The Canadian Investor - Episode 10 - Buy Quality Businesses - Interview with Barry Schwartz

Episode Date: February 2, 2020

Barry Schwartz is the Chief Investment Officer at Baskin Wealth Management. He is regularly featured on BNN Bloomberg's Market Call segment.--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee 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. The Canadian investor, what's going on? Today's show is very exciting. I had the opportunity of sitting down in person with Barry Schwartz, the Executive Vice President and Chief Investment Officer at Baskin Wealth Management. Barry's positive outlook on the markets is very refreshing. And it's a pretty funny story how Barry and I met downtown Toronto. And we talked about that

in the podcast. Simon is not with us this week. He is moving into a new home. So congratulations, Simon. But we will see him on our next episode. He'll be back. Without further delay, this is my interview with Barry Schwartz. Very good to see you again because I have to tell the story. Sure, please. It's a good story. It's a good story.

So I'm actually live in the room right now with Barry. And this is the second time we're able to meet. I guess the third. It's a good story. It's a good story. So I'm actually live in the room right now with Barry. And this is the second time we're able to meet, I guess the third, third meeting. So, um, I have always watched Barry's segment on BNN market call. And I kid you not, if you start typing BNN's website, it'll just auto fill to search Barry Schwartz I always watch his videos and we're out one night with my friends at a art festival called Nuit Blanche downtown Toronto and we were walking through one of the I think it's kind of weird all of it but we're walking through one of the art displays and there's Barry curious like what did your family have to say well I was there with my wife and another couple we were we had gone out for dinner and we said hey let's check out the

Nuit Blanche there's some crazy amazing art by the way so my wife always gets a kick out of it right I she's always smiles from ear to ear when people come up to me and say I see you on tv and everybody's always friendly yeah my best story is a bathroom story at Pearson Airport in Toronto some guy you know I'm doing my business he's doing his business looks over at me and goes you're Barry from BNN I'm like yeah he goes National Bank stocks been doing really well you're always talking yeah exactly so or another time we're in Calgary and some guy chased me and David Baskin down. He's like, are you guys, what are you doing in Calgary? And can you tell me what I should do with Manulife stocks? So it's always fun.

I love talking about stocks. I'm very passionate about investing. And, you know, people come up to me and tell me that they like what we're doing. We're always happy to chat. Because David has a segment, you know, every once in a while just like you as well. Absolutely. So David has been doing BNN now for 20 plus years. Wow.

Pretty much when I started at Baskin, that's when David started doing BNN. And I started doing it I guess about 10 years ago right after the financial crisis. They're looking for some new faces. They moved to new studios and have been doing the market call ever since. Yeah, it's fun to do i brayden i i i like doing it mostly for me because when i'm on it i can prepare and focus and talk about the economy and the companies but i'm researching them and i'm i'm paying attention and i'm spending time formulating my thoughts so for, our clients like it. For sure, it's great for business.

We've gotten a number of new relationships from it. For me, I do it for myself. Well, that's really awesome to hear. And I personally love the segment. And the reason for that is your outlook on the market is very refreshing. I find in financial news, they just want to sell the bad stuff because there's really not that much happening day to day in financial markets. And your long term view of high quality companies will continue to do well. And I swear by that as well.

So I just really appreciate your outlook. And when did you start to formulate that idea that no matter what's happening, good companies do well? Yeah. Well, my history in investing is kind of backwards a little bit because I started out and got very lucky and I was extremely successful investing, but doing all the wrong things, right? So I started out working at CI Mutual Funds in 1998. That was my first job after business school. And I started working as a trust accountant. And I don't have to go into the gory details about what a trust accountant does, but suffice it to say that I had to do reconciliations, data entry, and I had to have my reconciliations complete by 4 p.m. every day. The good news is I was able to have them done by 10

a.m. and my supervisor didn't know. So I pretty much had the rest of the day to do whatever I liked. And this was 1997, 1998, the dot-com era. All those stocks are going straight up. I managed to save a little bit of money and I started investing. And I was able to turn $10,000 of bonuses and savings into $100,000 of dot-com stocks. And by the summer of 2000, then I got married and my wife and I were looking for a house. So cashed out, used the money for a down payment. Braden had stayed in, you know, one month later would have lost all that hundred thousand dollars so got lucky thought i was a genius told my wife i'm going to stay home and day trade and work from home in my pajamas because i'm a genius and then of course it all blew up

and i guess i needed to get a real job and that's how i started at baskin but uh i've been formulating my investment approach with dav over the years, right? And we're always learning and refining and trying to understand where Baskin, what our competitive advantage is. And so we always say that there's got to be something to buy. And we've seen over the years that those that sit in cash or wait for the market to go down, A, never pull the trigger, and B, never know when to get back in. So we've decided stay invested. Doesn't mean you always have to stay invested in stocks. You can diversify your portfolio. But we don't sit around in cash. And that's worked to our advantage. And I think that's been our success in terms of asset allocation. As for refining our investment

approach, it's taken us a long time, but we've decided that high quality companies are the way to go. That makes complete sense. And, you know, over the last couple of days, there's this absolute freak out yesterday around the new coronavirus and people are selling Chinese stocks. And it's just, it's craziness. It's craziness. So what do you recommend to investors, Canadian investors, whatever it may be, distancing themselves and focusing on what really matters? So Braden, there's always going to be a reason not to invest, right?

