Chit Chat Stocks - Power Hour #5: Berkshire Meeting, Shopify Earnings, Evaluating S&M Spend

Episode Date: May 8, 2022

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Restrictions apply. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chitchat Money by Ryan or Brett or any other podcast guest is not

formal advice or recommendation. Now, please enjoy this episode. How are you guys doing? How are the portfolios? It's kind of a bloodbath today. Yeah, it's tough. That's all I got to say. Astute analysis there, Brett.

Yeah, it's, yeah. Bloodbath today. Did a little bit of buying. Um, but sold, I, you know, we were talking about the Twitter call the other day, I sold the Twitter call today, um, to generate some cash for the other stuff, got a little bit, about a 20% gain on that. So I decided, uh, that's enough, enough of a game there and, um, go ahead and use the cash for some other stuff.

So nice. You wrote a, you wrote a, you wanted it worked, huh? He hasn't, he hasn't, uh, he hasn't hurt you in the past. Right. So not much. Let's talk Berkshire Yeah we went What were you guys thoughts

What is it a few days from now A few days later How are you guys digesting it I enjoyed it a lot The first night was a lot of fun Second night was fun too But I was kind of fatigued from the whole day So I was a little down and out

But next time we got to stick around for the markel brunch i didn't know that yeah i didn't know that existed that sounds fun yeah it seems more niche kind of smaller you know you could ask real questions less of like a less of like a festival more like a real meeting yeah the for sure one is what you can't ask real questions anymore if you kind of get what i mean it's more of the i don't know you know you guys know what i mean it's kind of the questions you know are coming spectacle it's like yeah it's for the public not for like shareholders yeah but friday was great i mean we ended up at a uh a party not really a party like uh like a

dinner that we weren't supposed to be at so apologies to anyone but there was no there was no uh restrictions so that was great we got to meet a lot of people that we've known from you know twitter that i've never met from real life and some investors we respect so yeah let us give some context around how out of place we were so we went to a brewery in omaha and there it was a multi-story brewery and one of our friends from the show who's been on before invited us downstairs. We didn't know where we were going. And it just so happened to be the private party that a famous investor, I'll just name him, Chuck Ackrey was throwing. And we were so out of place and he looked at us like we needed to leave.

It was great, but I felt like we did not belong. I had a pink sweatshirt on. It was a bad choice of clothing. for that sort of event we were wildly underdressed too yeah but i think it worked out hopefully we didn't rain on anyone's parade but we did get to meet some people that have been on the podcast that was fun yeah it was great i don't know ian i don't know any other thoughts for the weekend yeah i think um it's probably not something i'm gonna go do every single year but it was cool to meet meet other investors and just be able to talk stocks and and get to know them a little bit too because there's just i don't know sometimes you talk stocks with all these people

but getting to just see their personalities a little bit and um over dinner and over a couple of drinks is kind of a cool experience so that was that was a lot of fun and just i don't know the atmosphere was just pretty cool it was i've never been around that many investors before so getting getting that experience was really cool to just be able to sorry i'm checking the question doc sorry i kind of went loud there no questions okay all right yeah uh yeah make sure to put that on mute ryan we got yeah someone's saying what are our top three high conviction names um well i don't think ryan and i can really do that if you want to look we we run our small fund that You can look at the disclosures on there.

We do update our holdings there every month. So I would look at the, some of the weightings there, but we don't really want to talk anything just because, uh, you know, keep it private for the fun, but Ian, I don't know. Do you have any thoughts on that or that comment there from, uh, sorry, I can't pronounce your name. I, uh, I have zero conviction in anything anymore. So yeah. Conviction's tough. Conviction's tough.

Conviction went out the window down 50%. No, my conviction, I will say, what I have conviction in is that over long periods of time, the U.S. economy is still going to thrive. The U.S. markets are going to reflect that over long periods of time. and i want to be invested in the companies that are going to be part of that uh u.s secular growth for long periods of time so why you really listen to buffett's answers this weekend that sounds that sounds like a 90 year old buffett answer right there no i mean it's hard right like i don't know i think that question is a tough one it's like the wrong framing nothing against whoever asked it but i just think the asking like what are your highest conviction ideas irrespective evaluation that's

kind of not, I don't know. That's not really how I like to think about it. Sometimes it's nice to think about what are the best businesses. I mean, we did that as a show, one of our quarterly roundtables ranking the top five businesses, or at least personal opinion top five businesses, irrespective of valuation. But I think, I don't know. I just don't think that's the right way to go about it because they can get you locked into a company emotionally. And if the business is, say, not performing how you thought and you have ingrained in your head, okay, this is my highest conviction idea.

I love this company, blah, blah, blah, blah, blah. It can be tougher for you to let go. Yeah. You know what? I might have a new mantra. Conviction doesn't exist. I think conviction is like investors convincing themselves they understand something or like trying to build yourself up confidence. Like your confidence in a business doesn't really matter.

That doesn't have any variance on what the business's results are going to be. So it's kind of like, yeah, like, as, as you said, you feel like you've built up conviction. So now you like have to own it. Like I, I can say personally that, oh, the, the business I know best has been one of my worst performing stocks of all time. So it's like, it doesn't necessarily like, it doesn't translate. It might not, it might not be indicative of what the best potential return is. All right.

