We Study Billionaires - The Investor’s Podcast Network - TIP143: Mastermind Discussion 2Q 2017 - Four Stock Picks to Beat the Market (Investing Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, how's everyone doing this week? So we're really excited about today's show because what we're doing is a little bit different than what we normally do whenever we do our mastermind episodes. Typically in the past, whenever we've had these episodes, what we've done is everyone kind of brings up a topic that's interesting to them during that quarter. But this time, what we're doing is every person had to bring one stock pick to the table of this week's discussion.

Starting point is 00:00:25 As that person brings that stock pick to the table, they basically give a pitch on why think it might be a good idea. And then what we do is we go around the horn of everyone in the mastermind, and then they kind of shoot holes and they troubleshoot why that might not be a good pick. The point behind the way that we're going about this this week is to show the audience how we're thinking through the problem and the key questions that we're asking to try to understand why something might be a good pick and why something might be a bad pick. So we really, really had a lot of fun doing this.

Starting point is 00:00:53 And as a side note, we also have Jesse Felder with us this week because Hari wasn't able to make it and Colin wasn't able to make our mastermind discussion. So we have Jesse Felder with us. Jesse's managed a billion dollar hedge fund before and he's extremely intelligent as you'll see during our conversation. And we also have Toby Carlisle with us who is obviously bright and brilliant in his own regard with deep value investing. He's the author of the book Deep Value and a couple other books that are just phenomenal. So we're really excited to have this conversation today. We'll be talking about how to value a commodity type business. We really hope that this in-depth analysis of four different stocks will not only make you excited

Starting point is 00:01:33 about the stocks, because that's really not the point. It's the process of how we are building a thesis for analysis and how to exchange the feedback and see if you can validate your own investment thesis. Okay, let's do it. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right. So this week, as we said in the intro, a little bit of an amendment to our mastermind group. So before we started talking today, on email, we were basically saying this is the company I'm going to talk about. What we're going to do is I'm going to open it up. Who wants to bring up their stock pick first? I'll go first. All right. Let's talk it, Jesse. Yeah, I picked CF Industries. CF is the largest producer of nitrogen fertilizers in North America. And really what brought my attention to this stock, I started.

Starting point is 00:02:39 started buying it last summer was one of the ways that I kind of screen or look for opportunities is just through insider buying and selling. And so I noticed last summer, the insiders started buying chunks of stock, CEO, CFO, both bought, you know, sizable chunks of stock. And so I said, I got to look into this thing. And essentially what's gone on in the nitrogen fertilizer market is demand grows at about 2% per year. Farmers have to put this stuff down every year. Demand grows at about 2% a year. So it's really the supply side that affects the pricing of their products. And pricing got really, really good back in 2011, 12, which brought on a lot of new supply, mainly from China. You know, China built a lot of, you know, production capacity. And so over the last,

Starting point is 00:03:22 you know, two or three years, the stock price was 60 bucks a couple years ago. Today, it's in the mid-20s. It got down to the low 20s last summer. And then after the election ran up to close to 40 bucks a share. And it's come back down to the mid-to- Upper 20s, you know, then. But what I like about this stock is that I think we've seen the bottom of the cycle for nitrogen fertilizer prices, urea and ammonia nitrates and those types of things. And so prices could be improving for them going forward. There's been a lot of supply that's come off the market. China, you know, has basically shuttered about 9 million tons of production a year last year. And it looks like 6, 7 million tons will come off the market this year. And, you know, North America depends

Starting point is 00:04:04 on imports of these products. We don't produce enough in North America to meet demand. So being the largest producer in North America has its advantages. One of those is the access to cheap natural gas. So natural gas is their main product they use to refine and create nitrogen fertilizers. And so they have a low-cost advantage there. And then they also have the advantage of being right here in the market and not having the transportation costs from shipping from China. So I think they're at the point now where they're going to start to see, you know, the cycle turn up again. You know, management thinks it's going to happen next year. We'll start seeing pricing really start to improve again.

Starting point is 00:04:40 And those supply demand dynamics come back into alignment. For me, I look at the fundamentals from, you know, price to book value. It's cheaper than its average over the last five, ten years. Price to sales also kind of similar to the lower half of its, you know, valuation range. I think in terms of valuation, it's probably, you know, worth about 35 bucks a share. but if today, you know, it's about 27, I think it closed today. So there's some upside there. But if your rea prices really start to improve, this has a lot of optionality.

Starting point is 00:05:11 You know, I think it could add back to 50, 60 bucks if the pricing really starts to improve. And then, you know, the final thing that I look at is technicals. I do a lot of technical analysis with these things. And to me, it looks like it's, you know, bottoming on the charts. On a weekly chart, it looks like it's in the process of forming a head and shoulders bottom pattern, which looks, you know, really bullish to me. So kind of when all those stars align, I get, I get excited. And CF, you know, looks like that type of situation to me.

Starting point is 00:05:39 Jesse, can I ask a question, just the technical, the head and shoulders. Why is that bullish? What's the significance of that particular pattern? Well, you know, it's one of the most effective patterns I've seen, you know, since I've been, I started looking into technical analysis a little over 10, 12 years ago. And one of the biggest problems we have is value investors is trying to avoid catching falling knives, right, or buying things that are cheap for a very good reason. And I think the technicals really help with that. When there's strong downside momentum, you know, I typically

Starting point is 00:06:09 stay away because momentum, you know, has a habit of keeping the price going in that direction. And so a head and shoulders pattern is it just, you know, a clear sign that momentum is shifting in the price pattern. And in the head and shoulders bottom, you know, you see a couple of lows in the momentum and really shifting in the other direction right now. And so for momentum, I look at RIS. and MACD. And then I also used demarc indicators which show trend exhaustion on multiple time frames. And so when all those things kind of show me that momentum is potentially shifting the other direction, that helps confirm my fundamental thesis. So, Jesse, I was reading a book by Jim Rogers recently on it. It's a commodities book that he wrote probably like 10, 15 years ago.

Starting point is 00:06:50 And the big driver that he talks about when you're trying to understand the shifts and the changes in commodity prices, just simple supply and demand. If you can kind of wrap your head around what the big picture is for supply and demand, you can really kind of maybe see the direction that these are going. So whenever we're talking about a company that's highly dependent on nitrogen prices and things like that, are you looking at that? You're looking at the supply and demand of where nitrogen's kind of heading. And are you seeing that kind of trending in a different direction for your expectation moving forward? Yeah, absolutely right. I mean, the demand is pretty steady. Like I said, it grows about 2% per year. Just, you know, farmers need this stuff. They have to put

Starting point is 00:07:29 it down every year. And so demand doesn't change really from year to year, but it's the supply, right? So prices get good and people put on a lot of new capacity and that brings prices down, right? Too much supply brings prices down. And so now prices have been horrible the last couple years and really kind of looked like they bottomed out last summer. And so a lot of capacity is just coming offline now because it's, it's uneconomic to produce the stuff. So yeah, I think, you know, these things that are really cyclical like this are interesting to. me because, you know, sentiment really runs with the cycle. You know, there's another thing, you know, from a macro perspective, why I like this trade, you know, one thing that I've tweeted

Starting point is 00:08:08 about a bunch is that real assets have never been cheaper in relation to financial assets in, you know, at least the last 50, maybe 100 years. And so I think over the, you know, next 10 years or so, real assets are going to benefit at the expense of financial assets. And so when I find ideas, that kind of, you know, play into that, you know, farmland and commodity prices and these types of things, which is see if it's all about that. It makes sense from a macro perspective, too, in my view. You know, it's funny because we had a conversation with Jim Rogers probably two or three weeks ago, Stig, something like that. And he said the exact same thing as you, Jesse, exact same thing as far as being very bullish in the farming and commodity type ideas.

