The Canadian Investor - A Small Cap Medical Stock That Will Surprise You

Episode Date: January 23, 2023

In this episode, Simon talks about STAAR surgical, a stock he found using a stock screener. Braden goes over the results of a screener that he used and why so going after a hot new market can be a death spiral for so many companies. Tickers of stocks discussed: STAAR, TOY.TO, SHOO, GOOG, FB, ADBE, LULU, ODFL, DHI, CPRT, ON, LEN, TROW, SWKS, TER, PHM, GRPN Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Register for ShakepaySee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Bélanger. The Canadian Investor Podcast. The date is January 17th, 2023. Welcome into the show. My name is Brayden Dennis. As always, joined by the very handsome Mr. Simon Bélanger. Dude, dark blue is your color. You look great. Oh, thank you. Just to let youanger dude dark blue is your color you look great oh thank you just

just let you know dark blue is your color it's uh it's merino wool that's what it is it's uh best kind of wool what does that mean merino wool is actually um those do a lot of outdoor stuff will know what it is it's basically this special kind of wool where it's um antibacterial and it lets your body breed very easily but keeps warmth a lot so it doesn't stink and it's very comfortable as well doesn't stink well that is ironic because is this the lowest point ever for me on the podcast right now like potentially ever the zoom call you can see literally half my face how there's like a toothbrush in the way. I'm recording this literally in an Airbnb bathroom. This has got to be the lowest point. I mean, yeah, it's interesting. I'll just

say that. You've had a few cottage recordings where it was challenging to say the least, but yeah, this is a whole new kind of podcast studio. Let's just say that. a whole new kind of podcast studio. Let's just say that. Dude, it's so bad. The sound is pretty solid though. Lots of wood and towels and the whole thing. It's quite the studio, but I think this is a new low point for me. Today is a Monday release, so we're talking mental models, frameworks, tools, stock investing ideas that we think are interesting and we want to talk about. So let's get right into it. As promised, we said we would do an episode where we ran some screens and the ideas that come out of those screens. So do you want to go first?

Yeah, yeah, definitely. So it was definitely fun to do. That's going to be my main segment kind of separated into kind of two bits here. So I use the stock screener on Stratosphere. I also made a poll on Twitter. So I asked people, what kind of market cap would you like me to screen on? And I gave some relatively small market caps. How did you come up with these market cap numbers? I was looking at the numbers. I was like, what is this? What's going on? The short answer is there's no logic behind it. I just had fun with it just because we've talked about how market caps are, you know, there's general ideas of, you know, a small cap is within, let's say, a certain range. Typically, I would say what below 5 billion is kind of typically less than two for sure.

Yeah. So, I mean, but you'll look different places, you'll see kind of different ranges. So I'm like, you know what, it's subjective already. So I just decided to throw out some weird numbers. So I did below 946 million. My second option was 94747 million to $2.63 billion. And the last option was $2.64 to $8.81 billion. So the winning one, I thought people would want some really small businesses. I was surprised, but the winning answer was kind of the mid-range here, $947 million to $2.63. So that's what I used for for the most most random dot ever. But I love it. Yes, I just I wanted to have fun. So the other

criterias I've used is I use listed in the US and Canada. I originally used Canada, but there was just not a lot of results. I'd wanted a little more. So I included US and Canada. I put 10 percent revenue growth year over year and a positive revenue growth on a three-year basis free cash flow growth year over year positive earnings per share growth year over year and three years so it doesn't have to be as long as it's positive here three years shares outstanding range I used a range here I was a range here. I was a bit more generous. I used minus 20% to plus 20%, knowing that I'll probably lump in some higher growth businesses by the 20% because there's a lot of stock-based compensation. But over a three-year period, I figured 20% is high,

but it's not crazy if the company's growing quickly. I chose under 50% in terms of debt to equity and a return on invested capital over 10%. So I got, I think, about 12 results here. I won't go through all of them, but the one I ended up choosing, which I'm not sure why it popped up on there, because after the fact, I actually realized it was 3.5 billion market cap. But it's a bit different here if you're looking at the screen. Some idiot built that screener. Oh, wait. It was us.