To answer the question, I'm going to post my holdings, or sorry, I'm going to post the funds holdings for Achilles, I think his name is, who put the question in the chat. So I'll post that. And then if you guys want to check them out, you can. Yeah, we don't really want to talk about that on a live stream. That's more of a, we do it every month. So things can change. But let me flip the question instead to something kind of tangential. So if you had to own, assume all valuation parity across all businesses, like they're all trading, whatever, 10 times, let's say 20 times earnings or 20 times cashflow, let's say.

And excluding, excluding unprofitable businesses. Yeah. And you could only own one business for the next decade and it has to be one business and you can't sell it. is there a business that you know would still be there and be more valuable oh gosh that's a hard question Ian did anything come to mind with you I think the first couple things that come to mind and I'm just trying to pull up their numbers right now because I know it doesn't matter what their valuation is but for this question but I think I would probably say uh home depot or costco would be high on that list just because i think they've

proven they can grow cash flow year over year they're very important parts of the um of the world economy and you know today let's see just for reference today which one was this this is Home Depot is trading at about 30 times free cash flow. And, um, uh, what was the other one? I said, Costco, Costco is trading at, let's see, Costco is trading at 43 times free cash flow. And so the idea of being able to get a 33 or a 50% discount on one of those businesses, you know, if I'm just getting the market multiple on a great business, that's growing cashflow and is well-managed and is a major part of the world economy, I think

I'd be all over that. Those are good choices. It's hard to see how they get disrupted. I think three that come to mind for me, these are very boring, are Google, Alphabet,

Microsoft, and Amazon. I guess Amazon is getting a lot of hate right now. I guess they're unprofitable. they're out of the uh they're out of this category but maybe microsoft and google then you uh you've officially climbed the traditional investor evolution where you go ah no no a lot of large numbers i can't own fang to just being worn down enough that you're like fang's the only

thing i can own uh well that might be a little only thing i can own is a little far but yeah I'm not anti-law of large numbers anymore. Although I am kind of anti-buying stuff. I'm a sure business at 40 times earnings like Microsoft. But if it was cut in half, I mean, man, that's pretty bulletproof. What do you guys think? Have you guys ever looked at, well, I don't know. I probably agree with everything you guys said.

I might risk it for the biscuit and go with like something a little more uh less less on the side of preservation of capital and more like could could be huge returns in 10 years even though it's only one company 100 at harvest that's it right that harvest might not be the uh the company of choice but just something where i think like the the growth rate could potentially be higher than some of the more mature businesses that are are like solidified and i think i don't know match groups one that comes to mind where something with just like a huge tailwind that hasn't yet been that it's still like early on in that tailwind versus i think google google search is pretty dominant i think it's a pretty mature business

at this point even though it continues to grow and defy gravity and pretty much all the ones we've named are mature businesses but uh another question that kind of when we were thinking about high quality businesses have you guys studied the credit ratings agencies at all i have not not much i've taken i've taken a cursory glance at them before but but i have not looked into them very much i was tasked with uh looking at s&p global this week and i've got to say that is one hell of a business yeah you like have to go through them i mean they they were like a main driver of the great financial crisis and everyone's like well whatever we just gotta like that would kill any other business but yeah it's a it's a good toll

road essentially and with esg stuff coming in that could be another challenge i don't know it too well but yeah they're very bold proof similar to a stock exchange where it's gonna be there as long as the stock market's open i don't know they're the ratings agency agencies seem a bit and maybe this is more like i don't know the maybe it's not necessarily the rating agencies or maybe it's companies associated with taking people public like goldman sachs or something or morgan stanley but it feels a bit tied to the business cycle so

well I don't know there is a little bit of risk there but I mean obviously as long as public markets are growing

and the number of stocks out there or the size of you know the public markets are growing it seems like they'll have a durable

tailwind indefinitely and they have an incredible moat with their brand that there's really only what two or three players

out there but I don't know the industry that well this episode is brought to you by kpmg as a business leader how can you innovate build trust and move forward in a digital era kpmg can help by bringing together the right talent and technologies generating insights that spark opportunities to explore their thinking visit read.kpmg.us opportunities interesting stat this quarter high yield debt issuance so So bonds issued that were, I guess, lower rated declined 68% year-over-year.

And S&P Global's revenue in total across everything was still up 2% year-over-year because they have the subscription business in their research services, Cap IQ, and all that stuff. And then they have commodity research that big funds subscribe to. There's another element to the indexes. They take AUM, like a percentage fee from all their ETFs and indexes. I don't know. It's guaranteed growth, it feels like, as long as the world doesn't turn into a multi-decade recession. Yeah, I don't know why. It feels like when I'm looking at, I always say, I mean, I said, I put the New York Stock Exchange on my top five businesses of all time. It seems almost cheating to me. I just have this block in my head where I can't invest in the stock exchange. I can't invest in these rating agencies.

