Chit Chat Stocks - The New Nifty Fifty; Texas Instruments Activist; Jaime Dimon "No Buybacks" (COST, CMG, JPM, CHWY)

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. We do this every week live on YouTube at 9.30 a.m. Pacific time, 12.30 Eastern time. And if you want to ask questions, if you want to get into the comment section and ask us anything, you can do that on YouTube just by

Starting point is 00:00:59 looking up chitchat stocks. If not, if you're listening to this podcast, then feel free to do that as well. We've got plenty of good topics. We talk all things financial news on this show, and there is plenty to talk about this week. I think maybe the headline here, is this the return of the nifty 50 for all you market historians that remember the – it was like 50 – I can't remember the actual – if it was like the 50 largest stocks, but basically everyone thought they were these unbreakable stocks in the early 70s that kind of traded sideways for 20 years and didn't really work out so well. So we're concerned that maybe we're in that situation again. And Brett's going to give a little piece on that. We've also got some other

Starting point is 00:01:43 news. Jamie Dimon is not buying back stock. He made that very clear. Elliott Management, our favorite activists, have wrote a nice little letter to Texas Instruments. And then we've got a bunch of other topics as well so we will get to those i guess brett how are you doing this morning what is your topic you're most looking forward to i'm most looking forward to the nifty 50 conversation i think that's going to be fun there's i think there's two sides of you know the people that say buy quality at any price and i know a lot of them do consider valuation into play there but at some point you know a stock no matter how good it is or excuse me a company no matter how good it is, the stock gets too expensive to buy. So I think that discussion

Starting point is 00:02:25 will be good. And it doesn't hurt that I get to write some nice Motley Fool clickbait headlines around this. Costco, Chipotle, here's some history lesson investors need to know. And hopefully we get some nice clicks there. Yeah. It's old reliable there. I am kind of curious about the Nifty 50 and whether or not we... It feels like there are some similarities to today where I think you could call it like the compounder bro bubble. I think it's maybe what someone referred to it as, which seems like an apt description because some of these companies, they feel bulletproof, but the valuations have certainly got extreme. Before we get to that, though, I want to talk about our friends, public chit-chat listeners. I'm going to let you in on

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Starting point is 00:03:55 Check it out for yourself and start saving on your options trades at public.com. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description, US members only. Let's talk 50, no, nifty 50. and who would you say is the the poster child or the uh the leading stock here of the modern nifty 50 it's got to be costco for me yeah no doubt i knew you were gonna say that i mean that's the one that people have argued about so much people have said at 30 times earnings that it's a little expensive then it gets up to 35 then it gets up to 40 then it gets up to 45 and now we're at 50 times on a price to earnings basis, I believe. And what's interesting is what

Starting point is 00:04:47 happens here is that you can have maybe a logical line of thought where you say, this is going to be a low grower, maybe 10% revenue growth. Margins aren't going to expand that much because of the business model. Yeah, they can raise prices on the membership, but they're not going to do that too much. And you can say, hey, it's not really something I'd want to buy at 35 times earnings. But then you look really dumb as it shoots up to 53 times earnings. So I think when price drives narrative like that, it can be a bit disheartening for someone that's trying to be valuation focused. And this is what happened in the late 60s and early 70s is there were all these articles,

Starting point is 00:05:29 all these funds, everything really just people talking about how the nifty 50 stocks, which McDonald's, American Express, Walmart, Philip Morris, L'Oreal, some stuff like that. Coca-Cola, which a lot of those that have survived to today did actually fine over a multi-decade period, but that's just because they were so cash generative and returning a lot of cash to shareholders that it terrible over the next 10 years. But people said, look, these stocks have done so well. It doesn't matter what price you pay for these group of stocks. they're going to beat the market. And I think that line of thinking is showing up a little bit today, but there are still a lot of critics out there. And I think it's just one of the

Starting point is 00:06:11 things where you can't let price drive narrative and you can't say, okay, this stock, I'm just going to buy Costco because it's done well. It's a good business. I'm going to buy it 50 times earnings. You have to think 50 times earnings is a lot different than 35. And 35 is a lot different than 20 that's my i guess opening thoughts yeah it's easy to walk into a costco and realize damn this is one hell of a business model this is i people love this place i'm gonna be probably coming here for the rest of my life i'm gonna be paying for my family's groceries here for the rest of my life. What a powerful business model. But you also look at Costco and you say, this is everywhere around the country. People already know and love Costco. It's in a lot of

Starting point is 00:07:05 ways a mature business. Now, it could probably grow for 5% to 10% on the top line revenue for the foreseeable future inflation plus some but if it grew revenue seven percent for 10 years what is that a double in revenue it would still be trading at like if it grew earnings at seven percent for 10 years it would still be trading at like 25 times earnings no more 28 times earnings on 10 year out earnings like yeah that's wild it's yeah god you can't just i like the idea of being a never sell close your eyes put this in your coffee can portfolio and just ignore it but it's i don't see how anyone makes money over the next 15 years owning costco at these prices i'm sorry i just

Starting point is 00:08:06 don't see it yeah and i think you know you i don't know what the time period is but definitely a 10 bag over maybe a 10 or 15 year period. If you bought it when the stock was at a reasonable earnings multiple and you've done well here, I see no reason to sell out of your position. I mean, that's usually a dangerous thing where if you're thinking, look, I'm going to not take the taxes. I have no reason to sell this now. I don't need the cash. I'm just going to hold it. No big deal to me. But maybe it's getting to the point when it's above 50 times earnings for a low grower like this where i would trim down the position and then maybe if it got up to something like 70 to 80 times earnings for a low grower like costco that's not obviously like nvidia

Starting point is 00:08:47 where it can grow revenue 200 or something like that where there's some giant inflection point that's just not going to happen with costco maybe if it got up to that like there's there's different ranges here where he kind of hit to the 35 to 40 times earnings maybe you're you bought it but you're not, you would not buy any. Then you're not going to sell near position. And then it hits maybe 50 to 60 times earnings. And you're like, look, things are getting pretty crazy. I might trim my position. And then at some point you have to ask yourself, when would I sell out of this entire position? And when is it just, when am I being either dishonest to myself or when am I being too obtuse, I guess. I don't know. Or something where you're not thinking logically because where

Starting point is 00:09:34 the stock price is. And I get that people that are in the never sell camp and have bought it at a reasonable price and are just going to hold on. But at some price, there has to be a thinking where, look, the next 10 years could get ugly for this thing. Do I love this company? Yes. Is it one of the best businesses in the world with a great management culture? Yes. But things could go poorly, and I'm not going to be afraid to sit in treasuries instead of this thing right now. Yeah. So I pulled this up on FinChat, the price-to-earnings multiple since 2014.