There must have been a slider that you just had off because it's pretty like decisive on the numbers in there. But, you know, it's easy to use at least. Yeah, it's very easy to use. So it's most likely a user error. But regardless, I had 12 names in total here. The one I ended up choosing is Star Surgical Company. It is listed in the U.S., has a market cap of around $3.5 billion right now. So I'll talk a bit more about this.

I'll give an overview of the business. I would say it's a semi-dive because there's a whole lot of stuff I did not know about what they're doing that I had to learn. I'll just say that. Is it medical devices? Yeah, it's medical. So it's optical devices. so it's actually very interesting what they do it's um it's an alternative for the most part to laser eye surgery oh okay yeah anyways

it's a company i never heard of i don't know if people have heard of on the podcast um so it was they're actually doing quite well so uh it'll be i'll go over that i'm pretty excited to talk about it yeah i'm interested too because i'm personally like quite bullish on surgical tech surgical devices especially if there's a recurring element to their revenues uh which i'll learn more about when you go through it but like just thinking out loud like you know i'm long intuitive surgical i think i'd like to be long striker because they're having some success with their robotic surgery wing now too. They're another entrant into this market. I think the DaVinci by Intuitive Surgical is the leader and the winner here, but if I'm wrong, I have no problem kind of pair trading a bunch of them, but I like this segment in general.

Yeah, no, it'll be fun so anyways i know i'll let you talk about your screener what you use in terms of criteria i know it's different because i saw the names way different yeah they're a lot different uh especially in size right that's the beauty of the screener i'll call my screen growth profits, and pricing power. I know it's a lot of buzzword-y things we talk about, but I had an interesting convo on screeners this week. And the question posed was, in your opinion, what is the value of a stock screener? And my answer was actually anti-patterns. And here from Wikipedia, here, the definition, an anti-pattern in software engineering is a common response to a recurring problem that is usually ineffective and risks

being highly counterproductive. So it's patterns you recognize, it's consistencies that you recognize across failures or things that are just overall ineffective. And so I am hoping to screen out anti-patterns, things that I usually do not find effective or do not match my specific style. And anti-patterns are useful mental models in life and certainly in investing. And as useful as they are for generating new ideas, stock screeners are. It's also useful for avoiding what I call tar pit ideas. And my next segment, so we're both doing related to the screener here. My next segment is all about tar pit ideas. So stay tuned for this. But for now, it just means avoiding mistakes and businesses that

commonly fail, do not fit my framework. And number two, I just don't understand well enough to generate alpha. And that's totally okay to screen out things that you just don't understand. So to do that, I first screened for US and Canadian listings for you as well. So North American listings, because that's 99% of what I look at. Then I added every sector on the sector part of the screener on Stratosphere. And then I removed every sector that purely sells, makes, or extracts a commodity. sells, makes, or extracts a commodity. So I removed materials, energy, forestry, chemicals, metals, and mining. I additionally removed sectors that I'm not in a position to analyze based on my circle of competence. So a lot that came in there are like boom bust biotechs that I do not understand whatsoever and have no real edge there.

And so here are the results in order of market cap. We got Google. You ever heard of Google? That is obviously the largest by market cap. Then Meta, which is Facebook. Dude, sneaky side note here. Meta is up 53% since November, just quietly sneaky. That's interesting. Those are the two mega caps. So don't worry, they're not all mega caps. Some more big names here, but it goes a lot smaller. Adobe, Lululemon, MediaTek, Old Dominion Freight Line, which is the trucking company. It's the US version of TFI. DR Horton, which is a home builder, high quality home builder. Copart, very high quality compounder. Lenar Corporation, no idea what that is, but it's 28 billion in market cap. Am I stupid? What is that?

