earning season there was absolutely no news so we kind of had to make make stuff up on our own especially with the holiday weekend in the united states yeah that's all right i think people probably appreciate it more than just us rambling on about random headlines maybe something a little more thorough yeah it is probably the trough in terms of earnings banks are probably coming out soon though right would be my guess uh two weeks or maybe the end of next week i actually don't know but yeah at least within two weeks we're going to start getting financials yeah because everyone

Starting point is 00:16:38 everyone loves when we just talk bank for a whole show yeah i think they're priced to books cheap and i think that net interest margin stable oh we'll see okay exciting stuff but yeah you have a small cap of the week here ryan nobility homes i'll load it up on fin chat in case you want any screen shares. Yeah, definitely do that because there's some interesting charts here. And typically with small caps, you're going to get real lumpy results. That has not been the case for nobility homes. So I actually came across this initially through a screener, just looking for like cheapest companies that are also growing and it showed up and I kind of dug in a little more looked up the ticker on twitter found some old write-up from a guy named adam willick who

Starting point is 00:17:26 actually love his writing his blog i think is called pound pound the rock investing which is a nice title for a blog it's a football reference american football reference for anyone who doesn't know um but here's what he says on nobility homes just as kind of a description he says nobility homes is a manufactured and modular home builder located in ocala florida the company has been operating since the 1960s and has shown plenty of resiliency as have most modular home builders having recovered very nicely following the great recession and experiencing only a few years of modest operating losses without increasing the share count or taking on new debt this if you look at the results around 2005 2006 they started to earn a ton of money as you might

Starting point is 00:18:13 expect because it was very easy to finance homes. Then it went from 2006 to 2009, they went from $60 million in revenue to just $12 million in revenue in a matter of three years, so a huge drop in performance. But they've just steadily climbed ever since. Since 2009, revenue is up, I believe it's about 11.5% annually. I think unless we've got another great recession coming, or there's a bunch of home loans that aren't warranted, it's probably a little more stable this time around than the GFC. I can hope, yes. And I got the operating earnings loaded up here.

Starting point is 00:18:56 It looks like we went from $1.3 million in 2014. Then it climbs, climbs, climbs. A little peak in November 2019 as their fiscal year, I think, is there. Peaked again November 2023. But now we're at about $10 million last whole month. And yeah, it's been slightly lumpy on an earnings basis, as you might expect for a home builder. But hey, $11 million earnings in the last 12 months. The long-term trajectory over the last 10 years has been high.

Starting point is 00:19:21 And I'm seeing $11 million in operating earnings, Ryan. And maybe I'm stealing the punchline from you here. But EV, $70 million. Pretty cheap. Yeah. It's a $98 million market cap. They've got about $30 million in net cash. The enterprise value stands at roughly $70 million.

Starting point is 00:19:37 and like you said around 10 million dollars in operating earnings around 10 million dollars in free cash flow the free cash flow conversion is quite good so um at least normally sometimes they'll have like one-time inventory things but that's more of just a timing issue so around 10 million dollars in earnings which has consistently climbed so yeah seven times ev to earnings and And it seems like an honest management team. So here's more from Adam Willick. And keep in mind, this write-up was in 2018. But he says,

Starting point is 00:20:11 Nobility Homes sells homes via retail to customers and wholesale to independent dealers. Both sales channels have the same growth margins, around 17% to 18%. The majority comes from retail. It says, The model is interesting and unlike other manufactured home builders in that Nobility builds to order homes as opposed to building models, storing and displaying them at the retail centers and paying to store the associated inventory. So not quite as much working capital issues there when you're building homes for people that have already committed,

Starting point is 00:20:43 either put a down payment down or kind of sign in the bottom line and it's ready to buy the home. It says nobility is run by the father and son team of Terry and Tom Trexler. Both get paid around $300,000, I believe. It was like 200 base with a $95,000 bonus. That was like the 2018 figures. But either way, I mean, 300K business doing $60 million in revenue, not that crazy. It might be a little high, but it's nothing horrible. And then it goes on to say, Terry founded the business and owns 53% of the shares in addition to Tom's 10%. Gabelli's small cap fund owns another 14% of the shares. I'm not sure if this is still up to date. With their proportion increasing over time, hopefully they also see some uses for the cash and will nudge management in the right

Starting point is 00:21:31 direction. So they've got a lot of cash. It's a management team. It's run by a father and son. It's been in the business for quite a long time. They seem very conservative with their cash. They don't seem fixated on growth at all costs or returning a bunch of the cash to shareholders. I'm sure they have some scars from the GFC, so they want to hold that cash buffer. But I think they're to the point where they could probably start to use a little bit of it in buybacks. They are trading at one of their cheapest EB to EBIT multiples in quite a long time. I think a lot of that is just people worried about the forward affordability issues for modular homes. So it's one where there's obviously going to be some lumpiness with the home, the real estate market in general.