Starting point is 00:10:08 And the minimum it's traded at – this is actually kind of mind-blowing. The lowest price-to-earnings multiple it's had has been 25 times, which is quite surprising. The average is 34 times and I would guess that the median is probably around 30 times. I can actually just check it right now. 33 times. So you could have said, oh, yeah, you know what? People have been complaining about Costco's valuation the entire last decade when it was trading at 30 times earnings. Yeah, well, a lot of the returns have come from it going from 30 times earnings to 54 times earnings.

Starting point is 00:10:47 Right. Big difference. For you to replicate those returns again this decade, you need it to go from 50 times earnings. Either you need accelerated growth, which becomes harder at this size for Costco, or you need it to go from 54 times earnings to 100 times earnings. Yeah. Which that's a harder bet to make. Yeah. I don't know if there's 50 of these type of stocks out there, but people talk about Chipotle in there. There's a lot of restaurants.

Starting point is 00:11:15 You got Kava that just went to the public markets. Wing stops trading at 100 times earnings as a restaurant, stuff like that. Have some comments here that says, I would buy Costco if they would double the number of gas pumps at the warehouse, just turn them into a Bucci, Buc-ee's, I think is how you say it. Sorry, we don't have any of those out here. That's obviously those type of stores have done well. James Goodwin, our actually friend and sponsor, you're missing the potential efficiency

Starting point is 00:11:41 improvements from AI, sarcastically. So I think that's a point here that like this is not going to be some sort of optionality type technology company. We have one sweet green and Dutch Bros as well. Yeah, Dutch Bros isn't as expensive anymore, but still up there, I would say. But here's a question that Tyler has. Why do you think competitors haven't been able to eat into Costco and Chipotle's consumer value prop? If a competitor started eating the ROICs down, the multiple rewrite would destroy fortunes. yeah i mean it's a good point but i don't think costco i think that mode is very rock solid

Starting point is 00:12:16 i mean just for the family shopper in the united states especially there's no better place for someone that has multiple kids but it's just not going to be beat but chipotle it could happen i mean that's a little riskier just because they have to keep up the quality of the restaurant you've seen those uh i think those are just news not or noise not news with those tiktok videos of people getting upset about their chipotle bowls which i think is more on the the tiktok video maker than the the chipotle itself but yeah i mean if that happens that's the risk of buying something at a high price is you are betting that the perfection of this business the higher price you pay on an earnings multiple you're betting the perfection of this business stays around for

Starting point is 00:13:01 longer and longer and longer and then the farther you get into the future the more unpredictable it yeah their their returns on invested capital really aren't that insane uh yeah they're not earning tons it's not like they're drawing all this attention to themselves with the capital they're earning on their investments so it's or sorry with the the return that they're generating on their investments so uh it's really quite a bulletproof model especially as you continue to reward your customers with lower and lower prices the more that they come back in it's it's really hard to beat their economies of scale but they just simply can't grow at that high of a rate for that long yeah it's really not doable um unless they take over i actually feel

Starting point is 00:13:54 bad i don't feel bad but if i were management i wouldn't know what to do here it's because it's a really difficult spot to be in and it's actually the opposite we're going to talk about jamie diamond in a second but it's the opposite of what jamie diamond has done what do you do if you're costco all of a sudden sabotage everything you've done historically where you give like special dividends and reward shareholders and start diluting them in order to because mathematically that's the right thing to do probably is to just give up the special shares Yeah. Well, I'm saying like would you start issuing shares at 50 times earnings?

Starting point is 00:14:33 Oh, probably not. It's not in management's culture. Yeah, no. They can probably just sit on the cash and keep with the conservative balance sheet and then pay out some special dividends if they need to. Let's hit an example here of what – Before we move on. Okay. You get in a situation like this.

Starting point is 00:14:54 How do you proceed over the next five years without losing shareholder money? Oh, I don't think they're focused on that. I think they're just going to keep running the business if the stock goes down, so be it. They're not worried about that, I don't think. At least my read into Costco's culture, I guess I'm not in the board meetings, but I don't think they care, and that's a good thing, honestly. But it's like Munger said, RIP, I think this was back when it was at like 30, in the 30s on a PE ratio, he said, am I selling it?

Starting point is 00:15:22 no am i buying it today no that's essentially what he said yeah it's probably just a ton of index ownership huh probably yeah and uh i think there's some nifty 50 attitude here where it's like buy good stock at any price let me go through there was a nice little viral this viral for fin twit standards on uh twitter a nice little thread that talked about essentially it was a good tease it said now would be a good time to study the nifty 50 mcdonald's was the og chipotle of its day and it gave out some stats here so from 1972 to 1980 and 1972 is when the nifty 50 bubble popped revenue at mcdonald's grew by 24 a year and earnings per share grew by 25 a year so basically in line per year so that's pretty high growth really really strong and

Starting point is 00:16:15 And the thing is, in 1980, the stock was down 35%. Adjusted for inflation, it was down 67%. But the business was incredible. So I think multiple contraction is a big risk that doesn't – the fact that you're making so much money in multiple expansion can blind you from the fact that multiple contraction is so dangerous over a 5 to 10-year period because you can't – if you kind of get what I mean here, where you're not realizing the risk you're taking on because all your returns are coming from multiple expansion and you just – price drives the narrative. I think that's just a big thing. On the flip side, there was that McDonald's example. What a great buying opportunity that would have been at the end. In 1980? Yeah. After it traded sideways and everyone became fatigued after 15 years of going nowhere.