Anything associated with like the actual market, like kind of the double, the weird thing where it's like you're investing in a stock that's a part of the stock market. But in my head, I put a blocker up, but they've all been great businesses. And they seem like, over a long enough time period, unless we go into a giant Great Depression, a really hard place to lose money as long as you have good managers at the helm. So it seems like they're all great businesses. And I know, obviously not spoiling any wrecks or anything, but I know Matt Cochran over at 7investing has done some great research on these type of businesses. they seem pretty rock solid i don't know why i don't care about them but i i just haven't researched them at all what one business from last year did you think all right this is the

this is a business i absolutely want to own but the price precludes me because i throughout all our not so deep dives last year it felt like a lot of the time we're like all right this is a wonderful business but the valuation makes no sense and now that they've come now that they've come full circle i'm like eh like shrugging my shoulders at it price drives narrative ian anything come up with you yeah i have to i'm pulling up the list to think about it real quick um let's see well i'd say roblox is actually roblox is in that boat for me like i bought just like a couple of shares as kind of a start you know to tracking position basically at the ipo but it was kind of one of those things that i was like oh you know once this gets

once if this gets beaten down then i'll really load up and it's kind of being down quite a bit but i was looking at the valuation again you know a couple weeks ago and it still just wasn't the problem is like the deals and a lot of other things still seem better than the deal than the valuation of Roblox. It feels like you still have to price in a lot of growth or expect a lot of growth given the current price. But I think that's the thing for me that's been weird is there was a lot of stuff we were looking at last year

that we said, oh, if the price came down on this, I'd really be interested in it. But the problem is the price has come down on everything. And so everything that you're interested in in 2021 at price levels has become even more interesting this year, except for oil and gas, maybe. Yeah, I'm pretty picky. So usually I'm like, well, I'll just buy more from the existing 10 or 12 companies we like the best.

And almost all of them haven't held up. So their valuations have come down as well, along with everything else. I mean, I was looking at Wise. They're a bit early to the public market, so I kind of want to see. But I mean, it's a great product. I've used them. And the stock's come down a ton. Shopify has come down a ton.

and that one was very interesting while we covered it. Twilio. Dutch Bros. I don't like their executive or capital structure. It makes me nervous because it feels like they're trying to pull our leg.

SoFi. Airbnb. But I guess Airbnb's been up. I don't know. There's a lot on that list. Go back and listen to the old Not So Deep Dives and you'll see us joke that it's at 50 times sales uh maybe today you know the price might be a little bit more attractive i'm i'm doing the math right now and

shopify is down more than 75 percent from its eyes and you know what not fine not to take a victory lap but i'm gonna go ahead and do it anyways we said maybe we we said this needs at least a 50 haircut and everyone's like it's never gonna get that and now that it's happening i hear all everyone's pessimistic about the business it's like oh yeah no it's terrible results like this isn't gonna like it's the same business really growth growth was slow this quarter but it's like they're lapping the greatest pull forward of all time yeah i didn't check out their quarter what would you did you guys look at it i i saw a little bit of stuff just expenses were really up and growth was like top line was like teens i think it was 17 maybe they're also

buying that uh deliverer yeah two hours like 2.1 billion i think did they give an earnings multiple or, well, probably not profitable. Revenue multiple on that? 22% year-over-year growth. That's not bad. Two-year compound of 60%. I don't know. People just don't want to own that right now.

It's strange. Well, that's the thing. For those types of numbers, I think they also said they don't provide guidance anymore and some stuff like that, but it's trading at, let's see, we're at uh still at 10 times revenue basically 11 times revenue 12 times revenue somewhere in

that neighborhood um so it's a lot better than 40 times revenue but still still pretty steep if if you're not able to project out you know 20 to 25 growth for the next five years yeah especially given their margins are what gross margins 50 so they'd probably i think they've got it to 20 long-term earnings or cash flow margins it's different than someone like adobe or facebook or autodesk at 40 times who seem a bit more reasonable at 10 times sales i feel like maturity what shopify would probably be like five times sales ish what do you guys think something around there gets you to if they're at 20 margins uh five times there are 25 times free cash flow so okay i feel like every digital business just like i just assume like terminal

20 times cashflow, roughly. Yeah. Well, you sound like a compounder guy, which I think you are. So yeah, that makes sense to me too. It's kind of impossible to tell whether something will be at 15 or whether the market will value it at 25 or whether it's at 10. I mean, that's kind of a bad downside if you're guessing at 20, but it's just a guess. So something just middle of the pack always seems nice to me. But we got a question here from Bill. What are some clues you would use to know when stocks are down far enough to start buying or do you start dollar cast cost averaging starting today great question um i would i would handle this by saying we are not financial advisors we say that on every show but i think we have a boring cliche answer

and we do not have years and years of experience um but basically what we're going to say is based stuff other people we've read that have years and years of experience it doesn't matter a stock doesn't care where it's been first of all so and i i i do it too so i'm kind of hypocritical on this but it's so and i just did it quoting how far down it is from its highs has is completely irrelevant to its future returns so it's fun though it is fun just to think like how much uh wealth has been lost i guess but the even though most often it's it's my own stocks that i'm quoting um no the thing i the thing i we kind of look for is we just um to the best of our abilities, I think try to take a stab at how much cash a company will generate in the succeeding

years and what we think a fair multiple would be at that point, and then retrace to the current price and see what our return would be. Yeah. Kind of evaluating what I like to do multiple different time periods. So how much do you think they'll generate three years from now? Okay, if it's not very much, I need to be very confident in their growth rate.

