Chit Chat Stocks - Rivian Stock Gets a Lifeline; Dividends vs. Buybacks; Is Celsius Stock a Buy Today? (CELH, RIVN)

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 Brett Schaefer, the one and only. And we've got really nothing huge on the week. I've got something exciting. It's a small cap of the week that's, I think, probably the most interesting one I've looked at so far.

Starting point is 00:00:56 most compelling. So I'm going to present that to Brett, see if I can maybe excite him a little bit and potentially do some deeper digging. We've also got Rivian news. I don't want to call it huge news, but it might actually be quite huge news for Rivian. So we're going to talk about that as well. And then I guess, Brett, any other news that you brought this week? Well, we got some questions on Celsius. The energy drink company has gone into a bit of a downturn. I think it's because starbucks has a new energy drink out there at its stores which seems quite interesting as well so maybe we could do a combo with those two but i think that'll be fun and we have some questions from twitter x that's really it we'll hopefully get some questions from the

Starting point is 00:01:41 audience maybe this could be a more philosophy focused episode but for any housekeeping items anyone listening we just dropped a nick sleep nomad investment partnership podcast as we're recording this today, but last Wednesday in your podcast feed, go check that out. We're recording one on Molson Coors yesterday as we're recording this. So exciting stuff. Yeah. And we were thinking about what investor should we do next? I got one for you, Brett. Peter Lynch. Who? Peter Lynch. Not bad. Okay. Yeah. I've never actually studied him that much. It's just kind of the quotes that get thrown around online. Peter Lynch. All right. So maybe we take that one for the next month. But before we get into things, we want to talk about our friends as always, Public.

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Starting point is 00:02:57 all investors and carry significant risk. Full disclosures are in the podcast description. Where do you want to start, Brett? I'll tell you what, maybe small cap of the week, or should we wait for people to trickle into the YouTube live stream here before we do the most exciting part? Yeah, I think it's good when we save that for the end because it's good when we get people asking some questions on that and you always, you almost get the hive mind researching at once, which is quite fun, but maybe let's hit Rivian. I think that is the biggest thing that happened this week. Stocks up what 30% today. Maybe we can do some little 10 minute segment on that. Sure, sure, sure, sure. So I guess, uh, the news here, Rivian

Starting point is 00:03:39 Automotive, the EV pickup maker. Is it a pickup truck, basically? EV truck maker. I think there's an SUV as well. That was at one point sort of a market darling, has suffered a bit as of late. And Brett, actually, if you can pull up maybe a screen share here to demonstrate the cash balance, the short-term investments plus the cash so that we can get an idea of- Yep, I will in about a minute here, tweeting out the link. But yeah, I'll get right on that after. Okay, so the news here is that Volkswagen is going to be investing up to $5 billion into the EV maker Rivian. It's structured a little funny.

Starting point is 00:04:23 So it's structured sort of as a joint venture. the line from the wall street journal here is rivian group is investing or sorry volkswagen group is investing a billion dollars into electric pickup maker rivian automotive with plans to spend up to five billion dollars as part of a software development partnership so it's kind of this uh i think they're trying to use rivian to help um kind of bolster volkswagen's software offering in car software um so it makes you kind of think it almost feels like this lifeline for rivian is almost gambling for volkswagen like i think it feels like volkswagen's kind of the savior here i don't know if i see necessarily the upside

Starting point is 00:05:14 as much from Volkswagen's perspective. And I'm not exactly sure how this joint venture works out or whether it's like an outright investment, how it ultimately, like what the financial incentives are here. But if you look at Rivian's financials, cash and cash equivalents, and if you go to quarterly, Brett,

Starting point is 00:05:35 we can kind of see a better visual here, has dropped from $18 billion in cash and short-term investments to a little over $7 billion, I believe. um and as of the latest quarter so it's been burning cash pretty quickly and if you add the free cash flow on there they burned i think through around six billion dollars in free cash flow over the last 12 months so this was cash that was really needed especially if they get all five billion of it you're looking at really a major lifeline and i think the ceo of

Starting point is 00:06:07 rivian actually went on in an interview and basically said like look this gives us the funds we need to actually get to cashflow positive at some point. And without this, it probably would have been pretty difficult. And it looked like from the outside looking in, looked like this was a business that was going to struggle to produce vehicles profitably in the future. And especially with Rivian having plans for a low cost model or a lower cost model that's coming out soon. I think this is cash that was very much needed. I guess, what are your thoughts here brett why why do you think volkswagen did this well according to i think it was the wall street journal article they said that they're they're having trouble with any sort of software

Starting point is 00:06:54 stuff in the what you might call it ev space and the infotainment systems the car stuff that tesla is famous for uh the chinese companies are famous for being much much superior to the legacy brands they just really couldn't nail that i don't know how complicated it is but maybe it is very complicated so that could help um but i i don't know why volkswagen would do this except you know maybe the terms feel attractive to them and rivian does have a good brand i mean people love the cars you can see the reviews. They think they're fantastic. You see them replacing a lot of the upper whatever Tesla Model X and S, the higher end ones, at least where I live. And I think that's all throughout the West Coast of the United States. And then Rivian, they're burning a lot of

Starting point is 00:07:53 cash and they need to get to a higher scale in order to hit positive cash flow just because with the vertically, they're manufacturing their own vehicles. So they're not doing any sort of partnership with an existing factory. They've built it all themselves. So they need to hit some sort of scale. I think they're only doing about 15,000 deliveries a quarter. I mean, you need to get much, much higher and that's going to take multiple years here. So it makes sense for them if they can reduce the cash burn to maybe, if you saw on the chart there, they have gone a little bit better over the last few quarters to about five and a half billion versus is six and a half billion in cash. And if they can get that down to two billion or something like

Starting point is 00:08:31 that, as they try to get bigger and bigger and bigger, I think the markets will appreciate that and they'll understand that there's a path to profitability and they'll give them room to raise more money and try to eventually get to scale. Because if they can be one of the second scaled EV player along with Tesla, there could be some benefit there, especially at this low value situation. I would say though, a lot of people, and this is a lesson on, sorry, my light gets way too, I don't know why it does that for anyone listening on YouTube, but I can never figure out how to fix that. It just kind of comes and goes. The light is actually not changing, but that's besides the point. If we look at, what was I trying to say here?