Starting point is 00:22:23 Any cyclicality there will be reflected in the top line and bottom line for nobility homes. But run well, cheap, and steady growth, a lot of that is purely from population growth in the Florida markets that they operate. So it seems like there's some tailwinds here, and it seems like a well-run business. Okay, so they have the exposure to Florida. I think people are probably concerned. That's probably the narrative out there that there's been a lot of oversupply in Florida, at least in the near term. But as you mentioned, they're in their little niche. What do they call it?

Starting point is 00:23:02 It's not mobile homes. It's modular or manufactured housing. But keep in mind, this is- Cheaper stuff, right? For more starter or- Yeah. It's anywhere from $30,000 to $130,000 homes. Okay, so that keeps them insulated from the potential Miami bubble that people have been speculating about.

Starting point is 00:23:22 Whether or not it's true, that could help. Yeah, and keep in mind, it's build to order. So it's not like they build a ton of homes and then they're going to be sat there with all this inventory waiting. The other part that's nice is these are modular, right? So this is sort of just a manufacturing business, right? You're not buying land. Um, so kind of helps relative to other home builders there. So yeah, I like it.

Starting point is 00:23:50 Going to do more digging. Would love to get in touch with the management team. It seems like they're probably pretty accessible seeing as it's just like a father-son combo. Do we get them on the show though? Because there's been a curse of anyone that comes on our podcast. All right. That will be a private discussion. Yeah, exactly.

Starting point is 00:24:07 Exactly. I think I'm interested. I looked at the shares outstanding down. I don't think they bought over the last two or three quarters, but I haven't looked closely. But it seems like it went down from it was like 4 million to 3 million. So pretty good buyback program that was consistent for a while there. And what interests me is if you say here, we have a 50% ownership stake from the father, I believe that was and then 10%. So combination family maybe owns like two thirds of this business. And you have a good belly fund that adds on to maybe 75% of the total. This could be a candidate where

Starting point is 00:24:43 everyone gets concerned about, especially if you're kind of trying to chase the index of, well, who's going to buy my small cap stock or who's going to buy my micro cap? Well, if you have 75%, say, insider ownership who isn't selling and you have a buyback program, well, that's how Dillard's turned into such a big winner. And this might be a much higher quality business than dillard's yeah it is dillard shows up in every screener i do like every buyback screener i do exactly if there's no one left if there's no one selling left that's what you have to be looking for and i think one of the keys i look for nowadays because of the flow issue with index funds and everyone being an s&p 500 index funds with small and micro caps

Starting point is 00:25:33 unless it's a growth one like a high growth one or something along those lines more of a speculative one like a rocket lab or a rivian or something like that i want a buyback program because that helps take advantage of a potentially persistent undervaluation yeah the other thing that i saw um following this up was i believe adam willick spoke to the management team and they didn't seem that ambitious about deploying capital like crazy, catering to the funds that own the stock and trying to just buy back a bunch of stock, when funds get frustrated with that and start selling because they aren't able to realize the gains in a short enough time frame, that's kind of an opportunity for the individual who's willing to wait it out.

Starting point is 00:26:31 I agree. I agree. Definitely interesting. I'm interested in this one for sure. Going to take a look at it. Why don't we, Ryan, go to our next segment, which I'm calling five small cap stocks that are up over 100% year to date. So this is going to be our pullout segment. This is going to be our clickbait headline segment for the YouTube clip. But I think it's going to be a fun screener. I found some interesting companies and some maybe case studies on when you can find a stock that's a potential hunter-beggar or something that could go up by a lot within a year. Obviously, you can't bet on that happening, but these are the ingredients for that sort of outcome.

Starting point is 00:27:13 So I did a screener on our friends at FinChat, which we'll talk about more later during this segment. And I had three criteria, year-to-date performance greater than 100%. And then I excluded biotech, energy, pharma, and healthcare, basically stuff that I don't understand and stuff that will have some wildly changing price movements, and I didn't want really much pre-revenue stuff. Then I just did market cap between $500 million and $1 billion because I don't want any of the tiny stuff that can just fly around like crazy. There's about eight of them. I chose five interesting ones. Ryan, you can maybe pull up any sort of charts you want while I'm going here, but we don't really need to. First up, I was very surprised to see this, is Root Insurance.