So remember January, I thought the US was going to have a war with Iran. Remember last year, worries about trade war, impeachment, recession. It's an endless list. And you can always look back in hindsight and say, damn, I should have got back in or I should have put my money to work. So we always take the approach, let's just stay invested. Unless I would say the only reason to get out of the market is either A, you need money for a short-term liquidity needs, right? You look at me in the summer of 2000. I needed the money to buy a house.

That was dumb if I would have left it in the market because I would have lost it all. So if you have short-term liquidity needs, get out of the market. Or if you're close to retirement or near your retirement, then your opportunity cost changes because you're going to need that money to live off so you need to reposition your portfolio but if you're a young investor and you're decades away from retirement stay the heck in the market but don't follow what i did you know in 1998 by buying stupid stuff by high i mean i just imagine if David and I were smart enough to buy the Berkshire Hathaways and the Visas 10, 15 years ago, instead of buying them three to five years ago, how much better our portfolio would have been. Instead of trying to buy cheap stocks,

sticking to high quality companies, I think that would have been the right approach. So we smartened up. We started doing that six, seven years ago. And I think that will continue going forward. And the reason for staying with high quality growth, but usually growing companies, is you say, oh, it would be better if I owned them 15 years ago. But you're still happy to owe them three years ago. Correct. And you're still happy to own them now. And I think that's the really important takeaway is that you don't have to buy these companies at IPO. I mean, when did Warren Buffett buy Coca-Cola? Probably not near IPO.

And he's done remarkable on that. So I think that's really important. I think you need a few good insights into the company. I don't, I've never done a discounted cash flow in my life. For those who don't know what a discounted cash flow is, that's, you know, a way to value a company by coming up with variables and doing a lot of Excel modeling work. And it's boring, boring as hell. But, you know, my approach is we have a checklist of companies that we're looking for.

And then the final one is can we buy it at a reasonable valuation? And that's a meaningful and meaningless statement because what does that mean? It means something different to every investor, of course. But I'll give you an example, right? Shares of Visa, right? to every investor, of course. But I'll give you an example, right? Shares of Visa, right? One of the world's greatest companies, Visa and MasterCard IPO-ed, I think, in 2007 or 2008, right before the financial crisis. Had you bought it at IPO, you might be up like 30,000% or some crazy amount, right? But we bought it, I think, in 2012, 2013. It it was expensive the pe multiple at that time was 25

times earnings well guess what here we are six or seven years later it's still trading at 25 times earnings but the earnings have grown as fast as or faster than the p ratio so uh the insight is if the earnings are growing there's's organic revenue growth, the company can continue to reinvest those earnings and continue to grow its moat. You've got to stay invested in that stock. And don't be quick to sell. Hopefully we'll talk about a number of lessons that I've learned over my career. But the Peter Lynch saying is don't cut the flowers. Don't cut the flowers. Cut the weeds, water the flowers. And that should be the case when it comes to investing. 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.

Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests.

It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Yeah. And I actually think about this all the time, right when I first convinced you to let me come to your office and meet you after our run in at the art show was, I think literally the first thing you said to me was don't sell winners. I tell all the guys around my office is why are you so quick to lock in profits and sell winners?

I really, I think that's a really powerful thing because I mean, if you thought in 2010 or 2004, sorry, that Apple's at crazy all time highs, you'd be at 15,000%. That's right. So I think value investors always think about if I can buy it at 10 times earnings and I can sell it 15 times earnings, I'll be a happy man. But growth investors or growth at reasonable price investors think if I can buy this at 25 times earnings and this company will grow a double-digit earnings growth for 10 years, I'm going to make a fortune and I don't have to worry about what multiple I pay.

So there's a great chart floating out there and maybe we can link it later to our audience in terms of companies that generate high returns on invested capital and the returns that happen from these companies over the long term, and if you stick with them and they keep generating above average return on invested capital and they have organic revenue growth, we can go through a few of those companies, your returns are going to be unbelievable, right? So the famous Charlie Munger quote is, you know, over time, a company's percentage growth of its stock price is going to earn its return on equity or return on invested capital, give or take. So if you have a company that's compounding its earnings at 15 percent a year, the stock price should grow 15 percent a year, give or take. Right. Not every year, of course. And even if you pay an enormous multiple, right, if you're afraid I'm not buying stocks at 30 times earnings i'm only going to stick to 10 times earnings you know if it's growing at 15 a year for 10 years doesn't matter what multiple you pay so i i've been in that value trap uh park earlier in my career of

course right and it's too hard because you don't know when to get in you don't know when to get out generally those companies that are trading at low multiples are in a structurally declining business. Their revenues are going down. Their balance sheets are poor. And so you're waiting for some catalyst. And I figured it's just too hard for me. I'd rather just buy companies that are growing. Absolutely. Yeah. And we talked about this before, too, that deep value is just incredibly hard. And there may be merit to it. I get it. You're buying companies inherently discounted to their intrinsic value. However, if you're entering a bunch of positions with companies that have declining revenues,

I just don't think that's the pond you want to be fishing in generally when there's so many amazing businesses out there. Right, right. So I recently read a book that said they believe there's only 60 to 80 great companies out there in the world out of the investable universe of North America and Western Europe. It must be 15,000 listed stocks. So if you're lucky enough to grab one of those 60 or 80 names, you've got to be a fool to sell them. So obviously, we're managing money here for families and institutions. And we care a lot about the downside. So for us, we do trim names, we don't like to let a stock get more than,

you know, a certain percentage in the portfolio, something, you know, if we're lucky enough to buy a stock, and it doubles, triples, quadruples, and it gets to nine or 10% of the portfolio, something, you know, if we're lucky enough to buy a stock and it doubles, triples, quadruples, and it gets to 9% or 10% of the portfolio, that makes us nervous because we're here for capital preservation. Our clients work hard for their money. They're, you know, they're doctors, lawyers, entrepreneurs, and they don't want to see the portfolio drop. So prudent portfolio management is something that we care about deeply.