Starting point is 00:09:18 The investors that look at Rivian, you have essentially a market cap of before today, like 10 billion dollars and i think it's a lesson in saying look given the balance sheet and you have to really look at the balance sheet before looking at something you probably should have priced in something like what happened yesterday where there might be a hundred percent two hundred percent dilution and that could be okay if you're gonna get the growth along with that but that's something you need to price into your valuation work you can't just say oh well they have this number of shares outstanding the enterprise value is actually lower than the market cap well i wouldn't include that because the cash is going to get eaten up almost entirely and we have a

Starting point is 00:10:01 market cap of 10 billion dollars well the stock looks kind of cheap if they can scale well no you had a price in that cash burn and the potential equity dilution it's just all part the valuation process. Yeah, I think people consistently underrate the complexity involved in building a successful automotive business, like a profitable automotive business at scale. Like Tesla would not have been able to do it had it not been for the investor buy-in, frankly like the the cash they were able to raise really gave them the the runway and pretty much every ev maker that we looked at i remember or any automotive company that started as of late they expected cash flow a little sooner than it came and there's just it's it's almost like the

Starting point is 00:10:58 airline business in a way where there's just always costs you don't expect coming due in the next quarter and inventory becomes an issue. And then the other part is interest rates probably don't help. It probably doesn't help people finance cars. So it makes it even more difficult. Yeah. I think they would have had basically a year, maybe a little over a year of burn rate at this point. So this is cash they certainly needed. The CEO seems to think they can get to cashflow positive with this new cash infusion. So certainly helps. The other thing that was interesting is there's been that inventory buildup on the balance sheet. I was kind of sharing my screen there. Maybe that can kind of help with cashflow if they're able to sell

Starting point is 00:11:41 through some of that. But at the same time, it's maybe concerning that that inventory continues to grow when they should be selling cars kind of at will now. So I don't know. I guess there's some concerns i will say anecdotally a lot of rivians on the road here in the pacific northwest yeah there are but i do agree that you got to look at if you look at that anecdotes you could say oh okay a lot of the wealthier people out there are buying these rivians they're very expensive they probably have good union economics i will say i think their costs are still extremely high so i think they're giving quite the consumer surplus on these vehicles which is going to make the customers happy but eventually you got to make money but the thing you mentioned there about the

Starting point is 00:12:26 inventory buildup is yes, they're still at such a small scale on their deliveries number. They're not even close to the scale you need about a million cars a year, maybe, or maybe for them as a more premium car maker of 500,000, 400,000, 300,000, something like that. They're so far away from that, that that would concern me like, okay, you're already hitting a deliveries wall and you need to kind of innovate and lower prices here or come out with new models. That's kind of troubling wouldn't you say i think that's the number one concern i would have with this company but given how much people appreciate the cars and given we shouldn't forget that 100 000 vehicle amazon partnership for the commercial van side of the business i think did that after the capital

Starting point is 00:13:13 raise it makes me more obviously the stock went up 50 so it was a good thing uh it makes me a little more bullish on the on the company i thought there was some sort of falling out between rivian and amazon whether it was no like they sold their equity stake or something with the contract but i guess you've been following it closer so yeah i don't i don't know there's i'm i don't think i'll ever touch rivian i don't know if i'll ever own a car company in general frankly it's just a business i don't really want to be a part of i like airlines more than cars to be honest and i don't like airlines yeah exactly that's a low bar to hit got some questions in here if we want to flip to another topic uh someone asked on nick sleep do you think nick sleep would have switched

Starting point is 00:13:58 away from deep valley if his aum hadn't gotten larger ie was the switch made because deep valley doesn't scale as well i will say that we had some thoughts on this during the interview and we'll have more fleshed out thoughts maybe it's a little tease here i'll answer this our thoughts reading the letters was that he really skated to where the puck was going where the opportunity set in the year 2000, 2001, 2002, 2003, was phenomenal for deep value across the world. But as we approached the great financial crisis period, the compounders, as you might call them, the Costcos, the Amazons of the world, were maybe the most attractive part of the market. And that's, I think, what happened.

Starting point is 00:14:40 There may have been some frustration around, I mean, he expressed in several of his letters is frustration around not being able to buy securities that were so thinly traded. So maybe that was part of it. The other thing is, I think with some of these, the performance wasn't really what he expected. I remember him being pretty frustrated with the Zimbabwe investments that made especially in some of the international markets like just not not materializing or the you know people running the company weren't did not think the same way as him well zimbabwe also went through hyperinflation and had a terrible dictator so a little unlucky there but also that's what happens when you invest in the most emerging markets yeah i mean i like the idea of

Starting point is 00:15:36 looking anywhere but i think it's a if it's a market you're really not familiar with i would maybe just be wary extra cautious and i think there are some markets for me where if you quoted ridiculously cheap multiple i'm probably just going to say no no matter what and i remember like i can't remember what it was but there was some company that he tried to invest in and it was like uh can i get he had to email them he's like can i get a or maybe it's a written letter he's like can i get an annual report they're like uh no annual reports are only for our shareholders he's like well how do i know whether or not i want to become a shareholder and they just like responded like yeah that's a common complaint yeah when you deal in small caps like