Starting point is 00:27:57 do you remember this one yes like vaguely i i thought it was a scam no i guess i'm not mistaken it's uh no that would be um metro mile ah which so what is it what does root do root is essentially lemonade but car insurance focused so they say we're going to be leaner than the old organizations We're going to be focused on mobile data. We're going to be focusing on providing a better offering to younger customers. And they're up 416% year to date. Smart car insurance startup trying to use better analytics. If we look at some of the revenue, I basically can look at their first revenue line item there.

Starting point is 00:28:42 You can see why the stock soared, right? Because premiums went nowhere and then they finally started to gain some momentum and revenues just absolutely soared. they were right around break or sorry they were losing money on a net income basis and people probably worried that you know their loss ratios are terrible blah blah blah blah you know people are like okay your your loss ratios are over 100 that's an unsustainable insurance operation well that's moved really significantly in the right direction where we're very close to break even now so people like that you know you have soaring revenue along with expenses getting better and And if you look at that stock chart, Ryan, yeah, it got totally bombed out.

Starting point is 00:29:21 And it went from trading at a price to book value this year below one. And today now it trades at a price to book value above five. So I think it's a good lesson in a stock going from very undervalued to overvalued that you can get in the small cap world. You have something that the narrative was terrible on it. If we looked at that, we'd be like, it's one of those SPAC insured tech companies, just nothing. I don't want anything to do with this.

Starting point is 00:29:45 Second, it was unprofitable and switched to breakeven, which is a huge difference for people that are thinking that the company might be distressed. And second, the starting valuation was quite low right before growth started to accelerate. Quite interesting. Yeah, I've looked at a number of companies where they need to get to profitability and you're kind of questioning whether or not they're going to be able to do it. And especially if you don't know the company super well and you're kind of just looking at it from the outside in and maybe looking at like the trailing profit margins and all that, it's easy to pass on it. But if they can make that switch and not kill the business in the process, it can lead to completely outsized returns. You see it with Root. I mean, they haven't officially made that switch yet, but they're certainly getting there.

Starting point is 00:30:41 Would you touch this? I don't know. I think right now, probably not because it's gone from undervalued to probably overvalued. The price to book is above five for an insurance company that hasn't proven it can be that profitable. And I'm not sure how much they can grow. And I'm not sure how much, if they start growing, the legacy operators can come after them. But I did read a fantastic sub stack back in before the, I think it was right after the first, or excuse me, the Q4 earnings when the stock started to take on this move and

Starting point is 00:31:11 go at 400%. This guy wrote up and I'm sorry, I can't remember his name, but if anyone wants it, DM us or whatever, we'll put out the link to that. And he basically said, look, this is a distressed stock. The market cap is super cheap. It's trading at a discount to what if they had some consistent loss ratios that were as good as the legacy guys. They're trading at a discount to what their premiums are of what a typical car insurer is. They're starting to grow again.

Starting point is 00:31:42 And it's so cheap that he said it was – and people probably laughed at him at the time. and he even wrote in this article or sorry they i don't know if it's who who it is it was anonymous account anonymous account they said people are going to laugh and say i'm too optimistic but this is the potential of a hundred beggar you get 10 10x growth from the multiple expansion and then you can get 10x growth from fundamental fundamental growth and it looks like so far they're really on that track because it's up 400 so got that multiple expansion within a year yeah i totally agree yeah people look at hundred baggers and they think they were these bulletproof investments but you gotta start out distressed majority of hundred baggers yeah

Starting point is 00:32:24 they came at a super cheap multiple you look at nvr who is kind of one of the iconic multi-baggers norbert lou wrote them up they were coming out of bankruptcy like yeah and then they had this new model that where it was like the land option agreements and and people thought that was going to help them like reinvent their business or that's what norbert louis bitch and i'm sure people just shrugged it off like okay this is a bankrupt this is a bankrupt shit go good luck with that yeah all right stock number two sezzle uh which is a tough name i gotta say s-e-z-z-l-e stock is up 315 year to date here's what it says they do on their website quote sezzle is on a mission to financially empower the next generation sezzle's payment platform increases the purchasing

Starting point is 00:33:11 power for millions of consumers by offering interest-free installment plans at online stores and select in-store location sezzle's transparent inclusive and seamless payment option allows customers to take control over their spending be more responsible and gain access to financial freedom so buy now pay later ryan and financials unsurprisingly when we look at them versus Root, they flipped to profitability this year. So I think there was a huge narrative against these buy now pay later players. Maybe Sezzle was under the radar. People just tossed him at the bucket and they've actually flipped to profitability and done maybe a little bit better than the big players. And they began the year at a price to gross profit of just 1.5. So I think

