Chit Chat Stocks - Small Cap Value Investing: How to Find Long Term Winners For Your Portfolio

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Starting point is 00:01:32 episode. All right, welcome in today. We do not have Ryan on the episode. He is away on a work trip, but we have two fantastic guests, two people that we've had on the show before, two people that have actually worked, well, one that still works at The Motley Fool, one that has worked in the past, and two that cover the similar types of stocks. We have Jim Gillies and Todd Wenning. Jim, you target hidden gems in your hidden gem service for Motley Fool Canada. And Todd, you have just started Flyover Stocks. So I guess maybe a good way to start this interview is we'll go through what both of those research services do, and then we can set up for listeners, okay, what we can learn from this episode. So Todd, what is Flyover Stocks? What

Starting point is 00:02:27 do you target and research with that sub stack? Yeah, thanks so much for having me. The Flyover stock service profiles one company every month. It's not a recommendation service. It's not buy or sell. It's just finding these really interesting companies that don't have enough coverage that aren't getting looked at and typically are based in Midwest or outside of major cities. And so aren't usually on the Wall Street radar, right? And so we want to bring them to light. And they always have, in my opinion, economic moats and great management teams that I think investors should know more about. All right. And Jim, you cover similar stuff at Hidden Gems. What is that service? Well, Hidden Gems Canada is a small cap stock picking service. Todd will remember going

Starting point is 00:03:19 back to our days when we were both at The Motley Fool, he will remember a little service called Paydirt, which very few people actually remember anymore. I was the advisor for that. It was basically small cap stocks usually value priced usually priced for death that if they didn't die they lived um a little little admission here i'm sort of running hidden gems canada kind of as pay dirt to the sequel uh whereas is uh very much the similar um similar strategies of what what todd is talking about here in for flyover we actually have a couple of overlapping stocks but i want it is a formal recommendation service so there is the buy and sells it's one canadian pick a month one u.s pick a month uh and the ongoing coverage that goes along with that but i'm looking

Starting point is 00:04:00 for the misunderstood um the unfairly beaten down the strange stories the special situations i like areas where i get really bored when everyone is chasing you know uh nvidia now nvidia is a fine company right i'm not no no shot at video but you know i'm going to add precisely zero value to any discussion of nvidia but i might add some value to a discussion of insert hidden jam name hidden gems name here so so that's where i'm going i'm i'm a little more i think uh uh eclectic than your average fool um and i'm fine with that so yeah i think the the rule of thumb for both you guys is if they're covering it on cnbc maybe uh i need to search elsewhere but you know you guys have overlapping strategies here and the companies that you're writing about. And I think to kick

Starting point is 00:04:52 off the conversation, a good question is, why? Why do you think there is value in looking at underfollowed companies? Maybe Jim, we'll start with you this time. There's value in following underfollowed companies because they're underfollowed, because they may be too small to attract. Yeah, I know it's a tautology, right? But because they're too small to attract Wall Street's interest, or they're misunderstood, or there's something that has just driven people off or it might just be um we know that spinoffs for example joel greenblatt has talked about spinoffs peter lynch has talked about spinoffs seth clarman about how they are mechanisms for driving in aggregate not everyone i can give you

Starting point is 00:05:34 some ones that have just been terrible uh but in aggregate spinoffs drive excess profits at least in the early going and then if you've also freed a great management team to steal from todd there a minute ago if you freed a great management team with an economic moat from a larger entity you know that can be beautiful right but it's it's it's looking for the things that are off other people's radar because you can generally get it at a better price better valuation you can see what's going on and then also you get the underfollow tends to also be not one-to-one but correlated with smaller and that again is you know if you're if you're running a 25 billion hedge fund, and we're talking about a $200 million market cap company, I mean, how much can you buy

Starting point is 00:06:18 to move the needle at your fund? So you're probably going to avoid it. And that's for individual investors, for small cap investors, that's gravy. And Todd? Yeah, think about what Bill Miller has said. I believe it was Bill Miller who said this in the past, that you have three opportunities to outperform. One's informational, one's analytical, and one's behavioral. And I would say for most large cap, well-covered companies, the only opportunity you have is behavioral. There's some situations where maybe you understand the large cap company better than some of the analysts. So for example, Costco, you may have had a unique perspective on it that wasn't well understood by the street. But most of the time,

Starting point is 00:07:04 I think the story is pretty well known. With smaller companies that are underfollowed, it's just not enough people have turned the stone in their hand, right? And done a look at it and try to figure out what exactly does this company do? Are they doing something different? Like we, for example, looked at a company, I keep saying we, but we looked at a company called Hawkins, one analyst on the sales side, and is doing this really interesting business with water treatment services. And they have this great operating model where they are investing heavily in it. And it's this hub and spoke model. And it's just not really in the street. I mean, there's no one doing research on Hawkins right now besides one person. It's not a major brokerage firm.

Starting point is 00:07:47 So those are sort of situations that I just light up over because those are situations that have not been talked about enough in the market and could really benefit investors, especially if there's a pullback in the stock or if they get a good, better understanding of what the stock should be trading for and what a good range is and try to find if there's a pullback in them, maybe take a starter position, learn more about them. And do you guys, so for, I think a lot of individual investors, they get in trouble with, at least at the start, and especially over the last five to 10 years with going heavy into just, you know, 100% growth stocks, a lot of stuff correlated to the same, you

Starting point is 00:08:29 know nasdaq 100 technology basket all the stuff that's talked about on cnbc do you do you guys think about you know having these type of stocks as maybe uncorrelated to the broader market movement something that's not going to be super extremely volatile or maybe they will be volatile i'm not sure is that part of the thinking when it goes into making these or uh you know adding any stocks to uh your research service um either either either you can go i'll take i'll take a swing um the amount of time i spend worrying about correlating with broader market or volatility is um precisely zero it's just not something that i particularly care about um that may or may not be a good thing i'm not saying that's the right way to be it's just something that i've never

Starting point is 00:09:20 it doesn't bother me but i'm also um i'm unafraid of looking stupid for a while um you know uh i i know what my own track record is a lot of it is public for various tool services um and believe me i have i i have had great opportunity to look stupid on on names for for for lengthy periods of time but my overall record's pretty good um and and so it it doesn't bother me as long as i am getting to really touch down with management that's another thing about a lot of the small cap stuff you can you can get management on the horn pretty easily if you have a question uh and in fact sometimes they may call you as well now that's that could be a dangerous sign because they might be trying to spit a story out there and i've got examples of that too uh

Starting point is 00:10:09 but but you you you have that ability to to get in at the business level and say okay uh this retail concept they seem to be stumbling how many stores are they doing should they be shutting down stores should they really be investing in new stores because the roic might not be there you could start uh getting i think a little bit um more granular that way maybe that falls into todd's behavioral uh advantage that you know that i'm just you know or i'm yeah and i know uh yeah when we get either a dm on twitter or an email from a company asking for them to either have their ceo or CFO on or for us to promote their stock, that's all right. Well, maybe we should check that one off the list.