Starting point is 00:08:56 So I guess I'm a little concerned about the supply that's being taken out of the market. I mean, obviously, it's good if you take out a supply of the market. But the reason why I say that is that I don't know the impact and I don't know if it's enough. And I don't know, especially China, what their long-term strategy is for this. And the reason why I'm saying this is if I look back at history, for instance, what happened with steel, like you could bring up the same argument saying, you know, it's not profitable producing so much steel anymore. The Chinese didn't even need it anymore after they had to slow down.

Starting point is 00:09:27 So why do they keep producing so much even flooding the North American market? Well, you know, there's a lot of employment there. So I'm sure you see where I'm going with this. Like the numbers might say that you shouldn't do it. The numbers say we'll enter another cycle. Yes, I definitely think we will if you read it up on the market. I don't know when it will happen. And the thing is also whenever you read about the sector, like CF are saying that, yes,

Starting point is 00:09:47 we are positioned for the recovery. And when it will come, we will bounce back and we will hit that hard. And it kind of also reminds me of some of the companies I'm reading about now in the oil industry that are saying the same thing, especially in the offshore industry. When it goes up to 70, then this happens. When the oil price goes up to 90, this happens. Assume that it will, and assume it will in call it a shorter period of time. So I guess that's my concern. And I'm curious, Jesse, your thoughts on the relatively negative look in terms of taking out the supply. That's absolutely a great point. And it's really tough when you're dealing with commodity, you know,

Starting point is 00:10:23 based industries, right? I mean, I think Buffett has said, you know, commodity type business, you're only as smart as your dumbest competitor, right? And if you're, you know, I'm not, I'm not calling the Chinese dumb because they're, but they're trying to manage their economy and they might just be trying to produce jobs, you know, it doesn't even matter if they're selling a product at a loss. What I feel like with CF is that because they have a low cost advantage, that even if prices just stay where they are, the stock is still cheap. I feel like I have a margin of safety at today's prices where, you know, the stock's probably worth 35. if I can pay 27 today and then have some optionality if your rate prices do recover.

Starting point is 00:10:58 I feel like my downside is pretty protected. So that's kind of where I'm coming from with that. And I also think, you know, the way that these facilities work is once they're kind of idle for six months or nine months, it costs a fortune to bring them back online if they can even be, you know, brought back online. So, you know, CF produces 19 million tons a year. You know, so when that nine million or actually 15 or 20 million, if it's a a new capacity came on in recent years.

Starting point is 00:11:25 That's like you just created a whole, you know, the second largest producer in North America to compete with you. But now that $9 million has come back offline again, and another six, seven million, they're coming offline or already idled. It's very unlikely that's going to come back online anytime in the near future. So I think that's bullish for Eurea pricing, you know,

Starting point is 00:11:44 for the foreseeable future. So, Jesse, I have to admit, whenever I was pulling up my notes and kind of studying each of the companies before we started the conversations tonight. This pick for me was one that was really kind of eye-opening because it was so much different than Toby and Stig's pick and also my pick. So whenever I was looking at this, the first thing that I really noticed that kind of stood out like a sore of thumb was just the idea of the top

Starting point is 00:12:09 line revenue. So when you're looking at the top line, you go to 2011 and it was $6 billion. And 2012, it was $6.1 billion. And after 2012, you've seen this thing just getting punished on the top line. And production is actually grown over that time. So that tells you what pricing is done. It's just gone in the toilet. Wow. So that's an interesting point because I didn't know that part of it. So yeah. And there's another factor. The company's really shareholder friendly. And the metric that they look at, which I like that they look at this is total production per thousand shares. So they look at they've been trying to increase the production, you know, the company's production per share. And, you know, through a lot of stock buybacks, they bought Terra nitrogen a few years ago.

Starting point is 00:12:53 And they paid, you know, I think $3 billion and then bought back $3 billion worth of stock. So essentially, you know, they had that company, you know, bought and paid for. But, you know, the increasing the production from, you know, I think it was in 2010, they had 10 million tons of production per thousand shares or something. And now it's up to 35. So they're more than the stock price is exactly where it was six or seven years ago. And the production per share is now three and a half times what it was. back then. So that if, you know, once your rea prices do improve, there's just huge leverage to the share price. No, I agree with you there. That's pretty interesting. So now my question,

Starting point is 00:13:31 I guess for me trying to time this, and I know timing is insanely hard, if not impossible, but if we're trying to time this appropriately, for me, whenever I'd see the top line stop that descent and plateau and maybe even start to have better numbers than the previous year's quarter, for me, that would be a really interesting time to maybe start taking a position in this. So I guess my question, because I'm looking at annual numbers here. So I saw in 2016 the number, you know, I talked about the 2012 number, which was $6 billion, $6.1 billion. And now last year, whenever they closed out at the end of 2016, it was $3.6 billion. So almost half of the top line that they had from just one, two, three, four years before.

Starting point is 00:14:14 So my question for you is this. I don't know if you know this off the top of your head, but when they closed out the first quarter of 2017, did you see their first quarter top line revenues being higher than they were the previous year for the first quarter of 2016? Did they actually perform better in that first quarter on their top line? Well, that's a great question. I think year over year, it's looking like it's about flattened out, you know, with the revenue growth. But my feeling is with this, and this is why I use the technicals and why I use the insider buying to try and confirm my fundamental thesis is that by the time the fundamentals start reflecting a turnaround in the business, stock price is going to be doubled. And so I want to try and find something where I think my downside is limited. Usually I try and look for a margin of safety of, you know, I want to buy $0.50 for $0.50. And when the stock was about $20 a share, I thought that was pretty darn close, $21 last summer.

Starting point is 00:15:10 that's pretty darn close, you know, to having a pretty hefty margin of safety that if things don't ever turn around and urea prices go to zero, you know, you liquidate this company and probably still, you know, break even. That's, you know, for downside protection. But honestly, once they start showing revenue growth here over year, it'll be fairly valued at least $35 a share probably. Yeah. Well, I think that it's a good point that you're saying that the revenues are starting to plateau out. And I think that when you're talking about a commodity like business like this, that's a great time to really assess whether, hey, this is the entry point or not. So you're saying insider buying is, now, were you seeing a lot of insider buying there in the

Starting point is 00:15:48 first quarter? Or was that just in the middle of 2016 that you saw that? Yeah, it was summer last year when they were really buying. You know, this spring, you know, I did see a lot of insiders exercise options and not sell any, you know. And so they have to pay tax on, you know, when they exercise that stuff. So usually you see some selling to help pay for their taxes. So, you know, to see options exercised and not sold is also, you know, fairly bullish, not nearly as bullish as guys in, you know, the CEO last summer bought about $2 million with the stock, which, you know, was not a huge amount, but when I see several executives buying stock, that's the one thing that kind of gets me really interested. I mean, nobody knows the business