Starting point is 00:16:28 that's sometimes the issues you're gonna get yeah and i think that's fixed now because edgar and all those online platforms because they had to file the 10k there if they filed it and it has to be publicly available so luckily the sec has helped with that but yeah we have a full episode on them so nothing on them we'll uh talk about something else we have a comment here did you hear about ferrari starting a 7 000 euro uh subscription for servicing their electric vehicles that includes a battery replacement after eight years that's interesting i haven't ferrari is supposed to have that super high quality customer service i think that makes sense they this reminds me of well i guess it's a little bit different but they do have the same philosophy in general

Starting point is 00:17:15 there was a huge long-form article in the wall street journal i believe about hermes and how people i mean there's almost some regulatory stuff happening where people they have this under i don't want to say under the radar no that's the wrong term it's a undiscussed thing but it's something kind of an unwritten rule of the shopping experience where you have to buy a bunch of other items before you get offered the ability to buy one of their top birkin bags and i think the same thing can apply to ferrari even as they switch to electric vehicles where you have to buy one of these then you get the top model then you get this you have to buy the subscription service for the battery replacement and it just keeps that club-like feel of the business going and

Starting point is 00:18:05 it almost feels like oh yeah you know like it's you have to think about it where someone has their ferrari and the point not necessarily is to have it and to drive it it's also to brag about the service and how you're part of the club and like you can say oh yeah like they do all the battery replacement for you that's not an issue for me you know you can talk talk to your friends and stuff like that that that's part of the moat and that's part of the quality the service they're trying to provide make you feel prestigious versus versus everyone else yeah and i think with ferrari specifically it's they're of course you know wanting to be a part of the club wanting to be able to brag about your car drive it around all that stuff that's part of what drives this

Starting point is 00:18:47 powerful model where they can charge exorbitant prices but the other part is they really do take good care of their customers they're you know they're renewing customers or the customers that have been around they get first dibs on a lot of offerings they get treated like they really are a member of this ferrari club i remember i think it was a quote from the rules royce ceo a long time ago where he's like the greatest the greatest investment i can make is going and taking very good care of my existing customers and i remember like if if someone's rolls royce broke down he would fly out or he'd have a team fly out there go take care of it and it's like aren't you i think an analyst or something asked like aren't you losing tons of money on that and it's like

Starting point is 00:19:34 there's no better service like they will tell their friends which is the best most powerful marketing about it and it pays dividends in the long run the other thing is this kind of takes me into a different tangent but my personal opinion is that customer support good real customer support will become a competitive advantage over the next 10 years especially as these a lot of companies are shifting towards ai powered customer support that is not able to really help a lot of questions or even edge cases um we spend a i think if we spend 100 billion dollars more in capex we'll get there i just think a lot of people neglect a lot of companies neglect that aspect of running the business and having someone who can really handhold like a

Starting point is 00:20:29 customer support agent who can really handhold the customers in the process like that serves that serves you really well in terms of word of mouth marketing yeah let me give you an example here i have two separate uh bank credit card accounts bank of america and american express bank of america uses their ai chat bot they call it something like erica it's useless and it's really hard to get a real person but american express you go to the customer chat thing right within the app there's a real person usually within five minutes so that's nice i mean it really helps saves you time saves you money um all right you want to talk celsius we already had a comment in here maybe this will kick things off from a guy named michael welcome and michael says nielsen

Starting point is 00:21:13 data says year-over-year decline market share down but still growing its energy market is growing so i guess market share year-over-year down company telegraphed for two quarters because pepsi was adjusting distribution which said would hurt in the short run ryan what do you want to start off with celsius here maybe we do this as one of our finchette ones i can kind of share the screen here and start her up i can share i can share here the uh you got it yeah let me share and just kind of give the total drawdown so down 42 percent off its most recent highs volatile stock this is volatile that's just five years how many drawdowns have we had three years we've had 60 a 30 a 30 a 30 a 30 and a 42 that's crazy that is wild yeah so the i think there's been a lot of stuff with

Starting point is 00:22:14 celsius like there there was like a lot of bad news the the year of sorry the growth trends and this is a huge like alt data investment this is one where people are constantly tracking like the alternative data and so you'll get stock moves constantly with that the other part is there was a guy that died uh or i think he died like drinking like two celsius a day which maybe that's on him but it just wasn't a great news story that came out right at the same time there was a little bit of negative negative commentary out of one of the investment conferences. I can't remember exactly what the executive said. And then, yeah, I guess you mentioned that Starbucks has recently launched this new program or this new energy drink. So

Starting point is 00:23:03 I think a lot of things are hitting them at once. The other part here is that they trade very expensively. And I think that's one of the difficulties is that when you have a business with a high multiple little things little news stories can have a huge impact on the stock price because yeah if you stop i have their price to gross profit uh if you want to stop sharing i can share chart on that yeah it's when you're priced for perfection it's you got to be perfect or else your shareholder is going to have a tough time i agree i agree yeah if we look at the shared screen here, price to gross profit has fallen to about right under 20, say about 19. And a couple of years ago, we were at 90. Earlier this year, we were close to 40, 35, I guess. So yeah, that's

Starting point is 00:24:04 all there is to it. And a price to gross profit of 19 is still not cheap. Obviously, if they double revenue again that would make it a little bit more inexpensive but what are your thoughts on the stock here ryan i guess we don't follow it too closely but if we look at the long term let's just look at the gross profit growth i mean it's been great you know especially the last three years let's even go annual it's more impressive it's just skyrocketed but if we look at maybe let's do the last few years and maybe do quarterly have we slowed down a bit i mean not really still at 95 growth and i think the problem was people were pricing in high double digit growth for a long time and it might just be this growth is going to slow down