Skyworks Solutions, Teradyne, and Pulte Group, which is another home builder. So these are much bigger names. Many of them I know, I think it's like one or two here on the list that I'm not familiar with. They all have double digit revenue growth per share. You can screen revenue per share on Stratosphere, which is badass because so many of these tech stocks, they have huge revenue growth, but they also have huge dilution on the SBC side. So you can usually, you can only do like EPS on screeners or free cashflow per share. Hell no. We got revenue per share as well. So they also have high margins, at least 20% operating margins at the minimum, high return on equity and high ROICs at over 10%.

high return on equity and high ROICs at over 10%. And a few other things like were profitable during X periods and sustained like quarter over quarter growth in some periods, but like just small little things that I put in there to try to avoid what I was talking about anti-patterns. But yeah, I mean, I don't really have anything more to add than that. It's just a useful tool to creating a universe for research. That's what I think about them. Yeah. Yeah. And we talked about that. It's just, it's an idea generator, right? I think that's the best way. That's the easiest way I can put it in. And you set the parameters to what you're looking for. And a couple other names that came up for my screening, because I didn't want to go through the whole list, but two names that people may be familiar with,

Spin Master Corp, which is a Canadian toy manufacturing company. I've looked up. That's a TSX listing. Yeah, it is a TSX. So that's one I'll probably try to dig into at some point this year, because it is interesting it's a smaller cap here and then the other one steve madden which has an awesome ticker shoe s h o like uh oh yeah not with an e with no with that double o's yeah which is um i'm

surprised yeah steve madden that i didn't even realize it was publicly listed i'll be yeah there you go uh i'm noticing on your screenshot here. I don't know if you knew this by the way, but you can add additional columns into your view too. So I know you just have the default. Oh, I did not know that. Yeah. Industry sector market cap. There's a little green button and you can add in like revenue growth and look at my screenshot. You can do that. Yeah. Yeah. I saw that. Okay. No, I'll try that next time. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge

for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple, yet incredibly low cost and effective. Very impressed with what BMO has

built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Now to get back to Star Surgical. So ticker STAA. Star Surgical develops and markets medical devices for use in refractive, cataract, and glycoma surgery. So also design develop and manufacture in implantable polymer lenses also known as icl these polymer lenses are made of collagen and polymer polymer

is a material that would be used to make hard contacts lenses for example and collagen is a main structural protein that is found in the body. You'll have people sometimes will put collagen in their shakes like there's a lot of uses for collagen. Those ICL generate 92% of the revenues in 2021. That was up from 87% in 2020. And again, I just I had to watch a bunch of different videos just to understand this stuff because it's not really something I was familiar with. So if we do have opticians and things like that, hopefully I'm making some good sense out of it. So these lenses, these lenses are tailored made for eyes of the patient in question.

So the implant requires surgery during which they dilate the pupil and then they place it behind the iris. So the iris is the colored part of the eye. Once the pupil returns to normal, the implant is firmly there and improves vision. So an easy way to look at it. Is it like a permanent contact lens? Yeah, pretty much. Yeah. So, yeah.

And what really stands out for Star Surgical is that what they use here, the columnar lenses. So they're really the only ones who do that. And I was looking through their 10K, which is the annual report for those not familiar in the US. Their primary competition is really laser eye surgery. So there's not really all that much competition. They also make lenses that are used for cataract surgery.

So cataract surgery, it's essentially you replace part of the eye with an artificial lens. So they do that, but that's a very small part of their revenues. The main part is here, the ICLs that I'm talking about. So one of the advantages of this over laser eye surgery is that although it is meant to be permanent, it can be removed safely if the patient wants to remove it later in life. So some people may like that option, whereas laser eye surgery, that cannot be undone since it shaves a tiny amount of tissue under the surface of the cornea. One of the downsides with their product is that it's much more expensive than laser eye surgery. So pricing I found online was between $3,000 and $5,000 per eye, which compares to a range of $500 to $2,300 for laser eye surgery. So a pretty big difference here. But again,

I think for some, it's just an attractive alternative because some people may be scared of having laser eye surgeries and the potential side effects although i from what i've read it's you know pretty safe in general now do you know i have laser no i didn't know that i got laser yeah and uh i regret it really we'll talk about that later, but I regret it. So this is intriguing to me. This is good. Okay. This is intriguing. Okay. So it is available in over 75 countries and they have over 1 million lenses that were implanted worldwide.