Starting point is 00:16:27 better than those guys and CFO especially. So when I see them buying, that's putting their money where their mouths are. And that's how I look at it. The only other thing that I would say is when you pull up the cash flow statement on this company, the operational income has just been horrific lately. And so to see insiders buying whenever you have such poor numbers, especially in the operational side, the free cash flow has just been negative for the last three years. So to see insiders buying with those kind of fundamentals taking place is very interesting. It should grab a person's attention. And the reason the free cash flow has been negative. I mean, cash flow has been, you know,

Starting point is 00:17:02 still positive. But the free cash flow, I think you're, you know, you're subtracting out what cap X to look for free cash is they've been really investing and expanding capacity during this downturn. So I think they expanded production 25% last year even while prices, you know, were going down. So, you know, for them to be able to maintain a healthy balance sheet and expand their, you know, production capacity through this downturn has been really impressive, actually. Yeah. Now, you make a good point because I'm looking at the numbers right here. So 2014, 2015 and 2016, their operational income was $1.4 billion, $1.2.2.

Starting point is 00:17:36 billion and 600 million in 2016. But their investments in their CAPEX was 1.8 billion, 2.4 billion, and then last year was 2.2 billion. So they're making huge capital investments here. Yeah. And I think their sustaining CAPEX is right around, you know, 500, 600 million to just maintain what they're doing. So essentially the last couple of years, they've been, the last couple of quarters at least, pretty much cash flow, just neutral, a free cash flow, neutral. I mean, cash flow has been about $600 million, and they would have spent all of that on sustaining CAPEX. Yeah, that's what I'm seeing as well, Jesse. Yeah. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days

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Starting point is 00:22:35 And when I look at how it's financed, it's financed primarily by debt. They are taking on around $5 billion. So in total, they'll have around $6 billion. And right now they pay around $242 million in interest. It's not because they're paying so much interest, but they're paying $800 million back in 2018. And whenever I see like at the cash flows, even though the sustainable cash flows might be lower, I'm concerned also about the share buyback, how much they can sustain that. And also the dividend, they still have a hearty more than 4% dividend yield. So when I look at this, it clearly I don't have the same insights about this company as you have, Jesse. For me, it seems like they really depending on a recovery in the price within perhaps just a few years. Whenever I look at how much they can back up their investments, would you agree with that? You know, it's, yeah, well, I think yes, if they want to pay the dividend, you know, going forward and all that stuff, yes, they're going to need probably a recovery or, you know, to scale back those CAPEX. And this year, they actually have decided to scale back the CAPEX. I think CAPEX this year is going to be, I think is at $550 million. So, you know, I think they've done all the expansion that they want to do. And a lot of that, you know, expansion too is not just an expanding capacity, but it was also into expanding their ability to adjust. to market conditions. So they can change any of their facilities from urea to ammonia, you know,

Starting point is 00:24:01 in half a day, depending on which has the best margins. So which we depend on demand, they can switch the production. They've also, you know, invested in a lot of warehousing and transportation so that they can, you know, if prices in North America are poor, they can ship to South America, they can ship to Europe, they can ship wherever, wherever pricing is best. And And they've shown in the last few quarters that they've been really adept at basically maximizing the profit potential based on where prices are the best. So, yeah, you know, you're right. You know, they do probably need a rebound inuria to maintain the dividend, but they've already scaled back to CAPEX this year. Yeah, that's going to give them a lot more cash to kind of.

Starting point is 00:24:44 But it's also like whenever I'm looking at the stock right now, I'm also thinking, hmm, I mean, yes, it makes a lot of sense that it will scale up now because. they can actually bring capacity when anyone is trying to get out. But I'm also thinking with the very shareholder friend of the policy that they have, and especially since 2011, whenever they're trying to buy back shares, that's now that you should be doing that. So I'm just curious, like, which path they would take. Because I definitely know what the market with part is clear that would be the cut in dividend. But I definitely see much more room for buy bad stock, if anything. And I guess, like reading through the earnings transcript, I don't think it's a priority right now compared to the other avenues. And I think that's more like a management concern, I guess. But I'm really sorry, Jesse,

Starting point is 00:25:25 like if this comes up really negative. I mean, I'm typically also very negative when it's very exciting because I really want to be sure that if this is a stock pick. So that's why I'm like pitching all this at you. So please, please forgive me for being a bit skeptic about a few things here. Nothing to forgive. I appreciate it. It's absolutely stuff to be concerned with. And I can't There's nothing that I hate more than seeing management, you know, buy stock at 60 bucks a share. And then, you know, stock goes to 20 and they're not buying anymore. What the heck are you guys doing? Yeah.

Starting point is 00:25:55 Yeah. All right. So who wants to go next? Who wants to do that? Everyone, Jake, out there, enough questions there. You guys have anything else? Toby, you got another one for Jesse. Are you good?

Starting point is 00:26:04 No, I have owned CF Industries in the past. I think I pitched on like a Jeff Mackey Yahoo finance show in like August 2014. seen and we liked the buyback and the dividend in addition to it being otherwise cheap. It's one of those funny stocks that it looked a lot cheaper, you know, the way that I do these analyses in 2014 when I think it was trading in the high 40s and we sold it like high 50s or low 60s about 12 months later and it was, you know, looking a little bit more expensive. But it's one of those stocks that when I look at it now, it's sort of on a fundamental basis. It's more work sort of needs to be done. I would need to do more work on the business to

Starting point is 00:26:45 sort of get comfortable with it. And it's just not enough screen. So it's not something we know well. But it's funny that when it was higher, it looked cheaper and at lower, it looks more expensive, which doesn't make sense. It must be cheaper now than it was. That's the way that cyclicals work, right? I mean, they look cheap at the top and they look really expensive at the bottom. Okay. Well, let's go ahead and head up the next one. The reason I really like that last conversation is because it was a great conversation about a commodity-type business. Some of the other ones don't necessarily fit that mold. So we're going to go into a different sector here,

Starting point is 00:27:17 and people can kind of hear how we pick through maybe some different companies here. So Stig or Toby, either one of you guys want to go next? So I think the pitch that we had about this time last year was Humana, which was our biggest position. And I was trading like a high 160s then. And the reason that we pitched it was because it had a takeover from Etna. eventually the takeover was busted, but the stock is still traded up basically to the takeover bid. So we've trimmed that right back.