Starting point is 00:10:48 But Todd, any thoughts on that before we get into the next topic here? Be you, be you. Sound the alarms. We have a new sponsor alert. That's firmreturns.com. It's a stock research blog. Our friend runs that and it covers companies from all around the globe, but it leans really more towards the UK as that's his home market

Starting point is 00:11:11 and it gives him easier access to management and he provides ongoing updates on the companies that he's invested in as well as an archive of longer form write-ups that you can access all for free there is a paid tier but there is tons of free content out there and these reports are very thorough to give you an example of just how thorough some of these are at one point he was digging into a company's account and for one company he wrote up recently he actually managed to find a material misstatement that had been missed by the auditors and management reached out and confirmed the error to him. And these are companies of all different sizes from all different sectors and all different markets around the globe, but with a focus on his home market in

Starting point is 00:11:51 the United Kingdom. If you want to check this out, firmreturns.com, like I said, tons of free content on the website. If you're interested in one of the paid plans, you can go to firmreturns.com slash chitchat. That's firmreturns.com slash chitchat, and it'll get you 20% off. well yeah i certainly agree that you have a lot more access to management as a small investor so you know just having being able to ask a question like if you try to do that with starbucks you're probably not going to get an answer or you'll get the you know the very lowest analyst or the investor relations analyst uh you know sending you a quick email back you're not going to get a lot of in-depth time, especially one in the C-suite. So having, it can help you certainly

Starting point is 00:12:36 from your education perspective as well. If you're a younger investor, just getting access to anyone on the C-suite is a great opportunity. I'm a teacher at University of Dayton and I help the students and we just started talking with management teams. That's one thing that I've been trying to start with. And we had one that came through an alumni network and I thought, we should be doing this more often. We should be talking with management teams because it's a great education opportunity for them to speak with someone who's in charge or at least in an area of influence in a major public company. No, yeah, that makes sense. I totally agree. Now, let's go into the actual business qualities you guys are looking for, because when I look at

Starting point is 00:13:23 or when anyone looks at all the companies out there that are not $10, $100 billion market cap, well, especially if you go international, there are thousands upon thousands of ones that an investor could look at. And obviously, you can't buy 1,000 stocks in your portfolio that would be certifiably insane. What are the qualities that you guys are looking for that, and this could be, you can toss in any historical example that comes to mind here, where a flyover slash hidden gem you know is set up to put up strong returns over the long haul what are some of the key tenants to a good flyover stock maybe todd you can start here yeah yeah i think so what really got me hooked on this idea was tractor supply that's sort of my origin story

Starting point is 00:14:12 with coming around to this this flyover stock kind of my mindset and so back in my motley fool days i'm working on motley fool pro with with our mutual friend jeff jeff fisher we uh we looked at tractor supply this was around the fall of 2008 and i started doing these screens and things were starting to sell off and so i'm looking through and keep seeing this name tractor supply pop up on all of my screen all my quality screens i'm like this is like a farming equipment company i'm not interested in that but it kept popping up enough where i started okay i'm gonna take a closer look and i started digging in i thought wow this is really neat this is a sort of hobby farming retail concept that is based in Tennessee, well outside of Wall Street's formal routine.

Starting point is 00:14:55 And we had an opportunity to buy it in early March 2009. And we waited and the stock just ramped up. We completely lost it. But that to me just was a great example of what a flyer stock can be, where you have this tremendous retail concept or just a general franchise in general. but that's not well understood that's not on the regular wall street beat that can continue to grow and all of a sudden everyone takes notice going wow they're growing 10 units every single year let's take a look at this and then eventually it gets large enough where the institutions begins to start buying it and then it can really ramp up and i think tractor supply i don't even know how how much it's up since march 2009 but thousands percent maybe my guess i mean it's just been a

Starting point is 00:15:39 huge winner and jack henry is another example of that just based in monette missouri population 10 000 one of the best banking software companies in the country and again one of those best performing companies over the last 25 30 years so it's funny that it's funny that todd brings up tractor supply um i mentioned paydirt earlier right about the same time that todd was looking Yeah, Paydirt ran until, it's very short life, you know, pour one out for Paydirt. Turns out, you know, when you're trying to sell small cap value during a global financial crisis, it's real hard to sell. It's because people, you know, won't buy Starbucks at $4 or Home Depot at $19. They're not going to buy your price for death crap.

Starting point is 00:16:25 But we actually put Tractor Supply on our scorecard, sort of. We put it on the Paydirt scorecard. But as a watch list company, we had the ability to do watch list only, meaning we would come back to it later. We never got the chance to, of course, because the service was closed down. But Tractor Supply, I mean, I'm just going to go all fanboy on Tractor Supply for a moment. This is Todd's fault. But about a year ago, about a year ago in Hidden Gems Canada, I recommended Boot Barn, which was a company I'd never heard of until another Fool analyst named Emily Flippen brought it up.

Starting point is 00:17:01 and I was captivated by the idea of, first of all, the name is absurd. I have a weakness for absurd names, okay? Anyone remember Dress Barn? Yeah. Remember that? No. It was, I think they went for a scene of retail

Starting point is 00:17:17 and they put Justice and Maurice's and Dress Barn and a couple other concepts together and levered it up and ran it into the ground and destroyed generational wealth. So it's not a real, it's a cautionary tale. But Dress Barn is a publicly traded individual company, was a fantastic name. And I'm just like, you know, what do you say to your wife? Hey, honey, I'm going to take you out, buy you something nice. Let's go to Dress Barn. How are you not sleeping on the couch for the next week? Right. But anyway, but no, Tractor Supply Company, I had the opportunity when I was recommending Boot Barn to revisit some of my notes and stuff on Tractor Supply and going back to the time that Todd's talking about it and also updating the spreadsheet.

Starting point is 00:17:55 and it just made me weep because as this is every year ago Todd but it's probably more recent than our than your your pro stuff and yeah you know when we were back both were going well you decided Jeff um the 20 as of a year ago the 25 year return for annualized return for tractor supply company this niche hobby farmer you know fly over stock I love that term 25.1 percent annualized 25.8 percent annualized if you want to have dividend reinvestment which is really just you know the the cherry on the sunday um absolutely murdered the market return with the magnificent seven or the monomonas whatever we're calling them just and again this is this is a company that sells chicken coop wire right and i guess the question i have and a lot of listeners might have is

Starting point is 00:18:47 what are the specific qualities that tractor supply had is it that you know they're based in tennessee it's something that is not going to be popular in new york city or san francisco where you know and maybe toronto too where all the analysts are like what is that i don't know i never interacted this is that some of the qualities that can help you know lead to long-term just crushing the market but no one really cares because i think it's just a fascinating dichotomy where you have this stock that's doing so well the market cap now is sizable 27 billion dollars and i guess he does get some coverage among the the bigger financial news places now but what are yeah what why why do you think tractor supply you know as as you mentioned jim just

