Motley Fool Hidden Gems Investing - Valuation Matters

Episode Date: April 2, 2024

Value and growth investors don’t need to be at odds. They’re all playing the same game. (00:21) Jim Gillies and Ricky Mulvey discuss: - Payments company, Nuvei, going private and the deal's winners and losers. - A demand shift to hybrid vehicles. - What Tesla’s deliveries miss means for the carmaker. (16:39) Robert Brokamp and Alison Southwick take a look at a couple’s real-life finances. Companies discussed: NVEI, PYPL, ADYE.Y, TSLA Link to a discounted Stock Advisor subscription: www.fool.com/signup Host: Ricky Mulvey Guests: Jim Gillies, Alison Southwick, Robert Brokamp, Tyler Satre, Cristen Oehrig Satre Producer: Mary Long Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

It's not easy being a public company, and you're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, thanks for being here. Thanks for the invite, Ricky. so i in between me inviting you and um you coming on the show a canadian tech company went private nuve a payment processor focused on e-commerce payments around the world is being bought out by a private equity firm advent international for 6.3 billion that's us dollars it's adjacent to stripe and adyen but i would say it plays in spaces like crypto and gambling went public three bagged fell back to earth was the target of a couple of spruce point short reports

i don't know you think uh nuve is just real tired of being a public company these days what's going on 100 i think they said the hell with this and they got out and they can do so because they have three large shareholders who basically control i think it's something like 92 of the vote when this thing went public in 2021, I think it was 2021, they came public with a dual share class structure. Most of the common plebs like yourself or myself, we own subordinate voting shares, one vote per share. But of course, there is a super voting class, multiple voting shares, 10 votes per share. All of those shares are held by three parties, one of which is the CEO and co-founder or founder, Philip Fair, one of which is another private equity group,

NovaCorp, I believe their name is, and then the third one is the Quebec Pension Plan. They are, all three of those companies or all entities, they are all rolling their positions into this new private enterprise. I think they're taking, I think a couple of them are taking a few bucks out, but they're largely rolling it into the now private entity that will be formed by Advent International. So there's no real consequence for them. Nuve is an interesting one for me, and I'm going to try to thread this needle, which I think might be a bit of a theme for this show. I'm going to try to thread the needle here because I'm of two minds about Nuve being taken away from us. This is a recommendation in the service I run, Hidden Gems Canada.

Basically, if you'd bought when I said buy, you've doubled your money in eight months. So, yay, right? This is a good outcome. But it's been a recommendation in several other services as well that focus on partnerships. So, we like owner-managers of companies. And as I've just mentioned, Phil Fair is one of the three-headed entity that controls a large number of the votes here and has a very large stake. And a couple of quarters ago, he said, I'm not taking any equity compensation anymore because they just initiated a dividend. I think there's going to be two payments of the dividend. He says, I'm only going to take my compensation and dividends because they own such a large share. Brilliant, love that. When these other services have

recommended this company, it was at a higher price. That was a couple actually that recommended at lower prices as well, not just Hidden Gems. But I want to be cognizant of the fact that the people who own from those, they're having a subpar experience. They are not getting out with a double in eight months. They might be taking a 50% loss, say, after three years of owning this thing. That's because the entities that control this company can take it private because they can roll their stakes over. Public shareholders holding the subordinate of voting shares, we're just getting slapped. It's a nice outcome for me and my members, but it is a crap outcome for several other member bases of other services that I'm not real happy about. I'm sure

they're not real happy about it either, but it's like the people bearing the consequence of this Action are not the insiders. They're not the people with multiple voting shares. They are Joe and Jane Average who have bought individual shareholders. I'm not real happy about that. It's like I said, it's a bit of a mixed bag. The fairness opinion, because you always got to dress it up. They went and got a fairness opinion from TD who said the stock is worth between $33 and $42 U.S. The price works out to the $6.3 billion price tag, works up to $34 U.S. per share. I'm like, well, why is it so low? I know you asked me before the show, is Advent getting a good deal? Since they're getting at the very bottom range of the fairness opinion, they are. I might humbly