Starting point is 00:17:17 Everyone would hate it too. Everyone would hate it. This thing has gone nowhere. Why would I buy it? It's gone nowhere for 10 years. um i'm looking at something right now for costco that might blow your mind since september of 2017 which i think is when they wrap up their fiscal year the september fiscal year um their total revenue has grown at 10.7 percent a year pretty solid their price to earnings

Starting point is 00:17:47 multiple has grown at 11% a year. Their valuation has grown at a faster rate than their business. Yeah. So you're seeing more returns as shareholders, excluding dividends, from their multiple expansion than the actual revenue growth, assuming earnings grow at the same rate. I'm not exactly sure. I have a comment here with the high PE business. isn't what Singleton did at Teledyne. Whenever a stock was overvalued, he would buy low PE companies with his high PE businesses. Yeah, they can do that, but that's riskier.

Starting point is 00:18:23 And the only way that works is if you're set up with a culture of being a conglomerate already. Someone like Berkshire Nelnet, Constellation Software, Markel, Brookfield Asset Manager. That's the advantage of those, but Costco's not going to go, hey, let's buy some low PE industrial business. They're not doing that.

Starting point is 00:18:40 no maybe they could buy like a logistics business but they already have one that they've built out so i don't see there's no unless there is like a situation where it would really help them where they're lacking and it's a way to just get there quicker and maybe it's a business that earns money already on its own you could but then you're buying like you're buying costco the capital allocators or are you buying costco the grocer or the wholesale company exactly now i know there is the classic argument that's got tossed around that says well if you held on through like 1995 didn't the nifty 50 actually outperform i would say one underperforms for 20 years is a mistake in your buying in buying a stock i would say two

Starting point is 00:19:34 it was basically all driven by tobacco so either yeah if you exclude tobacco you're it's good tobacco and i and i think if you exclude tobacco and coca-cola you underperform so a lot of them ended up being mistakes yeah you can thank philip morris and phil it's crazy that philip morris at the peak of the nifty 50 the valuation was still not very insane like I think they generated, what was it, like 18% annual returns from the peak of nifty 50 multiples? Yep, and I think the implied price you should have paid given where like if it was going to trade at a market multiple in the 90s and get the equivalent of S&P 500 returns over the time was something like 40, 40 times earnings. So that was a good run for the old tobacco businesses. Okay, let's hit a new topic.

Starting point is 00:20:30 questions here yeah we got some questions we should address uh okay so john galagos says good morning and happy thursday chit chat crew thanks for the portfolio video i am long british american tobacco uh ultria and turning point brands any thoughts on pfizer is it a value trap or possible double with the sweet dividend so i guess uh for anyone that missed it we did it brett and i did an overview of both of our portfolios what we like best what we're potentially buying or selling. And we discussed Philip Morris in depth during that show. So that's where I think John's mentioning the tobacco companies there. On Pfizer, I hate to let you down, John, but I am the least qualified person to give any sort of take on Pfizer. It's just a business I've really

Starting point is 00:21:20 never looked at. Same. What would this be? Pharmaceuticals? Not my cup of tea. You're have to listen to another podcast on that we have some questions on twitter as well we have one on the texas instrument news from ellie which i think is going to be a good topic we can say that kind of as the the non well i guess it's still a fun topic but it's not a sexy topic because we'll have to just kind of go through some capital allocation stuff we have a question on the day maybe we could save this for the finchad ad day 282 of requesting a ticker kfs i think it's a small financial company i'm sorry we're not going to do a full topic on that because it's just not popular enough for people on a podcast to listen to we have a question let's do let's do a quick glance at it

Starting point is 00:22:07 how about that yeah do it for do it i said i was gonna do it for the do it for the advertisement right now okay and then there was a question on jamie diamond so we can touch on that as well this is kind of our embedded fin chat ad and it was what kfs kfs is the ticker i believe it's it's from deep moat society so yeah he's been he's been very persistent whenever i tweet what should we talk about he says it every time for the last couple of months and then i go well it's just not big enough for us to talk about it on a live show but he's been persistent so let's let's talk about it this is our audience brett we have to we have to please the listeners uh pulling it up first kingsway financial services okay uh market cap of

Starting point is 00:23:01 224 223 million dollars enterprise value company description here kingsway engages in the extended warranty business services asset management and real estate businesses company operates the three segments, leased real estate, Kingsway Accelerator. So warranties, not an industry I'm intimately familiar with. Asset management, probably pretty digestible, understandable. Real estate, don't definitely want to consider myself an expert there, but fairly understandable, I think. If we look at the only problem with these asset managers, it's like total revenues, It's not always a great indicator, so it's a little hard to analyze purely on just a research terminal. Yeah, maybe look at book value per share.

Starting point is 00:23:56 Price to book, yeah. Okay, let's go to ratios here. Per share, book value per share. Well, maybe something happened in the early – or 2014 through 2016. It looks like it struggled a little bit. Let me look at the total returns over the last 10 years. There must have been something that happened between 2015 and 2018. If you look at the five-year total return, 27% annually, pretty good.

Starting point is 00:24:30 Something has been happening over the last couple of years. I'm not going to be able to analyze it. I don't think on this. What's the price to book and what's the price to earnings? One second. Price to book. It's a little complicated because it looks like book value is wonky. Yeah.

Starting point is 00:24:58 This ain't working. Isn't the number right there? I can't read it. It's 9.3 is what it says. Oh, okay. Well. So that's why I'm saying it's not. Something's off.