Starting point is 00:19:40 absolutely done so well over the long term, but no one really seems to care. Because I think that's where a listener can look and say, hey, I can look for these qualities in maybe another company down the line. Todd, do you want to start? Yeah, Jim, go ahead. Okay, I'll take it. Todd might remember his notes better because I'm just reading what I wrote a year ago, which wasn't focusing on the the tactics so much but it's it's cash flows reasonable valuation and and something that we all give lip service to but i i often wonder that how many people are actually doing the work like okay it's not enough just to generate free cash flow okay you have to have management with uh with an with a talent and an eye and an ability to reinvest that free cash flow

Starting point is 00:20:26 for the betterment of shareholders or to otherwise allocate it like maybe uh i i know we've talked about windmark before brett on on on this show uh one of my all-time favorite companies long-term hold their fantastic management they do not have the ability to reinvest their cash flows into the business they don't okay so what do they do with it well they either pay back debt when they have some or they will buy back stock but i'm talking to the ceo he's flat out said to me we know what our stock is worth or we think it's worth we won't buy above a certain price like you know he's very direct and he won't tell me the price of course and he shouldn't but like you know just the fact that a management team values their stock and does the buffett thing of we will buy back when x we

Starting point is 00:21:11 will not buy back when y so what they do with all their excess capital is they pay it out as a very nice regular dividend and a very generous special dividend quite often when they have the excess cash and and so with tractor supply it's cash flows and the ability to open new stores with returns on invested capital that are far in excess of their cost of capital uh and just basically the ability to sit back and not do much of anything i'm not a big growth guy i growth is an input to valuation in my book i'm very uh on the spectrum of valuation doesn't matter to valuations the only thing that matters i'm pretty close to this end um and so i'm i'm a sticker for valuation so i when i when i screen for things like this and and like todd i've had tractor supply pop up but

Starting point is 00:21:56 not so much in my small cap screens anymore because you know size um but you know you do think like i'm i'm just looking for like moderate growth if you're over five percent i'll look at you uh you know with uh slowly increasing margins uh reasonable leverage good cash flow and then you start doing some once you have everything you can start doing your work of how have they done their capital allocation work and that it's amazing how many great opportunities a very simple screen comes up todd yeah there was tractor supply from a qualitative perspective had a couple of things going for it that i don't think were well understood or at least well enough appreciated by the market when

Starting point is 00:22:37 it was growing one was that it had a fantastic corporate culture and there's a book out that was written by the company i believe but just talking going back through the history and there was a an article by this but the ceo how lawton where he talks about how he talked to the previous three ceos of tractor supply and all of them just wanted to talk about the culture that's what it was all about and it's this sort of kind of down home you know be be really nice to your customers be there for them when when things are rough for them and they'll they'll pay you back many times over the over the course and so like they want to know your name the next time you come in the store, not the first time, but second time, just things like that, where, you know, this retail

Starting point is 00:23:22 experience. The other thing is that I think a lot of investors probably thought, well, Home Depot is just going to do this. Well, Home Depot tried it, but people weren't going to Home Depot to get chicken coop, right? Or chicken coop wire, right? They were going to get their hardware and, you know, things like that. And it wasn't really what they were after. So what really separates tractor supply is their is their livestock feed and animal feed so these are for again hobby farmers this is not large-scale corporate farming this is a guy with a couple acres and doing some homesteading and you need some need some stuff for the chicken coop and for the garden uh and for for the lawn and but they also have i think that there's some crazy

Starting point is 00:24:03 numbers out there and jim might know them up top of his head but you know i think like half of their customers have horses or something like that yeah that was the tie-in with the boot barn actually yeah yeah so they all have something that you know is not your common consumer right that people aren't really thinking about and so there was actually best moat case i've ever seen for tractor supply was by the ftc so when when the when tractor supply tried to buy or shell i think A couple of years ago, the FTC sued Tractor Supply for antitrust. And you think, for a retailer? There's no possible way that there would be antitrust in retail.

Starting point is 00:24:46 But just the issue is with e-commerce, it's not economical for Amazon to ship this heavy, low-value material to people the next day. So if you need to feed your dog or feed your chickens or whatever, you know, those bags of feed are $30 or you might need six or eight bags of them. And there's no way that Amazon or Walmart price effectively send these things out to rural areas. But Tractor Supply is spread out enough now. They have enough retail locations where they're the only game in town. And so it's crazy that they had to spin off or divest some of the stores they acquired because you would think retail is just one next door and you can compete it away. But there's clearly something that Tractor Supply is doing that is hard to replicate by anybody else. That was an example of how a company that's in a flyover country can create a moat and grow very rapidly by doing things that nobody else seems to do by specializing in niche and really executing very well by having a great corporate culture.

Starting point is 00:25:50 okay and i want to do another example this is one that we've talked about before i believe uh one of them's headquartered in cincinnati where todd you are located so i think that'll be a fun one as well it's med pace uh just for some numbers here it has a 1300 well when i put the notes in total return of uh 1300 versus the s&p 500 at just 171 since they've been public and i'm guessing you know i never heard of this company and i'm guessing a lot of the listeners haven't heard of them why is that you know why the return's been so good but no one actually talks about it todd maybe you can start here todd should go first because i'm going to go on for a long time on this one yeah med pace i came around to too late so jim knows them a lot

Starting point is 00:26:43 better than me, but they are actually, they're based in Madisonville here in Cincinnati. And I went to a CFA Institute Society meeting about six or seven years ago now, and went to this really nice hotel. And it's kind of right next to this office park. And I was like, why is this nice hotel here? And someone at the meeting said, you know, it's MedPace's CEO. He built this because, so they do clinical research outsourcing. And so these are small and midsize biotech companies that need someone to take their molecule through the clinical research process, and they don't have the resources to do it internally, so they outsource it to MedPace. There's a couple different competitors there, but MedPace specializes in the small and medium-sized

Starting point is 00:27:28 biotechs. When these executives are flying into Cincinnati, Madisonville is about 10 miles from downtown, and there weren't many nice hotels out there. The guy, August Trundle, built this hotel, turned it from a warehouse into a luxury hotel. And for some reason, I never clicked my mind, pay attention to this because this is interesting. And so every time I turn around, I drive through Madisonville and the place is just growing, growing, growing, growing. They're just adding more jobs and reinvesting in the community and just doing a really nice job. So I started doing some research into it. And I thought, well, I don't really understand biotech. I'm just going to take a pass on it, put in a too hard pile. But once I started digging into it, it's not

Starting point is 00:28:06 terribly difficult to understand how their business works. And so August Trundle, he just seems like a guy from everything I've read that who has just like a nose for value. He's got things, if you look at party transactions and things, what he's doing, he's buying back stock at really attractive prices. He's got these different operations where he owns the land that they're building on. So he's got all these different things and he's thinking about how do I make value out of the capital that I have? And so the company's buying back stock at really opportunistic prices he's buying back stock opportunistic prices and you start maybe i should start paying attention to this a little bit more and so i've had some time to speak with

Starting point is 00:28:44 with them i haven't talked with the ceo but i've talked with the cfo and um just a really impressive company and and there are very few companies out there who i i say what i the phrase i use is get it and med pace gets it in terms of capital allocation and yeah it's very very impressive company. 100%. There seems to be a theme here, an overlapping theme that management's understanding capital allocation. I was going to ask this later, but I want to ask it now since you guys have mentioned it multiple times. With these undervalued followed stocks, it seems like the valuations are always sometimes permanently depressed because it doesn't get going through the hype cycle. Is a management team taking advantage of that very important to you guys