Starting point is 00:24:54 now and that's what's happening look one thing that i guess sorry i'll let you talk in one second when they were at 3% market share and you could kind of see it kept taking fire and maybe it was popular in certain parts of the country, you could say, okay, there's a pretty reasonable way for this to get to 10% market share. There's only two major players in this industry, companies like Rockstar and Bang Energy are seeding share. So there's a lot of open space to go after and it's a growing market. But when you're at a 10% market share with two incumbents like Red Bull and monster that dominates shelf space i think that's going to make it harder for them uh to gain market share for here but but i wouldn't be surprised if they hit 20 in the united states and the second

Starting point is 00:25:36 thing is they've struggled a lot internationally so that's a much harder like you have to see the momentum they're starting i'm not sure tbd and whether they can be successful uh internationally as they have been in the united states yeah celsius it's one of those that's really hard for me to judge it's kind of like it's kind of a crapshoot in terms of where i think market share ends up for a company like this like how many people switch off of red bull switch off of monster and move towards celsius how much of it is new consumers altogether how long can they sustain the growth rates that they've had over the last several years probably not very long so So it's – I think it's one of those things where I just have a really hard time judging the opportunity, especially when it trades at a premium multiple.

Starting point is 00:26:32 and it's kind of the same with retail in a way where if something's really hot for a while i kind of have a hard time figuring out whether or not that's going to last like a uh aritzia or a what's been popular lately hokas something like that where it's like a brand and it's culturally like taking off but you just like i have no sense of the longevity no sense of whether in 10 years people are still going to be like a huge chunk of people like call it two or three times today's current consumer base are going to be drinking celsius you basically have to believe that's going to be the case if you're going to invest in the stock from here so or you have to believe that there's lots of pricing power i think the pricing power is there but well food and drink

Starting point is 00:27:24 is better than apparel that's for sure but i think what ryan's saying there is he wouldn't be opposed to buying a stock like this but you have to consider that when weighing your probabilities how that impacts the price you're willing to pay it also okay so there's the distribution advantage that's real but it energy drinks feel a little bit lately like the vapes industry where a lot of companies are starting or building some sort of energy energy drink brand we're seeing it with coca-cola they're building all those coffee slash coca-cola cans uh we've seen it there's a whole bunch of upstarts of just energy drink upstarts. And it seems like it's easier to produce one of these than maybe it has been previously.

Starting point is 00:28:20 And obviously, the distribution advantage that's real, it's significant, and it leads to better unit economics. But I don't know, I just worry that it's going to be ultra competitive. And I think that's why you see big brands starting to get into this is they've seen the returns on capital that Celsius can generate and it's it's the capital returns theory just it's excited every big brand and now they feel like they they want to be a part of it yeah it's definitely going to be a moat test I would probably take the other side of that and say that if now Celsius is earlier but maybe call them the big three along with Monster and Red Bull I would bet that those are still the dominant players five years from now in the United States I mean Red Bull and Monster

Starting point is 00:29:09 have been around for a long time there's been a lot of people that have tried to attack their market and they've been able to successfully you know retain their market share within the space and the space is growing so they're going overall share of the just food and drink space so i don't know like there's those ones from all these influencers like prime that grew fast it's almost like Feastables, where there's a huge burst. And then I've seen some of the market shares. Again, these are screenshots from tweets. But the market share of that has apparently just fallen off a cliff. And Celsius, it's not as, again, it hasn't been around as nearly as long as Red Bull or Monster. But I'd say that they could definitely retain their market share. But

Starting point is 00:29:59 given the price we're at today, it's not about retaining market share in the United States. It's about growing market share and succeeding internationally. Yeah, Michael says energy drinks is like the ready-to-drink coffee slash Frappuccino craze in grocery and convenience stores of 2005 to 2009. No, I don't think so. It's way more durable. Well, it's been a secular growth category for, what, two decades now? Maybe three. i think there maybe i just haven't been paying attention but it feels like there's a lot more

Starting point is 00:30:36 options and alternatives today than there has been kind of if you look 10 years ago i feel like it was primarily dominated by monster and red bull and now you go to an energy drink section in the grocery aisle and you kind of have unlimited options yeah and i haven't followed monster energy this year though but it seems like the business is still firing on all cylinders so i think it's not a big deal now i'm going to read this starbucks thing that i think kind of scared people a little bit maybe it wasn't maybe it was some alt data that people saw i love talking about alt data because you never never have to get anything proven until it actually happens and a lot of the times the earnings report is actually quite opposite of what you're seeing in that alt

Starting point is 00:31:18 data so but here's what it says elevate the day and this is from starbucks his own new thing elevate the day with a boost of sugar-free energy with the new handcrafted starbucks iced energy beverages these drinks combine sparkling fruit flavors with iced tea for the ultimate jump start and are available at stores in the u.s year round the new melon burst iced energy features refreshing flavors of melon tropical citrus frozen tropical citrus iced energy with strawberry puree um and then they have some cold brew stuff that was new as well that's the thing about the energy the the sugar-free and the fruity stuff that's going after celsius a bit and i think that's probably where people are scared

Starting point is 00:31:56 yeah it makes sense from starbucks perspective to do this the one thing i'll say is that you know what was it 15 years ago that the uh starbucks also tried to become like a uh an alcoholic place to go past like five o'clock remember they were like trying to get really big into wine and it's just like they've tried to pivot a lot and try to add some of these different different drinks maybe this is a little easier but i don't know if it'll really steal that much share from celsius you see it all over people are trying to copy celsius a lot of the typical or sort of the name brands in energy energy drinks even monster yeah uh ice red bulls kind of had the thin cans for a while but they've gone after they're trying to replicate the style

Starting point is 00:32:49 of the product try to make it seem healthier by having a it's funny that just having a thin can makes people think it's a little bit healthier but yeah that's uh it is quite interesting how that stuff can work and they talk about sugar-free they add the b vitamins which people love oh gotta get all those b vitamins there's like 12 of them but we look at the stock today ryan clearly we're both fairly bullish on the celsius brand and we think it's an interesting category although not the best category in the world what god this light today has been crazy i might just turn it off honestly um what price what what let's let's say the earnings are a little bit lumpy just because they're still growing what gross profit multiplier are you buying celsius today i don't i don't