Starting point is 00:25:08 Okay, what about price to earnings? Price to earnings. also off somehow well okay well then it's going to be hard to analyze on the show maybe i don't know what the pitch is on this thing i'm seeing a comment that they are a funder of search funds i don't like that business if it's a fund of funds business but it doesn't pay a dividend i don't know any any sort of indicator from from the aggregate there yeah we're gonna need a bit of And maybe a more – we're going to need an elevator pitch from – what was it? Deep Moat Society.

Starting point is 00:25:45 I love that name, by the way. Yeah, exactly. It's actually pretty good. Exactly. Well – I'm not seeing a dividend yield here, so no. So nothing. Yeah.

Starting point is 00:25:52 I would need an indicator of what exactly we're buying and why we're going to buy it. If they're a financials, that's – because this is just what would be any investor's first look, especially at a financials business. You look at the book value, right? If they're an investment company or a bank-style business, I would look at the earnings ratio. I'd look at the dimmed-in yield. I'd look at the earnings growth. I'd look at the revenue growth, all that stuff, just the basics and say, okay, why is it like this? Why did – like Ryan just asked.

Starting point is 00:26:18 He saw the revenue go down. I think it was 2016. And he's just, okay, I got to make a note on that. Why did that happen? Let's investigate. Yeah, the other thing – look, this is where the opportunity presents itself. If it's a company that you follow intimately well and you understand what the drivers are of these numbers, because obviously this didn't screen particularly well. There wasn't anything that jumped out to me purely on the financial side of things.

Starting point is 00:26:49 We have companies that we own that are like this as well. Nelnet doesn't screen cheap. Harbor Diversified, if you just looked at the financials of that business, you would think it's the worst business of all time. Maybe it is. the, uh, but you know, the story better, you understand what's really going on, what's driving it. So on a company like this, where I'm not really getting the picture by looking at the numbers, I would probably try to find some sort of a research write-up somewhere on the internet to try to get a quick summary. Yeah, exactly. Yeah. Check out Valley Investors

Starting point is 00:27:21 Club, all the other good stuff. See if I'm going to find something to see what exactly are people excited about. And if you want to look at those charts and how we kind of, how we look at quickly, you know, the fundamentals of the business, doing our quick overview, go to finchat.io slash chitchat, get 15% off your premium plan. Link will be in the show notes. DM us for any questions. And Ryan, as a good employee of FinChat is out there for any demos for anyone looking to, that's basically his job. So anyone looking to fill up my calendar? exactly exactly here's a question on buybacks and he had a topic on it too from one of the uh one of our followers on x slash twitter so i can lead into maybe your topic on that because i know

Starting point is 00:28:06 you had it when someone like jamie diamond says he's not buying back jp morgan stock because capital deployed more efficiently elsewhere does that mean that investors shouldn't be buying anecdotally feels that bank buybacks have declined ally bank of america etc only american express has maintained its pace of buybacks. Ryan, thoughts on that and maybe lead into that Jamie Dimon quote that was floating around the financial news this week. Yeah, I don't have the exact quote. I can probably find it. But more or less, he basically said, we're not buying back our own shares at this price. We don't think that's the place to do it. They have been good share repurchases, ironically. But he said, we're

Starting point is 00:28:48 not buying back i think it's dumb to do that two times book value the stock sold off roughly four percent on those comments it might have jumped back up since then but what would i do if the ceo said that i yeah i probably wouldn't feel super eager to buy but that doesn't mean like buffett's done this along the way too he's kind of i think in especially around 2000 right he basically said like, look, our shares are a little overvalued right now. And you can try to talk. I think that's what a good manager does is try to talk it down. I wouldn't sell my shares because of this, because it's, this can still generate decent returns, especially over like a long, long, if you really extend your time horizon, then I think you can still get market beating returns,

Starting point is 00:29:34 but I wouldn't necessarily sell my shares. I probably wouldn't feel that eager to buy back. if the management team has no interest in it either or buy more with regards to the overall banking sherry purchases yes i believe there was a mandate or some sort of regulatory thing that required a whole bunch of banks to up their capital ratios and be a little more well reserved so a lot of banks have stopped buying back for that reason so they've had to get over a certain uh like liquidity ratio essentially i can't remember what the ratio was or what the specific number was but yeah a whole bunch of banks had to like slow down their buyback pace yeah and there's two other things interest rate hikes have caused the balance sheets to

Starting point is 00:30:24 teeter a little bit and they have been generally skittish ever since the silicon valley bank and first republic and what was the other one signature bank collapsed uh actually a little over a year ago from now ryan do you remember that the banking crisis that was going to take down the global economy again it's always it's funny to look back on yeah because it was really just one bank that had way too much of a customer concentration on deposits or three bad loans but three not giant ones the silicon valley raised the awareness for it the silicon valley you look back on that like what a risky kind of dereliction of duty for the people running that company you have a whole bunch of vcs who are more of a herd herd mentality type group than anyone else

Starting point is 00:31:22 and they are your biggest depository base if one floods a whole bunch are going to flood they can really dictate whether companies pull out their funds or not and then i believe they shortened the duration on their assets so they owned a whole bunch of pretty low interest rate assets so yeah they were super underwater on like everything yeah i mean i think extended the duration oh sorry uh they bought a bunch of 10-year treasuries i think and mortgages at super low rates right and they locked in yeah it was something like that i can't remember the situation exactly but it was like they were like they're they were earning like three percent a year oh yeah charles schwab is still that's yeah charles schwab is still in that same um they're facing

Starting point is 00:32:14 that same headwind right now and they'll hopefully be able to get through it but there was a lot of people talking at the time that they were the next domino to fall and luckily it didn't happen i don't think it would just because they're too systemically important and yeah okay that's right yeah they extended the duration on their loan portfolio the you look at a company who did not interact with brokers they were buying like what was it three month treasuries consistently just rolling them and they were earning nothing on it for a while then all of a sudden everything flipped and their interest income ballooned they were better off for it giving them flexibility as a financial okay other questions