Now, in terms of patents, they have 65 patents and 27 that are pending. That's really something important. I'm not the best first when it comes to either biotech or, you know, medical devices. But patents are very important because usually, you know, there'll be something proprietary and they'll have exclusivity for a number of years. We're thinking here about, you know, for example, drugs, right? So you can get either the generic kind or the name brand but the generic usually is available once a patent expires so just so people are aware of that so in terms of patent they did mention that they rely more on trade

secrets than patents as a whole and that the expiration of patents wouldn't have any adverse effect on their operations. Their intellectual property is tied to the design, production, and manufacturing of those columnar lenses that I talked about or the ICLs. And they also make intracular lenses which are used for cataract surgery, which is replacing the natural lens of the eye with an artificial one. And I think I read somewhere that like around 50% of the population requires cataract surgery at some point in their life. So it's pretty common.

But there's a lot of competition in that segment. And that's only a small portion of their revenue. I'm pretty sure both my parents have had. I know my mom has. I don't think anyone else. Yeah, people get this all the time. Yeah, I think it's more typically it's when you're close to your 50s, 50s, 60s. 60 plus, like a lot of people need this.

Yeah, exactly. Now, in terms of key dates, so people may be surprised, but Star Surgical was actually founded in 1982. It was a partnership between Tom Wagoner and Dr. Thomas Mazzocco. In 1983, Star completed its initial public offering. So it's been listed for quite some time. In 1991, they received FDA approval to market its foldable intracular lenses. This is what is used in cataract surgery. So this was a bit of an advancement compared to

what was available at the time. In 1997, they started selling the ICL. So what I've been mostly talking about for those who want to correct their vision, this started selling outside the US because it wasn't approved yet by the FDA. In 1998, they had marketing efforts to begin bringing the company into the glycoma and refractive surgery markets. In 2000, Star received FDA approval for its glycoma surgery device. And in 2006, they started selling ICL for myopia in the US. So their main type of products, they've had more development on that product. So if you look on their website, they have like all the different kinds of FDA approvals. They've had some recent ones because they have different kind of tiers. I don't know exactly the whole different

between all the three, four different tiers that they offer, but I'm sure people were well versed sure people were well versed in that you know the uh ocular kind of industry would know obviously i learned quite a bit just researching this company this is funny this is a this timeline is exactly what i was talking about when i say filtering out boom bust like waiting for FDA approval type stuff. Look at this timeline. 83. Oh, yeah. IPOs. Almost 10 years later, 91, they received approval from the FDA. How many times do you hear that? This biotech's waiting for this patent, or they're waiting for this FDA approval. That is literally, in my mind run. And when I say I like the devices space,

I do like the devices space. I'm talking about, I hate the boom bust biotech that's early in their stage. So where I'm going with this is look at the market cap here. This is a lesson that you don't need to be super early on on something that's super risky uh until they've really figured out their business which you know took a long time exactly and their revenues have not like really started increasing at a good clip until recently uh so that's something that people should be aware of right and. And, you know, my take here is that they've kind of found a bit of a niche from themselves, like a product that's, you know, I'm not sure if bigger players would think it's worthwhile to actually get into that.

And I'll talk a bit more here about what I find interesting. So first, I wanted to look at quickly at their management. So their current CEO is Thomas G. Frenzy. He became CEO actually just a few weeks ago. As of January 1st, 2023. But was on the board since June 2020. He's following in the footstep of Karen Mason. Who retired at the end of last year.

She had been in that role since March of 2015. Which I like to see. I like to see that there's not too much turnover in terms of leadership. And obviously, retirement's a very valid reason to change a CEO. And prior to that, Frenzy, the new CEO, was the worldwide president of Johnson & Johnson's surgical vision business and also worked in a senior leadership role at Abbott Laboratories, which is a large medical device company. So I think, you know, you have to hand it to him that this guy definitely has experience in that field. So they didn't kind of pick a random guy to run this business.