suggest that there might be a follow-on or there might be someone we've seen in the past. Sometimes when you have that kind of fairness opinion range uh you know non-controlling shareholders because they are allowed to have a vote they might protest a little bit maybe we'll see a higher price maybe this thing will be moved up to 36 37 a share but you know not really not real thrilled about some of this put it that way so i want to be pedantic for a second i know you were talking in a hypothetical sense but i know someone might take it in a literal sense I'm not a Nuve shareholder. My second comment is I got to stop giving you the outline before the show starts because then we just start ripping through the outline. But I mean, anything else

you want to say about this? I know you were talking passionately in the pre-show chatter about why the price you pay matters, especially, not just especially for tech companies, but this is playing out in this case. Well, yeah. I mean, I regularly annoy other Fool analysts because, you know, I am, I'm the valuation guy and I am, you know, I'm in the camp and this is not a universal opinion, nor should it be a universal opinion, but it is my opinion, you know, on the spectrum of valuation doesn't matter to valuation is the only thing that matters. I'm real close to that second end, right? It's not the only thing that matters, but boy, when it matters, it really matters. That's the problem, and it has nothing to do with any other Fool of Service. But during

2021, when all of a sudden payment tech and everything, Nuve got swept up with all the excitement of the time. This happens every single time where valuations get distended. It's happened, I can think of at least four occasions during my professional career, and it's happened many times before that, the nifty-fifty says hi from the 60s. Valuations, people forget they matter. Being taken out like this is, the only reason they can do this, of course, is because they have those multiple voting shares. This is a risk and this is one of the risks you don't really think about when you get into valuation matters arguments. But this is one of the big risks. Like, you have three entities that control the fate of this company, and they are working together

and aligned. And so, maybe when you're buying this, this should be a bit of a, put a bit of a discount on what you're willing to pay for these things. But again, I am someone who is always going to be valuation matters first and foremost, and growth. I know quite often you'll have people put up what I think is frankly a straw man argument, but they'll say, you know, they'll pit value investors against growth investors. And I reject that war because I've always said valuation, growth is an input to valuation. Okay. And so we're not these two opposed camps, you know, with, you know, weapons pointed at each other. We shouldn't be. We should be one camp of investors where we are all trying to look through the glass half-darkly, if you will,

to see where we see the world can go. Unfortunately, with Nuve, unless you're a recent buyer and have enjoyed the gain off the bottom, this is a disappointing end, and I don't think we should lose sight of that, and I don't think we should lose sight of the people who are actually hurt by this whether they're foolish members or not because you know because management here had the ability to kind of take it away from us and i think that's about all i'm going to say about that i i think that i think we've said a lot about it let's move to the next topic long time fools are going to hear me attempt what i'm calling the near impossible by quickly mentioning tesla with jim gillies and then seeing if we can move to a broader story so let's see if we can do it

few things are interesting in the car market is delivery numbers come in tesla missed on deliveries but it still it reclaimed its title is the world's largest electric vehicle seller back from byd the analysts wanted 450 000 vehicles tesla delivered 386 000 i will stop here before going to the macro story anything you want to say on that jim yeah all right it's generally a good idea not to ask me about tesla because i do have some rather strident opinions about them i will say this i don't think the deliveries in this quarter are the story i think the story is the fact that they produced they delivered 386 or 387 000 vehicles whatever delivered means in their accounting parlance they produced 433 000

vehicles there's something like 46 000 vehicles and surplus inventory um just from this quarter alone cumulatively i think it's at about 150 to 155 000 i don't quote me on that deliberately because you know there's a transcript of what you're saying right i know i know when you say don't quote me on that well okay i guess you can quote me well i just i i have the number i have the number roughly right but okay i got you wrong that's a lot of metal lying around and for a company that has had the history of you know they've been lowering price for the better part of a year which you know some people have attributed it to elon playing three-dimensional chess again i not that smart so i kind of look at this and go it's attributable to the fact that

they're overproducing. This quarter did not improve that situation. And as you, I think where you're going to want to go with this is kind of what is the consumer looking for? And increasingly, I'm thinking the consumer is kind of realizing that full battery electric vehicles are maybe a subpar solution as opposed to some of the other things available out there. There's a lot of talk that fully electric cars are harder to fix if you need to get maintenance on them they're very expensive and now you have the legacy car makers that have been sort of tarnished producing much better uh hybrid vehicles that they've been working on for more than 20 years now yeah i mean is there more to the shift we're starting to see more we're starting to see more plug-in hybrid