Starting point is 00:32:53 let's say did we already have the crm discussion no we did not i don't follow the company close enough but maybe the most i know the stock went down i don't even know anything about the earnings um i don't know if i included this in here but there was a quote that essentially said from mark benioff i think on the earnings call that said there's no one better at mna than salesforce let me try to pull up the direct quote um yeah because i know one someone i follow has it it's also yeah if you go to i posted it on the finchette twitter account before we get to that i do want to talk about our friend uh the firm returns stock research blog this is not really a new sponsor anymore, but now a kind of recurring sponsor of Firm Returns. They are a stock research

Starting point is 00:33:45 blog that covers stocks from all over, really emphasizes the UK, which anecdotally, I've been seeing more and more UK companies pop up on screeners I've been doing and just general, I don't know. I've become generally more interested in the UK market. And he really invests across the spectrum from $10 million companies all the way up to $40 billion. He tries to talk to management whenever he can and get access to them, which is easier to do when it's smaller caps from the UK. He gives you four in-depth research reports on new companies each year if you're on the paid tier. And then he has a whole bunch of free content and other long form write-ups on firm returns as well. So highly recommend going, checking it out,

Starting point is 00:34:28 at least see some of his free research and then determine for yourself whether or not you want to be a paid member. And if you do want to be a paid member, firmreturns.com slash chitchat gets you 20% off. So go ahead, check it out, firmreturns.com slash chitchat. Also, before we move on, you heard us 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 per 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

Starting point is 00:35:11 investors and carry significant risk. Full disclosures are in the podcast description, US members only. Okay. I have the quote. So Mark Benioff. Yeah. I got the quote. Quote, no company has been more successful on M&A than Salesforce. Ryan, you have the floor. google acquired what was it double click that's like probably most valuable acquisition of all time youtube acquired youtube very successful android meta acquired instagram acquired whatsapp i'd argue whatsapp is probably more valuable even though it might not be monetized quite as much as some of the salesforce acquisitions more valuable um amazon have they done any huge high profile acquisition berkshire hathaway yeah honestly though yeah but honestly their

Starting point is 00:36:11 their foley acquisition stuff is is really not that great they've done a lot of big stuff that generates profits but the return on you know the best stuff they've done yeah i mean see's candy but that was back in the day when they were way smaller but the best you know most returns have come from that stock portfolio

Starting point is 00:36:27 and the insurance operation I guess Geico insurance is acquisitions though somewhat somewhat they bought a tiny insurer and then built it up

Starting point is 00:36:37 almost themselves but Geico I could Geico is in there way better than anything Salesforce has ever done isn't general reinsurance like a huge part

Starting point is 00:36:45 of their business now yeah but I would say remember that was a bad acquisition actually never mind for a while that was good timing because they used the stock when it was super inflated.

Starting point is 00:36:55 So good timing on that acquisition. I guess the financial engineering Buffett did was probably smart. But remember, they found a bunch of cobwebs in that asset. Yeah. There's a million better acquirers. I'm sorry. Salesforce. Transda.

Starting point is 00:37:12 Look, yeah. Maybe not a million better acquirers, But I think Mark Benioff is kidding himself if he thinks he's absolutely hit the nail on the head here. Slack was – and also, okay, if you make a bunch of good small acquisitions and scale them up and then you blow that up with a big bad acquisition, you ruin your returns. Like Slack is probably not doing too hot for them. No. And that blows up a lot of their previous great acquisitions. It's like Bob Iger, right?

Starting point is 00:37:48 You buy Marvel, you build all this asset value by Pixar, great acquisitions, you become a great acquirer. And then you piss it away with the Fox acquisition. I'm sorry, it's a stain on the reputation. Now, who really knows what Slack is worth today privately, but what did they pay? What was it like $25 billion for that or something like that? Yeah, I'm not exactly sure, but it was a sizable number. It was a very extreme value. of the time and then they got ladder attacked by microsoft teams and i don't under okay i think they'd be in the same spot as zoom slackwood yeah exactly exactly now obviously crm stock salesforce stock over the long term has been a phenomenal winner the durable revenue growth has

Starting point is 00:38:38 been incredible if you're an investor today let's say it's been a 10 beggar for you a long-term winner. You hear Mark Benioff say, we're getting back into M&A. He has this irrational confidence of how good they are at acquiring companies because it doesn't seem like he understands how they make money, how return on invested capital works. Wouldn't that be a huge concern for you? I mean, that's a sell signal for me. I think today it's a sell signal for a lot of people stocks down 20 mark mark benioff is a walking cell signal he yeah everything he does i swear he has a god complex about him like paying matthew mcconaughey 10 million dollars to be your friend look that's a huge red flag it means he cares more like he is wasting company money i got

Starting point is 00:39:34 one person knock some commenter investing for beginners podcast which our friends thank you for joining us uh it has a comment that i think there's one clear acquire that is worse and that is the monk himself jack dorsey yeah after pay that was that's got to be worse than any of the ones that benioff has done i mean that was just terrible i guess it was a stock but you know title now they're still investing in title they're like the sound quality is better at title and i'm like great you're losing a hundred million dollars a year for us as shareholders okay so yeah not a fan of jack dorsey like i don't like him the and he also is a walking sales like you know what maybe if he were like my friend he'd be fun to hang out with he sounds like he like is kind of

Starting point is 00:40:22 a crazy guy like maybe he'd be pretty entertaining but same with musk honestly that's my fiduciary someone managing shareholder capital yeah i have no interest in that i'm sorry the same with benioff now after pay probably worse than slack for sure it's the biggest red flag for me is when it's like the little trivial things where it bent where they're using company money to benefit themselves to make their own lives better so uh jack dorsey trying to become with friends with jay-z through the acquisition of title. Mark Benioff putting Matthew McConaughey on some role to paying him $10 million a year to be his friend. Look, he views the company as a piggy bank. That's what I think. And I think Mark Benioff has to be careful because he does not have a ton of insider