Starting point is 00:29:29 when you know finding stuff that passes the sniff test it's an added bonus for me okay that way like if you pass the sniff test maybe i'll recommend or own you regardless but if you then demonstrate management gets it um which i think is you know we're going to say about 17 times i think for the rest of the show because um that is a bonus yeah um todd's given a good overview of what med pace is i will say they do more than just the small biotech they do they do medical devices they they do see our contract research for large pharma companies as well like they they but they do they they are very much specializing as well in in the small as well what is really interesting to me and and yeah so med pace is a two-time hidden gem rec

Starting point is 00:30:19 uh i think recommended in march 2020 so that was good timing um you know because we got it for sub seventy dollars uh and then um the second time is a bit different it's going to tie into the capital allocation so i'll come back to that but one of the things when i found med pace i'd never heard of it and i start reading through the proxy statement i start seeing they have the hotel there which todd is talking about um they have uh uh you know dr trundle owns an air uh uh you know kind of like an air charter uh travel services company private aviation company we'll call it um you know guess guess who handles the travel for for med pays um you know there's uh you know even like the buildings and stuff as todd says you know the the lease buildings are at least from

Starting point is 00:31:04 trundle's family and like some people might get turned off by that because there's you know trundle's got multiple ways to double dip into the thing but then you actually watch the company as well and how he handles his money and as todd says dr trundle very much has a nose for for value you start to realize yeah he's not taking advantage of the company and i've got two examples i want to i want to throw out here um this is from the 2018 proxy statement a year where operating income again remember dr august trundle is the founder of the company he is the founder and ceo company was founded in 1992 he's the only ceo the company has ever had okay through small startup private got passed around through private equity a bunch of times

Starting point is 00:31:51 ipo in 2016 i believe um been public ever since they bought out you know when they came public they still had some private equity overhang they bought those guys out then did nothing with capital allocation for a few years let the cash pile up on the balance sheet until we start getting into 2020 but in in the 2018 proxy so he's the largest shareholder dr trundle he's the ceo and founder. This is a man who, if he wanted to, could put his thumb on the scale. From the 2018 proxy statement, where operating income grew 56%, earnings per share doubled, and the company produced $139 million in free cash flow. In the proxy statement, always read your proxy statement, kids, stated that Dr. Trundle was, quote,

Starting point is 00:32:40 eligible for a discretionary bonus for attainment of individual and company performance goals, end quote. This statement is immediately followed in the proxy by the terse comment, quote, for 2018, our board, chaired by Dr. Trundle, our board determined to not provide Mr. Trundle with a cash bonus, end quote. Again, operating earnings up 56%, earnings per share doubled, swimming in cash. What did the man need to do to get a bonus? I do wonder.

Starting point is 00:33:09 But again, then you say, well, he owns a hotel and like, he's fine. Like he's, you know, there's no tag days for August Trundle, right? And another thing that I thought was really interesting when they, when, and again, all of this sets, you know, like, you know, when you're investing, it's almost like long-term relationships. You learn more about the companies. You learn more about the people involved. Sometimes you wish you didn't learn more about the people involved, but, you know, but, but

Starting point is 00:33:37 like you learn more and you see how people act or cpl talk i mean i suppose we call that culture todd certainly has talked about uh you know about the tractor supply story which again like it was always the culture culture culture company ipos in 2016 usually an ipo is either you're raising money for for you know for growth right or it's insiders cashing out very rare is it when the ceo and founder of the company, as he's IPO-ing, buys shares. Yet Dr. Chandler put $20 million of his own money into the IPO at the IPO price. He's already the largest beneficiary of what's going on, but he was a buyer at the IPO, not a seller. I submit to you that's rare. right that's a nice note that's a good indication that he gets it as you guys have been saying and

Starting point is 00:34:35 then further on the subject of getting it i mentioned that med pace is a two-time hidden gem recommendation okay and and todd will remember from you know from the fool days you know like all these frontline services you know it's two picks a month and every six months you do a review issue where you do a re-recommendation it's scheduled blah blah blah i made med pace my only unscheduled re-recommendation because i'm at the time i think it was august 2022 i'm like this is literally my best idea my review issue is not until december or whatever like do i not go with my best idea and so i said i hope you will indulge me i think we got it on the scorecard a second time at 140 but my my rationale was this and it was almost exclusively on these guys get it because the three

Starting point is 00:35:22 or four quarters prior to that every time they reported perfectly good numbers like they were there's nothing wrong with it the stock would get whaled 15 percent am i i don't get it and then coming into 2022 i mentioned again you know we talked about management's getting it med pace hadn't done anything. They just built their cash on the balance sheet, did nothing with it, did nothing with it. Coming into 2022, they blew the whole thing buying back stock, and they took on some debt to buy back some stock. That can be dangerous if you're a company named Sleep Number. But if it's not Sleep Number, it's a shot at another Midwestern company. Sorry, Sleep Number, but you did it twice. Deep cut. But these guys, they started buying back their

Starting point is 00:36:08 own stock aggressively in the first two quarters of 2022. They bought back 14% of the shares. They exhausted their cash hoard from the previous four years, five years. They took on a bit of debt. By the way, that debt's now gone. They paid it all back, so it's fine. They reduced their share account by 14% in the first two quarters. Third quarter, so starting in July of 2022, Dr. August Trendle, founder and CEO, starts buying back or buying stock for himself. And he put $155 million of his own money into his own stock in less than three months. Again, he's already the largest shareholder. The company has already bought back 14%.

Starting point is 00:36:49 And I'm saying to my team, one of our investment managers, I'm like, they don't ring a bell at the bottom. But sometimes they ring a bell at the bottom. Like, you know, this guy's making a big bet both professionally and personally. And here's the valuation numbers. They look good. like i said the three or four quarters before where they got in wailed every time they reported they it looked fine like they talked a little bit about well you know maybe the request for proposals down a little bit maybe some biotech funding might be down five percent but it's not

Starting point is 00:37:19 filtering like if you read the conference call transcripts everything looked actually good and the stock gets slammed so i re-recommended it in august 2022 and i basically went through the whole valuation argument went through the whole cap location that they get it october 2022 comes along q3 earnings come out stock goes up 38 a day it's like finally the market goes oh yeah there's good stuff happening here and it's it hasn't looked back since like i said i think that was about 135 or 145 i think the second time i think it closed yesterday at 405 or 410 yeah i'm seeing 412 i gotta there you go okay so you know so it's it's you know so if you're in at 70 and you're in at $140,000 and now it's $412,000 in less than four years, barely four years, I guess,

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Starting point is 00:39:32 off any paid plan, go to FinChat.io slash chitchat. That's FinChat.io slash chitchat to get 15% off any paid plan. The link will also be in our show notes. Todd, maybe we can start with you. For me, it's my three key things are part of my philosophy are moat management and price. Those are the three things that have to come together for me to be interested. So if any one of those things doesn't fall into place, I pass on the idea. So if it's just price, I'll keep the name on my watch list. I won't buy it, but I'll be interested and keep it on the watch list.