Starting point is 00:27:43 A second largest position last year, which has now become our largest position is a short guarantee. And the ticker for a short guarantee is AGO. So this is a, it's a reasonably complicated stock to sort of get your head around. And there's a lot of reasons why it trades cheaply. Basically, it's an insurer. It's a muni bond re-insurer. So that means that when a local government wants to issue, debt, they need to get insurance wrapped around it. And so that's what these guys do. But you can imagine

Starting point is 00:28:12 then the problem that that creates any time a government like Puerto Rico or Stockton, California, or Illinois, somewhere in Illinois, anyway, anytime something happens, AGO is going to be in the news and it gets a hit whenever that happens. But the thing that we like about it, very simply, it's trading at. So they publish this figure in the financial statements. They call it adjusted book value and we think it's a pretty good proxy for value and it's sort of 70 plus dollars low 70s dollars and the stock can be bought today for about 38 dollars it's run a lot since we started buying it last year but the underlying value has improved sort of commensurately and maybe even more than the stock is up because they're such an aggressive repurchaser of their own shares so they've bought

Starting point is 00:29:00 34% of outstanding shares back since 2009, and they've got cash there to buy back more stock. The current reason why it's cheap is Puerto Rico, which is defaults on its debt, and they've wrapped some of that debt, but they've aggressively provisioned for it. And they've been through these processes before, and they're very good at this sort of stuff. They get to the table and they negotiate. And it's a reality for these governments that they can't negotiate too hard with AGO because they're going to need AGO. when they go to issue more debt subsequently, which they're going to need once they get through

Starting point is 00:29:33 this process. If it wraps debt with its guarantee and the debt trades down, it'll buy back the debt strip off the guarantee and resell the debt back into the market, pays a little dividend. Business looks a little bit like it's in the legacy rundown just because there's not as much business to be done, but they've been using that frees up capital all the time, which is part of the reason they've been able to buy back stock, but it's also allowed them to buy lots of competitors. anytime they do it, it's accretive to earnings per share, adjusted book value, all those sort of things. So we think that they're sort of the biggest and the strongest. They're going to keep on buying competitors, buying back stock, and they're going to

Starting point is 00:30:09 either not lose money in Puerto Rico or they're going to be able to release some of the provisioning that they've got there. So we think it's half-ish price. So, Toby, whenever I'm looking through some of my notes that I took on this one, The first thing that I would say is 2007, 2008 time frame, they had a really rough time going through that. I would suspect that if we would experience another systematic kind of event that they would experience hard times, like any other company. They didn't weather that very well. But whenever I was doing my assessment on it and trying to determine what I think the value was, I used the free cash flow rate of around 233 million, which was an average of the free cash flow that this company produced.

Starting point is 00:30:53 over the last 10 years. What I did is I didn't take any growth into the future. I just, I basically said that that free cash flow is what's going to basically persist over the next 10 years and let's figure out what rate that will give me if you do an IRA on the company. So whenever I looked at the current price at $38, I came up with around a 6% return, 5.5% to 6% at the current price. Would you agree with kind of that assessment? Are you looking at it as a similar return, annual return at the current price? That's not how I would value it. I think, for insurers, the better way to value the insurers is on a book value basis. And you just want to buy them in a big discount to book value. And so these guys are at a big discount to adjusted book value.

Starting point is 00:31:34 And when they're at a big discount and they're taking advantage of it by buying back stock, that means that you've got path to sort of realizing or catalyzing that valuation. Explain to our audience a little bit of your thinking on the price of the book, why you're saying that when you're dealing with an insurance company that you do the price to books, so people understand this. Insurers have, just because the accounting and insurance is a little bit odd, you know, sometimes when they're writing business, that can depress their earnings. So if they're, it's slightly complicated further because the business is slightly in runoff, which happens to insurers every now and again, they go through periods of expansion and contraction. When they

Starting point is 00:32:08 contract, they're freeing up capital that they had previously allocated to business that they had written. It was to support the business that they'd written. So cash flow is not a great indicator of what the company does, even on an average basis, you better off. And it does vary from insurance company to insurance company, but typically book value is, you want to adjust book value to roughly the value that you think it's worth. And these guys do it in there, you know, it's non-gap, of course, but it's, they'd sort of do this calculation, which is a pretty good guide. And I just want to throw it out to the audience. So the industry average for this type of business is to pay a 1.4 price to book. So the industry average today is about a 1.4.

Starting point is 00:32:47 Toby's pick, the ticker again is AGO, is at a 0.7. So it's literally half of what the rest of the industry is pricing these companies at. And I would assume, like he said, it's mostly due to the Puerto Rico exposure that they have in their portfolio that it's being priced down at a 0.7. But it's half of what the rest of the industry is being priced at. This headline risk in this business, it's always going to stumble from bad headline to bad headline. And then in between that, you get a quarterly that will be a good result. book value will be up substantially. They'll bought back a lot of stock and it'll get that little goose along and then it'll stumble into the next headline. So the time to buy this thing is

Starting point is 00:33:26 anytime you see it in the news associated with Puerto Rico or something like that, that's when you go and buy it. What price did you get into it, Toby? We've bought it a few times. I'm not entirely sure, but we're up like not 100% but in that kind of vicinity, it's up 70 or 80% for us, something like that. Fantastic. It's still cheap though, still really cheap. It's our biggest position because it's so cheap. So, Toby, whenever I read through the financial statements of AGO, I was pretty excited and I was excited for a few reasons. First of all, I was excited because it had something to do with Puerto Rico. The loss that they have provisioned here is approximately $250 million. And it sounds like a lot of money. And if you read that in the heading, you know,

Starting point is 00:34:07 it would be like, oh my God, you know, what's going on with this company? They're lost $250 million. It's actually not that much money. If you think about it. the hit that it's been taken because of it. I mean, you're looking at a company here with the net income around one billion. I mean, clearly it's not good, but there's no reason to necessarily trade down to, you know, low 20s as it has been within the last 52 weeks. Another thing that I really liked about this company is that they expect to ramp up the repurchase of common stock, which they've been kind of been halting in 2016. So in the latest earnings call, they said that they will go back to the 2013-14 timeframe where they bought back for 500 million plus.

Starting point is 00:34:50 That's a lot of stock for a company that's with a market cap of 4.7 billion. And I really like the timing of that. So I just want to say 10% buyback yield. That sounds like something my buddy Toby really likes because he's really into cannibals. I've heard. Monish is the quantitative cannibal buyer. We like buybacks, but we like materially, you know, big meaningful buybals. back's one stock is very cheap. We think that's a really good indicator because it tells you three

Starting point is 00:35:17 things. It tells you that one management care enough to sort of do it at the right time. It tells you that they've got the genuine free cash flow there. Like that's assuming that they're not using debt to do it, provided that they're sort of doing it out of free cash flow and cash that they've got sitting on the balance sheet. That's a great thing to see because it's proof of the free cash flow. And then you know that it's sort of concentrating. They're telling you that they think the stock is cheap too. And so at $38, their average buyback price, last quarter was $39.50, so you're buying at a discount to where the company was buying itself last quarter. You know, speaking of headline risk, there's been a couple of pension funds in the

Starting point is 00:35:55 United States that look like they're insolvent or going to be insolvent and probably more than a couple over the next 10 years, you know, in terms of their assumed rates of return versus what they probably are going to earn over the next 10 years. How does that factor into your analysis of this company. If you're insuring municipalities and they have pension funds that are likely going to go bust over the next 10 years, at least in my view, you know, how does that potentially going to affect this insurer? They're very careful about the nature of the bonds that they insure. So they're often backed by, you know, they can find a specific revenue stream that it's backed by and then it's not part of the, I can't think what the exact word is it's secured against that individual

Starting point is 00:36:36 revenue stream rather than relying on being mixed in with all the other liabilities. General revenue, Yeah. General revenue, general obligation, general revenue, whatever they. Okay. Yeah, you know, because that pension issue could be a problem going forward. And if you're ensuring that, you know, general obligation or general revenue bonds, but if they're secured by something specific, you know, and then, you know, that was another point that I was going to make to is for me,

Starting point is 00:36:58 financials, you know, are always such a black box in terms of their financial, trying to read their financial statements that you really have to have a lot of confidence in management in that they're, one, honest, and that, two, that they know how to run their operation. So, I mean, what are your thoughts on management? Unusually for us. So we tend to be in things that we don't think have particularly great management, although the Humana, we thought, had very good management that were doing material buyback

Starting point is 00:37:25 at the right time. We do think management here is super smart. It's sort of like, it's a little bit like a listed hedge fund, the way that they trade, you know, buy back the debt, take off the wrapper, resell the debt, buy back their own stock. So we do think that the business is good and management are good. And management are doing something about the fact that there's a big discount to valuation. So unusually for us, it is a good management. Just one final word.

