We Study Billionaires - The Investor’s Podcast Network - TIP518: The "Buy" List for 2023 w/ Eddy Elfenbein

Starting point is 00:00:00 You're listening to TIP. My guest today is Eddie Elfenbine. Eddie is a portfolio manager and editor of the blog Crossing Wall Street. His buy list has beaten the S&P 500 by 102% over the last 17 years. Eddie and I discuss his buy list for 2022 at the top of the year, episode 413, and I'm so excited to review his list for 2023. In this episode, you will learn how the 2022 list performed during one of the worst stock market years on record, which stocks Eddie swapped out for 2023 and why, which stock performance

Starting point is 00:00:36 surprised Eddie the most over the last year, an overview of the 2023 list, and which stocks the TIP Finance Tool considers to be the most undervalued, Eddie's thoughts on the markets, and a whole lot more. I've looked forward to this interview ever since Eddie and I spoke a year ago, and I'm hoping to make it an annual tradition. The buy list performance speaks for itself, but I think you'll find this discussion highlights a lot of the reasons why it continues to outperform. So without further delay, here is the buy list for 2023 with Eddie Elfenbine. 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.

Starting point is 00:01:31 Welcome to The Investors podcast. I'm your host, Trey Lockerby. And like I said at the top, I'm here with Eddie Alphen Bine. Eddie, welcome back to the show. Thanks for having me. I have been really looking forward to this conversation because you do something very fascinating. And for those who don't know, you publish something called The Buy List. It's now an ETF, which we'll talk about.

Starting point is 00:01:52 But also, you only touch this fund once a year. So there is so much to discuss around this. But I want to first dive into the performance and then talk about the updates to the fund for 2023, et cetera. So I'm going to go ahead and brag a little bit for you. So the 2022 fund performance came out to a negative 10.42%, but negative 9.28 adjusted for dividends, which is versus the benchmark of the S&P 500 at negative 18.11%. So an outperformance of nearly 9%. I mean, that's not to be understated in the year we just had. So I wanted to, as you know, 2022 was one of the worst years on record for the stock market.

Starting point is 00:02:34 So talk to us about what it was like to live through it, knowing you had to wait till the end of the year to make any changes. It was a difficult year. And sometimes you want to take the hammer and bust the case in and grab it and make changes. But I always feel is sticking with the rules is in the long term, it's better because you know exactly you don't panic. It keeping with these strict rules forces you to. stick to your game plan and stay with the stocks that you like. And it was an interesting year because,

Starting point is 00:03:10 I believe it was the fourth worst calendar year of the past 80 years. Some of that is the calendar effect because the peak day was the very first trading day of the year. And then we were tempted with multiple bear market rallies. So a lot of times people just going by their gut instinct, they would have been fooled. They would have thought, okay, this is past us by and we're going to go right back. Nope. Then the bears came right in and pushed us lower. It happened again and again. I think the low didn't happen until the low so far until mid-October. So nearly in the entire year, the bias was always to the downside. It's a really difficult year for the stock market and the bond market as well. The 60-40 portfolio, legendary strategy. And that had one of its worst years on record as well. It seems like we're no safe places. Now, your ETF, which is, the ticker is CWS, and you launched this in 2016. It's had an amazing run, but it kind of ended up flat for the year, which I have to assume

Starting point is 00:04:18 it's only a good thing, you know, considering the market we had. But maybe talk to us about how you saw the ETF performing, you know, versus the fund list on its own. We have to be very careful in our language in saying that the ETF is based on the buy list. It's not always going to be exactly 100% the same. For example, an ETF just has to hold a small position in cash. So it's something like 0.3 or 0.4%. We have to do that where when I do my buy list calculations, that's not figured in at all.

Starting point is 00:04:55 It was, it's always difficult on a year like that. We sucked just, we sucked less than everybody else. And as odd as that sounds, that actually is very important in long-term performance. In many ways, in a strongly bullish year, we're probably not going to be up as much. But the, it's not symmetrical. So we'll do much better in difficult years and not as well better in the, those strong years and string together many years of that, it results in long-term outperformance. So it is odd saying, you know, the ETF was flat or, you know, we didn't get those returns.