Starting point is 00:40:36 For me, it really comes down to moat is it has to have a moat. That's the number one thing for me. And so if I can't figure out why this company has a dirt advantage, if I can't put it into one of the five Morningstar buckets or think through what might prevent someone from doing just what this company is doing with a little bit more money, a little more capital, I take a pass on it. Because sometimes you'll see some companies with maybe a narrow moat, but it's kind of temporary based on some secular tailwinds or cyclical tailwinds that they have, but can't really pinpoint what it is that makes them special. Like if they disappeared tomorrow, what would their customers miss? That's a question I was asked. And so sometimes I can't answer that. If it just doesn't strike me as invested in the company, not just financially, but personally, in terms of are they passionate about this? If there's this revolving door of CEOs, CFOs, what I call mercenary executives or, you know, paid managers.

Starting point is 00:41:34 Right. That's why I want to avoid consultant. Yeah. We call them the consultant brands. I want to see people who maybe they're just starting. Maybe they have a small ownership stake. That's not completely disqualifying to me where a management team only owns like 1% of the company collectively or something. That's not terrible for me. I won't pass based on that alone. I'd like to see a little bit more than that. But if it's a new team or a new group coming in, what I'm looking for there is just are they passionate about what they're doing?

Starting point is 00:42:04 Are they looking at their track record? Have they been with a company for a long time? If it's just, if there's a lot of external hires, that's concerning to me because, you know, and that's one of the things with Costco, a new CFO coming in from outside was a little confusing to me, right? Because I like to see companies of great corporate cultures promote from within because you don't have to sell them on the culture, right? So when I see a lot of external hires, that usually strikes me as, you know, something is wrong and the board says we need to bring in some fresh blood to a new perspective on the business. And I should disclose, I'm not sure what your disclosure policies are, but I own Costco and Interactive Supply, my personal accounts. Those are the only two that I've mentioned so far that I own. But so those are the major things that I look for, a moat management perspective.

Starting point is 00:42:48 Price, some of the recommendations, or not recommendations, I shouldn't say that, because the profile of the names I've profiled on Flyover stocks is they're overvalued at the time. And I'm just like, this is a great company to keep on your watch list. I don't own it. I don't think you should own it at this price. It's up to you if you want to, but this is not a great perhaps time to buy it, but it's a great company to know. And so that's sometimes when there is a price issue, you can just keep it on the watch list, but you don't have to buy it. Okay, Jim, anything to add? I love what Todd has said.

Starting point is 00:43:25 I love the concept of moats. I think I'm kind of bad at identifying moats sometimes. So, you know, but, but I aspire, I aspire to be better at identifying moats. Oddly, I don't have a problem buying companies without moats, so we'll call it a cyclical or what have you, like, you know, you know, oil company A's oil is not somehow specially branded better than oil company B's, right? You know, so I'm, I'm, I will play in that pool. um i think that what disqualifies me probably the most or it disqualifies a company for me i should say um is when i i do like reading proxy statements i do like reading i know it's the sickness uh but reading proxy statements reading conference call transcripts and comparing and and and this this is

Starting point is 00:44:18 how i know we're going to have some job security kind of thing right because this is not easily done like the the implications is not easily done throwing it into an ai generator it's like you know but like just matching like has management actions followed what they said they were going to do it sounds simple right but like did did management have they have like i'll give you an example it might not be the um the most popular example but um uh i i know todd knows who sardar big larry is and i i think i and look sardar he's a nice guy i've met him several times um but you know he very famously when he was making an activist campaign to take over steak and shake which then he he was successful and became part of what is now known as big larry holdings um

Starting point is 00:45:00 and it's very important that we have the portrait of big of sardar big larry in the front foyer of every steak and shake out there um but uh too cynical oh sorry um but you know he was very famously talking about uh i'm gonna get a nasty message uh but he was he was very famously talking about you know that that uh his interest in because he he went after western sizzling first and then friendly ice cream and actually acquired western sizzling helped really affect change at friendly ice cream and then went after steak and shake and his whole thing was uh you know to you know to the message to other people you know individual investors who might buy and vote for sardar when the proxy statement came um that you know wanted to make money with you not off of

Starting point is 00:45:41 you okay and then so and he won he won the day at stake and shake and got in became chairman of the board became ceo and then ultimately folded it into the greater big larry holdings empire uh but along the way the um you know all of a sudden the salary went from 200 000 to 900 000 and along the way uh there was a licensing agreement where you know uh you know he they signed with himself about himself for the name big laurie holdings which has no historical name for this very classic flyover company in steak and shake um there's a good book on that selling steak burgers as well which i think is on the shelf behind me somewhere uh just about the the story of steak and shake pre-sartre um you know and and just and and then there was an incentive package that was hedge fund-esque

Starting point is 00:46:29 you know 20 it was very buffett-esque but still was 25 percent of any book value gain above six percent you know and sardar has made millions you know okay that's fine like you know it's he's followed the rules and he owns a good chunk of the shares but in the lion in the lion fund which is part of his whole empire um but i encourage you to look up the performance over the past five and ten years vis-a-vis the market and you know what he did didn't match what he said and i was a steak and shake owner i've owned it in the past i think i've been out since 2014 2013 uh so quite a long time because of that um and some of the names we talked about you know med pace tractor supply you know they got it and you know and i'll say more that sardar got his

Starting point is 00:47:23 um but like and and then as well todd talks about you know about management and do they have a passion for the business um i'm not getting paid to say this right but i i occasionally have i i get to talk to various people various companies um i would i would encourage either of you at some point get brett hefas to see if he'll talk to you uh but brett hefas the ceo of windmark i'm not sure i've heard someone with as much passion for their business recently i mean he's the one that's made the most impression on me and i've talked to him a couple of times uh including uh an episode of another podcast on the motley fool banner from i think last july where he it was a fantastic conversation completely held up by him um you know on motley fool money

Starting point is 00:48:11 but like the business is they're the business of resale they're the parent company of play it sports once upon a child play those closets style encore music around they're they're a franchisor of used goods this is not a business that a lot of people would say you know i'm so excited to own this but i challenge you to listen to that i'm sorry this is bad form challenge you listen to that that podcast from last july if if uh again if you if you can get um brett hafus on the show brett or todd utah like and it's and it's a minnesota-based st paul minnesota so you know there's your flyover country um you know i've not heard someone who is as passionate about a business that i think a lot of people would write off because you know

Starting point is 00:48:57 if Brett's listening he's probably not listening but if Brett's listening sorry Brett you know it's not a sexy business yeah but you will you will talk to him or you will hear him talking and you'll go this guy gets it to use our parlance and I think he's an evangelist for the stock I think he's in for the company I shouldn't say for the stock I don't think he cares about what the stock price does but that guy has a sense of passion and purpose for that business that is i think outstanding to behold okay what are some telltale signs of a dishonest management team because i've just spending some time looking at small and micro caps it seems like and yeah you know there's dishonest dishonest management teams in the large cap and egg cap space as well but