Starting point is 00:41:23 ownership and elliot could easily get rid of him if they choose to yeah they're too yeah they're a little bit sizable i guess we'll lead into another company that might be a bit more cordial on the how about the uh similar scientific making half its balance sheet bitcoin i was gonna say i have my question for you ryan i know you saw this was are you feeling it now kind of like the the you know are you the popular spongebob thing are you feeling it now mr krabs the uh are you feeling the bubble now similar scientific let me pull up the quote similar scientific a pioneer in developing and marketing technology products and health for health care providers to combat chronic diseases announced today that its board of directors has adopted

Starting point is 00:42:08 bitcoin as its primary treasury reserve asset in addition similar scientific announced that it has purchased 581 bitcoins for an aggregate amount of 40 million dollars inclusive of fees and expenses stock soared it was a it was a struggling microcap stock soared and i had some people commenting saying that this was an auto sell decision what's interesting is we had followed similar scientific loosely i guess over the last five years it's something that's been on my radar it seemed like an interesting company but this is the difficulty of microcap land i mean it is just a landmine field of landmines of management teams that want to just pump their stock and do things that are actually not rational for and aligned with shareholders but doesn't this i

Starting point is 00:43:01 have another here here let me just relate to this other topic too the bubble seems and don't worry we'll get to texas instruments at the end here the bubble seems like it might be forming now coreweave have you heard of this company ryan okay he's shaking his head for the listeners coreweave is essentially a new they're trying to be a competitor with the hyperscalers so aws microsoft azure and google cloud plus others oracle ibm whoever as they essentially just raised a bunch of money bought a bunch of gpus i think they used to be a crypto company honestly and they essentially got a bunch of nvidia chips and are trying to be an ai you know cloud provider and there was a i think it was sourced i forget who they are it looks pretty reputable but who

Starting point is 00:43:52 knows obviously it's just rumors at this point that it is planning an initial public offering the startup has started early preparations to go public by the first half of next year set a person with direct knowledge of the company's plans the plan set up what would be the largest a focused initial public offering after the recent wave of funding for private firms in the sector the move towards a listing all also a rare sign of life in the u.s tech ipo market so what this port c capital called on twitter a gpu rental company founded in 2017 last fell to 19 billion dollars and raised 10 billion dollars in equity and debt to date looking to ipo in the first half of 2025 this feels to me like rivian from 2021 what do you

Starting point is 00:44:34 think i don't really remember the rivian uh ipo that well 100 billion dollar market cap ryan yeah that was outrageous and you know what at least rivian has materialized into something remember uh nicola yeah that hit like i think that almost hit a 50 billion dollar market cap if i remember correctly that's more like there weren't any vehicles ever true any any working vehicles rivian at least has i see them all the time i don't know if that i don't know what kind of indicator that is i i think they're burning like six billion in cash flow a year right now because they're trying to ramp up manufacturing and sales have slowed and they're really hitting the ev capital cycle which is tough yeah this listen i i'm all for the ipo market being back up

Starting point is 00:45:32 because it actually did it kind of sucked when it was happening like i was like oh these just bad company after bad company going public and all that but now you do have a lot it feels like you kind of have a lot more to choose from i think it kind of helps public investors now be able to look at a whole bunch of options as opposed to just either dead micro caps or i don't know it feels like it just created more options for investors yeah we have a comment here yeah they started as a crypto miner seven years ago decided to turn into a hypercaler instead it's my favorite signal so far because nvidia can give them the gpus but i love when companies switch to whatever's popular no shame yeah exactly exactly uh

Starting point is 00:46:25 yeah other questions okay do you want to talk texas instruments and elliot i think this one's interesting sure yeah let's do it all right activist letter they sent the letter it wasn't sort of, it was mini-activist. They said, we have a lot of respect for Texas Instruments. I guess, you know, the stock's done well over the long term, but essentially, and it was like a 10-page letter, so I'm not going to read out everything right here. Essentially, they said, and I'll quote this, we have tremendous respect for TI and its long history as an industry leader and innovator, and we greatly appreciate the board's consideration of our thoughts. We believe our recommended path forward embraces TI's long-term recipe for success and reestablishes its long-term

Starting point is 00:47:08 commitment to its shareholders. Essentially, they're saying, here's our idea. You should go for it. Now, what is the idea? They're saying that TI has greatly increased their CapEx spending and their CapEx spending plans. And they say that they're being too rigid about it. And they're going to just essentially overbuild or there's a big risk they're going to overbuild their capacity over the next few years. And they want them to temper down their spending and make it more flexible with the demand of the end markets for semiconductors and automotive and the industrial space. Now, if you look at some of the charts, you can see that free cash flow has depleted a ton and capital expenditures have absolutely boomed. Now, one could argue that they're being smart

Starting point is 00:47:56 during the down cycle of the automotive and industrial space, where there's going to be long-term, just a huge boom of electrification and digitalization across electric vehicles, electric vehicle charging, all the industrial manufacturing, especially with the hopefully on-shoring boom in North America and South America. So you have that thesis, but if you look at the free cash flow, it's been pretty ugly and things could get pretty bad for Texas Instruments if they overbill by, say, 50%, like Elliot is proposing here. And if you look at the long-term success for Texas Instruments has been very smart capital allocation, standing in their niche, high returns on invested capital, producing shares outstanding,

Starting point is 00:48:43 increasing that dividend per share. I mean, it's just been a simple, easy formula. And I think they've gotten away from that. I mean, shares outstanding haven't declined. I wonder what this management team is thinking where we're just going to boom CapEx like this. It seems a bit aggressive. I kind of agree with Elliot here, but curious your thoughts, Ryan. Yeah, it's kind of a bummer just because I remember we were kind of pitched this stock. I don't know if I'd say pitched, but there were a couple of people that mentioned Texas Instruments as a potential investment. John Rotante came on. I think we did a whole show on them. We talked with Andrew and Dave from Investing for Beginners, and they mentioned how much they like Texas Instruments as well.