How much are they going to generate five years from now, seven years from now? And the farther you go out, the harder... It's impossible to predict. So the more uncertainty there is. So there's just so many factors

that go into it. But I'll say that the question I think that Bill framed it was the wrong way to do it because you don't know whether a stock is far enough down or... Sorry. The chart doesn't mean anything if you're a fundamental investor. Now, some people use technicals. That's fine with them. But say if you're not someone that's a professional or anything like that, what the stock chart looks like in the past is kind of meaningless. Do you think it versus its current

market cap or enterprise value today, do you think the stock is undervalued or do you think it's going to be worth much more in the future. That's what you should try to be doing. And if there is a bit of uncertainty, or if you're worried about, say, I don't know, if you're very, very nervous about where stocks are headed, which is not something that's not an irrational thought right now, dollar cost averaging isn't a bad way to go if that's something you're worried about. Because if you buy something over once a month for the next year, over the really long term, it's not a big difference between doing that compared to just buying it all today. Does that make sense, you guys? Or am I off base there? I'm really bad at giving

any sort of advice to people or teaching stuff. Not my expertise. No, I think that makes sense. I would add, for me, the drawdowns when you see, the stock is 50% off its highs or 70% off its highs, that serves as a good little indication to me that maybe I should take a look at it. And so I'll use that sometimes as idea generation, like why did something fall 50% or 70%? And I'll go kind of explore it. And then I think the next step is, are you just like you would with any other asset in your life, whether it was a house or a car or whatever else you were buying, is the price I'm buying this at today going to provide enough value for me in the future that I'm willing to buy it. When you buy a house, you don't really

care if two months from then, two months from now, the house drops by another 10% because you were happy buying that house, making the payment on it and owning it for presumably for years to come if you're... I'm assuming you're living in it. And I think the same thing is true with stocks. I don't know... When I buy a stock, I always set a rule for myself that I expect the stock to drop another 10% like in the next week. Um, just because that always seems to happen to me whenever I buy something that drops 10% the next week. And so that doesn't matter to me though, just like the house price dropping 10% a week later, doesn't really matter. Like it's annoying because you're like, Oh, I could have got it for a little bit cheaper, but it doesn't matter if my ultimate

expectations play out the way that I expect it to. And so if that, you know, house or that stock rises in value by 5% a year, and that's what I was looking for, then when I sell it 10 years from now, it's all great. And it doesn't matter what it's done in the interim. And so I think the important thing is, like Brett was saying, is it's focusing on what kind of free cash flow, basically what kind of profits can this business generate for you? And are you happy with that and happy with its growth, growth prospects going forward. And if you are, then, you know, getting into the stock is, is kind of up to you. Sometimes when I have, when the stock is bouncing around a lot, it's easier for me to buy in chunks. And so I'll buy in thirds and say, okay, I'm going to put

a third of my money in, um, a third of the money that I'm planning to invest in this stock in this week, um, a third in the first week of next month and a third in the first week of the month after that. Um, if I'm having trouble just kind of pulling the trigger because I'm, I'm worried about the volatility. And so I think there's some strategies like that to kind of figure out how to enter a stock once you've decided to. Um, but it's, that's all, you know, that's all based on your kind of risk profile and what you, what you feel comfortable doing and all that, those sorts of things. So, um, it's a highly, I'd say that piece of it probably even more so than just about any other piece of investing is highly, um, personality. Yeah. Yeah. Kind of personality

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Yeah, it's so situational because if you have a fixed amount of money, I guess let's use our fund for example. Unless we're constantly raising money, there isn't a steady stream of income like an individual would have. And so managing the money should be different. You should use a different approach to portfolio construction. If you know that you're going to have cash coming in every month, then using a cash buffer might not be that essential because you can dollar cost average as that cash comes in, as opposed to having a fixed amount of money. i don't know it i always i always struggle giving like anything any sort of broad rules around portfolio construction because everything's so each situation is so unique yeah it's tough it's all about what makes you comfortable psychologically that's the most important thing because you don't

want to make irrational mistakes when the market's down like you know like today five percent The Aztec, I guess bringing it back to that, did you guys see anything that would cause this to happen? Or do you think margin calls from people, people getting speculative about future Fed hikes? Because did anything change from yesterday? The market was up 3%. I don't know. It just seems wild that today of all days, everyone decided to sell randomly. Shopify reported. It's a market mover. I don't know. I don't know how that's a market mover. It's kind of weird to me. They're not the economy. B Branda One says that Shopify's expenses were out of whack this quarter Due to gap rules

Associated with their investments In Global E and Affirm I can Say that I have not officially read the Entire report but we were kind of Shooting at the hip I would not be surprised if Shopify's expenses Were

Generally higher Their hiring face has probably been pretty rapid. And now that revenue is slowing, it's harder to stop that engine. Your revenue growth will slow because it slows. And if you're hiring growth, you probably... I don't know. I think of that as more of

a giant steamship engine. But without reading the report, I don't think any of us own Shopify. You own Shopify? I own a little bit of Shopify. And I can speak to that a little bit. So that... Those investments do hit

earnings per share because you market to the market. And so it hits earnings per share because those valuations of their investments have gone down. What investors were more concerned with, and maybe the algos had something to do with the earnings per share miss and driving the stock price down. But I think what investors were more concerned about was basically the pace of um, the pace of expenses stayed the same while the growth pace, the growth rate slowed. Um, and so the pay, and when I say the rate of expenses, I mean like operating expenses, not, so not that, not the global investment or the, um, uh, a firm investment. And so, um, those things like don't have a cap, those, those pieces don't have a cash impact on the

business because it's just a valuation change. But the operating expenses, things like sales and marketing, headcount, all those types of things, maintained a fairly high level of spend. And so I think those were the expenses that fundamental investors were more concerned with. Yeah. I'm seeing here they're spending almost half of gross profit on sales and marketing. It's going to have to come down eventually. I don't know. I get concerned. What are you thoughts on a fast-growing business i don't know i feel like sales and marketing it's just such a hard thing to judge when you're trying to value a fast-growing business because you have i don't i don't know if you have no idea but it's very hard to judge whether it is