Starting point is 00:05:37 That's actually good news considering the environment. And also when we, at the end of the each year, we rebalance all of the positions. So many aspects, we're getting good prices once we do that rebalancing. A couple of thoughts on that. I mean, what's so fascinating about it being flat is that it's all equities, right? Also, it's not like this is some sort of ETF that's hedged with a bunch of different asset classes. It's all equities, which I find really interesting. Now, I know your rule of thumb is to, well, I don't know if this is a hard and fast rule, remind me,

Starting point is 00:06:11 but I know you swap about five stocks every year. This year, were you tempted to change more than five because I know there were some dogs in there. actually believe it or not i was tempted to do less than five sometimes it gets harder and we've always said you know five stocks each year and my uh my business partner says there's no reason you can do four or three and that's true but we've never done that and sometimes i do have difficulty selecting which one i i want to get rid of and you become just naturally you you sort of become attached to them. And you have to fight that urge. You need to be as rational and business-like as possible. But for example, one of the stocks, Church and Dwight, I like a lot about it. There's a lot

Starting point is 00:06:59 of things I like about this company. And ultimately, I made the decision to drop it this year. They just had a number of issues crop up during the year as far as managing expenses and dealing with supply problems and inflation, I think hurt them more than they realize or I realized. And so I had to let that go. And oh, not church and Dwight. I like that stock so much. But also we have more than once. We've had companies that we've cut and rejoined us.

Starting point is 00:07:31 And that even happened this year with a cool company, Middleby, which did very well for us. We didn't have it in 22. I'm not a good market timer, but boy, we got that right because the stock got flattened last year. And then I looked at the, well, hey, we'll just add it right back. And so, you know, that can happen. A lot of times maybe that will happen with Church and Dwight down the line. So it's always nice. Another one that did very well for us this year was now it's called FICO.

Starting point is 00:08:03 It used to be called Fair Isaac. I think legally it's fair Isaac. But I think they're trying to push the FICO. And even when it's entered the lexicon, when FICO score, any American knows what you're talking about. And they had a great year for us. One of our top performers, even jumped 30% in one day. And they were on and I got rid of them years ago. I probably shouldn't have done that to atone for my sins.

Starting point is 00:08:30 Well, it's funny how, you know, that human bias is always going to be a part of the equation, unless you're a total quant, right? but at least you're mitigating it with these once a year changes. I imagine that has a huge impact. So a couple points on what you just said there, the church and Dwight won. In our last conversation, we talked about a little bit. You were explaining it as sort of the baking soda and condoms company. So you never have a hesitation buying something like that. Because if you think about it like a Buffett-style stock where it's boring or just at least like

Starting point is 00:09:01 everyone's going to always need these products, I found that to be surprising that it went away. So is the sentiment on that more around management as far as what you were saying there is not so much the conglomerate itself as far as the products go, but more about how they're managing the company itself? I mean, it's both. I would say that in the sense, it was management was blindsided by the macro environment, particularly sales. The cost, passing on the cost of goods in a sector that's very competitive as far as cost. and they had a difficulty doing that, trying to look through. They said their organic sales would be negative. I'm trying to recall what they said earnings growth would be something like 4% to 8%.

Starting point is 00:09:48 That got cut. And then they said basically it would be flat. That happened all throughout the year. And so that sort of led me to, instinctively, I tend to like it if it gets into a little trouble. But ultimately, I thought. And also, I wasn't really wild about the recent growth numbers. A similar story with Reynolds consumer products, facing many of the same issues and got rid of it for many of the same reasons.

Starting point is 00:10:21 So you mentioned Middleby as well. You've brought it back, as you mentioned. You let go of it in 2020, I believe. Talk to us about why or what it's done to win you back. Well, I mean, I have to talk about this was one of the most incredible roller coaster rides we have because they make sort of industrial kitchen supplies, big ovens and conveyor belt kind of things. And when the lockdowns came in March of 2020, the stock got absolutely clobbered. You see hotels in businesses, this is what is going to impact them. The stock fell, I'm trying to think it was around 120 and it fell to 40 within days.

Starting point is 00:11:08 I mean, it was so fast and so hard. And then the company put on one of the most spectacular rallies and it got to 200 by the end of the year. Right around there. I may be off some, but it vaulted from its March low. And that's when I said, okay, this is too much. let's take some profits off the table on this. Then, so this year, it fell again. It fell back from 200 to about 120.