Starting point is 00:33:58 the lesson so far this year is if you're searching for stocks that could potentially do quite well, or could be these ones that go from hated at a low valuation to gaining some momentum and being a really good investment is you want to start with one or sorry, you have to have a thesis of them going from unprofitable to break even or maybe generating a little bit of profit because that can change so much from the narrative out there. Yeah, this one, I guess, buy now pay later at its core can be a profitable business i frankly don't see how it's all that different than just a credit card but if you're able to convince consumers that it's a better proposition and you're able to underwrite successfully like you can probably make a lot of money from it i guess it's more

Starting point is 00:34:50 just like how you can convince consumers yeah and if we look at them let me share the screen here um they went into a big drawdown they're actually still technically in a drawdown if we look at their max chart so you again it's not the easiest investing to find these stocks and it makes sense you know high risk high reward these are you know obviously we don't know any of these things uh if you dabble into this definitely make sure you diversify your positions because a lot of these are going to go to zero that's the reason that they go up so much is that their price for zero But we have a small market cap, $500 million today. And I want to look at the operating income here.

Starting point is 00:35:32 Because essentially, why don't we just do quarterly to even yell it out? If we look, they were unprofitable and they've inched their way to profitability. Last quarter, $19 million. I mean, it looks pretty good to me, right? But the thing is, for me, I can't really get confidence in what you might call it, Ryan, like anything around buy now, pay later. I have no confidence in any sort of durability in this business where root, maybe there's a potential there, but that's an existing operation and they're hoping to improve on

Starting point is 00:36:08 it, or sorry, an existing sector, car insurance that they're hoping to improve on, where buy now, pay later is almost a whole new category that they're trying to disrupt entirely a legacy system which to a point maybe root is trying to disrupt them but i think it's a little bit different and yeah we see today it went let's see went from a pe of quite low and they were barely earning any money to a pe of 40 today and why don't we talk about before we move on our friends at fin chat ryan do you want to give their little pitch there for our mid-roll ad yeah i mean this is one that we shamelessly promote all throughout the shows because we actually use it all the time. And it's kind of just embedded as a part of my research process

Starting point is 00:36:53 nowadays. So if you have checked out FinChat, if you want to check out FinChat, you can get all your segments, KPIs, you can get a complete research platform there. And if you're interested in any paid plans, first of all, you get two weeks free. So try it out. If you end up liking it, You can use finchat.io slash chitchat to get 15% off any paid plan. So go ahead, check it out. It's finchat.io slash chitchat. I also want to take a second to mention our friends at Public again. Earlier in the show, you heard us talk about the investing platform, public.com.

Starting point is 00:37:30 That is where you can trade options with no commissions or per contract fees, and you get a rebate of up to $0.18 per contract traded. NerdWallet recently gave public five out of five stars for options trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. U.S. members only. Brett, before we get to the remainder of your list, I do want to take a sec to answer some questions here because I think it's good to kind of sprinkle these in throughout.

Starting point is 00:38:05 So Tyler asks, how would you define your circle of competence? What industries do you feel you know well? Consumer goods, except for maybe apparel, but there's certain things within consumer goods I like. I think I can understand industrials fairly well and financials. That seems to be what I like to write about. I might be forgetting some stuff. I know that consumer internet gets tossed in with technology, but basically anything

Starting point is 00:38:34 that the consumer interacts with with technology as well i think i can understand fairly well and if we look at my portfolio that's kind of how it plays financials industrials and consumer anything anything consumer what about you ryan i'm assuming it's similar yeah i want to say i like thrive in any specific industry like i like feel like i have an edge over everyone but i know where i don't have an edge uh biotech would certainly be one um uh insurance i struggle with i i just have a it's really a different type of business to analyze financially um so insurance biotechs trying to think of the other one software i think as a category i i like it's fairly understandable like you said consumer goods

Starting point is 00:39:27 anything that's consumer technology i feel comfortable with i'm probably forgetting something financials are pharmaceuticals and healthcare yeah anything pharma anything healthcare it's just something i haven't really taken a deep look at anything come like oil and gas it's just a pass for me every time frankly and maybe maybe that's the opportunity for all the oil and gas investors um but yeah it's i tend to write off certain categories pretty quick financials, they can be a little more intimidating. But once you understand the metrics, it seems pretty uniform throughout. You can get a pretty good understanding, especially with banks. You just got to understand where's the money coming from? Where is it going? What do you think of