Starting point is 00:37:48 The reason that the free cash flow and the buybacks, partially that's, it's a regulatory issue. They have to get permission in order to do those certain buybacks. So that's why you might see them go quiet in a particular year. And then they'll be able to release some capital this year. And then there'll be a meaningful buyback this year. All right, Stig, it's either yours or mine. Okay, I'll go next, Preston. So my stock pick is Beth Bath Beyond and the stock picker is BBBY.

Starting point is 00:38:16 I think most people probably in the States, they're familiar with Beth Bath Beyond, but they sell bath towels, kitchen electrics, you know, cookware, everything it has to do with your home. They have 1,500 stores. That also includes that subsidiaries. That would be like Christmas tree shop, cost plus, world market, buy-bye baby, and a few others. But that split would be around, call it thousands, just a little more than 1,000, and the rest would be the subsidiaries.

Starting point is 00:38:42 But BethBath beyond are the biggest stores. Typically, there would be around 45,000 square feet, which is very, very large for homeware. The reason why this really popped on my radar again, because I actually, I used to to own this stock years ago, was that it seemed to be priced really favorably. So price earnings, less than eight, price to cash flow, five. enterprise value to EBIT of a 5.5. I mean, to me, it looked interesting and I decided to look closer into it. So the story is basically that I used to own this stock, and I think I bought it in January 2014. I bought it not at a really good price. I think I bought it in like in the mid-60s

Starting point is 00:39:24 or around 60. And I sold it 18 months later. Now, so the reason why I pitched this, that it was actually around $80 whenever it peaked, and now it's around 35. Honestly, I don't see the business changing so much. So that's really what was interesting for me. If you look at the EPS, if we should do that to begin with, you know, it's been very stable between $4.5 and $5.5. But this is fueled by share buyback. I like cannibals too.

Starting point is 00:39:55 And they are buying back a lot of shares. So it's been fueled by that. The margins are not as good as they have been. If you go back just a few years, call it four or five years, you would see an operating margin of 15%. Now we're just short of 10%. Now, the reason for this, because obviously it sounds really, really bad that your margins erode. The reason for this is that they are starting to sell products a different way. They're scaling up the online store where they have lower margins. They also fueling a lot of the revenue growth with coupons, which too will give people a 20%

Starting point is 00:40:28 discount. They are also starting to do free shipping for $29, where before it was $49. So they're really giving up a lot of the margins to compete in this market as it is. So it's hard really to say Beth Bad Beyond. And I'm just going to play those applicants for myself here before you guys have a chance to tell this apart. It's really hard to say anything in retail without talking about Amazon. And Amazon is definitely a force to be reckoned with. And if we stay here just to talk about what Beth Band Beyond have been doing in that part, is that online, the store for them is growing by 20% per year. It's around 10% of the total revenue

Starting point is 00:41:09 right now. What it has also meant is that the SGA, so the sales general and administration overhead, would go from 25 to 28% of the revenue. And a lot of that can be attributed to the new IT center that they built a few years ago in North Carolina. It's really the driver behind this. So I would perhaps expect a slight pullback, but I don't think necessarily that you will see a significant pullback in the overhead cost of that. I'm curious to hear your thoughts about this stock. To me, this seems like a stock. I mean, this is the cheapest it's ever been. When I look at the valuation measures, it's never been this cheap. That was also because it was growing rapidly and had, you know, good profit margins. One of the things that I'm always afraid of as a value investor is buying something

Starting point is 00:41:57 that's cheap for a very good reason. And that for me, when I look at this thing, that's the red flag that goes up. This is probably cheap for a very good reason. Why does it not deserve to be cheap? Why should it trade at a higher valuation? Wow. I really like that question. And it, for me, as a value investor, it really comes back as value being driving in itself. Like, I can't find the catalyst. So that's, that would actually also be a question. I would like to send up to the group. Like, I can see a catalyst right now that would just bump it up to $70. I see that whenever I look at the cash flows, whenever I look at the earnings of this company, really strong balance sheet, a capable management.

Starting point is 00:42:33 Like, I'm thinking, this is undervalued. I'm looking at perhaps a double-digit return of this. You're saying, Jesse, that it can't be a value trap. Have we only seen the top of the iceberg? Okay, the operator Martens used to be 15. Now it's 9.3. Is it 5% in three years? Is that what we're looking at?

Starting point is 00:42:52 So I completely understand your concern. Just so you know, Jesse, whenever I do my stock pick, you can ask the exact same question because it's... I was looking of asking the same question. It's kind of the exact same scenario. But anyway, so Stig, what I did with this one, and I think Jesse brings up a fantastic point, is I can't find what the problem is. The only thing I could suggest that why it's trading so low is because of this Amazon

Starting point is 00:43:15 effect that's happening for all retailers. So you're seeing the JC pennies of the world, the Macy's of the world, all just getting crushed. And I mean, absolutely murdered right now at the beginning of 2017, at the end, second quarter of 2017. And so is this pick kind of going with that momentum, with that group or that basket of stocks? I don't know, but that's the only thing that I can kind of see by the numbers. So whenever I'm looking at the top line of this company, because I guess for me, I'm always wanting to see the top line of the income statement. Is the company, because it's such a raw number,

Starting point is 00:43:52 if that number's still growing and that's, that number's hold and strong, for me, that's a really good sign that, I mean, the company's still doing great business. And whenever I look at bed bath and beyond, their top line's still growing. I looked at the first quarter 2017 compared to the first quarter of the year previous, and it's higher. It's gone up. The top line has gone up. So that to me is surprising. You would think that maybe it's being punished so badly because maybe the top line is kind of contracting with some of these others, maybe not as strongly, but at least they'd be contracting a little bit. And it's not. So I, I find that really interesting.

Starting point is 00:44:29 Now, whenever I think about myself personally and how I shop, I don't shop at Bed Bath and Beyond. I shop at Amazon. I can't think of one thing that I would buy at Bed Bath and Beyond. And maybe it's because I don't shop there that I couldn't get at Amazon or some other store. I guess I don't understand the competitive advantage of Bed Bath and Beyond as a retailer compared to anybody else. What makes them unique?