Starting point is 00:33:37 really think i want to own celsius really yeah there's i don't know it's one of those things where i've got no reason for it it's just kind of a gut feel that i don't want to own it and it has been professionalized if you want to call it that over the last three or four years they they used to have a lot of the accounting issues there was a lot of if i remember correctly there was like executive problems going on too and part of that was because they were turning from a small cap into a large cap in a matter of two or three years so there's always going to be some issues but i don't know something's keeping me away i think i'm i'm just a little wary about their market share within the energy category and i think a lot of people are just forecasting

Starting point is 00:34:31 growth in the energy drink category indefinitely here like way above average growth and i my gut tells me it's going to slow down a bit but i've got nothing to support that so it's purely yeah the alt data apparently supports that this year uh another thing the thing i think i'm the most concerned about is the lack of international growth now it's early they've really only done their push internationally in a meaningful way over the last year, but I would hope that that would start growing at 100%. Why can't this work in Australia, United Kingdom, Canada, which is their first markets, just as it has in the United States? And if it hasn't, well, then that would be a big concern for me because one of the key reasons for Monster Red

Starting point is 00:35:20 Bull's success is the international distribution and why they're replacing soft drinks in that part of the world. See if you have any comments here. It says, yeah, you had that one. Celsius has to be addictive like Coke or Pepsi or Zin and Smokes in order to have the true conviction in the investment. I've never had a Celsius. I know it has caffeine, but maybe that specific taste people can't replicate. There is that type of discussions. I mean, I've been looking around at the Zin shortage stuff and people talk about how each different pouch for the nicotine pouches has a different feel you know and it has a different there are these unique things that people have i mean with the coke versus pepsi stuff there's that slight difference in taste

Starting point is 00:36:03 but it really matters for people that have built up that habit over a long time we have james goodwin saying uh i always choose red bull because of the can size over monster it does make sense i guess it does matter out there uh and it's also the size of the caffeine there i think that's it though for that topic ryan unless you have anything else on celsius We're going to move on to another question. Yeah, let's do the small cap of the week. First, do you want to talk about our friends at FinChat with those charts? Yeah, sure.

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Starting point is 00:36:58 but I wouldn't be working there if I didn't really love the platform. So I recommend checking it out. It's finchat.io slash chitchat gets you 15% off any paid plans. Also, if you sign up, you get the first two weeks free. If you are on the fence about whether or not you want a research terminal,

Starting point is 00:37:17 let me just tell you, I was one of those guys that thought I can do all this in Google Sheets or Excel myself. I don't need that. And it is a massive time saver. So highly recommend at least checking it out. But do we want to talk about our small cap of the week? Definitely. It looks like we got, let me tease you up here, Hammond Manufacturing Company Limited. Now, what is this, Ryan? Yeah. Maybe not the sexiest name in the world, but I guess I came across this by reading the annual letter from a small cap investor that I really like. I think the name is Smoke Capital. And he does a lot of good write-ups on really undiscovered stocks. So this was one of them that he wrote up in his latest annual letter.

Starting point is 00:38:07 He says Hammond Manufacturing makes electrical enclosures, racks and cabinets, power distribution products, transformers, and many related accessories for a variety of industries. I know that sounds pretty exciting. So I can see Brett getting excited there. These may sound like boring products, but due to secular trends in cloud computing, infrastructure investment, and electrification of everything, Hammond has experienced steady profitable growth for many years. And that is the case. If you pull up, Brett, maybe if you pull up the chart here, I'll say that there are two different companies, and this is Canadian. This is a Canadian company. There's one that's Hammond something or other.

Starting point is 00:38:49 I can't remember the other one, but this is HMM.A if you want to type that in. You want the chart from the show notes or what? Either one. Either one if you just show the screen. You can see revenue has grown at about 9% annually over the last decade. So gone from about $105 million in revenue to $235 million in revenue. And earnings per share has grown by roughly 20% a year for a decade. So impressive financial growth.

Starting point is 00:39:19 And usually for a small cap, you don't see this level of consistency. It's typically a little more lumpy, but it seems like it's been good results for Hammond. the total market cap of Hammond manufacturing is 108 million Canadian, which I think comes out to probably like 80 million USD would be my guess. Just kind of mental math there. Last 12 months though, this is all in Canadian, by the way. So just kind of, I don't know, convert it if you want, if you're interested in looking a little deeper. It says last 12 months, $235 million in revenue, Canadian. And keep in mind, $100 million market cap, roughly. $28 million in operating income with $35 million of net debt on

Starting point is 00:40:06 the balance sheet. So EV to EBIT of roughly five times for a company that has grown earnings per share at about 20% a year for a decade. There's another quote from the letter. He says, they own over 500,000 square feet of manufacturing facilities located only one to one and a half hours from the Toronto metro area. Since the company was founded over 100 years ago, and most of this is carried at cost, the value of their manufacturing facilities alone likely comes close to, if not exceeds the current market cap of a hundred million Canadians. So obviously that's probably not going to be monetized as long as the company wants to continue operating, but it's a little bit of a margin of safety there knowing that they've got

Starting point is 00:40:48 this real estate value in the event that there was ever a liquidation. But in the meantime, It seems like you've got a business where there's been some real tailwinds. Management doesn't really seem that keen on big public investment disclosures, getting more and more investors. They're not much of a hype-up management team. But the results have been there. They've got some tailwinds. The total returns over the last decade have amounted to a 22% CAGR.