But, you know, for an individual investor, you know, that's where you can have sometimes the advantage over, you know, the guys, the pros that are getting paid for it in the sense that you're not forced to trim. You're not forced to sell a winner. And I urge you, if you have a great company, don't sell. Now, of course, you know, the difference between a great company and a great stock. And that can be the difference in your portfolio right what's a great company and maybe we'll go through a few examples versus what's a great stock just because the stock price keeps going up yeah so let's let's break out into i'm very excited about this because i'm such a fan of his market call segment that we're going to go through a couple companies

but just before we go through some of these names, a lot of these are really, really solid companies. And something I wanted to bring up was back in 2013, 2014, I thought big fang tech was just outrageously expensive. You know, how are we buying these stocks at 50 plus times earnings? I don't get it type of thing and now the earnings have caught up to them like facebook in particular is just like their income statement is just it's too good to ignore and i i wanted to ask barry because his outlook on tech is very very optimistic um on these quality companies. So I just wanted to touch on that, on what is your take on that and how did your opinion change on them over the last couple of

years? Yeah. So our entry into tech was we made the initial purchase of Apple for clients in 2012. We bought Microsoft in 2013. Then we also, the same year, also bought Google in 13. bought Microsoft in 2013. Then we also in the same year also bought Google in 13. Then we got more comfortable with tech and finally bought Facebook in I think 16 or 17. Now we bought Amazon in 2019, should have bought that one sooner. And I guess really the only big one we don't own is Netflix, but I got to tell you, it's a very interesting business model. It's hard for us because there is no reasonable valuation on Netflix because there's no earnings or the earnings are there, but there's no free cash flow. And free cash flow for me is very important. But the dynamics of Netflix business model and the scalable possibilities of Netflix has got me pretty excited.

So how did we get into them? has got me pretty excited. So how did we get into them? We started thinking about the size of the markets that these companies could address. And we started thinking outside our comfort level, outside of we're Canadian investors and start thinking about the world, right? We do want to own companies outside North America.

We'd love to get exposure to China and love to get exposure to Europe. But, you know, it's hard for us to take the currency risk, the country risk, the accounting risk. And so we decided let's get exposure by buying companies in North America that have significant growth and potential outside. So Facebook, unbelievable, 2 billion users. Is there a company that has, you know, a similar scale that matches it? Can you think of anyone in your opinion? Not 2 billion. No, that's insane. Right. Insane. Right. And all of its I posted something the other day on Twitter, a copy of it from someone saying that for Facebook in, for example, Nigeria, half the

population thinks Facebook is the internet, right? They don't know the difference. That is wild. Yeah, it's amazing. And when you think about 2 billion, think about the amount of people that don't have an emerging markets, have internet yet, or even electricity for that fact, an emerging market. So that is very impressive. Yeah. A lot of companies are scared about Amazon, right? What's the Amazon risk? Is Amazon going to get into my market? Are they going to disrupt retail? Now they're disrupting FedEx. Next, they're going to disrupt pharmacies, right? And grocery. But the one people should be really worried about is Facebook. Two billion users and growing and you have no

idea what they're thinking about and what they're trying to break into, whether it's video gaming, whether it's streaming, right? They want to get into there. Whether it's online shopping, there's still so much potential for Facebook. So that's what has gotten me excited about these companies is the potential. Sure, I can buy Bell Canada, right? I'll get a nice fat dividend every year. But what does a company grow at? GDP. Is there any pricing power? Maybe they get the ability to raise internet pricing once a year. You know, obviously, we all use our cell phones every day. So no risk of them losing business, but highly competitive.

You know, that's a fine business in an income portfolio, but in a growth portfolio, you've got to think bigger. You've got to think scalable markets. You've got to think long runways of potential, and not only long, but wide, right? Not just the product appeals in Toronto or appeals in Halifax, but appeals in North America, Europe, Asia. And that's what I'm thinking about when we started buying Amazon and Facebook and Microsoft. And I got to tell you, obviously, they've done tremendous, but I don't think they're expensive. And I think that the potential of them going forward is unbelievable, especially Facebook. Yeah, no, those are really good points. of them going forward is unbelievable, especially Facebook.