Starting point is 00:44:52 And I can't tell you what it is. So that's concerning. but when you look at the financials and you look at the numbers, they're everything but concerning. They look phenomenal. They're absolutely incredible. In fact, let me just tell you my valuation that I came up with. So when I looked at the free cash flow on the company, the free cash flow has been really

Starting point is 00:45:12 kind of holding its own. I took the lowest number in the last five or six years, which was $668 million in free cash flow. And I grew that at zero percent over the next 10 years. I just said the free cash flow is going to be fixed. And I took, like I said, the lowest number that they've had in the last five or six years. And I came up with a 13% annual return based off of the current price, which the current price is $35. So, I mean, that's insane.

Starting point is 00:45:41 That's huge when the rest of the S&P 500's priced at 3.5% or 3% or whatever you want to use. I mean, that's 10% higher. Let me just jump in here real quick, Preston. I think about, you know, I mentioned the Buffett. a quote, right? In a commodity business, you're only as smart as your dumbest competitor. Bedbath and Beyond, we talked about their main competitor is Amazon. What does Amazon sell these products for? What profit margin? Zero or negative? Yeah, not much. Right? Yeah. So if your biggest competitor selling your products at zero or negative, you have a problem. And Bedbath and Beyond,

Starting point is 00:46:16 their earnings in the first quarter were down 3% from the year earlier. And the quarter before that, they were down the year ago quarter was down 7% from the year earlier. On the bottom line. You're talking the bottom line. And so, and that, you know, that compares to free cash flow to me. So I think when you're making the assumption of 0% free cash flow growth, that might be aggressive. We might have to assume a negative 5% rate for cash flow growth or earnings growth for a company when their, their biggest competitor is willing to sell products at a loss. So, you know, I mean, what does Bed Bath and Beyond sell that Amazon doesn't?

Starting point is 00:46:49 I don't think there's a single product. So, I mean, the question is for me, what multiple do you put on a company whose earnings are falling 5% a year? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure

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Starting point is 00:50:24 not going to Beth Bad Beyond. It's not completely true because I actually went to Beth Ben and Beyond with Preston. And I know that sounds like a weird story. So it goes something like this. We went to the Berkshire meeting in 2014. We were sitting six guys in a van. and then suddenly, you know, what appears out of the blue, a Beth Ban Beyond. And it's actually turned out that not only did I invest in that stock, also another guy in the van invest in that stock. So Preston's dad that was also in the van said, guys, let's go on a field trip.

Starting point is 00:50:58 So we went on a field trip into Beth Bad Beyond. You know, the regular thing you would do six guys on a Friday. So we just toured the place. Now, for me, that was not like a super exciting experience. Like for me, it really didn't say anything to me to go in there. But I kept thinking to myself, my wife would thoroughly enjoy being here. Now, my wife also shops at Amazon, but the reason why she likes to go to places like Beth Bath Beyond is they have the racetrack layout. People would drive to walk around in the Beth Band Beyond, to walk around and just shop.

Starting point is 00:51:34 It's not as fun, especially for women, because it's not a question about being efficient necessarily in shopping. It's an experience. And I think for all the good things you can say about Amazon and yes, the retailer beside you as the user, it's not the same for women. I don't know if I will get a lot of angry emails now for the few female listeners we do have, but that's my experience. I will validate that stick. My wife and my daughter just went to go buy her new bedspread and stuff. They went to bed bath and beyond and they got new pillow cases and all that kind Because they wanted to look at it in person. And my wife sends me there to go refill the Soda Stream cartridge.

Starting point is 00:52:10 So you can't do that on Amazon. I got to take it in in person. So yeah, no, literally I shop there or my family shops there. So I hear you. Stig, I'll be the only person who supports you in this. We do think it's one of the cheaper stocks around. It is one of our favorite stocks for the reason that lots of free cash flow on their buying back stock. Having said that we can't figure out what the catalyst is to drive it up.

Starting point is 00:52:34 So at the moment, we have a basket of these cheap retailers. So we've got Office Depot, Bed Bath and Beyond, Best Buy, Target. We've just got tiny little holdings, cores. We don't have any view. I get the feeling that long, Amazon, short all of these terrible little retailers, is the most crowded trade in the market at the moment. So I just like being on the other side of those trades. But we don't have any, you know, to Jesse's question,

Starting point is 00:53:01 what makes this thing trade higher in the future? I don't know. So that's why it's only going to be a small position for us. You know, Jesse, I'd have to do the numbers, but I think even if you would take the free cash flowed today, the lowest one that I said that I used, and you would grow that at a negative 5% growth rate for the next 10 years, I think you'd still come up with a pretty high return. I think you'd probably be above a 7%, you know, just off the top of my head, just kind of thinking through it. Well, you know, it's probably a classic, you know, well, I mean, it depends on how much online business they can garner. And but to me, it feels like a cigar butt, you know, the classic Buffett, you know, it's got a few

Starting point is 00:53:42 puffs left in it. You might see it trade up, you know, 20, 30 percent. But longer term, you know, the fundamentals for the business, you know, it seems to me it really has no moat. And, you know, from a Buffett perspective, that is, you know, big checkmark against it. No, I think everyone agrees with you on that, right? Everyone's kind of nodding their heads, right? Well, I mean, I think there's a lot of good things to be said about creative destruction. I mean, yes, it does make a lot of sense to say, here comes Amazon and everyone else has heard. Because we see so many of these retailers just being punished. Like you mentioned Target briefly.

Starting point is 00:54:14 Even though that Target has been out with a somewhat negative earnings guidance, I mean, you still get a lot of value if you invest in that company. It might not be insanely owned undervalue, but I think it's still a very, very good price right now. And I think Target can do a lot of things that Amazon can't. I just think that there's this sentiment right now in the market that if it has to do retail, we need to sell it because we have Amazon. Yes, to a certain extent again, but I definitely see all reaction, and it's been going on for years now. I'll just make one other point, as I have seen some insider buying and Target, but in the

Starting point is 00:54:48 retail sector, generally, I haven't seen any insider buying. And for me, that's what's kept me away from energy over the last two months, as energy has been absolutely crushed, but insiders have no interest in stepping in front of that downtrend. And so for me, that's a huge, you know, thing that I look at. And like I said, I've seen insider buying a Target, but I really haven't seen any anywhere else in the retail sector. Well, on that note, let's talk about my cigar butt. All right. So I was originally going to be talking about Apple tonight, but then I decided to mix things up and make things interesting. So I picked GameStop. And this is the retailer that's,

Starting point is 00:55:30 sells video games. At the end of the day, this thing deserves a lot of beating here because, I mean, it's not sexy. If anything, this is, they're selling used video games. They're not even new it a lot of the times. But from a number standpoint, this thing has some powerful numbers behind it on the financial statements. So just to kind of give everyone a heads up. So the ticker is GME. It's GameStop and it's trading at $23.78 whenever we're recording this. So for me, I go into this thing and I look at the numbers and I look at the top line again and we're looking at the revenue of the company. It's been very flat. The last year, I mean, it's just been, it's at about $9.3 billion. So the numbers have been pretty flat right around $9 billion for the last eight

Starting point is 00:56:15 years. When you look at the free cash flow of the company, they've been pretty consistent. You know, anywhere from $300 billion, the best that you've seen in the last 10 years was $600 billion for the free cash flow, but really flat once again. Well, one note that I'm, you know, one note that I would like to say is in 2008-2009, you really didn't see this company go through too much turmoil. Their top line was contracted only about a billion dollars off of the $9 billion that it's been doing ever since. So does really well through a recession, a deep recession kind of period. And the free cash flow during that time period was really quite well.