sales especially as car prices plateau range it you have you have folks with range anxiety and also the difference between maybe industry wall street government bodies expecting a full shift to electric vehicles in what people actually want which is i want to save money on gas but i also want to be able to drive to another city without worrying about my car dying yeah i mean and and full disclosure you are talking to a biased audience here uh i i own two plug-in electric vehicles, a 2018 and a 2023. We are in the process of buying a third. The newest one I have, which I've had for three months, I'm averaging about 107 miles per gallon. I won't give you the Canadian version of so many liters per 100 kilometers. It works out to about 107 miles per

gallon. The improvements that they've made on plug-in hybrid range, pretty much every plug-in a hybrid electric vehicle out there, the range has doubled from where it was five years ago, the electric-only range, I should say. Then as you say, if I want to go on a seven-hour trip, I don't have to stop and plan my stops at superchargers and hope there's no lineup and hope I can get in and out in under 40 minutes. It runs on gas. I think the movement to people realizing that Toyota has got this fantastic fleet of hybrid vehicles, don't even have to be a plug-in. The increased cost of living where, of course, car prices have gone up substantially over the past few years. We all know about the inflation stories. Interest

rates have gone up as well, so you're now talking about higher car payments or people now taking six, seven, eight years on a car loan, which personally gives me hives, but that's just me. Then coupled with things like, again, I'm trying to be nice here, I don't like to talk about Tesla, frankly, but a certain CEO of the company making reference to Tesla's being appreciating assets, he himself has disproven that argument, I'll put it that way, but people clearly unwilling to, well, I mean, if your whole intent was, hey, Tesla's are appreciating assets, so I'll buy this model for a couple of years and sell it for more and buy another one. That ain't happening. And I think it's, I think it's a little, it should be worrying.

These numbers that were released today should be worrying to Tesla shareholders, I think, because I think it, worst case scenario, and things are never the best and things are never the worst, but there's usually a chart in the middle. Worst case scenario today was the death of the Tesla growth story. That's the worst case scenario. You know what? I want to make it clear, jim is not the only full analyst we have on staff we do have bulls we have tesla bulls oh that's why we have a motley we have a motley group of opinions one and i will say i actually like the cars i almost bought a tesla model x a couple years ago that i realized like with those gullwing doors i couldn't get my ski box on top which is why that guy bought that like i like the cars

i got you but you know i'm a little worried i saw this this was actually worse than i thought it would be today and i'm like oh that's not good last thing i'll leave the listeners on average monthly payment on a new car is about 750 that's in february up 25 from three years ago you're going to see some decisions being made because of that that are going to continue to play out affecting spending and also the car industry anyway jim gillies as always appreciate your time and your insight. Thank you very much. All right. Before the next segment, I'm going to do a quick ad. If you liked this conversation and are ready to take your investing chops to the next level, head over to fool.com slash sign up to join Stock Advisor. That's our flagship investing

service. As a Stock Advisor member, you'll get two new stock picks each month, rankings of a whole scorecard of companies and access to all episodes of our premium podcast, Stock Advisor Roundtable. That show is only available to premium Motley Fool members. It focuses on foolish recommendations and takes a deeper dive into the businesses we cover, featuring Fool analysts you already know and love from listening to Motley Fool Money. Tom appears regularly on bonus episodes of Stock Advisor Roundtable to discuss what's new in the Stock Advisor universe and to answer questions sent in from Motley Fool members. I will also include a link in the show notes. All right, up next, some real life money questions with Allison Southwick and Robert Brokamp as they

help a couple figuring out saving, estate planning, and 401k loans. You're obviously very busy. You're both working. You have twin boys. How do you divide up the money chores in your house. Tyler, why don't you go first? A little while ago, I guess it was when we got married, is when we really started to combine finances. Actually, I'll take a step back. It was, I don't know, maybe a year and change into our relationship. We knew we were serious. There was a lot of going out. We pretty much always split everything 50-50. At some point, we decided to just get a joint credit card because it made things a lot easier, far less overhead of keeping track of like, all right, I paid for dinner this

time, and you Venmo'd me, or just keep it in a running tab for any big expenses. We started with a somewhat combined earlier on with that joint credit card, but when we got married, then we just completely combined our finances. Really, at that point, Kristen was the one who wanted to take control of making sure that bills were paid. She's the one who does, I would say, the accounting, the way I would describe it, of just tracking what we've got and what's going, what's coming in and what's going out. All right, Kristen. So you are the accountant in the family. What does Tyler do? I would say Tyler is more of the strategist. He has the further outlook. That's just sort of the way he approaches life in general is he looks