Yeah, no, those are really good points. And I like how you brought up that these are North American companies, but with global exposure. So it's not like you have to buy them in foreign currencies and take on that geographical political risk when these businesses do revenue all over the world. Absolutely. So let's get into some of these names before we talk more about those big tech names in the US we're going to talk about two Canadian names and the first one is Canada goose give me your thoughts very yeah Canada well so I don't own a Canada goose jacket so I can't really tell you if I like the product or not obviously I've seen the

lineups in Yorkdale Shopping Mall, and it's a high-end luxury brand. And they have a pretty good reputation, obviously, a terrific Canadian success story, which we love. The problem that I have is it's fashion. And so, obviously, I wish I would have gotten in the Lululemon because I also said that about Lululemon. It's a fashion. What idiot is going to pay one hundred and twenty dollars for a golf shirt while you're sitting across from an idiot? Me, not you, but me. I'm wearing all Lululemon head to toe. That's all I wear, too. And like I'm the idiot, too. So I think obviously Lululemon, whatever they did was terrific to break in across all different segments, you know, men, women, children, athletic wear, going out wear, but Canada Goose needs to

pivot as well. And if they can do that, maybe we've got that extra Lululemon on our hands. If it's just going to be a winter coat and accessories, then I don't know. Obviously, and accessories, then I don't know. Obviously, high-end luxury is extremely hot in Asia and specifically China, and they love their products. And so big runway of opportunity for Canada Goose. But for me, it's hard to come up with a valuation for it. I see it's trading at about 60 times earnings. They still haven't scaled their business model. I'm worried about discounting. I see it's trading at about 60 times earnings. They still haven't scaled their business model. I'm worried about discounting. I'm worried about competitors. What about this moose knuckles that all of a sudden is popular? And so it's hard to get your mind around luxury companies. I tend to stay away from fashion and fad companies, not saying Canada Goose is a fad, but they're just not the type

of companies that we're comfortable investing in. So the valuation doesn't meet our model. I really haven't done enough work to see if it's, you know, the business is totally scalable. Obviously, winter coats don't do very well in warm countries. They're quite limited in that. Yeah, they're quite limited in that. Yeah, it's quite limited. So, you know, out of about 30, we're pretty concentrated here. We only own 30 stocks in our growth portfolio. to buy Canada goose at 60 times earnings when I think Amazon is, you know, still growing massively and so much potential in so many different markets and different industries. I got to say no at the

moment. Yeah, no, I agree with all those points. And it does become hard to justify when it is a fashion brand when there's so many good opportunities trading at those very high valuations. It hasn't reached compounder status yet. The company's still in its infancy. So I think you are taking on a little bit of speculation risk. You know, I prefer to buy companies that have had many, if I'm looking at fashion, I prefer to buy companies that have a long track record. So we do own something in the high end luxury and that's Ferrari. And Ferrari, the reason we like it is when you buy a Ferrari you're not buying a luxury car you're buying uh entry to a special club a high-end club uh that is that is only limited to a number of users and once you get entry to that

club you can continue to progress higher and higher through the club by buying better Ferraris and more expensive Ferraris. And the $300,000 watches that they sell. Whatever they do, they're doing it. The low end. Yeah, doing it brilliantly. And this is a company that has obviously the history of Ferrari goes back a very long time. So I feel more comfortable. And there's resale value in in a ferrari there's

still there's resale value i i assume in a canada goose jacket also but um you know i think canada goose has some challenges as well with maybe some of the young people in terms of uh uh the animal products that are in the in the clothing and how they're gonna you know how they're gonna figure that out is is remains to be seen so um that's that's my spiel on uh canagus no those that's that's very appreciated so next we're going to talk about you know maybe a more boring name and for canada but uh definitely a backbone of the economy especially here in ontario which is enbridge yeah so enbridge is interesting because everybody loves dividends right i for whatever reason canadians are crazy

about dividends it's because we're crazy about the banks yeah we yeah and of course owning the banks for the past 20 i i read somewhere that had you owned uh you know the canadian banks as a group over the last 25 years you would have beaten berkshire hathaway right exactly joel from thunder bay has beaten uh warren Buffett just by owning Royal Bank. Totally. And we have a few clients here who I got one guy who bought Royal Bank for he got got some money, a wedding present and some savings. And he put twenty five thousand dollars in the Royal Bank 30 years ago. And now it's worth two and a half million dollars. And he says, if I ever sell a share, it'll kill me. So, you know, there's a lot of those success stories

with the banks and that's phenomenal so I understand why we love our our dividends here uh a lot of Canadians are also obsessed with oil and gas is also but it's a story for another day absolutely but Enbridge when I looked at it recently I you, a little throw up in my mouth, to be honest with you, in terms of the capital allocation. Over the last three or four years, they've made a bunch of acquisitions. The balance sheet has expanded. But they also issued a crap load of shares. So they diluted your interest. And they made all these acquisitions spent all this money and at the end of the day over the last five years the cash flow per share has only increased not eight not 18

percent not per year but 18 percent total over the last five years that's terrible it's not good no it's terrible so and i hear it every year well this is finally enbridge is going to do it you know don't look out the last five years look look forward. But you know what? They haven't put the puck in the net. So I'm not sure I can trust the management to actually deliver on those results. So we do have an income portfolio for our clients and we can't put everybody into growth stocks. We manage money for a lot of retirees, those living off those portfolios, those that are nervous. So we like solid dividend anchor tenants in our portfolio. But Enbridge hasn't been one that has, to me, has delivered on its promises. It certainly

had been a home run investment prior to the last five years, but things change. So does it have a scalable business model? No. Does it have great capital allocation? No. Can you buy it at a reasonable valuation? I guess so. Obviously, the stock has done well recently because it's a bond proxy and with interest rates so low, people love dividends. So I guess if i owned it in an income portfolio i would do a double check to see are they covering the dividend last i looked they weren't covering the dividend is that right i i honestly have looked at their stock for three years and almost never seen them cover the dividend um from a earnings or cash flow perspective So that's why I've just basically turned, didn't even look into it anymore. I went seeing that because, I mean, yeah, it's so easy to be attracted to locking in those 6% yields in the oil and gas sector.