Starting point is 00:41:19 So real returns here, good valuation. I don't know. So it feels like there's a lot to like. This might be the most exciting one I've looked at so far. Yeah, definitely. There's a lot to like here. As always, there's a few questions that we'd have to answer. And the ones that come to mind first for me, I know you mentioned that it is a secular grower.

Starting point is 00:41:36 And, you know, he said it may sound boring, but products, you know, there's cloud computing, infrastructure, investment, electrification of everything that's helping with their products. But what I see on this chart here is earnings from 2021 to today went on a huge boost. So I wonder if that's one, inflation, right? Or two, some sort of COVID bullwhip. And that's something I would be concerned about, whether the normalized earnings are slightly lower, and maybe that doesn't matter since it's at five times earnings. Then second is the cash flow conversion. I'm seeing on the chart here that it's okay. I have a chart here on FinChat. Actually, I'll just share it so that people watching on YouTube can see it. But essentially, it's showing that free cash flow has lagged a little bit here when i pulled up yeah i would imagine this is

Starting point is 00:42:26 especially as of late kind of an inventory heavy business yeah so that's that it's not the end of the world but it's something to to be concerned about so we have operating income over the last 12 months 28 million but free cash flow of only 14.7 million that's the blue chart it's the free cash flow orange is the operating income and it looks like i'm trying to track here almost every year free cash flow has been lower now it's been positive most years but i think that is a concern for me it does matter at the end of the day that it's not like the unit economics of the business matter a lot more but the free cash flow conversion is a factor and that would probably impact my valuation work what about their capital return strategy anything on that i don't look into

Starting point is 00:43:12 it too much but i'll say with any sort of industrial type of business where they're selling whatever gizmos gadgets and it's growing you're going to have inventory growth hopefully in line with kind of revenues you don't want like insane inventory growth that's like outpacing sales but that's that's going to lead to a cash flow lag that's a part of the model and as long as it's a business that continues to grow what are we looking at here shares outstanding yeah very insightful chart here ryan uh shares outstanding have not gone anywhere maybe they're inspired by old constellation software 11.3 million in 2014 11.3 million over the last 12 months so you know what i guess i kind of like that hey it's better it's better than a two percent growth which a lot

Starting point is 00:44:02 of us companies have i actually nick sleep in one of his letters was he said he that was something he did he looked he did a screener for companies that had exactly zero percent shares outstanding growth because if you because if a business generated good returns and it wasn't moving its shares outstanding at all you knew there was some power in the business so um yeah you really have to assume that the growth continues for this business because if it doesn't, then you get a whole bunch of inventory that you no longer need. If it continues to grow, I think it's okay to see the cashflow lag. You just got to believe in the durability here. It's definitely one that I worry maybe a little bit about cyclicality. So I'll probably have to do a little more

Starting point is 00:44:58 digging the other thing that was interesting is their little i don't know if it's like a sister company how it works but there's another hammond based company that operates similarly to hammond manufacturing limited and it trades at like twice the multiple so and the growth hasn't been that much better so i'm curious what the uh why why there's the big discrepancy yeah i yeah i would uh investigate that as well i guess there's probably some history usually when there's two companies with the same name it's probably a family business that got split up a while ago or something related to that you know when something has the name hammond it's usually the same family i would guess but any canadian listeners let us know on that one i know we have a good chunk from canada maybe like

Starting point is 00:45:50 seven percent of the listeners are from up north so hit us up if you know anything about hammond although it's a tiny company. All right. Before we move on, earlier in the show, you heard us talk about the investing platform, public.com. That is where you can trade options with no commissions or contract fees, and you get a rebate of up to 18 cents 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.

Starting point is 00:46:54 congratulations this is the easiest crime to solve ever good good luck with that one good luck trying to make uh someone's getting a huge i can't wait for the i subscribe to the sec newsletter for enforcement actions which can be is that it's free it's it's it's kind of nice uh you can kind of see you can see if anyone's getting any fines this one's going to be an easy it's guaranteed insider trading yeah if i don't want to give insider trading advice, but if I were, my advice would be if you have material information that you know is going to move the stock and you want to profit off of it without getting caught, buying extremely out-of-the-money options that expire in a short duration is the number one way

Starting point is 00:47:46 to get caught i highly recommend not doing that maybe just buy the stock because that could happen at any point and it's a little harder to track i know you're not going to get quite the same profits and if you think oh you know well i tipped off a friend they can draw they can draw the lines they can connect the dots so it's i just yeah maybe don't buy out of the money options don't buy that many like you can't be a huge change in what the volume is like they're going to track that irregularities all you have to do is some sort of algorithm the tracking thing to see for any irregularities in the trading we have a question here i think this is an interesting one have you guys been following embracer group since you had the ceo on a couple years back

Starting point is 00:48:36 no hate but what an example of 2020 insanity yeah it's one we didn't own we were a little bit concerned because it was just listed in that european market they were in uh the guy was a nice guy seemed really sharp but from what it seems like it happened uh they went on they just got a little too aggressive and now they're trying to claw things back as the video game industry really hit a tough spot over the last few years and that combination uh was tough for them yeah I hate to say it, but it's a little bit of a yellow flag if you come on our podcast at this point. It seems like for executives, as much as I want executives to come on our show, it hasn't voted – it hasn't ended up quite that well for a lot of the securities following joining our show. Hopefully, that's just coincidence.