Starting point is 00:49:29 And the thesis was pretty simple. It was like these were semiconductors that were – they have an inventory of semiconductors and a catalog of semiconductors that are always going to be relevant. They're a share cannibal. And now all of a sudden, it's kind of a different thesis, right? they're spending so much it's not just a capital returns durable capital return story it's you gotta hope that the demand shows up yeah yeah makes it tougher for me as someone who has zero sense of whether or not where we're at in sort of a semiconductor cycle it makes it harder for me to invest yeah and was they gave some interesting anecdotes or past stories for uh

Starting point is 00:50:13 Texas Instruments from the Elliott letter and they said stuff about how historically they were much more flexible in their capital allocation plan. So if they saw the demand, they would build it and stuff like that. And that's all they're saying they should do here. So they essentially were saying, look, if the demand shows up, we want you to spend all this money on capital expenditures like you're planning here and do it because the return should be solved. You have your competitive advantages and that'll be great you'll get you know huge investment and a strong return on invested capital but if it doesn't show up we need to temper our expectations and pull back a little bit so we don't just blow up and have a huge inventory build which would be quite concerning

Starting point is 00:50:55 if they if they you know i think they were saying something like 50 over capacity or something like that which i think that's on the new builds but still that would lead to a huge inventory glut but which would obviously no one wants. Yeah. I'm a big fan of Elliot in general. I think when they enter a position for me, it actually kind of means something. I think there are a lot of investments out there or investors out there

Starting point is 00:51:24 where whatever they start buying something. And I kind of just shrugged my shoulders, but I think Elliot for one CEOs, they tend to shape up a bit after they see it, after they maybe get a call from someone at the company. What about when they're in Match Group though, Ryan? Give it time. Give it time.

Starting point is 00:51:46 Yeah, but what was we talking about? So here's my thing. Okay, with Match Group, because there is a question about it in our comment section here that says, we need Elliot on Amazon Meta Match. I would argue you don't really need it on Meta or Amazon. I don't think Elliot being a shareholder

Starting point is 00:52:02 would really benefit the company in any way. I think they'd be fine with capital allocation, too. What if they got them to cancel Alexa and the Metaverse? It just doesn't matter. That definitely matters. They're not capable of doing it. What? They are not capable.

Starting point is 00:52:22 I know, exactly. Exactly. It's a hypothetical if they could, but yeah, it's not possible. They're too small. I'm okay. You know what? I'll say it. I don't mind the Alexa spending.

Starting point is 00:52:35 Really, Ryan? Spend 10 years. $100 billion he's spending. I know. It's useless. They're so far behind everyone. You know what? They are probably in more households than anyone, though. Who cares? Who cares? No one uses it. Sorry. We'll talk about that a different day. I use it every day. Okay. Well, they make no money on you. true they're yet to make a dollar on me but if they ever find a way to do it they've got the

Starting point is 00:53:05 infrastructure now the network of households to do it the uh anyway with match group if we see that elliot has just silently exited its position i'm probably well i already sold my match group shares but i would feel more inclined to knock it back in yeah exactly exactly and yeah for people asking yeah we did we did during that portfolio ranking show i did rank match group pretty low so it's uh it's lower than some stuff that was on my watch list so there will be some portfolio shuffling i don't listen to that i know i've been talking about match group for a long time still think it's a good risk reward but i guess the details on that can be for another episode um yeah we have tyler here as a comment if alexa has losses of 10 billion

Starting point is 00:53:50 and a 30X multiple, well, I don't know about that. That would be a $300 billion swing at valuation. I would think they could just pour it into other stuff or return it to shareholders. Yeah, I mean, it makes sense. We have a joke here from James that says they're waiting for you guys to leave Match Group first. Gave a little wink.

Starting point is 00:54:08 I know he's joking there. Hey, I will sacrifice myself. We have. I have. I will sacrifice myself as the bag holder that sells just so match group can can start soaring i will i will make the sacrifice i i plan on doing that actually so it's yeah i've already sold i have you sold a while ago like a multiple not not even recently right a while ago no i sold after alex's write-up oh okay but it was a small position for you at that point right yeah it was tiny okay and to be honest i told i played it completely wrong

Starting point is 00:54:51 i elliot announced their stake and i bought the i like i bought when the stock jumped and then they reported this disgusting quarter and i sold and you know what this is one where the stock didn't even drop that much after the earnings but i thought the earnings were pretty rough Right. Yeah. And I've had concerns with management. We talked about that before. We might do a full one on them as maybe a postmortem later this year, maybe sometime in 2025. But it's an example of, I can see it in the comments section here too. When you sell something that's down and you admit it's a loser, the worst thing you want in your mind is for the stock to go up like 100%. And you have to just tell yourself it doesn't matter. It might go up. It might go down. Who knows?

Starting point is 00:55:42 You're not in it anymore. You got to just focus on your portfolio there and just keep it on the watch list if you still think it's a good company. Okay, Ryan, any other topics? Someone wanted us to talk Chewy. Yeah, I think Chewy just had like a marginally more profitable quarter and the stock jumped 30%. Beautiful. No. You get an e-commerce company like that when the margins are so thin, if they can find a way to expand them, you're going to get significant appreciation. I think they did that this quarter. Operating margins, the gap operating margins significantly improved year over year and probably sequentially. So yeah, I think if you're a Chewy shareholder, it's maybe not what management thought it was

Starting point is 00:56:33 going to be for a while. Their active subscribers have, or their active customers have certainly come down, but their net spend per active customer has continued to trend upward. There are people that spend a ton on their pets and I think Chewy is actually capturing that audience quite well. A lot of them are auto-ship customers now too. I think the number's at 77% of customers are auto-ship, which makes it logistically a lot easier to ship profitably. And it seems like that's what we're seeing play out here. They've become more and more profitable and it seems like it's largely from logistics improvements. So yeah, I'd say kudos if you've been a shareholder,

Starting point is 00:57:19 but I don't think the stock's done very well. So maybe if you thought they were going to get to profitability and you bought at the right time, then kudos. Yeah, it could be a good one to look at. It's interesting, but I still don't like their moat. Let's see, we had a question. I guess it's from you. It's in your section.