Starting point is 00:40:11 those two categories and do you trust management? So I think those are probably the categories I like the most. Do you want to keep going with your small caps here? Sure. All right. Number three, new scale power corporation up 248% year to date. They are a leader, well, quote unquote leader in small modular reactors. And it looks like this is something around the AI electrification and energy increase play for the United States. The company is basically pre-revenue, barely generating any, and they're burning a lot of cash. Valuing this one is obviously difficult, but if you look at the narrative around energy usage with all this AI stuff where they're projecting that electricity and energy usage is going to grow in the United States for the first time in a few decades, well, maybe they're going to need more nuclear reactors, and NuScale could be one that provides that. But this is not one that really excites me. It's kind of just, I don't know, if you could predict there's going to be a AI narrative that translates to a second-order effect on energy and electricity and the utilities, maybe you could have bet on this one. But it just looks like a shot in the dark, and this could just be a short squeeze and people playing around with it.

Starting point is 00:41:33 I didn't get too excited by this one at all. yeah this does not excite me it's okay next one a 900 million dollar company and whatever like 15 million dollars in revenue yeah um let's see we have a question here from tyler says do you guys think coal or natural gas might make a comeback given ai energy needs maybe but i don't know what ai demand is going to be in three years so i would not want to make that bet a second order effect bet on something that i have no knowledge about doesn't make sense to me. Agreed. All right. This next one is going to excite you, Ryan, I think. It's called The Real Brokerage, up 179% year to date. Here's what it says they do. The Real Brokerage is

Starting point is 00:42:15 revolutionizing the residential real estate industry by pairing best-in-class technology with the trusted guidance of an agent. We provide a digital brokerage platform for agents while working to build a better end-to-end home buying experience for consumers. Up 823% since 2020, revenue growing 119% year over year since June, 2021. And price to gross profit is still, I said, just 10.5. It's right around 10, which isn't crazy expensive for a growth company, but also not crazy cheap. Is this a legit compounder, Ryan? Did we maybe discover something interesting? Potentially. It's something I got to look at way deeper, but just off the top of your head would you know what metric to kind of use here gross profit would that kind of

Starting point is 00:43:04 gross profit make sense yeah it looks like they're not any sort of weird insurance thing or it seems like a standard software business um then gross profit has grown at a compound annual growth rate of 161 so yeah this might be kind of an early stage compounder is this the one of the five i guess you're going to talk about one more here would you say this is the one that has you the most intrigued? Yeah, because Root, I get why it worked, but I don't have any confidence in those SPAC management teams and insurance startups are risky. Although I get why it worked this year. I get that was an interesting play and it's just so overvalued right now, or I shouldn't say overvalued. The expectations embedded in the stock price are much, much higher for growth than

Starting point is 00:43:52 they were at the start of the year, just because it's up 400 and something percent. But let's move to the last one, FTAI Infrastructure. I can see Ryan already rolling his eyes. We got another AI play here of 139% year to date. I'll do another quote from their investor relations page. The company primarily invests in critical infrastructure with high barriers to entry across the rail, ports, and terminals, and power and gas sectors that, on a combined basis, generate strong and stable cash flows with the potential for earnings growth and asset appreciation. And it is an affiliate of Fortress Investment Group, a leading diversified global investment firm. So I think it might be similar to a Brookfield entity where they spin off different

Starting point is 00:44:33 segments and you can publicly invest in whatever you want. It looks like this is another infrastructure AI play. They even put it into the title. They've had steady quarterly revenue growth, but this thing trades at 12 times gross profit as an industrial type thing, as an infrastructure thing i don't think this one interests me whatsoever um and i worry that people getting are getting ahead of their skis with these kind of infrastructure reshoring plus ai energy needs and you're gonna bid up a stock 140 because of that do you have any confidence and what the actual number for energy and electricity generation is going to be in three years what if we see huge efficiency gains on the chips and stuff like that whatever that's another that's

Starting point is 00:45:18 a little bit of a ramble here ryan what do you think looking at this one ai beneficiary play i will pass thumbs down yeah it's gonna be a thumbs it's uh what do they say on shark tank for that reason i'm out for that reason i'm out yeah well i think that's a good little segment there again check out finchat.io slash chitchat get a little discount on any paid plan and if you use our code don't worry you're not just getting a discount it helps us out growing our business as well. Ryan, any final thoughts looking at these small caps? Because I think there's some lessons here, but curious what your thoughts were. Well, I guess it kind of cemented my belief that you got to be extra picky in small caps because you presented five. I thought four

Starting point is 00:46:08 were generally not that attractive and one was potentially more attractive in the real brokerage. So definitely got to be extra choosy. I do like this question from Tyler, though. He says, I mean, we've talked a lot about micro caps and small caps today. So I want to, he kind of asked, do you think micro cap might be harder than large cap because you are buying your shares from informed retail investors, whereas there are uninformed retail investors in large cap? Maybe, especially in drawdowns with a lot of large cap.