Starting point is 00:49:30 But, yeah, I don't follow Embracer Group that closely. To be honest, I've soured a little bit on video games relative to what I thought kind of two to three years ago, especially with some of the larger publishers, Take-Two and EA. Embracer Group, maybe now's the time to look and kind of – Do you want to guess what drawdown they're in? 80 that is right 83 nice let's look at the old i know this is in swedish krona so sometimes you have to do a little bit investigation to make sure the multiples are correct price to gross profit ryan i know that's not a real metric doesn't matter you can't eat gross profit but it's below one that's what i'm saying maybe now is the time to look

Starting point is 00:50:23 i'd have to revisit the catalog because with a business like this the last thing i would want is like a bunch of like of one-time hits like if there's no stability yeah if there's a whole bunch of games in there that like had some success but you have to bet on like repeat success and there's no like durability of the brands then i'd be a little worried but if you've got some durable brands and i don't even remember what was in there but if you've got some durable brands could certainly be worth it even if it's the difficulty is that operating expenses for developing a game are quite high so the gross profit might be slightly misleading in terms of what the company could truly earn

Starting point is 00:51:10 i agree i'd be curious what kind of cash flow margins they could actually generate i will i do remember lars kind of roasted me and he's like i was like so what do you look for in your when you're acquiring a company he's like i try to make money that makes sense well that hasn't worked out so far maybe hey maybe this is the one that i should research next i know we just did molson coors uh or i did molson coors for my stock research episode maybe this one you know a little revisit could be fun might be potentially cheap and i think they're about they've always talked about listing in the u.s i think they probably have done that now but we're hitting the last part of the uh episode here ryan anything else i got a question for you

Starting point is 00:51:55 mount rushmore of management teams that frustrate you the most like a type nope specific ones just specific ones well block um autodesk hard to think of everything that comes to mind probably not spotify although they were for a little bit back in 2021 2022 but i think they've they've learned their lesson they've shown a little bit of aptitude to learning from from shareholders those those two come to mind autodesk electronic arts a little bit yeah yeah they're up for because they say the same thing every quarter and they don't really grow and they're like oh we're investing in this and we're going to grow five percent blah blah blah blah blah but nothing ever changes so they become a bit of a boy who cried wolf yeah it's funny how

Starting point is 00:52:50 you don't when you read conference calls in and out quarter after quarter for ea you get the sense that they're growing like not but then you look back at the financials and they aren't growing and it's like how and it's it's because they're constantly changing the metric that they talk about for growth like okay live services grew uh mobile grew uh booking specifically grew or revenue specifically grew whichever one kind of paints them in the best light and then you just look back and it's been this stagnant business for quite a while um yeah that frustrates me anyone where the ceo has been taking quite a huge chunk of compensation and the true underlying growth of the business hasn't been great that's a frustrating situation autodesk and ea are

Starting point is 00:53:38 definitely up there for me all right we need one more for the mountain rush more we have ea autodesk and what do i say oh block i mean come on dorsey maybe he doesn't frustrate me because he's kind of an enigma he's fun fun to follow but oh gosh if you were a shareholder you'd hate him yeah exactly but exactly yeah he's entertaining for the sole purpose of like he doesn't seem to care what any shareholders think so like from the outside looking in it's kind of funny uh salesforce sure yeah benioff i said a couple podcasts ago walking red flag the other salesforce has got to be there for me because the stock's done well but the management still frustrates you it's not necessarily about the ones that i wouldn't invest in

Starting point is 00:54:28 but Salesforce like they're so frustrating I'd say Axon's that way too great business model great stock performance but man something about that management team kind of irks me I think it was probably a lot of lies plan yeah remember that one yeah yeah they finally remedied that but there was some issues there I got a fun final topic for you I tweeted this out and got a lot of comments. So I always do that as my, you know, that's the criteria on for whether it's whether it's a fun topic for the episode. So this is my take, lukewarm take, not something I'm hard like I have a hard opinion on. Here it is. A dividend plus share repurchase combo is almost always better than only using one capital return strategy. Do you agree or disagree, Ryan? I think

Starting point is 00:55:20 we've talked about the software too yeah i probably agree i remember kind of when i started investing i used to be some share repurchase truther that like in the long run share purchases are better and if you're a long-term investor that's all that matters but it's easier to pull back on a share repurchase authorization than it is on a dividend like if you're constantly paying out a dividend, you get a lot of shareholders that like dividends. And if you turn that off, it's going to hurt the stock price. Whereas if you don't buy quite as much stock in a quarter, people might not notice. So I like having at least some level of a dividend where it forces you to return capital to shareholders. And then the buyback, yeah, having it as an open authorization

Starting point is 00:56:11 allows you to really turn on the capital return strategy when things get rough. So yeah, I agree. Probably some balance of the two is probably best. I think we're even seeing that now with companies that have historically been huge dividend payers. You see it with some of the tobacco companies. They're starting to sprinkle in some buybacks as well. And if they have the cash to do it. I like that strategy. Yeah. So a couple of things, a couple of things. Let me organize my thoughts in my head here. You know, people always have the classic thing and it's right that dividends are not as tax effective, especially, you know, you get that 20% tax rate that matters. But two things I think help with paying a dividend along with

Starting point is 00:56:59 repurchasing stock. One, if you're a buy and hold, never sell, hold a company for the long-term investor, if it never pays out a dividend, you have to make some sell decisions eventually in order to realize gains. But if they pay a growing dividend, that makes it so you don't have to have a tough decision of, okay, when do I time the sell? No, they're going to give me some cash, a growing amount of cash every quarter or every year, however they pay it out. Um, and then the second thing is if you are, for example, these tobacco companies, if you are even declining your share count by two, 3% a year, you don't have to grow your free cashflow that much.