Starting point is 00:57:39 Maybe you want to hit that last one to close things out. What's the favorite investing books? Yeah, sure. I got a message this week that just said, will you talk about some of your favorite investing books? I don't have any off the top of my mind. I would say for the beginner, I'll look up some books here in a second. Brett, maybe you can do that while I'm talking. And for the beginner, there's going to be a lot of investing books that are kind of around how to value a business, how to look at what matters in investing, returns on invested capital, why it matters, what drives returns of the long run. There are a lot of books like that. And I do think it's worth reading a number of those. But once you start to feel like this isn't new information to me, then I personally recommend reading a lot of 10Ks, reading business biographies, like stories of how businesses grew. If you can find like founding stories, I really like those.

Starting point is 00:58:53 And just the more 10Ks you can read, the more you're going to be able to apply it to other companies. and it really gives you a foundation for being a generalist. It's just the more 10Ks you can kind of digest. So I do think it's important just to get used to or assimilate it with the nomenclature, like understand the terminology. But I think there are diminishing returns once you're on your 10th book

Starting point is 00:59:18 where you're understanding a lot of the same metrics already. Yeah, here's what, okay. I would recommend not reading The Intelligent Investor. I would recommend not reading security analysis. I would recommend not reading a random walk down Wall Street. The random walk down Wall Street could have been a blog post, honestly. I would recommend maybe the Peter Lynch book. That's good for a starter investor, especially because you're not looking to get into this

Starting point is 00:59:44 just to buy index funds. I would recommend, I read this one recently, so it's a top of mind. Capital returns, I think. it's it's invest it's like investing through the capital cycle sorry i can't have the exact stuff in front of me um i'd recommend the outsiders although that is it some people say it's nitpicky right where it's just it's it's almost survivorship bias but i think there are good examples there in that book uh but yeah ryan said as ryan said make sure you learn the basic accounting and then read a lot of blog posts about industry analysis business biographies i

Starting point is 01:00:19 I mean, there's two on Amazon that I think are quite interesting to show how that culture works. There's the Netflix one that I think is quite good. There is, and I'm trying to just go through the list. I'm reading one on Oracle right now, which is interesting. Larry Ellison is a unique individual, but sharp and just, I don't know. He did quite well. There's the Walmart one. There are, I mean, we just recorded a show with Leandro from Best Anchor Stocks, and he did one on John Deere.

Starting point is 01:00:49 There was a there's a business biography on that. There's a business biography on tons of stuff out there. So I just read a couple of those at least or just consistently try to read some of those. I think those can be very, very helpful for how a business turns into a success. Get on Value Investors Club, start reading those type of things, start reading a bunch of sub stacks that can help because you see how people analyze things, what they're looking for, how they how they determine what the value of something is. And yeah, that's really it.

Starting point is 01:01:19 Don't get bogged down and say, I need to read my next, I need to read another book called How to Invest. You don't need to read those books. They're actually not very helpful, in my opinion. Yeah, let me just give a couple that I've liked. And Brett, you might have gripes with this one, but I enjoyed Snowball. And you kind of get a sense of how he looks at a business, what he did, what his process was like.

Starting point is 01:01:46 And it's a Buffett biography. I liked the book Quality Investing. It goes through some of the competitive advantages that really drive returns over the long run. That's by Lawrence Cunningham. And then there was one more. The Phil Fisher one, the – what's it called? One Up on Wall Street is quite good as well. So I'll give those three out.

Starting point is 01:02:13 Oh, also there's the Buffett Letters, which you can get for free on their website. But I would recommend not reading that until you've got a little bit of experience. Read them or because it's just going to be too boring for you if you don't understand all the topics. So save those maybe a couple of years and read those. And it would be quite helpful for how Buffett thought and how his investment style turned into such strong performance over the long term. Then we have a comment here, Malboson's writings. You can find those for free as well. It's Michael Malboson.

Starting point is 01:02:44 I think I'm pronouncing it right. Those are, I think, from Morgan Stanley, and he's on Twitter, so search for that type of stuff. He posts those for free, and they're quite good as well. But like the Buffett letters, you need a little bit of experience first. So you got to look at the basic accounting stuff and read a lot of blog posts, annual reports before getting into that, because those can be overwhelming if you don't know a lot of the basic terms.

Starting point is 01:03:09 All right, we're at an hour mark here, Ryan. I think we close things off. Anything you want to say for writing this episode? No, I think the most important thing is just read a bunch. You don't have to have a perfect blueprint for what exactly you're going to read. You'll figure out whether or not it's adding value to you as you read it. So it's better to read a bunch and find out something isn't worth it than to be super selective and not go for anything. I annual reports, investor letters, books, all wonderful. I, I almost forget some of the books

Starting point is 01:03:47 I read early on, but I remember getting the most value out of reading the full annual report for a lot of companies. And I'm not talking about just glancing over the numbers. I'm talking about reading through the whole thing. And that includes risk factors and stuff like that. You don't have to read those every time. But once you get an understanding for what risk factors are required, you kind of have, I don't know. If you go through the nitty gritty, you kind of get a good understanding of the accounting for a business, which is really helpful. Just don't watch any of the scammy YouTube videos that can get you trapped into the date. There's so much of that out there. I know we do post our podcasts on YouTube, but

Starting point is 01:04:33 And there's so much low quality stuff on there that is, it can get you trapped into thinking things that, yeah, just don't do that. All right. Disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast. They've held them in the past and may buy, sell, or hold them in the future.

Starting point is 01:04:58 Thank you everyone for tuning in and we'll see you next time. Thanks for watching!

Chit Chat Stocks - The New Nifty Fifty; Texas Instruments Activist; Jaime Dimon "No Buybacks" (COST, CMG, JPM, CHWY)

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