But it just doesn't meet any of my check marks. No, neither does it for me at the moment. But it's something we always look at. Anytime you see a big fat dividend yield from a well-known company that increases dividend every year. And the fact that I think Enbridge is giving guidance for strong dividend growth going forward. But is it baloney dividend growth? Are they using the dividend reinvestment? I don't know for sure, but are they using the dividend reinvestment? I don't know for sure, but are

they using the dividend reinvestment plan? Are they raising debt to cover the dividend? Are they hoping to raise the dividend because they're having prayer sessions? I don't know. It's difficult to understand. It's difficult to understand. So for now, it's a no-go for me. But, you know, you can't – I think it's good for investors to know. You can't invest by looking at the rearview mirror, right? You have to look out for it. It doesn't matter what happened to the stock five years ago. It doesn't matter what the results were five years ago. You have to come up with a reasonable assessment of what you think the future is going to look like for the company.

And companies can turn around and companies can improve. But over the last five years, based on the company's results and what its management's done, it certainly deserves deeper scrutiny before you jump into the pool on Enbridge. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized,

hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. little bit here onto a stock that I know you have been bullish in the past on, which is Live Nation. I think that this company has an incredibly strong moat and is in a good space and is charging fees that almost when you go buy a concert ticket, it's almost like these fees are taxed. You just

assume that they're reasonable and that it's just something that you have to pay. So I think their ties with music and with sporting and the relationships that they have with those big behemoths is so strong. And yeah, I really like this pick. So I'm interested to hear what your take on this one. It is a controversial business, right? So no one knows how much they charge you for the tickets. What are the embedded fees? You hit the nail on the head in terms of you see it as a tax. But I always prefer companies where the customers love the product that they sell.

But ultimately, you love going to see Adam Sandler or your favorite, you know, going to see Metallica. And, you know, Live Nation has these guys locked up. It's such a brilliant business model. So you'll pay the fine, you'll pay the penalty, because that's, you know, live music, the experience is where it's at, right? So, for example, I and a few buddies flew to London, England to watch a football game. It's an experiential event, right? We went to go to London and we bought the tickets on StubHub. We bought food.

We bought jerseys. Is StubHub owned by Live Nation? No, it's owned by eBay. But Ticketmaster has reselling as well. So they're going to make money on selling the tickets. But just give me an example of what people will do, right? There's lots of people that will fly to another city to go see their favorite concert, to go see an event. Especially in this economy where we all certainly have enough stuff.

Our bet is that as people get wealthier, and definitely the millennials will be spending more money on experiences. And then of course, as the emerging economies like Asia and Latin America, as the middle class gets wealthier, they'll also want to spend money on experiences. And Live Nation, brilliant operators in the sense that they've purchased a lot of venues around the globe. They own a lot of stadiums and arenas and relationships with them. Of course, they own Ticketmaster, which is essentially the only way to buy tickets on a mass scale. And they don't make any money actually putting on the concert as you know you know if you're beyonce and you put on a stadium show pretty much beyonce is getting all

the money uh for the tickets it's ticket master makes money charging fees obviously the convenience fees and sponsorship advertising parking and uh maybe some of the concessions. And so it adds up. Their hope, their goal is to get as much spend that NFL and NBA and, you know, the baseball. MLB. MLB. It's getting late. MLB, yeah. It's late in the night. Yeah, so apparently people spend $20, $30 per head at those games and those events, whether it's on swag or concessions or parking.

Whereas at concerts, people are only spending a quarter of that. And their hope is over time, people will be spending per person $20 to $30. And that's where the long-term opportunity lies for Live Nation as well as a global company. They're putting on concerts across the globe, right? So Beyonce doesn't just do a concert in New York and L.A. She does it across the globe. And they can promote and sell advertising and sponsorship. Obviously, it's a hit-and-miss business.

Not every year your favorite artist is going to go on tour. I think Guns N' Roses was one of the biggest artists that went on tour the past couple of years. If they're not on tour this year, it could be, you know, a weaker concert year for Live Nation. And a lot of the older artists are getting older, right?

I mean, how many years? They got the new ones on tour. Yeah, how many times can the Eagles go out on tour? I saw the Rolling Stones this summer. Yeah, they're almost 80 years old. Like, come on. But they say that there's no end to the amount of stars and YouTube people that are coming up.

And the only way to make money now, if you're an artist, is to go on tour, right? You make nothing from Spotify, nothing from YouTube music. And so that's what we're betting on when we own Live Nation. It is a John Malone company. So John Malone is a major shareholder through his Liberty. And John Malone has been one of, many people don't know him, but he's been as good or better than Warren Buffett. And he's been investing in cable and media for years. He's got a business called Liberty. And John Malone has a specific style of running his businesses, which is don't show profits and lever up your balance sheet. Now, all of his companies are levered. All of his companies never really show profits. You have to really do the math and

the homework on them to determine what the free cash flow generation is. And that's the excitement about Live Nation. So our insight on Live Nation is experience. We believe people are going to be spending more money on live events around the globe. And Live Nation is essentially, I hate to use the word monopoly, but they've monopolized both the ticket selling, the stadiums, and the artists, and run by a genius. I think it's a Canadian guy, Michael Rapinoe. So kudos to the company. Yeah, no, it is incredible.