Starting point is 00:11:39 And I was looking at the earnings reports, and the last one, the bottom line missed, but the numbers were quite good. I think the EBITDA growth was 235. It's odd what numbers you can remember. I think that's what they did. So they were still showing impressive numbers. I'm trying to think it was around $10 per share is what we're looking for earnings, give or take, and it's around $140. That's not bad for this environment.

Starting point is 00:12:11 And also, I just like the long-term growth of their operating income. It's a nice grower. It's a good business to be in. So I saw that the numbers continue to look good this year, and the price went down. And so I figured, hey, this is a good time. to get back in, maybe we can have the same magic with it. But I really like this company. Now, I think I do know the answer to this, but I wanted to make sure, did any of the macro themes leading into 2020 help inform the list at all, you know, knowing interest rates were

Starting point is 00:12:46 likely going up and you were seeing inflation, et cetera, were you looking to build more of a defensive portfolio going into the year? Yeah, the short answer is no, but the longer answer is that even by not, don't. that it helped us very much. And I think that was the key driver to our outperformance last year. But I can't take any credit for that whatsoever. But this is how I would describe it and it's probably filler for a lot of listeners. But when COVID came, the market got very scared. And the government, particularly the federal government and the Federal Reserve responded massively. In many ways, I think they were trying to not do what had happened during the financial

Starting point is 00:13:32 crisis, where the response was somewhat slow, only as they saw more and more evidence, did the response get more dramatic? This time, they responded dramatically and very early. So you have to understand that the stock market is a delegate balance between return and risk. And what is a What the Federal Reserve did was, it said, we're going to take risk off the table. Risk it, we're going to, basically, if you prefer, we're going to nationalize risk. That completely worked the market. It's like putting a magnet near a compass because all of these areas that are much riskier, they had a free ride.

Starting point is 00:14:16 They had a backstop. So all of these sectors, places like, you know, Peloton and Zoom, and they just took off to the moon. We saw these enormous rallies in this and also in the crypto world, also in the NFT world, just all those high-risk areas. Meanwhile, the boring areas, the value areas, the low volatility areas were really left behind. So the story of 2022 was we completely unspooled that. And all the high-risk areas, I thought Facebook. meta platforms. It fell by what, 60, 70 percent. Tesla was down. All of them. I mean, the stars of the lockdowns really, they fell significantly. And then a lot of the value, I wouldn't call

Starting point is 00:15:12 the ETF a value one, but it was value, high quality, and those did well. So it was the research. And that was, look, when interest rates are at zero, who cares about it? a PE ratio. I mean, it doesn't matter. But suddenly, when rates are at upper three or four percent, then suddenly people worry about things like valuations. So in many ways, 2022 was the waking up to that, that the valuations came back and some sanity was restored to the market. I didn't predict any of that, but I certainly rode the events all throughout last year. That's that sort of rotation, right? You hear about every, so now and then from momentum into value into growth, et cetera.

Starting point is 00:16:00 In our last discussion, you said that every year, the biggest winner is always one that surprises you. So I'd like to go over the top five winners and highlight perhaps some ideas as to why they did so well. But before doing so, I'm curious to know which stock surprised you the most. Oh, boy, maybe Aflack. It's such a steady, steady business. They do what they do so well. And I had, do you have the numbers in front of you? I don't know.

Starting point is 00:16:30 I do. Yeah, 23.21%. Wow. And so it was 40 points better than the SMB 500. And, you know, it's supplemental insurance. It's nothing, nothing really. But also, I think that going back to the previous point, it shows you the effect of, you know, it did a lot better.

Starting point is 00:16:49 It had a better year than Mark Zuckerberg. I mean, yeah, and to be quite honest, that one in particular is still looking undervalued to me, which I'm going to cover a few of my three that I see in the new list that I'm still very optimistic about, but I'll just spoil that that one, even though it went up 20-odd percent in 22, still seems very undervalued. And last time, we did touch on this one in the last episode a year ago, and you mentioned that 70 percent of the revenue comes from Japan, which I still find to be kind of a fascinating fact. Do you see that shifting? Are they going more global? Is their growth coming from elsewhere now? Or is it all kind of still a lot of it coming from that part of the world?