Starting point is 00:49:48 seems like it can be prevalent in the under followed companies it's kind of the downside of looking at something that isn't as heavily covered what are some of the telltale signs that a management team might not be either telling you the truth or misleading you or all that good stuff um jim it seems like you're gonna get me in trouble man yeah maybe yeah uh if we we don't need to use specific examples just if we don't want to i will use a couple of examples i'll leave the ticker out and then i'm hoping todd's going to rescue me um i've already mentioned one with big larry holdings not dishonest but just uh interest disaligned with that of outside shareholders i'm going to put it that way

Starting point is 00:50:34 um i have had again read your proxy statements read your conference call transcripts compare subsequent actions to what they tell you they're going to do um if if you start seeing a pattern where it's consistently they're saying one thing and doing another that's probably not great uh refusal to admit like i think a superpower one of my core philosophies this is a terrible philosophy to have um but one of my core philosophies is that most people will do almost anything they will they will sever familial relationships they will end marriages they will they will torpedo jobs people will do almost anything to avoid admitting they are wrong and so in the spirit of invert always invert i think admitting you're wrong is a superpower

Starting point is 00:51:26 i have had some absolutely amazing investing returns from companies where they say hey we screwed up hey we did this wrong and here's how we're going to do it now i can give you one that was a 60 bagger that it's gone now it was acquired but you know i found it at a dollar 15 us it was it was canadian and us cross-listed i paid the canadian price but you know exchange rates are what they are but it was about a dollar 15 us at the time i found it and it was taken out i think i found it in 05 and it was taken out in 2014 at 61 50 a share and i got interested because the company they had been spending all this money developing a side project i think and then in one quarter it went away they just we we've gassed that project and we're acquiring this other

Starting point is 00:52:20 company that basically does with it so they they made the make buy decision and they said we're going to make it not screw that we're going to buy it we're going to buy competitors basically they said we were wrong what we were doing and i'm like well that's interesting like anytime you pardon me oh it's it would say so so when you know but but companies that can't admit they're wrong that's a warning sign so i can give you a company that uh again i'm going to try to not be specific stay away um but like was in in these two kind of complementary you know i'm going to say subprime finance opportunities areas and they made an acquisition in kind of a one a one alongside side that you know initially looked like okay well they're in they're in sector a and sector b and

Starting point is 00:53:04 sector c is kind of adjacent to that so it seemed like a good expansion so they bought it and then very quickly everything went to hell you know like they had like a like their loss rate was like like you know capital out the door that never comes back because they were in in a subprime lending subprime finance area um their loss rate on this new new division they'd bought was at 50 percent five zero and i don't care what rates you're charging as a subprime user as financier if you are losing 50 cents on every dollar walking out the door that's going to be a disaster and and i had the opportunity to talk to management and they just absolutely refused to acknowledge that there was a problem no and i'm like but i'm like walking them through like i can see you

Starting point is 00:53:48 it's like when my kids were like four years old right and we're playing hide and seek and they're they're under a blanket but the blanket's moving and i'm like i could see i could see what you're doing like just admit you're wrong and then say how you're gonna fix it they wouldn't do it and i was this the other fool analyst who was with me at the time in the room said i thought you were gonna go over the table at them and i'm like i'm just i people don't like to be lied to i hate to be lied to i if you're wrong that's great it's fine but don't lie to my face and and then the pst resistance was you know they had been buying stock back at the previous quarters like 25 or whatever the stock at this point is now eight bucks and they they they'd stopped it so of course

Starting point is 00:54:28 i asked the the ever popular well you liked it at 25 what don't you like it at eight oh well you know and i'm like and then you know but then the ceo said oh but it were undervalued we're undervalued i'm like well how do you determine undervalued because i'm like oh so that that that implies you have a pricing mechanism for your own stock that that somehow triggered at 25 but not at eight and then he goes oh price earnings to growth and which you know we all know is the peg ratio and uh their peg ratio's got some certain flaws and i'm like the ceo of this company that is burning just tell me they make their stock buying their their stock buyback decisions based on the peg ratio that may have been when the other analysts grabbed my forearm

Starting point is 00:55:10 and said don't but you know like that that'll disqualify a company well if if i think you're lying to me, I'm done. I'm done. Because if you're willing to lie to me now, you're willing to lie to me later. And you're willing to lie to everyone else. And so if I think you're lying to me, we're finished. And then the other one was, we've already alluded to it. When management calls you, sometimes can be, okay, you're trying to get a very specific story out there. I'm thinking of one company it was canadian it was cross-listed canada the u.s at the time again not making mention of any names um they had had a really difficult quarter they'd been they'd been cash flow positive before that they turned into surprise cash flow negative thing uh and part of that was

Starting point is 00:56:03 exacerbated they were they were multinational so they were trading in all various countries and uh they were trading i think three they were the stock was trading in three countries but they were they were doing multinational and they had a four million or five million dollar loss on like just someone didn't hedge and the cfo called me personally at home to tell me well the guy who was responsible for that yeah we fired him like you're the cfo aren't you responsible for that like where does the buck stop what what was on harry truman's desk again where does the buck stop i think it should stop with you dude but so again like these these kinds of things when when i when i when i feel i'm being misled or i'm being told a story that might not jive with what i

Starting point is 00:56:50 what i think i'm seeing that's going to get me out and i haven't said cash flows todd no i agree i mean i think it's admitting mistakes is a superpower and one of the reasons it is a superpower is that i think to be an entrepreneur or to be a leader you have to have this almost blind faith and confidence in yourself. And so to admit mistakes is even more challenging when you're the one in charge, because you're supposed to give off this aura of strength and confidence all the time. And I think a lot of, especially founder CEOs who have grown multi-billion dollar businesses, they're not used to hearing they're wrong. Everybody around them is telling them how great they are and their stocks keeps going up and everything. And then as soon

Starting point is 00:57:33 as it doesn't, they go, wait, I'm making a mistake. You're telling me I'm making a mistake. And so I have plenty of stories. I mean, one situation, and I liked how Jim said, once I think you're being unethical, I'm out. Or lying to me, I'm out. We had a situation, I was part of a stock, and we got out for those reasons, and stock went on to multi-bag.

Starting point is 00:57:54 And that's really hard because you think, did I make a mistake in doing that? And the stock has since come back down to earth since then. But sometimes you don't get that positive feedback right away. It can take a long time, And that's one of the troubles of being a long-term investor is the feedback loop is so long. But I agree that you should be able to sleep at night with every single person you're invested behind. And we talked about August Trundle earlier with having a value mindset.