The name Ticketmaster, it is synonymous with getting tickets for an event. And yeah, the fees might be outrageous from a consumer perspective, but from a personal perspective, I feel like the tickets are illegitimate if I'm not purchasing them on Ticketmaster. So the moat is just incredible. I think a lot of people feel negative about Ticketmaster because of the reselling and the scalping. And that's really something they can't control, right? So some of the negative press about the company are things beyond their control. Absolutely. So let's transition to another really strong company with this one having tons of intellectual property, which is Disney. Yeah. This company is very, very interesting.

And they're kind of going into all these different verticals and repurposing their intellectual content into different verticals. And I think that's what's really cool about Disney. So I'm interested to hear your take on Disney. So Warren Buffett calls Walt Disney like the reverse oil well. Just any time you need to make money, you go back to the oil well and tap it and it explodes, right? So they bring out Beauty and the Beast cartoon so they bring out beauty and the beast cartoon they bring out beauty and the beast live they have beauty and the beast uh production shows theater shows and broadway shows and they just keep on milking and every time there's a new uh you know

the new generation right so when you have kids you'll be be showing them Disney stuff and your kids will be showing their kids Disney stuff and on and on and on. So just a brilliant ownership of the intellectual property. We started buying Disney for clients in 2015 and it did nothing. We started buying at $90 a share and two years later it was $100 a share. And this is when the market's taking off. So we're looking like idiots. So like, what's going on? We didn't understand how cheap the company was. It was trading around 15 times earnings. This is a company that, in my opinion, has embedded in the company one of the best businesses in the world,

which is the theme parks, right? So you can Google the theme park of the best businesses in the world, which is the theme parks. So you can Google the theme park or the Disney pricing power, the cost of the tickets. And it's like gone straight up for like 50 years, beaten inflation. And of course, when you go to a Disney theme park, you don't just buy a regular ticket. You buy the FastPass, right? Exactly. If you looked at the price of the tickets, tickets you think that we'd have hyperinflation you know wait till you buy the wait you have four kids and you want to take them all the Fastpass that's gonna cost you $5,000 for a

weekend at Walt Disney so and then of course they're into the cruises they're into vacation and lodging and and any family that I've heard that's been on a Disney cruise or a disney property you know maybe the parents ain't going to the park but you know the family loves it and enjoys it and absolutely yeah so similar to live nation in the sense that global operations a bet on experiences and emerging middle class around the globe. And unfortunately, with the current coronavirus, they've shut down Shanghai Disney and Hong Kong Disney for a bit, which makes sense. But these are temporary issues. So we were excited to see Disney come out with their streaming

product. And obviously, it's not a competing product to Netflix. It's very niche, very targeted, right? They're only going to have Disney, Marvel and Star Wars stuff on it. They're not going to have the edgy shows. There's never going to be a show on there with someone swearing or gratuitous sex. That's going to be left for Netflix. But there's lots of kids in the world and there's going to be more kids going forward. And so I think if you're a family in North America and you want to have peace and quiet to check your phones for a few minutes, you put your kids in front of Disney Plus and you'll be happy. And I can see them having – I think their goal was to have 60 million subs in North America by 2023. I think they're going to smash that. Right now,

in the world, there's 700 million homes that have streaming access around the world, excluding China. I can see a substantial number of those, not only both having Netflix, but Disney. And as Disney adds new programs and shows more movies and puts more movies onto their platform, it's going to attract more subs. And, you know, kind of like a flywheel as you go to the parks. You'll buy the Baby Yoda because you saw the Baby Yoda show. And you'll want to see the next season of the Baby Yoda. I don't even know what the show is called. The Mandalorian.

I should have just called it the Baby Yoda. The Baby Yoda is great, by the way. I watched the show. He's so cute. Yeah. So I can see, Brayden, we did a little analysis here. And we're not owning the stock just because we love the brands. We're owning because we think there's potential.

And we feel that there's potential for $10 of earnings per share by 2024. And our feeling is this is one of the world's greatest companies, deserves a high multiple, at least 25 times earnings. If the S&P 500 is trading at 19 or 20 times earnings, this is one of the world's greatest companies with intellectual property that's going to last and stand, in my opinion, the test of time. It should be worth 25 times earnings a few years down the road. That gets you to $250 stock price from the $136, $140 that's trading today. So lots of upside.

Lots of upside. More dividends to come. Lots of upside, more dividends to come. And once they start being profitable on the streaming, they're going to gush cash and they're going to have no, no, nothing else to do with that money. But either continue to buy back stock or raise dividends or look to make more intellectual property acquisitions. That's that's really cool. And I like the analogy used about, you know, using the oil and just continuing to inject cash into the business. I'm going to throw a curveball here on a company for you because I know it's another one that you've spoken about before with a lot of intellectual property and continuing to reuse that intellectual property. I saw that Call of Duty was the best-selling game eight out of ten years in a decade.