Starting point is 00:17:30 Well, they have close to a monopoly in Japan. So that's always going to be a large part of their business. But they do a significant business and a growing business in the United States. I don't know how well that's going to be balanced in the long term. But when you look at the business and they're known for the famous ads with the Affleck Duck, America is pretty small in their universe. I think Japan will continue to be a major source of the dominant source of their business. So some of the other big winners, you mentioned FICO. That was up a little over 38%, which is incredible.

Starting point is 00:18:08 H-SY, which is Hershey, 19.69%. And then we had scientific applications. SAIC 32.71%. We discussed this last time. So if you want to go back to our last episode, we kind of touched on this one in depth. Your shorthand for it was that it's a, the Pentagon's IT help desk, which I've always liked. You have this gift for coming up with these really sticky branding ideas for these stocks, which I love.

Starting point is 00:18:35 Can I say something about Hershey? And this is a, and this is a good lesson for investors, people listening out there, is that so often the best year to own a stock, you really don't senior gains until the third year. And with Ers, it was really our fourth year. So we had had it on the buy list for three years. And if you had done well, nothing great. But then it outperforms by, what, 50% this year. It really turned into a rock star this year. And it's on the buy list for the fifth year. So that is, you know, people want to see immediate gains. When you do a lot of focused stock picking. It takes a while before you really see that huge payoff. And a lot of times they say the best stock to own is one you already know. Another thing with Hershey is that the

Starting point is 00:19:31 company said this was not hidden anywhere. The company said, we are having productivity problems. We cannot keep up with demand. And there are multiple articles about this. It's sort of like they were advertising. Anyone who just bothered to pay attention would see that the company was doing very well. And their problem that they were dealing with was managing growth. And they have since increased capacity to keep up with business. It's so odd that this is a name everybody knows. You know, as I said, there's no city in America called, you know, low-fat Pennsylvania.

Starting point is 00:20:07 But for Hershey, for chocolate, there absolutely is. and they were basically telling us right to our faces. It was a bargain hidden in plain sight. So I just wanted to add that bit about Hershey. I'm glad he did. I touched on it with David Gardner recently, The Motley Fool, because I was challenging him on non-sort of tech-oriented stocks, for lack of a better way to say it.

Starting point is 00:20:31 And I mentioned that it had reached its 52-week high. And that was fairly recently, you know, in a year where the S&P 500 did what it did. I mean, the markets just in general did what they did. the hit your 52 week high in a year like that's pretty remarkable. I like their business model. They make chocolate and then they sell it for more than they make it. And then they repeat that. And there's nothing high tech about it whatsoever.

Starting point is 00:20:55 But it's a very profitable business. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors,

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Starting point is 00:25:01 That's Shopify. slash WSB. All right. Back to the show. Now, another big winner was Silgan. I'm saying that correctly. Silgan Holdings, which was up 21.01%. And again, this is one we highlighted at our last discussion because it was standing out to

Starting point is 00:25:21 me as another one that seemed pretty undervalued. This one, just to recap, is sort of the metal containers stock, if you will. You mentioned it's very boring. It's very overlooked or overlooked. And talk about maybe the validation you saw with that stock. going into the year. This, I have to say, is one of my favorite stocks, and I have a soft spot for it. And it's a very boring company, but I think of it this way, whatever their market cap is, I don't know, $5 billion or so, if someone said, here's a check for $4 billion and

Starting point is 00:25:55 recreate, go off and do what Silgan does. I don't think you'd be able to do it. You need a lot more money to be able to do this. They have production facilities all over the place. So it's very, very close by to whatever you want to do. It's not just metal. They do all sorts of containers. Remember, any business needs a container, needs something to ship it in. And they're the kind of company that if you're going to be in business that involves containers, it's hard to avoid Sylvie. I mean, if you wanted to, if you said purposely, we're going to avoid. them, that would be very evident in your business decisions. They're just a part of the industry that you need to deal with. They service their sector and they do a really good job of what they do.