steady state marketing that needs to be around say for like a coca-cola or something like that it's always going to be marketing. Or if you're in someone's shoes like Shopify, where you're spending half of gross profit on sales and marketing, and a lot of software companies are much worse than Shopify, spending all of their gross profit on sales and marketing. Is that just a house of cards keeping revenue growth up? Or is it actually leading to good ROIs? No. Well, I don't know. It's so hard to judge. it's really uncomfortable with these stocks i mean there's kind of two things that go into my mind

which is like how what's the payback i guess so like how long are those customers sticking around right if if your expenses are going up or if your marketing spend is going up but you're attracting customers that are going to be around for 10 years the payback's probably there But it's really hard to judge whether or not, especially if they don't give out like a churn figure. Like if you don't give a churn figure associated with it, it's hard for us to judge what the payback is going to be. Even though some of the companies give out a number on that. And then the other one is like- One thing on churn, churn is static.

It's not, or sorry, churn is not static. It's dynamic. You can change every quarter. Yeah, but it's, I feel like it's helpful. to know, even if it's trailing. No, it is. It is. It is.

I don't know. Just basing off of like an extrapolation of what would happen if you stop spending sales and marketing on, I don't know. I just think it's, there's so many variables with churn is one of them, but sorry, go ahead, Ryan. I don't know. It seems like the ROI has gotten worse over the last few years on like, or sorry, over the last year on traditional marketing spend.

And I feel like a lot of companies are spending more to get, are having to spend more to get the same result they got last year because there was like sort of this organic pull forward of users. I'm thinking of like the content management systems companies. So like BigCommerce, Shopify, Wix, there was sort of that natural adoption. But now in order to get those same users, they have to pay up substantially more just so they can show that growth. I would rather have something where the cost to acquire a customer diminishes over time, which is typically more of a network effect business, which is more, I don't know. If you're a B2B, you're not going to find a big network effect business, I feel like. Yeah, it's more consumer internet. Yeah. Ian, any thoughts on that? Or should we move on to another topic? What's a fun topic

this week? Earning stocks that are not down 20%? We have nothing to talk about. We've had a guy named Favre in the chat making a couple of comments about some macro pieces of the market right now. And I think he's right that there's a lot um macroeconomics at play and the you know the quote-unquote kind of sector rotation or the movement to you know oil and gas stocks have gotten really popular recently and a lot of this tech stuff has become less popular and i think for for someone like me and i you know i'd flip this over to you guys too to get your comments on it but i think for someone like me the macro

stuff is always interesting and i kind of i'll follow it i'm never or almost never but almost never trying to like play the macro environment, but I'm trying to understand how the macro environment affects my companies. And then also trying to take advantage when there's things that are short-term macro events, right? So something like COVID, when it was first announced and causing the market to tank and all of a sudden you look around and you go, man, there's some great deals on some businesses here that I think are still in great shape for the long-term. Or when the market gets spooked about interest rates or things of that nature, those can have effects and those can have years long effects. Um, but it can also create really cool buying

opportunities for, for certain companies. And so I think a lot of times for long-term investors and particularly individual investors, the macro environment creates a lot of opportunities for, um, for you to kind of take advantage of it because you're not playing the game that the majority of the money is playing in those situations, right? When there's all this money that's getting focused on quarterly or one to two year timeframes. If you're able to take a longer term approach, there's some inefficiencies that can work in your favor because a lot of the market gets focused on the shorter terms when there's macro uncertainty and there's a lot of volatility. And so it can create these, like I said, these inefficiencies in the market. At least

this is my opinion, it creates inefficiencies in the market that really benefit long-term investors. but um no the market is what do you guys think about that the market's perfectly efficient yeah have you seen it i will say it's an it's an interesting comment because i think the um the market is efficient in a lot of ways but market can only be like the market is efficient it has to be efficient like for something and so for some time frame or for some type of outcome that people are looking for or for what people believe or what people believe right and what they believe could be wrong right for what they believe and if you're playing by a different like if you're playing a different game than most of the market is playing um there's going to be some

opportunities there because you're valuing something that the market's not optimizing for right the the market's efficient for what it's optimizing for and what what people believe but if you're actually playing a different game um then sometimes then the market's going to be inefficient for you, right? And that may work in your benefit in some cases and work not in your benefit in some cases. And so there'll be some companies that look to you like, oh man, this is a screaming deal. And there's going to be other companies that look to you like, wow, this is really a, like, I don't know why anybody would buy this, but I think, I think the market is efficient in a lot of ways, but there's,

but like holistically, right? And so you can still, I think, find opportunities as investors obviously in the market and it's i know it's like a cliche to say that having a long time horizon is a competitive is like an advantage over other investors but like i think we're seeing it now with all the companies that are having like supply chain issues that are like pretty you could almost say like even if it went out two years, even if the supply chain problems went out two years, it's still going to be a fine business, but people can't weather that. And a lot of the institutions, their investors are not going to sign on if they say, listen, we're going to have two years of bad returns. They have to