Well, we've purchased it every year. Activision Blizzard, right? Yeah, we purchased Call of Duty every year at my house. I got two boys, 15 and 12, and they like to shoot stuff. So, um,

Call of Duty. Yeah. Is owned by Activision Blizzard. One of the top selling video games for like how long, how many years in a row? It's unbelievable how well their series have done. Yeah. So it's just goes to show you that boys and girls,

mostly boys like to shoot stuff and uh i think shooting stuff and killing things is you know it's it's not something that people like to do in toronto it's it's ubiquitous right boys like to get their aggression out on video games and it's fun right so i play i've played the crap out of the series when i was in high school so i mean i get it. And I'm 45. There are some people my age that play video games too. You know, they like to come home from a tough day at work or they're not ready to go to bed. And they'll go hunker down and play some Call of Duty for a couple hours and always buy the new one.

So, Activision, in our opinion, the sky's the limit in terms of the potential opportunities for their intellectual property. So they own Call of Duty. They own Diablo, which is like a role-playing fighting video game. They own Overwatch. They own StarCraft. They own Hearthstone, a card game. I mean there's at least a good six quality franchises that they're just going to keep on milking for years and years and obviously now they're trying to get these games uh as real sports and i can't believe it

people go and watch these sports and pay money to watch these sports and there's sponsorship and they watch them online and uh so we're excited about the opportunity to call duty. The guy running it, Bobby Kotick, is a terrific allocator of capital. He's been running Activision for years and turned this company from nothing to a multi-billion dollar market cap. And our feeling is that right now, I keep calling the company Call of Duty, but Activision, I think it has 300 plus million daily users or monthly users. They see a path to a billion users. With all the mobile gaming, right? You got it, right? And so creating mobile versions of their game.

They released a mobile version of Call of Duty, and I think it went pretty well. And that's going to be the test for them going forward. They're looking to do a mobile version of Diablo. And then there's other properties they can continue to release. And then every year they have to update them and release new versions. So huge potential.

And their balance sheet is beautiful. There's tons of cash. So potential for them to look to acquire more intellectual property. So we haven't done well on this stock, by the way. This has been a loser in our portfolio. We bought it last summer. I can't even remember. We're in 2020. So I think we bought it. I think it's 2020. Yeah, I think it's 2020. We bought it late 2018. We actually bought it in the mid-70s. So for some clients, they're underwater.

Some clients, because of the way we do things, we're always getting new clients. We're always putting cash to work. Some clients are well above water. But from our initial purchase, we're down on this. But we're so excited about the future that we're not giving up. And this is one where the revenues are going to grow. The fundamentals are terrific. Trading at a reasonable valuation.

So we're going to stick around. Yeah, those are all really good points. And the fact that you brought up mobile gaming. I was on a podcast last week and I brought up this mobile gaming craze. And I told the guys basically, I don't get it at all. But the numbers are just insane on how much it's growing compared to the rest of the sector. Mobile gaming is growing so, so fast. So them being able to not even be on the surface of mobile gaming, they can just take all of their games, make those applications on mobile.

And, you know, I think the top line, bottom line is going to grow at a very, very solid. I think so. You are taking obviously some creative risk, right? Maybe the the games aren't good they don't get good rating but activision has a pretty good success ratio pretty good hit ratio and so i don't think you're taking a lot of risk especially when those those games have already been so successful on other platforms chances are you know they'll do well on another. So we're all addicted to our phones and most people do the two screen experience, right? Even when they're watching TV, they're looking at their phone or either, you know, doing social media or playing a game while watching TV.

I don't know how people do it, but, uh, it's overload. It is. Yeah. That's the world we're in. Yeah, absolutely. So I'm going to, uh uh throw you for another curveball here because uh because you did so well um there is a stock that i know that you did once recommend and that i personally own and still do own and that is the auto parts manufacturer magna

international and the stock is very cyclical and we don't even have to talk about magna right now um i just have a question what your position is on cyclicals because you look at this business and you're like the fundamentals are insane yeah um you know everything looks really good um but we could be at the top of an auto sales cycle. Who's to say, right? So I'm just curious about your position on cyclicals overall and your stance on the market. So for the most part on cyclicals, I think you really need to own a good operator, right? So if you own a high quality company like Amazon or Apple, you don't have to worry so much about, every company is cyclical, of course, but you don't have to worry so much about every company cyclical, of course,

but you don't have to worry so much about the ups and downs of the business cycle versus a cyclical company, right? That's betting on a specific product that they're selling. But, you know, when you own a good quality company, the long term opportunities are huge. And for Magna, I can't say it's a great quality company but i can say you know for the most part they've run the business very very well but i don't know if the company has great capital allocation i don't think the company has a good dividend it does have a good dividend but But I don't think the company has a good outlook for growth. Yeah, exactly.

So I guess I'm worried about cars going forward. Right. I'm worried about autonomous vehicles. I'm worried about electric vehicles. I'm worried about what Magna's role in place is going to be in the world. We have kind of seen a peak of car sales over the last couple of years. So it kind of goes against my new way of investing in the sense that I'm not, I don't want to buy companies where there's no, where there's no organic revenue

growth. So you're absolutely right. The valuation on Magna is cheap, generating an enormous amount of free cashflow. But when do you sell it, right? So Magna has always been a cheap stock. So when do you get out? Do you get out when it's trading at 10 times earnings? Do you get out when it's trading at six times earnings? I don't think Magna is ever going to trade at 20 times earnings. So, you know, the things have been the best they've been

in terms of the car sales the past couple of years. It probably should have gone out two years ago because it looks like sales are now on the decline. So that's the hard thing about a cyclical company. So if I'm going to own a cyclical company, I really want to own a company that is run by a great operator, someone who has experience allocating capital smartly, someone who maybe makes smart acquisitions and grows the business. You know, I'm thinking of like a company like Transforce, right? That's a cyclical company in trucking. And that company, they seem to know when to buy distressed assets, they seem to know when to get rid of them, they seem to know when to acquire and get out when their buyback stock like crazy when they raise the dividend.