It sounds, I don't know his whole background, right? But it does sound that like he knows the type of business that they're in. sound that like he knows what the type of business that they're in now looking at management again it seems like looking at Glassdoor something I like to do they generally approve of this CEO they have pretty good rating 3.8 stars out of 5 but again it still has the old CEO name so we'll see whether whether it actually continues for this new CEO but But generally, I think CEO approval is also reflective of senior leadership because obviously people raid their CEO, but a lot of what's happening with the CEO is usually implemented by their SVPs, right?

And the senior leaders. So I don't expect this to change too much, but something to keep an eye on. So I don't expect this to change too much, but something to keep an eye on. For the financial metrics, like I mentioned, market cap $3.5 billion. 2021 revenues were $230 million. Trailing 12 months revenue, $280 million. They're growing revenues at 19% over the last three and five years. So pretty much 19% to 20% every year.

So this is really accelerated recently in the past five years where before that it was much slower growth their gross profit margins have gone from 70 percent in 2014 to 78 percent in the trailing 12 months so a very nice kind of trend up here the operating margin and net income margins have been steadily increasing over the past three years as well. Free cash flow has grown nicely. They more than doubled year over year after being slightly down in 2021 compared to 2019. Shares have increased about, the share count has increased about 17% over the last five years. So that's a total increase. Not low, but not alarmingly high considering the growth. What's your take on here? 17% increase over five years? Yeah. So just a little over 3% a year. I mean, look, of course never i'm never looking at that and going oh nice no but that is

that is not uh unreasonable especially in a growth phase like you look at tech that has been so loved like companies like salesforce uh you know names like that that are like well-known like kind of like blue chippy tech stocks blow that dilution out of the water um and so if you give that context then it's not so bad no exactly and one thing that's really important for a business like this and i'll put a lot of emphasis on that is they spend a good amount on research and developments or R&D. And that's a good thing. You want these kind of companies to be at the forefront and keep investing and not sit on their laurels. Because if they do, they'll tend to lose market share. So over the last two years, they've spent over $30 million in R&D.

And it's been increasing steadily, which is fine. You definitely want to do that. They can afford it. Like increasing steadily, which is fine. You definitely want to do that. They can afford it. Like I said, they are profitable. And as they mentioned their annual report, the, I'll butcher this word, but the oftalmic surgery, which is, I had to Google the word. So it's cataract surgery falls into this. And that market is very competitive and is driven by technological advances and regulatory approvals and the regulatory approval is what you were talking about here about you know an FDA approving it and that's why constantly working to improve and develop products is essential and they

do mention that so that's something you want to keep seeing if they slashed R&D a year over year by half for for example, that would be a warning sign in my view. They have a pristine balance sheet with no debt on it. They do have some liabilities like leases, but the balance sheet is very good. They have $210 million in cash on the balance sheet as of September of last year. Valuation, it's not a cheap stock by any stretch here price to sells of 12.5 price to earnings ratio of 92 and the price of free cash flow of 155 so my whole like this is obviously not a deep dive and there's a lot there's a lot to like about this business I'll be honest I just don't know how big the market can be for that

compared to, you know, having the laser eye surgery option. I think it's going to appeal to a lot of people who would prefer having the option to remove it should they want to move. I think having just that option is attractive to a lot of people. But on the downside, I mean, it is quite expensive. So and in terms of coverage for insurance companies, I used to work in benefits a bit more in my old job. So I know how it works. This tends to be seen laser eye surgery and this as optional kind of procedures. So for most insurance companies, they will not cover it.

If you have something like a health spending account, that will oftentimes be allowed under there, but not everyone has that. So something to keep in mind, because if people cannot pass that through their insurance,

the cost can be a bit prohibitive here. I'm messing around. I just the ticker sta i'm messing around on on stratosphere with the data here dude pretty amazing financials i'm not surprised this stock is yeah uh so expensive it's uh it's not a cheap stock at all no which is surprising um to find still expensive stuff in small cap land yeah but, but they, I mean, if you're... Oh, it's three and a half billion. Yeah.