give them something to chase soon. So it makes it hard to be in there. So if you actually have no one that you have to explain or rationalize your investments to. And you can genuinely see like, all right, I'm owning this company for five years because I think it's going to be a bigger business in whatever five, 10 years. That is a game other people structurally can't play. Yeah, I agree. I think an example on this, there's an industry that I'm trying to learn about is semiconductors, which it'll take a few years for me to do that. But it seems like one of the key, and this might be simplifying it too much, but sometimes the industry is cyclical or it is cyclical and there are down cycles when people overbuild and those fears can drive stocks

wildly lower in the short run because people are worried about next year's earnings, next quarter's earnings, blah, blah, blah, blah, blah. They don't want to be in the stocks because it's going to look bad for a few quarters. But to me, and there's examples of this across all sorts of industries, if there is a long-term tailwind, or if you believe in the long-term thesis of the business and you believe in the management, blah, blah, blah, all those fundamental things, those can present buying opportunities for you when they occur if your time horizon is longer than a year. And it's weird to think, you caught up with maybe the FinTwit bubble, or just your friends in investing who are all fundamental investors, or the people you follow

that are the same type of investors say like we are long-term five to 10 year time horizon you think everyone is like that but it's actually the opposite most people aren't when it comes down to it and it's it seems crazy to me uh but i guess that's just the way it is and you can sometimes take advantage of it if you're looking to buy individual stocks yeah all right i want to share your topic what else do we have someone said docusign is another a good example of that yeah i think it is yeah example of what what was he referencing the uh like increased marketing spend to achieve the same like customer yeah i can network with that business i know the marketing spend is tough some i think i heard someone this i forget who it was

we were talking to one time that said there's a chance that all of digital marketing is just a Ponzi scheme layered on VCs putting money into startups. And I think there's a chance that's correct. Not literally a Ponzi scheme, but Google and Facebook's profits are based off of these unprofitable startups and software companies that are getting a ton of VC money. And it'll be interesting to see what happens if, I don't know, sales and marketing... Say there's a ton of down rounds over the next three years not as many startups coming into play i mean could that have a negative impact on digital marketing in general but on the flip side for the existing companies sorry i'll let you go right on the flip side of existing companies the marketing spend there

might be less dollars going after the same you know audiences saying youtube or whatever or facebook or google that could actually like the cycle come through and increase rois for the companies that stick around. Yeah, that's kind of a good point too. The Airbnb example is really fascinating. They cut marketing spend to the bone and didn't see an impact on growth. So just put, I wonder how many companies just say, all right, 50 million a month to Google AdSense. Whatever, like we're just going to keep it there. Just put it on the back burner. like what happens when you cut that are you going to see the customer count drop off a cliff i i doubt it yeah the problem is i think there's oh i don't know i'd have to really do some research on

this but i think a lot of this sales and marketing spend that we see in um in the 10ks is there's large chunks of that that are headcount and i think the companies are very reticent to to cut jobs. It just doesn't look good. No one likes to do it. Um, and so I think a lot of the companies that have bloat on them, um, are potentially like a lot of them that we would say, Oh, they really need to improve margins. The problem is they probably have hired too many people because they've been VC funded. We've been in a raging bull market, all those types of things. And so it's just, things are going up. They're offering stock options and they're expanding, expanded headcount. And, um, when a lot of these companies could probably be, um, run more

efficiently i do want to give a shout out to just to everyone all the viewers in the chat today it's been it's been great getting all these these comments and questions keep them coming hopefully we only got uh eight watchers right now so we're double listeners right double watchers our week over week listener growth is 100 so if that continues watch out it'll always be on the podcast probably on saturday or something whenever yeah we know so we know a lot of you are listening on the podcast too so thank you for that and if you want to jump in and watch live we always love have new viewers um yeah we got a question here uh oh go ahead yeah i was gonna say this isn't really a cheerier topic but nick asked what do we think about the uh sms fm drop the safe uh

safe moon sprouts farmers market no that's not safe yeah i read the quarter i read the quarter this morning um i guess okay i think we're allowed to say this but i i put the holdings i linked the holdings in the chat we we don't own it anymore so i'll say that um but i read the quarter i thought the quarter was fine uh obviously the market didn't the the uh it's kind of misleading though when you look at same store sales because inflation should help same-store sales. And so if you've got positive 1% same-store sales and inflation's 15%, these are just examples. That's not what's happening. Your same-store sales, that is not good, even though you are growing technically, because your costs associated with them are outpacing your

sales growth. Yeah. I didn't look at the details of the report, but yeah. I mean, luckily we don't know anymore but um yeah i don't know it's it's it's a hairy situation so it's this isn't this isn't google this isn't costco this is pump depot you just got to be okay with that and evaluate uh i don't know evaluate accordingly um i don't think i really have anything super intelligent to say about it except that if they'll benefit their existing store base given that pretty grocery stores aren't going to depreciate super fast. And they might even overstate their depreciation. It'll benefit from inflation, existing stores. But if they start accelerating store growth and materials costs are coming in higher, that's going to lower their returns on

invested capital because they had to invest more after inflation. And that's kind of the classic one that, I don't know, Buffett talks about that one constantly, where their future returns from the new stores might be a lot lower. But I mean, look, the company continues to generate cash. It seems like it's pretty hard to lose money. I don't know, Ian, you possibly still own it? Yep, I still own it. So I don't know. Did you read any of the details of the report? I need to dig in more. I did read... I read the top line numbers or the top, the high-level numbers. I think generally, I agree with what Ryan was saying that