Starting point is 00:46:43 Yeah, I think there's probably unwarranted sell-off where people just – all of a sudden, the stability is not there and they don't really know why. They don't want to track it so that they're out. The thing with large gaps, just generally speaking, and it's not always the case, but there are a lot of inherent advantages to being bigger. You have more resources. You can allocate more money to marketing. Now, it might make you slower. There might be more bureaucracy, but especially in like a retail type of business, you can out-compete your competitors because simply – and oftentimes simply because of your size. You can offer better costs.

Starting point is 00:47:32 You can offer – you can get better rates from suppliers, all that. The economies of scale thing is real. And so that just kind of is a nice safety valve when investing is, you know, at the end of the day, the business is going to have a better chance of growing into the future than some of these microcaps. That's kind of why I would say if I were choosing between microcaps and large caps, if I had to, I'd say there's a little more safety in the large caps being that they just have more resources. yeah i think that makes sense in a vacuum but when we're looking at one thing i maybe disagree with with this question here so again let me read it again do you think microcaps might be harder than large caps because you are buying your shares from informed retail investors whereas

Starting point is 00:48:14 there are uninformed retail investors in large cap so i think what is wrong about this is that in large cap the uninformed retail investors are never selling because they are in index funds and it's buy never sell unless we're rebalancing right so i think if you look at i'm not a index fund bubble truther there's some good arguments around that but i don't know what i really don't have a strong opinion on it i just think it's interesting but if you look at the valuations of large and mega cap stocks today they seem to be going higher than any sort of small and micro cap they're outperforming they're doing better and

Starting point is 00:48:51 there's that multiple expansion i think within the large caps yes there might be less informed investors, but that's actually worse because they're not indiscriminately selling. They're only indiscriminately buying and index funds are only gaining market share year after year after year. Honestly, for short sellers, I think low volatility, large caps, such as Nike, where people kind of fall asleep at the wheel can be good short candidates. When on the other hand, in small and micro caps. What I do enjoy is that the flows are falling away from them. Active investors who go into these are getting redemptions and they're year after year after year, they're losing money to index funds. And if you get one that is a good capital allocator,

Starting point is 00:49:40 cares about shareholders, and is going to buy back stock or pay out a dividend or whatever, I think that can be a huge advantage. But yes, you can get stuck with a stock that goes nowhere in micro-caps and small-caps for a long time if management doesn't really care about the – I wouldn't say care about the share price, but care about returning capital to shareholders or taking advantage of a low valuation. Yeah, the other thing you get with micro-caps oftentimes is –

Starting point is 00:50:11 and I think this is Seth Klarman who said this. Yeah, I think it was a Seth Klarman quote, but he's like, some of the best situations you can get is when someone is forced to sell something for reasons other than like company analysis. So maybe they need liquidity. They need money for their own personal life. They have to sell because there's redemptions in their fund. You get that a lot of the times with microcaps because they can't just sell into the open market. They have to sell in chunks, that kind of thing. And that's why you see sometimes with, all right, I looked at nobility homes recently,

Starting point is 00:50:46 And there was like a bid filled 15% lower than the quoted price. Like that's part of it. And so if you're the person that's got those orders open, you can get them filled at major discounts. Yep, that does make sense. And Ryan, before we move on, we got about 10 minutes left. Have we hit all the advertisements? Yes. All our friends and sponsors, we have discussed.