Starting point is 00:56:52 So what I did is I took the lowest free cash flow that I saw over the last 10 years, which was $320 million, and I did an IRR on this to figure out what I thought that the return would be based off of the current price. And I came up with 13% on this company using the lowest free cash flow that the company's seen in the last 10 years, and it has very stable numbers across the board. So I found this to be quite interesting. And although I think that there's concern with the whole Amazon and all that kind of stuff, I think at the end, of the day, a lot of people that frequent these stores want to go there and kind of maybe have some of the experience that Stig was talking about with the bed bath and beyond. But they go there and they're trading in their old games because I think whenever somebody's going through this,

Starting point is 00:57:43 they're wanting something right now. They're not wanting to wait three days to get a new game. Maybe they just finished playing some game that they were playing. They go to GameStop to basically sell it, get some money and have a little bit of money to basically invest in their next video game. and they buy it there on the spot and they want that immediate interaction. They don't want to have to wait for it. And I think that that's why maybe this business model is sustainable. And I think that game consoles in general are going to continue to be around. I don't see gaming being moved onto like your MacBook.

Starting point is 00:58:14 I don't see that happening in the future. I see these, if anything, there's probably even a growing demand as these games get more complex with the virtual reality and stuff, to run that with a really high-end processor with hardware that requires some type of, CD or DVD or I don't even know what the, I don't play video games. Let me just disclose something here. I don't play any video games. So I might be the worst person in the world to be talking about this. But from a number standpoint, this thing makes sense.

Starting point is 00:58:40 So go ahead and fire away and pick this thing apart for me. Well, you know, I actually do play video games. My son and I have been playing video games together for like 12 years. He is a console. He's probably one of the more hardcore console gamers that you'll find. And, you know, he insists that the real hardcore gamers are actually PC games. gamers that guys are really into it. But he plays console and GameStop is really focused on the console.

Starting point is 00:59:04 And I saw this was your pick and I said, hey, Kurt, what do you think of GameStop? Should I buy some stock? His two-word answer was, no way. He just thought, you know, like the last few games he's bought been directly through the console, through his Xbox One and bought him directly through the Xbox store. And so he doesn't go there to buy games anymore. And I think that's probably what's going on. with the stock price, why the stock has been hurt because essentially, right, this is a video game

Starting point is 00:59:32 pawn shop. Yeah. Right. They buy your used equipment, you use games that, you know, five bucks and sell it for 25 bucks. And they have great margins in that business. But as this stuff is being digitized, and there aren't physical games anymore, or they're going in that direction, it's hard for them to find, you know, market for the business. So that's just my son's two cents. He said, no way, dad. No, I think that you bring up a fantastic point because I was thinking through that angle where they're able to download the game straight into the consoles. But for whatever reason, you don't see that happening very much today. You see these people that are still just frequent these stores like crazy. But maybe what's happening is in three to five years from now, you see a major movement towards that as the hardware is replaced and everything starts moving towards more of that.

Starting point is 01:00:22 Now, where I was kind of thinking through maybe that wouldn't be the case is because I would think that that would require an enormous amount of memory to download some of these virtual reality games because I really see a lot of it maybe going in that direction, right? Yeah, and I did have to buy them a new hard drive. So we had room to download all these games. And I'll tell you, this is a stock that's been on my radar for four or five years because it's been a cheap stock for a while. And so I've been, I've thought about it and looked at it. And I just haven't been able to pull the trigger because it's incredibly cheap. I have pulled the trigger in the past and lost money on it. Everybody knows the reason why it's cheap, which is kind of the, sometimes those are the sort of stocks that I like.

Starting point is 01:01:03 Like, everybody knows why GME is cheap. And this is a few years ago now. And I bought it then, and I just, I've become increasingly persuaded by the view that Jesse's, I think that it's sort of like a blockbuster Netflix at some stage. It just sort of, it completely flips. And there's no need to go and buy the physical copy anymore. because you can download them so quickly. Yeah, I mean, I got to say, guys, I don't agree with you at all.

Starting point is 01:01:26 And I'm, and, you know, I don't know I am so negative today, but it's a good discussion. It's really good discussion. I honestly, I never heard about GameStop before Preston brought it up and told me how often he went there to play video games. But, you know, whenever I look at the breakdown of the revenue, you know, 29% the comes from new video game software, 26% pre-owned and value game. I would assume that that is what Preston talked about before, like in common with your own game, but also like older games, just in general,

Starting point is 01:01:58 it would be a value video games. And then they have a really interesting segment called new video game hardware. So what you, for instance, don't see right now is that the new Nintendo Switch, they're selling a lot, and it's not included in the latest earnings. So a lot of this is seasonal.

Starting point is 01:02:14 That's another thing. They actually change their guidance policy. And now they're doing like a yearly guide. instead of doing quality guidance because it doesn't make sense to look at it, go from this from quarter to quarter because you would have, they mention themselves Apple whenever they are with the new iPhone, what that means for them. They also talk about what's happening with the new PlayStation 5 whenever that's coming. So that's an important segment. Another thing that's very important for this company is that it used to be a physical shop and that was also what

Starting point is 01:02:39 you're getting at before. Back in 2008, it was solely a physical store. Now, the goal is in 2019, it will be 50% the operating earnings would be from non-fysical game stores. And right now that number is 37%. That's non-physical. So they're going in that direction. And one of the ways that they're doing that is they have something called technology brands. And that's something that they're setting up together with Apple. So they're actually selling a lot of Apple's products.

Starting point is 01:03:07 They're selling more than a million iPhones now. And that's something that's just growing like a weed right now, that segment. And they also teamed up with AT&T. So the reason why you also seen them make so many acquisitions, I think they spent more than $400 million in acquisitions, is that they have bought these small stores from AT&T where they're also licensed to sell their products. So I think it's a very interesting company, but again, it also really assumes that value is a driver in itself.

Starting point is 01:03:36 A lot of good things going on, good yield, more than 6%. They're buying back stock at a decent rate. I think from a margin of safety perspective, I like this pick. So I'm curious to hear what you guys have to think. You know, if we were playing WrestleMania, Stig would have just jumped off the top rope on all of us. You know, Stig, I really like some of your points there. And in fact, it sounds like you would have presented this idea more than me because you had some amazing points there. The thing that I would be curious where you were talking about the virtual store sales and how, I forget the number that you said there is around one third of their revenues.

Starting point is 01:04:11 Are you able to see how much of the margin is coming off of that? Is it just like top line revenue that doesn't really produce any net income? Or are they actually making decent margins that are comparable to their in-store stuff? Really insightful question, Preston. And if you look at the different categories, actually where they have the highest margins that's in digital. That being said, digital is still a very, very small segment. They have 85.9% gross profit margin. By definition, since you would have very low.