Starting point is 00:57:42 And you can continue to grow that dividend per share payout. And it's, I think it's a much healthier situation for everyone. One, your stock doesn't stay in the gutter, even though your total return might be okay. People do get upset about that. I think it's a much better symbiotic relationship to have that combination. even if it's 80% buyback, 20% dividend, you can grow that dividend per share at a pretty aggressive rate if you're reducing that share count and vice versa, where someone like say Netflix, who hasn't started paying a dividend, they're just buying back stock, I would like them

Starting point is 00:58:11 to do the combination because they're in more of a profit mode right now. They're done with the huge investment, you know, the reinvestment that they've done for many years. This will help like If they started paying a nominal dividend, that can really help for your long-term shareholders that have been with you and it's turned into a hunter-bagger. But how do you make that sell decision? People are usually bad at making sell decisions. I think that dividend payout, I almost think about it like a pressure valve building up and then the dividend per share that they pay and hopefully grow each year can be some

Starting point is 00:58:47 release of that pressure and make it much less stressful for the long-term shareholders because for me i would just like them to pay out the dividends and i don't have to make any more decisions after i buy as long as the business is still performing well yeah the other thing is a div a dividend just makes it a little easier to model because you're like okay here's the cash i could get and they are giving it to me whereas a sherry purchase you kind of have to you really gotta get to know management because if you think they're gonna like say here's what we could give you whoops we made an acquisition with that money instead uh it makes it quite frustrating as a shareholder so i do yeah i'm maybe i'm just becoming like a boomer or something but i feel

Starting point is 00:59:34 myself growing more and more into the dividend camp like yes give me the money now here's some good examples apple for for combos apple american express texas instruments those have been some really strong performers someone says here uh hilton says who i think that's his name yeah says the problem with buybacks is that the company for the most part has to be uh misunderstood or in a disliked industry in order to be truly value creating i think yeah the buybacks can be so helpful in a perfect situation but there has to be a few factors that come into play where if you're yeah, where the buyback, where a sole buyback can be such a huge value creation if you have durable earnings and you're trading at a below 10 times free cash flow, something like that.

Starting point is 01:00:20 But that's not for everyone. And it doesn't happen that much. And the management team has to be good, right? Where a dividend, if you just say, we're going to pay a dividend, we're also going to consistently buy back some stock. But then that's going to allow us through our earnings growth and the share count coming down, we can grow our dividend by 3%, 4%, 5% a year that's very simple for management teams to understand and usually that's better than oh we're going to be great capital allocators and uh you know repurchase at the lows yeah i think it's slight i think it's funny when the when people see okay a company a company initiated a dividend well that's that's the beginning of the end like that there it speaks

Starting point is 01:01:08 to the robustness ratio element that we study with Nick Sleep, where it's at a certain stage of a company's life cycle, after a certain point, you can still reward employees and reward customers with whatever, returning some of the cost advantages that you've got getting to the size you have while returning capital to shareholders. There's just more capital to go around and you don't and you can still grow in the process so no it is not the beginning of the end when a company initiates a dividend in fact i would love to see some studies on that and see what the growth rates have been post dividend initiation because my guess is that companies still grow pretty quickly even after the dividend has been initiated yep we have some comments here

Starting point is 01:01:58 as we're trying to wrap up dividends keep them honest makes sense fan of dividends only because most ceos are not good allocators in a magic world where i have a good allocator give me the buyback all day problem is hard to find and hard to know in advance i've come to distrust acquisitions so much it's almost a sell signal for me when a large one is announced unless there's a very solid case or track record preceding it i think those yeah both those make sense and usually when you have a dividend uh getting paid out and you have a policy of we're going to try to grow it and use say 70 of our earnings or something like that to fuel it well that can keep the management in line yeah you know you might not get the optimized returns and the taxes aren't as good but you'd

Starting point is 01:02:40 rather have that make a giant mistake and blow up all right yeah yeah if like anything else if if buffett is the one allocating capital i think i'd rather him do it than having myself do it which that that is really the dividend like a dividend is more or less who who gets to allocate the capital and hot tag run berkshire should have a dividend no you think yeah yeah you don't think buffett can generate above better returns to you all respect to the goat he's about to pass away within the decades so they need to have they should be yeah so this is a great it's a great example of how it how the pressure valve of expectations are so high and that they should yeah so do you think you can generate a better return with the dividend paid out to you

Starting point is 01:03:38 than ajit jain can generate finding a new insurance deal no i think that's a separate question because the company's too big now they don't need the cash give it back to their shareholders. There's nothing that's going to prevent giving a hundred billion dollars in cash back or whatever it would be over a multi-year period is not going to impact their ability to do anything. Yeah, maybe at this size, I could agree with that. But when people were clamoring for dividends in the early nineties or the late nineties, as I remember it from the shareholder meetings i i think i'd rather have buffett with that money yeah but he is in 93 now ryan he's hitting his prime he's just hitting his stride that japan deal oh it was a once in a lifetime

Starting point is 01:04:28 investment he nailed it no special dividend let's do it uh maybe that could be another that that's a hot take video that i think could do quite well uh maybe we could do that as a everyone uh but thank you everyone for listening we're going to close things out here i know we're a little over an hour apologies for the time change we will try to be as consistent as possible but sometimes we got to change it up and do different times depending on our schedules so we usually try to do this about 9 30 a.m pacific time 10 30 a.m pacific time something along that on thursdays but today we have to do it one day early on wednesday and next week given the fourth the July Independence Day for the United States. We're going to be doing it on a Wednesday as well.

Starting point is 01:05:10 Either way, though, you can listen to the replays on your podcast player of choice that comes out every Sunday or watch the replay on YouTube. You don't have to join us live, but the only thing is you can come on live and ask us any questions and we'll do any sort of topics. We love the audience that joins us and ask some fantastic questions, gives us some ideas and helps us research. As I mentioned, as the hive mind, sometimes for some of these small cap stocks, But let me hit the disclosure. We are not financial advisors. Anything on the show is not formal advice or recommendation. Ryan, I or any podcast guests may hold securities discussed in this podcast. They've held them in the past and may buy, sell or hold them in the future. Thank you everyone again for tuning in and we'll see you next week. Bye.

Chit Chat Stocks - Rivian Stock Gets a Lifeline; Dividends vs. Buybacks; Is Celsius Stock a Buy Today? (CELH, RIVN)

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