Starting point is 00:51:14 Our friends at Public, our friends at FinChat. thank you for your unwavering support of our show yeah yeah definitely definitely okay we have one any thoughts and there's a question here from the listeners any thoughts on ulta talked about him a while back anything changed for you ryan i know we kind of put it a little bit in the watch list slash could be interesting you get seem to be interested in this as well any updated thoughts you buying you researching it for your next uh research report episode not for my next one i don't own it but i do like it it's i think this could be when we look out over the next 10 years or so assuming that the multiple kind of sticks around

Starting point is 00:51:59 what it's at and people kind of treat it like a low growth retailer from here on out i think this could be a real share cannibal that you know they've opened the buyback up the authorization and they seem to be putting real money towards it it's one where i think the narrative is maybe a little off base they've got if you look like like the automotive after market parts businesses the auto zones o'reilly's these are businesses where they have like a consistent tailwind that just kind of helps propel them a little bit because cars on the road continues to grow people looking for cosmetics in the united states that is a growing market and the more and more people care about social media i think the more and more cosmetics will

Starting point is 00:52:50 be purchased so it seems to me like ulta's got kind of a tailwind there and it's one that's quite resilient to online competition yeah all right i think it should be the one well spoiler ryan's doing a auto parts retailer for his next stock research episode but the one after i think you should do ulta seems like a lot of people are interested in it and could be an interesting opportunity as well let's see tyler says have you guys looked at lvmh yes we did a full episode on them at the end of 2023 and we did a luxury overview one go look at our episodes from december 2023 we did a ton on luxury companies i don't know why but lvmh just doesn't interest me too big yeah probably i mean the multiple wasn't crazy it's really well run

Starting point is 00:53:47 but there's just something about it you know how there's certain stocks where you just kind of you just shrug your shoulders like i'm just not going to be a part of it maybe it's like the whole i don't feel original in buying it sometimes i like i know there's no points for originality in investing but sometimes i like to find an undiscovered company make it seem like i know there's a little more intellectual stimulation for me in finding something that's less covered than lbh i agree i agree we have ryan uh different ryan in the comments saying is brett looking to outsource his research well that's what we do we ryan does a research episode i do a research episode and it helps each other and hopefully that's the whole point we help out

Starting point is 00:54:37 the listeners as well with their research providing free research uh you know things can be quite valuable and we appreciate the people that listen and yeah as a note if you didn't see it in your podcast feed or YouTube feed, we did release today as we're recording this, but as you're listening to this a few days back, the Molson Coors episode. I think that one was quite interesting. Definitely would say, wouldn't be opposed to people adding that to their portfolio, but for reasons we get into in the episode, there are some other stocks in the SIN category that we like a little bit better. Speaking of Molson Coors, tomorrow's the 4th july what uh friendly consumer consumer thing will you be doing tomorrow to benefit america's

Starting point is 00:55:24 economy what will you yeah that's exactly right well we made a my house is doing a barbecue that i live at and we made a tosco run you gotta say it was extremely busy and it was in the 100 we had food and drinks for the barbecue i gotta say we were pretty diversified across the beer categories Coors Light Budweiser we decided to get one of every of everyone AB InBev one of the only consumers left I guess yeah exactly exactly uh Budweiser uh Coors Light Bud Light or not Bud Light uh Rainier um some seltzers for the ladies right gotta have some of those in there as well oh and then some Mexican beers so we did some of that so we we helped Costco's numbers quite well i think with one trip two carts lots of stuff i think this is gonna this is always a

Starting point is 00:56:17 good weekend for that company yeah i mean just the food consumer goods in general i imagine fourth of july is a hot time for that yeah it says only coke or coke zero for me i like that all right coke coke i'm sure they don't need any extra consumers but they've already got pretty much the whole world captured. I guess that kind of makes me think, would you ever invest in Coke? At the right price? Yes. But I treat it more like a tobacco stock than people maybe would like it to be. I think it's closer to tobacco and nicotine than people think it is. Would you feel more inclined to buy Coke or Pepsi? pepsi is more diversified into snacks but i think pepsi given that snacks diversification

Starting point is 00:57:15 has more ozempic risk if you get what i mean so there might be more uncertainty this year than there were with them than i thought there were you know a couple years ago fair fair someone says booking holdings versus southwest airlines do you have oh yeah that was he put that in the the twitter machine did you know that they traded the same multiple ryan i i mean if it's not the same multiple booking over southwest easy because airbnb and booking at the right price are very easy buys to me because travel is going to grow a little bit faster than global gdp as people reach a certain level of income they haven't more of their income goes to travel because they have their basic needs set.

Starting point is 00:58:03 So if the world becomes richer, there's going to be more travel. Airbnb and booking are going to do well, but they're not hyper growth businesses. They're more durable growers, I think. So buying at the right price makes sense. Hey, I think next weekend I have a booking trip. It works quite well. You're going to go through booking and yeah. A booking trip in America.