Starting point is 01:04:41 variable cost since it's digital. If you look at technology brands that we just talked about before, that is 68.1% gross profit margin. And that is compared to the overall 35%. Really to answer your question here, Preston, yes, the newer non-physical gaming segment, the margins are actually a lot higher. And that's actually what you see from fiscal year 15 to fiscal year 16 is that you can see the gross profit margin, which has been in the high,

Starting point is 01:05:11 20s and 2015 it was 31.2, that has actually gone up to 35%, which is the highest margin has been for the past 10 years because they're going into higher marketing products. Another thing I'll just like to add here in the end is that with all the new Apple products that they're selling, one thing that I really like, and it's probably because it's a more branded product, is that people really like to go out and look at Apple products. Speaking about what we also talked about with Beth Ben Beyond, you know, there was some type of goods you would actually like to go and see for herself. It's part of an experience. So that's why I'm also so excited about them teaming up with Apple. I would just add one thing to that.

Starting point is 01:05:53 And I think, Stig, you brought up a good point, which is in this industry, there's a console cycle. And so, you know, when a new console comes out, the game creators have a huge burst in their business. And so we saw that actually, you know, when the Xbox 360 came out and then, you know, in the early 2000s and then you see the software companies do really well, Activision and EA. But then GameStop later in the cycle did really, really well because that's when all those popular games start being resold in the store. And so, you know, I think GameStop was traditionally late cycle and the software companies were traditionally early cycle. This time we've seen the new console came out, the Xbox one. and, you know, PS4. And they all did well together.

Starting point is 01:06:42 The software companies have been doing really well. And GameStop later in the cycle this time has actually been doing very poorly. So this cycle, I'm seeing something different than previous cycles. And that to me is a big red flag where right now the resale business for all of these popular games should be really doing well. And this is when GameStop should be, you know, doing really well. And they're really not. And so to me, that's a big flag from a cycle.

Starting point is 01:07:07 standpoint. I will applaud you guys for picking retailers. I think if there's any segment in the market right now that's even halfway contrarian, it's retail. And it takes a lot of guts to, you know, pick these types of names right in here, which is usually, you know, if it takes guts to do it, I mean, some of my best investments of all time, the ones where I'm literally telling myself, Jesse, you're crazy for buying this right now. I think it's really interesting. Like the four of us, we all pick very, very unpopular stocks. I mean, it's not. not like Toby said, you know, Tesla and I said Google. And we were talking about something that's extremely unpopular.

Starting point is 01:07:46 Guys, this was awesome. This was such a pleasure to kind of shoot some holes through various ideas. And I think the thing that for me that was really interesting is just to kind of hear, at least for the audience, they can kind of hear how we're picking through and troubleshooting each other's picks. And I know, I don't know in any of these four picks, but it's a great exercise to talk through things, to hear how people are thinking through the problem. When I think that's the real value of this, if we go across all four of us,

Starting point is 01:08:13 we all think that we're at a stock market high or very close to it. And we think we're due for a very large, systematic event. And I hope I'm not taking words on anyone's mouths. If I am, let me know. Everyone's kind of shaking their heads, no. So we're here talking about this when the market is extremely high

Starting point is 01:08:31 on what we could potentially buy and not get crushed if something like that would happen. and just we want to throw this out here so people can kind of hear how we think. So any other comments that you guys want to say before we kind of wrap things up with the assessment of the stocks or any just market discussions in general that you find interesting right now? Just that I appreciate being on here and it might be fun to come back a year from now and be able to explain why I was such an idiot to buy CF today. I think my question to you guys would be, did you change your opinion about any of your stock picks? about somebody else's stock picks?

Starting point is 01:09:05 I did about Jesse's. I did about Jesse's for sure. I kind of came into this thinking like, oh, that thing's ugly. But I didn't know the background on it. So after hearing him talk about it, it makes a whole lot more sense now that I heard it. In relation to GME, Preston, in relation to your pick, I think it's one of the problems with being around in the market for a little bit of time and seeing. So Jesse, I've both seen GME. I've known GME for years and years and years.

Starting point is 01:09:32 bought it and I've lost money in it. So just, when I see the ticker, it just gives me chills these days. So the fact that, you know, Stigs seen it for the first time and thinks it's cheap, I mean, that maybe you're finally going to get it right. And I'm just so jaundiced. I can't think about it anymore. Real fast before we end the show here, we are really, really excited to make this announcement. So our good friend Jesse Felder, who's with us today, is starting his own podcast. And as you guys can see, Jesse is brilliant. And he has has just amazing comments. And I know as a former billion dollar hedge fund manager, his network has to be huge. And I know the people that he's going to be bringing on the show and the discussions

Starting point is 01:10:14 that they're going to be having are going to be phenomenal. So all of our listeners, we can't help promote Jesse's show enough because we are so excited to know that he's going to be putting fantastic information out there. I know you have a listener sitting right here that can't wait to hear some of your conversations, Jesse. So congrats on starting the new show. You know, thanks, Preston. That's really kind of you to mention it. I'm really excited about it. I think, you know, I'm just a finance geek at heart who wants to just pick the brains of smart guys. And that's what I'm going to do with it. So we'll see. I'm a total newbie. You guys are super polished at this. And I'm going to, you know, look like a fool and trying to do, you know, make it look half as good as what you guys do. But I'm excited about it. So, oh, well, thank you, Jesse. And yeah, we're very excited. I see Toby nod in his head. He's excited as well to hear some of your conversations. So. congrats on that. It'll be great. Yeah. I'm looking forward to it. And Toby, something I'm always looking forward to is whenever we have a chance to invite you on the show, I actually did a count here before the show and you're actually the person that we have most frequently on the podcast.

Starting point is 01:11:18 And I'm really, really proud to say that because it's really, really hard for me to find anyone out there that's an authority in value investing like you are, and especially in deep value. And I'm sure everyone who's been listening to you in this episode, but also the previous episodes, they would all agree with me. So, Toby, please tell people where they can learn more about you. I've written three books that you can check out in Amazon. I don't think they're sold for a GameStop or Bed Bath and Beyond. You have to go to Amazon to get these ones. They're not selling there yet, Toby.

Starting point is 01:11:54 Hopefully, yes. My next one will be for Bed Bath and Beyond. deep value, quantitative value and concentrated investing. And if you want a free stock screener that has some pretty good research and data backing it up, you can find it at AcquireasMultable.com. It's the largest thousand ranked on the Acquireors Multiple, which is the metric private equity firms and activists used to find takeover targets. And so we write some stuff there and you can find me on Twitter at Greenbacked at G-R-E-N-B-A-C-K-D.

Starting point is 01:12:23 And I'll just jump in and I have to endorse Toby's website. I use that screener on a regular basis. And Deep Value, one of my favorite value investing books with a lot of nuggets there. You won't find anywhere else. So, yeah, definitely check that stuff out. Yeah. And the deep value is absolutely one of the best books on value investing out there. So if you guys haven't picked that up, you're missing out for sure.

Starting point is 01:12:46 And after you read it, you'll understand why we're saying this. And Toby's blushing now. So we'll stop embarrassing. So. All right, guys. So no later than a year from now, we'll invite. Jesse back on the podcast to talk about how much money he lost. Come on, stick.

Starting point is 01:13:04 I'm sure you do very well with that stock pick. Jesse. I'm definitely looking forward to following that over the next few months. Next quarter, Tob will be back on the mastermind group as usual. And in a week, Preston and I will be back with another episode of The Investors podcast. Thanks for listening to TIP. To access the show notes, courses or forums, go to the investorspodcast.com. To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy.

Starting point is 01:13:35 This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

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