Starting point is 00:26:48 So it's a cool little company. Now, I'm jumping to an assumption here, but given all the supply chain issues we had, and it seemed metal containers were part of the equation, just being really high in demand and very low in supply. Did we see a big price increase happen for Siligan, were they able to capitalize on that? Do you think that was part of the market performance? Maybe talk a little bit about the revenue growth or something that was driving here. Yeah, I think it was a good example of revenue growth does not always equal volume growth. So I think they did a good job of balancing the higher prices and getting to their customers as well. So that was a key issue last year for that.

Starting point is 00:27:30 And I was impressed by the way the company performed. All right. Well, let's talk about some of the bigger losers here. I'm just going to go over a couple of them. You mentioned Reynolds. But that one, although it was facing headwinds, like you said, it wasn't down that big. It was only down negative 4.52%. But you still nixed it for 2023.

Starting point is 00:27:52 Whereas Trex, T-R-E-X, ticker, and just to refresh my memory, that's, yeah, just Trex company, right? So Trex, ticker T-R-E-X was. down negative 68% but has stayed in the mix for 2023. So I'm kind of curious to know more about what drove these decisions. You know, it's obviously not all performance related or short term. So one of the things when you look at the company, you want to say are the problems internal or the problems external? If the problems are external, like a good example is Affleck. They always have to deal with the yen dollar exchange rate. But the thing about that factor is it comes and goes. So if it works against you one quarter, it may work against you in the future.

Starting point is 00:28:35 But if there's a problem with the business, something endemic to them, that's a much bigger issue. So with treks, so they make the fake wooden decks, they were blindsided by the housing industry or knocked down due to the weakness in the housing sector. It's not really due to their failings as a business. Once the housing sector revives and gets better, I would have every reason to believe that Treks will get better. There's nothing implicit within the business that is a problem for Trekk. So that's the key. And whereas we were talking about was it Reynolds, the ones that I thought there was greater

Starting point is 00:29:24 problems in the performance of, in the execution of their business that had me more concerned. So going into 2022, Reynolds, you were looking at it, I believe we talked about it a little bit last time as a turnaround opportunity. Their free cash flow had recently taken this huge dive and it dropped off the list in 23. But I'm just kind of curious, was that not the case, just not seeing the turnaround opportunity or just didn't prove out in the time frame you were looking for? Yeah, I would say so. They said that EPS for this year would be a buck 56 to a buck 70, something around that. And then that was lowered once and then it was lowered again to around $1.30 per share. So the Q4 numbers will be out later this month or maybe early February. So it was that continue, not one, but two downgrades that really had me concerned about what was going on. And I didn't feel that it was. turning around the way my thesis was. And that's really a key to selling a stock when it's no

Starting point is 00:30:31 longer the company that your original thesis was. And I had to come to the realization that my reasons for buying the stock were not panning out, even though the loss wasn't that bad. Let's dig in a little bit more on the 2023 buy list. So you newly added Polaris and there's a repeat accompanying their step in. And both of their free cash flows seem to have fallen off a cliff fairly recently as well. You know, Polaris was $805 million in 2020 to negative $39 million in the trailing 12 months. The number for 2020 was very high. And in fact, I believe it had really been creeping up in the late teens. So the 2020 number was significantly compared to all their previous trends.

Starting point is 00:31:24 And you're right, it completely tanked in 2021. And I believe it's a decent rebound last year as well. Now, also, if you look at the operating income, the adjusted operating income, that's pretty stable. And it has been, and I think we'll continue to be. So it's sort of just want to add those other variables to what I look at. The thing about Polaris is by conventional metrics, it's a cheap stock. And there's a strong cyclical factor to the industry.

Starting point is 00:31:57 I mean, snowlobeels and play things. And obviously, that's going to go better when the economy, you know, people are going to cut back on those sorts of a good example of a consumer cyclical stock. And that can be difficult to look at under conventional metrics. And so you always want to adjust for where you are in the economic cycle. So that's just for people doing securities analysis, that can be very tricky because you can get false negatives by just following regular PE or EBIT or enterprise value or something like that. So I always want to take a more expansive view on that. Polaris, I'm probably not getting it at the best time considering the fragility of the economy.