at the longterm. I'm a very like here and now sort of person. And so he is great at sort of looking at our, you know, overall nest egg, where we want to go, big picture investments type stuff that I'm perhaps not as, um, as skilled at, or as you know, my nature isn't inclined to those kinds of things. I think the doctor is ready to see you now. Is that correct? Dr. Bro. Yes. Again, not a real doctor. Not a real doctor. Are you going to get tired of me saying that? No. Did you just get your doctorate already in something? Two masters and you couldn't go for a doctorate? Come on. I'll work on that. I'll work on that. Over the weekend, I'll get one. Okay. So, before the show, we talked to you about what concerns you had, and you indicated that one

challenge you have is differences in risk tolerance. And we've touched on it a little bit. And it's a term that's often applied to investments, but could actually be applicable to most financial decisions, right? How much you spend, how much debt you take on, how much insurance you get. And it really gets down to your financial fears, right? What are you most worried about when it comes to money. So Krista, let's start with you. What risks are you most concerned about? What worries you most about money? Great question. I think I don't deal well with change in life in general. I'm very resistant to change. And I think the impermanence of money is terrifying to me. And the experience we went through with this house build and the

kind of harrowing adventure that we had to go through really reinforced that fear for me in a way that I think now has exacerbated maybe some of those perspectives that nothing ever works out, money comes and goes, there's never a real savings, and we'll be working until we die because we'll never have a real retirement. As long-time listeners will know, you and I actually have a good bit in common. Allison likes to call me the awfulizer because I'm always worried about the worst-case scenario happening. I'm going to ask you some clarifying questions that have helped me cope with my awfulizing. Do you know someone similar to you, your background, your work ethic, your situation, who has essentially lost everything and never could

retire. Everything they had was gone. No. Right. That doesn't mean it doesn't happen, right? There are people, maybe people listening to this podcast that it's happened to, but it's probably not a likely event. That doesn't mean your concerns aren't valid. But one thing that has helped me is to put my fears into probabilities. It's not likely to happen to you or to me that we're going to lose everything, right? You're working for the federal government, which is it the federal government you're working for? Yep. Okay. So, will you receive a pension? Yes. Okay. So, that's something that you have. Again, the reason I point this out, and I think it's good to, it's really to right-size your concerns,

right? It's never good for you to be worried 75% of the time that you're going to lose everything when there's a very small chance of it happening. Really, it's a way of giving yourself permission to relax and to think about some of the things that you have in place. I'm going to put a pin on that because we're going to attack a few more questions about your finances to hopefully make you feel a little bit more comfortable. We've talked about how you are actually good communicators, but there's some differences in your money. Of course, every couple has some differences. Some of that is due to personal preferences because people are different and there's no right or wrong answer. But some things are essentially things that every family should be

doing with their finances, and it can help the worker, like a financial planner, to provide an objective, neutral, third-party opinion that sort of helps differentiate between what's negotiable and what's not negotiable. I'm not your financial planner, but let's start by asking you a few things about your finances that a typical financial planner would ask and recommend that just about any family should do. First of all, do you have an emergency fund, which is that three to six months of cash that you could live off of in case there was a big-ticket expense or one of you lost your job? We don't have an emergency fund that is liquid. We do have investments that we can draw on that we have drawn on, but obviously, those come with the cost of capital gains.

Though I would add, we did just open up a HELOC on our house, which is to basically act as an emergency fund. If we need to be able to draw something, we've got some room to work with there. realizing there would be some interest to pay. But if there was an immediate need for a big expense that we could pay off in the near term, we have that option with it. Good. And you've opened that now, which is great because often when you try to open one of those in the middle of an emergency, you won't be able to get it. So that was smart. Do you each have enough life insurance so that your family would be financially okay if one or both of you passed away? Yes, I think both of us do. Yeah, that's one thing we've made. Once we had kids, we made