Nevermind. Yeah, three and a half billion. And if you're going to, you know, this is the kind of growth companies that I like where they are profitable, right? And they're not diluting like to an extreme. Very recently though. Yeah, very recently, exactly.

So it's more recent but you know it is you're paying a premium but you're not you know it's you're not talking about path to profitability here they are profitable is it sustainable i'm not sure again i've not dug deep enough to to know that but it's trending the right way i I'll just say that. You said, what was it? Karen Mason took over the job in 2015. No, she used to be the CEO. No, no, she was the role in 2015. Oh, yeah, yeah.

Yeah, that's right. Dude, this business transformed in 2015. It looks like. Just graphing out their revenue and gross profit, it's been unbelievable. The business was just kind of meh and then oh my goodness uh kegger since her tenure revenue on kegger 21 gross profit 23 and a half percent and made the business profitable wow i suspect they were probably focusing a bit too much on the kind of cataract surgery side, because one thing I mentioned, right, the ICL, so the one for people, you know, that they would use instead of using the laser eye surgery. That was 92% of the revenues in 2021 compared to 87 in 2020. I didn't check all the financial years before that, but I suspect it may have been increasing prior years.

So maybe that was a shift in kind of the direction of the business where the cataract surgery market is very competitive into something that they seem to have almost a bit of a monopoly if you are looking just at the icl and not considering the the laser eye part i like that you can like it looks like safely remove it it's not permanent because yeah look i have i got laser three or four years ago now um and i have five plus friends who have all gotten it during that timeframe who have had no issues, no problem, nothing. You know, you have like dry eyes for like a month or so. And then you're, and then you're flying. I still, to this day, wake up every morning with excruciatingly dry eyes and have to put in eye drops. It is probably like the thing that stresses me out the most in my life. I would say is how dry my eyes get from LASIK.

And I can't do anything about it. I'm just, it just is what it is. And it sucks, dude. It sucks. It drives me nuts. So I regret it. A lot of people love it. Yeah. And it was, it is great. You know, you could wake up and see all of a sudden, but bro, I mean, it, it, it, it ruins my day sometimes.

Oh, there you go. Star surgical. Star surgical. Uh, you should be paying the podcast here you're like you just you just get me you just get me isn't that it's like are you suffering from dry eyes from lasik surgery contact star surgical today i mean yeah i hope people enjoy this because i had no idea like i never heard of this company i don't know about you but uh yeah, it was fun to do. Yeah. Never. I'm going to have to contact them. Tell them they could be onto something here. They are in Canada. They do sell in Canada. So yeah. There we go. There we go. No more ads. They got to start paying us here. We're giving them too much credit. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using

Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. So not so long ago, self-directed investors caught wind

of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one

ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. and more information. All right, let's talk about tar pit ideas. My last segment and last segment for today. You're familiar with Y Combinator, right? No. No. Really? Yeah. I'm actually surprised by that. Okay. I know you're not in the startup scene, but I thought you might've heard what they do. Anyways, Michael caldwell and michael sybil the guys that run uh why i'm sorry dalton caldwell and michael sybil those are the guys that run y combinator

today and they see so many startup ideas because they they get applications from all over the world to try to join y combinator it's a startup accelerator. Okay. It is the most famous startup accelerator. It is the startup accelerator that defines Silicon Valley. Airbnb went through it. Stripe went through it. The list goes on and on. And they talk about tar pit ideas. And so credit to them for coming up with the term. And that's what this segment

is about. Now let's talk about tar pit ideas and how they're found in business ideas and how they can relate to business models and traps that stock investors fall into. So I'm going to have my own little spin on it here. Are you ready by the way? This is my podcast segment in weeks yeah go for it this is this is top tier sitting down i'm ready to be floored yeah yeah you just move the standing desk okay we're ready um a tar pit is a spot where oil seeps up through the earth as a result of large amounts of organic decayed matter. Through long, long periods of time, these form naturally in the earth. And in a tar pit, you can find a great amount of fossilized remains. They're like an archaeologist-like hotspot.