Starting point is 00:58:20 Having a CEO like that is just incredible because you can sleep at night knowing that they're waking up in the morning going, how can I make this business better? And you don't have to do all the legwork yourself. You can outsource it to them. Yeah, Jim, you mentioned or wrote to me in the chat here. you have another example you want to talk on uh i remember it was one that we covered it's kind of a covid story fulgent genetics very would say maybe not a hairy situation but there was a lot of moving parts there so what uh what what what do you have to add to the table with that one well fulgent genetics is one you can go look up in real time and um not going to make me popular for a few

Starting point is 00:59:00 people looking at this one but but fulgins is in this weird spot where the stock today is around 21 or 22 dollars the company has 28 dollars per share in cash on the balance sheet and net cash so ahead of their debt and they are cash flow generative this shouldn't happen right you know this is a situation that should not happen i mean mr efficient market should at least be carrying this at 28 dollars i mean they're they're literally ascribing negative value to to to the business um and part of me wonders why they don't take the company private but you know you can use the company's own cash flows and you know the ceo and founder is still there it's it's got the hallmarks it's got the hallmarks of a lot of

Starting point is 00:59:47 things that you know i think i would look for in hidden gems that i think todd has talked about here and that i know and i know in todd's past work he's also praised um you know it's not not a one percent not a one percent uh insider ownership i think the ceo owns 20 or 25 percent like but and this was a recommendation in my service until i saw what happened and then you know todd you know says to paraphrase what you just said you know i see this i'm out um they uh there was a when they ipo'd in 2016 they took the genetics business public i think it was 2016 they took the genetics business public and they had genetic testing things and then during covid they stood up a covid testing business which just sent them to the moon

Starting point is 01:00:28 and generated all that cash so that's largely gone now but this the the the the core business is still there and it's still growing and it's still you know it's by all accounts doing well um but about a year year and a half ago out of nowhere out of nowhere the company announced They were acquiring Fulgent Pharma, which was a private business with the same name. Kind of curious. I wonder who they were acquiring that business from. Any guesses? Right?

Starting point is 01:00:58 Like if you said the CEO, gold star ahead of the class. They basically bought the stuff they did in IPO. He bought it from himself. and this business allegedly is going to be a cash consumer but it's less than the cash generating from the other part of the business but everything about this screamed self-dealing uh the two there were three members of the board who'd been there it was a very small board anyway there's only five members but there were there were there were three members the ceo and these two other guys who've been there since day one they both resigned one of the guys who also came replaced one of them

Starting point is 01:01:37 he lasted two months and i would again read your proxy statements observe like look for little things because our informational advantage comes from it ain't going to come from reading the same balance sheet and income statement everyone else's right but a little thing like when you have three directors resign in a very short period of time two of which have been there since day one and one of which replaced one of the guys who resigned oh you know read the announcements where they talk about them leaving okay and there's usually a boilerplate thing of some kind of you know um their resignation was not due to any disagreement with the company on matters blah blah blah you know very boilerplate crap right well the third one of those director resignations all of these

Starting point is 01:02:21 happened before this little you know self-dealing deal was announced the third guy the first two guys got that boilerplate the third guy didn't i wonder why i'm just just making an uh it's an implication she's making an inference right but it looked like self-dealing there there's a bunch of other stuff that's going on there where the ceo is you know giving himself multiple one-time exemptions yes i know multiple one-time exemptions doesn't really sounds a little orwellian um you know from the the hedging and pledging so he can like you know sell his stock on a prepaid forward get the money but he gets to keep voting them and on and i just said you know what there's a lot going on here and i think i when i wrote the cell rec i think i even said look i'm probably gonna

Starting point is 01:03:06 look stupid here but i don't trust these guys anymore here's why i don't trust these guys anymore i've given you a taste of it i'm out and i think that's a good example like once you're you know and it and it made money for for gems members but what i thought was interesting i think we sold it at 36 and again today so i at the time i was like i'm selling at 36 when they have 28 or 29 dollars a share in cash like i'm gonna look dumb but i don't trust these guys what i wasn't expecting was the stock to fall 30 40 percent down to 21 or 22 and i'm like okay clearly the market i think is agreeing with me at this point if the market is saying yeah there's something wrong here okay we've gone kind of into the nitty-gritty details as

Starting point is 01:03:53 we close in on an hour here i want to go back up to the high level stuff what i think a good way for the listeners to maybe get their dip their toe into looking at you know small cap value flyover stocks hidden gems is to understand maybe what sectors to go after because i know that again we've harped on this time and time again you know the stuff that's covered on cnbc might be nvidia magnificent seven palantir all those stuff that a lot of people are reading about a lot of people are buying but there's thousands of other companies that that's no one's covering and it might be overwhelming at the start to say okay well i have this giant list where should i go and i think i'm curious what sectors come to mind when i ask what's a what's a flyover stock industrials

Starting point is 01:04:47 chemicals i don't know anything anything todd maybe you go first you know i get my ideas from a lot of different sources it's not just screening you know i have a subscription to local business journals you can buy access to nationwide local business journals and once in a while just flip through them and look at the front pages for each city and you'll see something like company x is adding 3 000 jobs to the local area let's take a look right that won't show up in the wall street journal, but it'll show up in this local business journal, or you know, the Omaha journal, because that's impactful. And when a company is adding 3000 jobs, usually means they expect

Starting point is 01:05:26 to grow. And so that's, that's something I start to look at. And so sometimes things come from screens, sometimes things come from just word of mouth, or something I'll read and I'll do work on one company and see if they have this competitor that's doing something interesting and dig into them. And from in terms sectors, most of the companies that I find tend to be, I'd say industrial tends to be the common, the most frequent that you'll see in the Midwest. Naturally so. I mean, that's logistics and manufacturing. It's kind of the heart of the country in terms of that. So you're going to find

Starting point is 01:06:04 a lot more of that. So to be careful with those, you have to understand, you have to have a good feeling for what mid-cycle earnings look like. If you're going to invest in a company that has cyclical demand, either for their business or their customer's business, you have to understand what mid-cycle earnings looks like before you can comfortably invest. Consumer, sometimes you'll find something like Windmark or Tractor Supply. That'll pop up once in a while. And those are great because they're growing store count very rapidly, but it's not on the coast yet. And so the analysts aren't seeing it they don't they can maybe not relate to it like boot barn i don't know enough about boot barn but i've heard good things about it so i'll take a look at that one too

Starting point is 01:06:46 um but really there's anything it's just maybe not as as much in certain areas so there are technology companies in the midwest and outside major cities there are banking companies outside major cities there are software companies like med pace is a health care company based in cincinnati and they've got operations all over the world so you can find things by you know the sector as i would say it's probably weighted towards industrials or industrial services but there's you can find just about anything if you keep looking jim i mean i've got a lot of i got a lot of thoughts uh about i i like to throw a really wide net i i and again i mean if you're looking for people who well first of all if people want

Starting point is 01:07:31 to find flyover stocks or hidden gems uh you know but may i suggest subscribing to a flyover stocks substack or a hidden gems canada service i'm just you know we'll find them for you um but you know i'd like to do a lot of screening uh i like what todd said earlier i'm going to paraphrase what you said a little bit but um you know you you're not you're not a recommendation service you're finding businesses that hey this looks interesting educate yourself now so when it you know when the when the price is right you can maybe jump in i love that philosophy there is there are stocks that i found 15 years ago that i've recommended in the last year but i've just kind of watched them and you know watch how they grow up watch what they do uh yeah i may or may not take a