Starting point is 00:58:27 One of the only consumers. i know no airbnb yeah it was a already a hotel so you know you decided not to go direct to the website no i guess not it worked i get it worked i think what happened is i did some searching in that area on like a map i kind of like searching on the map for different areas and then i was like hey this is it go through booking it was easy i guess interesting yeah i think booking i think booking's in a good position you know i i think mark market share will skew more and more towards airbnb in the states but they really seem to have a hold of the european market same with this really most places internationally they are well protected kind of with a moat in its network

Starting point is 00:59:23 effect you know people really rely on booking the host do um and yeah like you said just tailwinds tailwinds galore travels travel's going to grow the number of people that can afford travel will likely continue to grow if southwest lowers costs and gains market share the way they have it's going to continue to grow i will say this if global gdp grows it will grow so yeah this is interesting booking might have a great summer the olympics and the euros they might but that's something that gets priced in you think right you'd think there's yeah there's got to be some that's pretty obvious huge investment bank that's tracking every single number with some alt data around yeah with a bunch of satellite imagery on all these popular hosts

Starting point is 01:00:15 exactly exactly yeah we have someone here talking about expedia maybe we're forgetting about them maybe there's an opportunity there if they can become the third player but it's harder to do expedia has one of the most egregious corporate offices maybe in the world they have no business they bought up some huge corporate office in probably one of the most expensive areas for real estate in the world in seattle and it is enormous and they just really had no business doing that they're not yeah i agree i agree yeah we have a comment saying did you see the wells fargo chipotle bowl size research i did see that no what was it someone in new york city um you know how there's been the complaints about chipotle shrinkflation yeah a wells fargo analyst

Starting point is 01:01:07 went to 75 locations and measured the quantity of the same exact bowl size and there was actually quite a bit of volatility in it so the thesis was room for uh something like lower volatility in bowl sizes for chipotle and how it could be a growth factor so interesting research that's some good research from an investment bank right there give that analyst a promotion yeah give that that analyst definitely earned their bonus but maybe one more topic here ryan you want to talk about tesla deliveries or do you want to close things out no i don't know that there wasn't that much to talk about right it was basically in line but so no it was in line but they reduced do you see that chart yeah it was in line with expectations but expectations for deliveries

Starting point is 01:01:58 the delivery estimates has just come down and down and down and down over the last year and a half so it's whatever i guess you could say it was priced in but when you just leak what your deliveries are going to be like closer and closer to the quarter and you just make it five percent lower yeah shoot just a little under what you know they will be like i don't see how anyone reacts to that news no but they should add 100 billion dollars in market cap because of that I think seeing that makes me want to hide in these high dividend yield tobacco stocks and just go away. Treasuries, high dividend yield tobacco stocks, and just wait for this nonsense to end. Tell you what, I took a road trip actually using a Tesla this weekend.

Starting point is 01:02:47 Drove five hours both ways in a Tesla. I don't know. It was fine. It was a car. It's a car, yeah. It's a car. Yeah. it's nice that you don't have to pay for gas but don't you have to pay for electricity now or no

Starting point is 01:03:06 or do yeah some people don't it's still a discount relative to gas obviously okay but there are a lot of states are instituting taxes around having an ev like you have to pay a annual fee to have an electric vehicle because they're not generating tax income as much tax income on uh on the gas that they're losing gas volume so i don't know maybe it will maybe there'll be cost parity over time well yeah i saw that their market share has gone down to like 50 which obviously they're still the dominant player within the ev space but given where the stock is it's priced like they're going to be 100 of global market share so since that's happening especially if we look back to 2021 where they're still in like what a 30 drawdown from that high at that then it was priced in like

Starting point is 01:03:54 they're going to take over the world and i'm interesting to see they have this new narrative about the optimist bot and the ai research that they're reportedly spending 10 billion dollars on and the robo taxi service that is supposedly going to launch i'm interested to see what happens with that we as always will be following for fun from the sidelines not touching this either way yeah i agree all right you want to wrap things up here yep thank you for everyone for joining. Had a fun one. I think more people honestly are free to watch on Wednesdays. So maybe we'll stick with this one, but we're going to try to find, given with Ryan and I's schedules, the same time to go for these podcasts. So as it's been about 10.30 a.m. Pacific time,

Starting point is 01:04:40 1.30 p.m. Eastern time on either Wednesday or Thursday. It's historically been Thursdays, but we'll give everyone an update and we'll hopefully lock in the same time going forward. Let's hit the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for tuning in, and we'll see you next time. Thank you.

Chit Chat Stocks - Nike In Turmoil; 5 Small Cap Stocks Up 100% This Year; What Is Your Circle of Competence? (NKE)

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