You can find dinosaur bones there even in large tar pits. And animals tend to be attracted to tar pits, thinking that it might be a watering hole in the wild. They think, oh, here's some fresh water. They get stuck in the thick, sticky tar pit, and it is most often deadly. They'll get stuck and they will pass away. It is a trap they cannot leave. So what happens is more and more living organisms end up decaying in the tar pit. And it has a compounding effect. The flywheel is in action because the smell of decaying animals brings in more animals who also fall victim to the tar pit and so on. And that's how you get these really, really concentrated organic remains, fossils, bones, and in the end, oil because, you know, science. So tar pit ideas are business ideas that founders

are attracted to, but you will find a list of dead companies that exist in the tar pit that never found product market fit. These ideas are crowded. They have tons of competition. They sound exciting. They sound original as well, which is the true trick. And it feels like a wide open space, like a blue ocean. And the reason for that is because you can't see all the dead companies that are stuck in the bottom of the tar pit because they're already dead. It feels like a blue ocean. You think you found the watering hole, Simone. You're trekking through the Serengeti and you think you found the watering hole and it's a tar pit. And it's even worse than a red ocean. It's worse than a red ocean with sharks and competition and

business because you just drown in the tar pit and no one knows and no one cares. So that's what a tar pit is for business models. Before I get on to stocks, what do you think? What do you think of my African lion safari here? No, it's interesting. No, I definitely, I can think of a couple business ideas that would fall into that. I think the one, I mean, you must remember Groupon, right? Yeah.

Groupon's still going though. But yes. Still going. A bit of a tar pit. For sure. Yeah. It's the brand name. And I just looked up the stock here and it's 253 million market cap.

It's down from. Never really worked out. No, I mean, it's down from never really worked out no it's i mean it's massively down i don't know what the market cap was at the time if you factor in dilution but at some point i think when it ipo'd it was around 400 a share and now it's eight dollars so perfect you know what simone perfect tar pit idea you just pointed out is groupon because the leader in the category and still didn't work exactly and just think of and how many ideas come out like oh it's like yeah like big discounting for you know companies because you have this two-sided marketplace that's like really impossible to solve exactly and the amount of times i watch either like shark

tank or dragon's den and people were pitching a variance of groupon yes and you see groupon that's like very it's struggling clearly i i don't know what they're if they're profitable or not i'm just kind of looking at the quick overview here but you know just thinking if they can't make it work chances are there's probably hundreds if not thousands of names that tried to borrow that idea make it slightly different thinking it would hit big and you know if you pitch someone just like that not a bad idea per se but i think you know the proof is in the pudding here that was such a good tar pit idea uh right off the top of your dome look at you you're wearing your you're wearing

your color today. The mind's going. You're on fire. All right. So now let's talk about crowded stocks because in the tar pit, it attracts a lot of people coming to the tar pit. Naturally, you have this flywheel. And this happens with trader bros and retail investors in crowded stocks. The exact same thing happens and they're all tar pits. Think of meme stocks. Think of innovative, groundbreaking, high-flying stocks like the, what is it? The Aerotine International from the Wolf of Wall Street. When Leo DiCaprio was like, I have a high, he goes, John, you're going to want to hear this. I got a high flying tech stock out

of the Midwest. It's got patent pending civil and military applications. That's a tar pit. And retail gets excited about it and pumps it up, but there's no substance to the business. The crowded stocks relative to the business fundamentals. The management team is interested in selling a fascinating story. The investors go online, try to pump the stock. They tell the friends. Meanwhile, they're drowning in a damn tar pit business, and they're going to eventually lose all their capital, but they're also going to drag in their entire network into the tar pit business, and they're going to eventually lose all their capital, but they're also going to drag in their entire network into the tar pit too. Everyone knows a friend that has tried to sell them a tar pit stock. You've had plenty. Some junior miner, some patent pending approval drug