Starting point is 01:08:15 small starter position i think those are those are important just to you know so you know like we're talking 0.1 percent of your portfolio but just like okay it forces me to keep watching this and then you go back six months later like why do i own this again what the hell but that's maybe that's just me um but you know like i like some very basic screening um you know which which there are tools out there you can search around for tools but like one of the screens i do is i just do a i do a size screen you know like then again because i'm searching for small so it's generally you know under four billion dollars maybe on above 250 million uh and i do very basic financial screens right like uh has to be cash flow positive on an operating

Starting point is 01:08:56 basis okay because funny thing is um in the spirit of admitting you're wrong as a superpower my two worst recommendations in hidden gems canada okay both down 90 plus percent like just i did a terrible job with these um and i all i can do is say i'm sorry and what and tell you what i'm going to learn from my mistakes. Both were cashflow negative. It doesn't mean that every cashflow negative, it doesn't mean a company can't have a cashflow negative quarter, but like, you know, cashflow negativity blows up on you if you're persistently cashflow negative, you know, which, you know, think about a few of the names that IPO'd in the 2020, 2021 mania and look at their cashflow statements. They might get a lot of play on CNBC, but I ain't going to look at them.

Starting point is 01:09:48 So basic cash flow. And then I like to say, okay, does my – so positive cash flow, positive free cash flow. Very simple, very simple, you know, cash operations, less CapEx. Is it greater than 10%? Is cash flow for operations greater than net income, which suggests a higher quality of earnings? What's their leverage look like? Want to keep the leverage below a certain level. And then just like I said, I'm not enamored of super, super, super rapid growth.

Starting point is 01:10:18 I don't care, frankly. I love companies that are growing 5% to 7% because people discount them. And if it's run by someone who gets it, to go back to our theme, you know, 5% to 7% top line growth might end up being, you know, 10% to 12% operating profit growth may end up being 13% to 15% earnings per share growth because they've done things there. but so that you know i i would urge people if you have an interest in this kind of stuff to get comfortable with like those types of little screening and then you know and then yeah look outside the areas where people are um really excited like i'm i'm gonna give todd a flyover stock here if unless it's one he's probably already knows it but if you don't know it i'll throw one out here have you ever looked at cas information systems

Starting point is 01:11:11 i have not so they are a payment and information processing uh company so you know a little bit something sexy right right we like payments companies we like we like uh you know processing companies but like they're out of st louis missouri um they've got a bank stuck on but but what their payments and logistics are it's it's for the trucking industry it's very mundane their bank is very mundane and and their banking clients and this is again like you know i always like absurd stories because you can make money in absurd stories um their their their their niches are just run-of-the-mill banking in in st louis and their home turf so very localized banking uh the second is they are the franchising partner for mcdonald's

Starting point is 01:11:58 so that helps set you up and then the third and this is 40 percent of their lending and it's a kind of a crazy again it's a kind of it's a stock that very few people have heard of but no one follows it 40 percent of their lending is to church and church related mortgages and construction okay um and i don't care what your religious affiliation may or may not be i think we can all agree that no one is building churches on spec in order to flip them right like i think that's probably going to be reasonable lending so you know it's just like you find these stories and and and and the last point i would say is just immerse yourself in the story unless you find something that makes you go i'm out but like you know i i i think we often have a little too

Starting point is 01:12:45 much ascribed to what we do or at least what i do um i can summarize most of what i do by saying i read. I'm done. Like I'm, I'm, I'm chasing the story. And I think I'm inferring from what Todd said earlier, you know, getting local business journals, you know, what are you doing? You're reading about things that other people, it's not making the wall street. It's not making the Silicon Valley. And I think that's an advantage. All right. Let's hit a wrap up question. Kind of a quick closing one, two-parter for each of you guys. I'd say, what's one thing you want listeners to take away from and then to add on. Where can any listeners find your work, Todd? Let's start with you. Sure. You can find my work at flyoverstocks.com on Substack. Follow me on

Starting point is 01:13:30 Twitter at Todd Wenning. I would say what I would ask you to do if you're interested in sort of flyover stocks or hidden gems is just to start turning over rocks. That's the best thing you can possibly do. If you're just starting out as an investor, read as many annual reports as get your hands on um read the proxy statements try to develop some pattern recognition because i think that's really important for small caps in particular because once you start identifying certain traits of management teams or companies that are that are successful and again you can go back to history so you can read about tractor supply you can read about jacket start getting those pattern recognition skills in place and then see where it takes you but it's

Starting point is 01:14:10 just it requires a little bit more work than the large cap space because not as much analysis analysis is being done for you. But I find that most interesting as an investor personally. All right, Jim. I'm going to largely echo what Todd said. Read, read broadly, get interested. There's going to be no substitute for passion. And bluntly, if you look, if you don't have passion for finding your own stocks, look, dollar cost averaging and index funds is a perfectly acceptable way to probably beat a lot of active investors bluntly um but you know i i i you can find me at uh fool canada at hidden gems canada if anyone wants i'm gonna do a shameless plug sorry uh but you know you can feel free to send me an email at uh at j gillies at fool.com and i'll

Starting point is 01:15:00 send you a new member pricing link if you want to kick the tires um and i'm also on twitter at at Jim P. Gillies, because apparently I wasn't fast enough to get my name without the middle initial. But what I would hope that listeners are going to take away from here is the passion for doing this that I have, that I certainly know Todd has, because we've known each other for a while. And just, I love the intellectual challenge of finding a company, and especially because I work for a larger organization that's got you know however many services the motley fool now has um you know catering to all these different you know and and so we will for our compliance stuff we'll put in a ticker you know you'll have to reserve it so no one in the company can trade

Starting point is 01:15:46 on it and blah blah blah uh and that's and that's good and wonderful but i've had a number of times where i put the ticker in and it's not in the system because no one at the company has ever looked at the company before you can't do that with apple you can't do that with nvidia you might be able to do it with med pace or cas information systems or windmark right um you know where and and when you when you find these things and you find them for a number a number of times you find them over a number of years and you see them clocking 15 20 25 annualized returns from wherever you started looking at them especially like i mentioned you know with with tractor supply going back to when todd was looking at it and when i was stupidly just putting it as a watchlist

Starting point is 01:16:30 company cheated myself out of 25 annual gains you know like uh so it's just you know what read widely be curious turnover rocks as todd says think long term and have fun with it and if you're not and if you don't want to have fun with it again if you think of it as work there's nothing wrong with dollar cost averaging into indexes all right that's a great way to wrap for anyone interested there will be the links to both of these places directly in the show notes to make it easy for anyone that really wants to check it out right now. But let me hit the disclosure. We are not financial advisors. Anything we say 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

Starting point is 01:17:19 in the past and may buy, sell, or hold them in the future. Thank you, Jim and Todd, for joining the show today, and we'll see you next time. okay when i sell my business i want the best tax and investment advice i want to help my kids and i want to give back to the community oh then it's the vacation of a lifetime i wonder if my head of office has a forever setting an ig private wealth advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivateWealth.com.

Chit Chat Stocks - Small Cap Value Investing: How to Find Long Term Winners For Your Portfolio

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