given inflation, the growth is somewhat disappointing. It's good that they still grew same store sales. I think from what I was reading, people were more concerned about the guide that they were coming in at the low end of their original revenue guidance for the rest of the year. That's what they're expecting. And so I think that's not great. They're still planning to open new stores. I don't know. It's kind of one that, like you said, they're still generating cash i think it's hard to lose lose much on this i would have to look take a look and see what the multiples back down to now but famous last words though yeah it is it is famous last words for sure yeah don't like we'll say this though it's it's don't listen to what we're saying like

like you have to do your own stuff like i'm very uncomfortable i don't want to talk about stuff that we own you know since you're just you know on your own talking about stuff um you own i guess you're more comfortable but i don't want to talk about stuff we actually own but even something that we own say a few months ago it still makes me very uncomfortable because um i don't think you should be listening to us i love to talk about the business i agree yeah um i don't know it seems super cheap though like don't get on if anything if anything it seems super cheap their market cap is actually lower even though the stock's a little higher than it was a year ago or a year and a half ago.

And look, it seems simple. Even if their ROICs are going to be coming in lower because of inflation, they're going to grow store count. Same store sales, okay, might be flat or inflation adjusted might not be that great, but they're going to generate cash and buy back stock. Hold on.

Go ahead, Ryan. All right. So first of all, $153 million in operating cash flow for the quarter. 22 million in CapEx. So we're looking at 131 million in free cashflow in a quarter. They announced a new $600 million share repurchase program, which is equivalent to 23% of the market cap, I believe, and entered into a new $700 million credit facility with ESG linked pricing term.

Oh, boom. That's automatic buy now. I can't believe this is down 22% today. Yeah, it seems weird because the stock I don't think was pricing that much,

but you never know what's going to happen if you own Stroud's Farmer's Market. This isn't a durable compounder, so you kind of have to be up with

or not up with is be comfortable with big price swings. So that's just kind of how it is with these small caps to turn around stories. although it's not even a turnaround story because it's been profitable every year, the last five years. I mean, kind of, kind of as a turnaround story,

it's a new management, but they've been, they've generated cash every year. So yeah, right. It's kind of a, I think it's more of a story of if this has been a fine business, can we turn this into a great business? Yeah. It's kind of the question. I've got a question for you guys and, and this is kind of related to Sprouts Farmer's Market, but you can take it more generally when you've owned a company previously, do you ever consider and then you've sold it subsequently like you've done with Sprouts

and you don't have to comment on this particular situation but when you see a when you see a drop like this does that make you think hmm are you willing to bring it back into the portfolio I don't think I've ever I don't think I've ever sold anything that I've then re-bought and part of that's because I tend not to sell things I just hold on to them and let them let them run to zero in my portfolio rather than sell them for a 90% loss. But yeah, what do you guys think about that? Yes, we have and we will. I say we, but I've grown more comfortable with that because, and it kind of helped in this situation that the decline happened really quickly. So we had still kind of kept up with the business. So we knew there wasn't some big material change.

We didn't have to like re-associate ourselves with the situation. And Ryan, you're referencing a different, not Sprouts, right? You're referencing a random company. Yeah. We both know who it is, but we're, we're not going to say the name. The, uh, it, we've done the work. The situation has not changed and we, we ended up making money and now it's back to where it was and it's even cheaper on a valuation basis.

like it's I it there's always that mental hurdle of like well I already sold it like do I really want to own this again and it's like you should if if if you think the value is still there it's kind of just but now that I've gotten over the mental block I'm I'm happy I did yeah I don't know I've never been uncomfortable with that uh if you sell on valuation I think it should still be on your watch list because if you sold on valuation that means you don't think the business has deteriorated or anything like that so if it gets a 50 haircut or not 50 is pretty harsh if it gets a 20 haircut for no reason because the market's tanking and it comes back into your price range where you think forward returns are going to be adequate for what you're looking for

you already know it well uh it's so much and you may be biased just because you already know it well. But it's so much easier to get up to speed. If it hasn't been that long, if it's been less than a year, it might just take you a few hours or a day to get back up to speed. Instead of a new idea, we get to learn the whole business, learn the industry, blah, blah, blah. So yeah, I think it's a great... If you sell something on valuation... Obviously, if you sell because the business has not worked out like you think, say... I don't know. Whatever. It just didn't... It wasn't a good business. You were wrong.

You sold. It wasn't because of valuation. You throw it off the watch list. But if you sell something because of valuation, I think it's very, very important to keep it on the watch list because that can be an easy hunting ground when the market goes into a bear market like it is right now. All right.

Got a little bit of time left. Yeah, what, five minutes? I don't know. There's so much chaos this week. It's kind of hard to... I don't the interest rate stuff just doesn't get me going so I just it's just not exciting

like oh 50% or 0.5% whatever it was I just I don't know dinner tasted the same like they'll be like we're we're gonna increase 50 basis points then they'll go to the next meeting it's like

yeah I look outside my window like alright the earth is still the same nothing's different they price it. It's like work at the next meeting. We're thinking about doing this gets priced in. They do it gets priced in again. It was never priced in.