company, some flying car type hype story, And they all turn out to be carpets. Carpets. Tar pits. Avoid them at all costs. You know, be aware of the tar pit and, you know, always do your research before flocking into what looks like a watering hole. And it turns out to be one of these stinking tar pits. hole and it turns out to be one of these stinking tar pits no well put yeah it's a deal i think a lot of those tar pits too are the allure of a quick buck right the next big thing and i think just as you were talking i was reflecting a little bit the you know the whole amazon story yeah it's such a disservice for a lot of investors, because people constantly look at, oh, you know, if I would have helped bought Amazon and you know, whenever

listed, I don't know, the 1990s, not exactly sure when. And, you know, look at the price today, I'd be a millionaire. And people constantly are looking for that next multi multi bagger and they just hear that story and i think it kind of ties in a bit with what you're talking about here because people focus in on a handful of success stories like that but you know they don't look into all the names that the dead bodies burn them yeah exactly that's it so because there were so many in the that dot-com bubble and amazon found their product market fit and a lot of the tech companies that are the mega cap trillion dollar names today they went seemingly being boom bust in the early 2000s um they were different in the fact that they were navigating

product market fit and building real businesses that had sustainable, you know, sticky products. And, you know, Jeff Bezos is just, you know, the most ruthless competitor and capital allocator maybe ever. And so you're right right there's a long list of the dead bodies that you don't see yeah yeah and i it's just i don't know if it's laziness i don't know if it's people wanting to hear a good story a combination of analogies right yeah they like analogies and you know people get pitch stocks by friends, family, and whether, I don't know, it's a trust thing. I think a lot of people just love a good story and don't take the time to actually do some basic analysis.

I mean, I'm not trying, I've made that mistake. I've talked about it before where I invested in a junior minor. I lost everything when I was, I think, 18 or 19. So I've made that mistake before. I've learned from it. I know it's easy to make. I'm not trying to put anyone to shame here. And we saw it recently, right? It's not publicly listed, but don't feel too bad if it's happened to you. Just make sure you learn from it because it's also happened to some institutional investors with FTX recently. Exactly. And we're seeing it unfold right now.

And these supposedly professional investors were, yeah, I don't know what they were smoking, but they were believing the story. They did not do their due diligence. Web3 is a tar pit. Yeah. Yeah, because you here and there are... Those startup ideas. Yeah, that's it. So nothing to feel bad on, but just something to remind yourself when you're investing in

companies, you may get some tips from people you know, and that's fine, but don't invest blindly in the companies just based on a story. Take the time to do some research. Because oftentimes, if you just take half an hour to an hour, you'll probably be able to tell whether that's actually a good investment or not. Yeah. No, I wholeheartedly agree. And just basic kind of one-on-one figuring out what the business does, uh, avoids a lot of targets, like in terms of at least doing the, like the base level of research before jumping on some hyped up thing,

or, or, you know, what Peter Lynch calls a whisper stock. It's basically the same thing, right? It's like, this thing's going to boom. They just need to get approval for this mine off the coast of East Africa or like, you know, up in the tundra of none of it. They're waiting for some, the green light to start mining gold there. These are the whisper stocks that attract a lot of, a lot of what we're talking about. Yeah. that attract a lot of, a lot of what we're talking about.

Yeah. So dope episode. Um, I can't believe this was recorded, uh, with my current situation. Look at that. Like I wish you could see the level of despair from my vantage point. It looks like you're recording in a bedroom where you're under a bunk bed.

That's what it looks like it looks like the spring of the upper bed yeah so that's where i i know you're in a washroom with towels and stuff and but from my vantage point it looks like you're in a bedroom under like in between the two it totally does because half the screen is like held up on the thing that like holds people's toiletry bag. That's like where my laptop is hanging. Oh, man. Yeah, it totally looks like – yeah, look at me now. I'm like half under the bed.

Oh, that's brilliant. That's it. Yeah. Thanks for listening to the show. This is the definition of the show goes on. Thank you for listening. We appreciate you. for listening. We appreciate you. And for this content, we don't ask a whole lot, but we can't verify that you do it, but we appreciate that you do. If you go on and rate the show five stars,

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