sure to up that to the max we could get from benefits just because, yeah, if something happens with two kids, there's plenty of expenses. Excellent. Do you have an updated estate plan, which includes all your legal documents like a will, healthcare directives, maybe a trust if it's appropriate for your situation? Not everyone needs a trust, but some people think it makes sense for them. Since moving from DC to Virginia, we do need to update our estate plan. But when we had children, we did kind of get the initial ducks in a row, mostly to make sure that they would be cared for in the event of both of our deaths. Is there a burning desire by one of you to retire significantly early, or are you comfortable with just that traditional path of

retiring at some point in your mid to late 60s or so? I mean, if there was an option for me to retire tomorrow, I would absolutely take it. But realizing the reality of, you know, most Americans, ourselves included, I mean, I would very much like to be able to retire, you know, in my early to mid-60s. I will be eligible for my government pension after five more years of federal service, and I have no doubt that I will meet that. And, you know, then I'm sort of, I'm for sure working toward the minimum retirement age that my pension will allow for, and likely beyond that to really maximize my pension's payout. Yes, I am. Yeah. I'm contributing the minimum amount needed to make sure I get all the company match and don't miss anything.

And I know we both want to be able to contribute more to those, but that will come when expenses go down, really, when daycare costs stop. Right. And Kristen, are you maxing out the match with the TSP? I am maxing out the match. And I just last year also opened the TSP Roth account to start putting some money in there, post-tax dollars. But I aspire to be able to max out my annual contributions at some point in the near future. Okay. So, of course, I don't know how much you're contributing and how much you've already accumulated, but knowing the full 401k match system and knowing the TSB match system, I know that you're both probably actually doing pretty well for retirement. Again, I don't know how long you've been doing it, but you are taking

a very big step forward and you add the pension to that. And it sounds like you're probably doing pretty well, but of course you'd want to look at the numbers, but that's all very encouraging again. And then the other thing I'll just ask about is the college savings. You talked about how that's important to do. Are you able to do that now? And are you both, even if you're not able to do it now, are you both on the same page in terms of the importance of that? Yes. We established 529 accounts actually even before our sons were born and have been pretty regularly contributing a small amount of money just to try to at least get some tax relief from our donations in the state of Virginia, but we definitely aspire to be able to put more in

there. But it is, I will say, as our kids get older, so many grandparents, I would far more be appreciative of a grandparent donating to a 529 than giving us another toy or an outfit. And I think both of us have encouraged our parents to do that. It's not been... And, you know, I, I think my dad is the only one who has taken that to heart and on birthdays and stuff, you know, he puts in a few hundred bucks for each of them into, into each of the accounts and yeah, adds up. And that happens a couple of times a year. So everything you've told me indicates that you two are in really good shape. I mean, you are, you've talked about the, the debt from the, the home purchase and we'll get into that second, but I just want you both to know

that your foundation is, is really solid. Like you're, you're doing things better than the average American. And I'm saying that particularly for you, Kristen, because if I were in your shoes, I am in your shoes and I need to hear that every once in a while as well. And that you really, you've got a solid foundation. Now, clearly that you've brought up the debt a couple of times is the debt. Do you feel, is it too much or is it still manageable? But psychologically, you're just not comfortable with it. I'll go first, Tyler. I think it's the latter. It's very psychological at this point. And though I hate how this word gets overused, I think there was some trauma involved in the debt that we did take on and the fact that

these investments that we had so carefully made in the real estate market really resulted in no net profit for us because of the debt we had taken on. It is now at a very manageable place. And I would say the largest outstanding debt we have is actually to our own retirements. However, it is a bigger number than I've ever managed in my life when it comes to debt. And that in and of itself, I find very discomforting. Anything you'd like to add to that, Tyler? No, I would agree with Kristen. Really, the biggest debt is to TSP and 401k. When it came time that we needed to get more money, that was one of the first spots I looked because I thought, better to take a loan from ourselves when we're paying interest back, but it's going

back into our accounts. We're not losing money to a third party for those loans. So, went to that well first to get what we needed. So I'll just repeat again that I think you're actually doing pretty well. I think the thing to think about would be what could you do to pay off the 401k TSP loans quicker if you could. I think you'll feel a lot better when you do that because it's not only, again, not only just a loan, but there are consequences if you can't pay it back. Another thing to consider is maybe if you could boost up your emergency fund, but that may be difficult given your situation and you've taken out the HELOC if you need it. But I think if you have a plan to take care of those two things, you will be in great shape. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal

recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.