I don't know. It's impossible. It's, it's impossible to, I know like who would have thought that, I don't know. Yesterday people were relieved and one of the market went up 3% today. They're like,

Oh wait. I mean, if you bought and sold, if you bought yesterday and sold today or whatever or did two different actions today like you're not an investor you're a trader that's fine but you just gotta

know what you are how cheap can stuff get as cheap as I think as cheap as there's no level of cheapness I made it I had a good yes there is isn't there technically if a company can buy back its own stock

Isn't there a theoretical threshold? I like Peter Lynch's. As long as there's volume. As long as there's volume. I mean, if every other investor thinks a business is worth one cent and the stock will trade for that amount because that's what the buyers and sellers think it's worth, it doesn't matter. I mean, the company could eventually buy back its entire float at that point and drive up the stock. And if you're the one remaining shareholder. Yeah.

I mean, look, that's what happened to Dillard's recently. but theoretically, if there's no buyback, it can go as low as possible because it's all just about what the marginal or what the, I don't know. Just two third parties exchanging tickets. Exactly. Exactly.

Virtual pieces of paper. Sorry, Ian, you had something there. Well, I was just going to say, I think Peter Lynch said in this lecture that I've watched a few times that people always ask him that, how far down can the stock go? And he's like, well,

or how much money can I lose in the stock? And he said, well, if you put in $3 per share, you can lose $3 per share. It doesn't matter. It doesn't matter if the stock used to be at $10 a share. If the stock goes to zero, both the guy who put in money for $10 a share and you who put in money for $3 a share, both of you end up with zero at the end of the day. So I think it is a... Well, that's one of the reasons I like being fairly diversified is, you know, just any, any individual stock going to zero doesn't have a crazy impact on my portfolio, but they can, right. I was just looking through my, my account today and looking

at some stuff that was down to our point earlier about not listening to what we were saying. I was looking at some stuff down, you know, 80%, 90% and just being like, wow, that, you know, it, it, it seems, you know, when everything's going right, it seems like things can never really go down that much, but they do, right? There's, there's things that, you know, you get some overhyped emotion and, and, uh, some bad results and that's what you end up with. So yeah, a stock can't go below zero. Uh, good. That's great. But it can fall 50% forever. Your, your, your net worth in the stock can get cut in half every year indefinitely. uh i think someone like plug powers probably tried that very handily since the dot-com bubble

not to you know but there are stocks out there that do that um and yeah it's just part of the game if you're concentrated you have to realize that that could happen you have to be comfortable with that sort of stuff happening um but i don't know that's a whole nother conversation it's do you ever think about how absolutely insane the sentiment swings have been over the last two years yeah we were just doing an interview with brian ferroldi and he said that even david gardner who has 30 years of experience running the motley fool he said that this is the most chaotic two years that he's ever been a part of and the sentiment i i think what's weird is that no one there's no historical precedent so no one knows what to think so anyone that's trying

to make a short-term prediction has bad information. Does that make sense to you guys or am I? There was a point there during 2020 when valuations across the board were trading at insane, what I thought was insane premiums over and over. And I thought, well, how can any business ever go bankrupt? Because these guys can issue equity forever. I know what everyone's talking about. Yeah. And one year later, one year later, I'm sitting here like, oh, all right. 15% interest on those bonds and you're burning cash. This might be your real bankrupt candidate.

Yeah, I think there was a nice little indicator there when everyone was like, well, the stock's overvalued, but they can use the stock as currency. When stock as currency was becoming in vogue again, that was kind of an indicator maybe that people were diluting themselves into thinking that the stock was fine. But they can just buy- They were diluting themselves that the diluting was fine. Oh, that's why. Yeah, exactly. They were D-E-L-U-D-I. That's a good Ryan knows my joke I call it I don't call it

Shareholder delusion I call it Shareholder delusion But The delusion of delusion Yes exactly Shareholder delusion But

I guess We got to wrap up But the biggest example Coming back to Shopify With their earnings today Remember when everyone Was like Oh they can just get

About 30% delusion Just take out UPS Like maybe That was an indicator That their stock Was slightly Overpriced Given that UPS

Is one of the giant delivery networks in North America and around the globe. I don't know. But I just thought, thinking back to that, that's what a lot of,

and that's rational. They could have done that and maybe created some value, but now they're probably worth less than UPS. I haven't looked. It's gone. I wouldn't be surprised

if it goes from 50 times sales to 50 times EBITDA in less than a year. Well, what about next 12 months long-term adjusted EBITDA? I don't want to hear about that metric.

That's what I mean. All right. Ian, last comment. Last comment here. Yeah, last comment here. To provide the numbers, Shopify is currently at a $52 billion market cap. UPS is at a $157 billion market cap. So UPS is over three times the size of Shopify.

Oh, I don't think it was UPS then. I think it was FedEx. FedEx. But same. same you know yeah i'll give you i'll give you the number there real quick too just to to check it out fedex is at 53 billion dollar market cap yeah it must be okay i think it was fedex yeah versus shops uh 52 billion so fedex is has surpassed shop oh all right i'm gonna what a world all right sorry last question then we'll sign off what do you think what

performs better over the next 10 years i don't know the companies very well at all either I don't remember what performs better, FedEx or Shopify. I'll take Shopify. Yeah, I would probably have to take Shopify there. I agree. I'd take Shopify. But I think that buy with Prime could be a killer. But that's a discussion.

That's why the stock's down 30%. Everyone thinks buy with Prime is going to kill it. Yeah. All right. Well, I'm going to sign off. Do we do disclosures on this one? We should. You know what?

We should, yeah. We talk a lot of individual stocks, so yeah. Yeah. Yeah. Well, Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. We'll see you next time.