And there's a big ownership stake by the CEO. I do think that the stock is undervalued in the sense that it is not positioned as a tech play that I think it is. I think it's a fairly strong tech play in the computer that is the car these days. I agree. Because they own about 50 engineering and technology centers that don't even produce any cars. So I think that is underpriced in the market. However, I do see what you're saying.

We've seen a pretty much flat line in auto sales, and you can see it reflective in their income statement. That's right. The last three years, Magna's revenues have gone nowhere, right? Absolutely. So the earnings have been growing exclusively from buying back stock, which they're buying a lot of stock back. A lot of stock.

Right. And they really don't have anything to do with the money, right? They could make acquisitions in, I guess, autonomous vehicles, but they're going to just lose money on that stuff, right? On those bets. So, uh, they're going to let the OEMs make those risks and then hopefully develop the parts for them. Exactly. So I think it's an interesting play. I like what you said about the technology and no question, right? My car beeps at me nonstop. Like it's talking to me all day long. So it's, and it's now become a computer right

so more technology is going to obviously go into the cars going forward and if magna has the right relationships and the right technology it should benefit so let's talk about one more company before i let you go which the moat i mean it's become a verb when you use the internet, which is Alphabet, obviously the parent company of Google. And they're similar to, in my opinion, like a Facebook that can use their insane user base and try out new things. And essentially, I think it's cheap if you just look at it from the search business alone. So I'm interested on your take on that. So, yeah, we I own Google.

Clients have owned it for quite a long time. We continue to buy more. You know, here's a company that I think has grown revenue at 20 percent a year. Many, many quarters in a row of 20 percent revenue growth, even with a trillion dollar market cap. Insane. Unbelievable. Yeah. And trading, I think think 20 slightly over 25

times earnings or you can buy procter and gamble which is growing at two to three percent revenue growth a year for the same earnings multiple yeah for the same earnings multiple so obviously you can make the judgment saying well we'll probably be still be using tide 50 years from now who knows if we'll be searching stuff on Google, which is fair. So that's – but a company growing 20% revenues at that multiple seems quite low. And so I don't think it's now – I think it's not the cheapest stock. It's certainly been cheaper in our lifetime. But we would continue to buy it here because i what one of the things i'm really

excited about is the new the new ceo has now got carte blanche right sergey and larry the two founders have stepped aside they're not going to be running or operating the company and uh sundar i think his name sundar uh is now familiar yeah he's he's he's got carte blanche in terms of how to operate the business and so the biggest gripe that investors have had over the past few years is the investments in these other bets, right? These moonshots. None of them have paid off yet, right? Their biggest one, which has potential, is Waymo, which is the investment in autonomous vehicles, which could be unbelievably massive or never work out. For me, I just don't know how autonomous cars are going to work in the snow and the ice,

but that's another story. Why I'm excited about it is if he's going to pare back those investments in other bets, if he's going to take a more focused approach on capital allocation. I think Google has $100 billion net in cash. So you could see a dividend very shortly on Google. You could see massive share buybacks. And you could see a slowing down of those investments and the other bets, which falls right to the bottom line. So I don't think the market is properly pricing the explosive earnings potential just from share buybacks and more conscientious approach to capital allocation. Meanwhile,

the search business is just like one of the greatest businesses in the world. You know, you want to be at the top of the search business. We pay for it here at Baskin Wealth Management. We try and, you know, when people Google Wealth Management Toronto, we've paid to be at the top of the front for our company. And it works, right? You get recognition. And for a lot of companies selling a product, this is a must spend. And it's absolutely a must spend.

You know, the saying goes, they hide the dead bodies on the third page of Google. So you need to be, if you want any organic growth online, you need to be paying for the service. And it's essential part of any digital marketing strategy is using Google AdWords. So I've listened to some analysis on the business and some people think it's extremely discounted even right now from a cashflow perspective, just on the search business. And this doesn't include the, this doesn't include the a hundred billion in cash or the other, you know, verticals that they can easily enter. What about YouTube? But like just a monster. Exactly. Right. So I have a 12 year old son. What does he do all day? He makes YouTube videos. He wants, he wants to be a YouTube famous person and monetize his YouTube videos and his YouTube page. And that's what interests him.

And so do all his friends. And they love watching YouTube videos. That's what his generation is interested in for the most part. So I see Google just doing what it's doing. I don't think it's going to continue to grow revenues at 20% a year going forward. I mean the law of large numbers obviously has to catch up with it. At a trillion in market cap. Yeah. But yeah, I think you're still going to see double digit revenue growth, double digit earnings. And with some smart capital allocation, reinvesting

those into things that actually make money, I think you're going to be a pretty happy camper buying Google even here, you know, close to $1,500 a share. Well, Barry, I got to say thank you so much for taking the time. Your outlook on the market. I love the way you look at companies long term and focus on the quality is really impacted how I've looked at businesses over the last two years watching your segment. So I really appreciate you taking the time to talk not only to me, but also all the listeners of the Canadian Investor. Thank you so much. Cool. Thanks for having me.