Starting point is 00:32:50 but given its price, given its historic operating income, I think there's a very good chance in three years that could turn into a decent winner. It's similar to Hershey. So in a way, are you viewing these two stocks as maybe in a similar framework that Reynolds was where you're looking at them at these turnaround opportunities or are they simply just economic cycles that you're waiting to pan out? I would say with Polaris as a turnaround element, with, With Steppen, not just that I see this, I mean, it has 55 years consecutive of increasing earnings.

Starting point is 00:33:28 It's also, it's a small company. I mean, maybe two and a half billion in Marquette. A lot of people don't even know about this company. It's a wonderful, wonderfully run company. And I think that I see as more as the long-term grower. And even if I had a difficult year, but I'm optimistic for it. So Miller, ticker MLR, had a pretty tough year. It was down over 20%, but you held on to it. And last time we spoke, you mentioned you do have this soft spot for this stock. So how has that conviction

Starting point is 00:34:04 held up through 2022's performance? Well, let me say, if you have a well-diversified portfolio, you, it's always a good idea to have one off-road stock, one that's kind of different from everybody else. And that's Miller. Miller is by far the smallest company. So step in is maybe two and a half billion. That's our second smallest. Miller is probably 320 million. I mean, it's one-eighth the size of our 29th largest company. That's how small it is. And then you compare it to like Thermo Fisher or Danaherk. company like that, it's barely, it's a tiny, tiny drop. It's a cool company and I really like it. And my thesis is a longer term turnaround. So they make towing and recovery equipment.

Starting point is 00:34:55 No analysts file it, no Wall Street. And I mean, there are people filed, but no major of the Wall Street firms. So when you say, what are earnings expectations? We just don't know. What happened with Miller is that the business was very much hurt by the lockdown and the period following the lockdowns. But if you look at the 2019 numbers, I think their earnings were $3.43 per share. Recently, really a few weeks ago, the stock was going for $21 per share. So the PE ratio of a couple years off is what, six times earnings? seven times earnings, but it's just getting up to the full potential of where it had been. The revenue has already got there.

Starting point is 00:35:45 The last earnings report was quite good. I think revenue was up maybe 25%, and net income was up 35%. So they're recovering very, very strongly. So I still see it in play. My thesis is that it's a company that was wrecked and is doing well. and a lot of people just don't see it yet. I wouldn't be surprised that Miller is our top performer for this year. But getting back to your larger point,

Starting point is 00:36:14 and that is a good example of a 20% loser last year, not bothered at all by it. In fact, it's probably maybe in the last two or three months. It's up 30-odd percent. It's actually been moving up steadily. But as long as I see that continuous increase, I'm trying to think this year or so, we'll get the Q4 report.

Starting point is 00:36:35 they'll do earnings sales of around 900 million. In 2019, their earnings before interest, before taxes, was about 50 million. And so now the market cap is about $320 million. It just seems such an obvious hold this and wait for the market to come to its senses. I think it's a really neat company. Yeah, this one was interesting to me because this would be sort of on the higher end of what you would call a microcap stock. And I know that you're sector agnostic. I was kind of curious, though, raises the question around size agnostic, right?

Starting point is 00:37:16 It kind of jumps all over from midcaps, large caps, and now microcaps. And I'm curious if that's intentional or if my second question is just, how did these microcaps appear on your radar? Because you've got to go fishing a little bit deeper for those. It's always cool to get something that nobody else knows about to get that. So I will go. I'll get an unusual stock that if I think, especially I like companies that nobody else follows. And that's a great way to find values. I saw that Morning Star, by the way, we just got our fifth star from Morning Star.

Starting point is 00:37:55 Congratulations. They call us, thank you. They call us mid-cap growth. And I remember when I first said, really? We are? It means nothing to me. It's just the 25 stocks. They put it in their computer and they said, this is mid-cap growth.

Starting point is 00:38:11 But in no way, it doesn't mean anything to me. But I like to get a couple, like I said, off-road companies. I don't know if I call Miller Smallcap or MicroCamp, something that nobody knows about. I think you always want to, you know, it's a simple game. you turn over rocks and look for diamonds and whoever turns over the most rocks wins the game and that's really what it's about. So I'm willing to look in an unusual, non-traditional place if I think there's a good bargain to be had. Not only that, but I'll write it with a 20% loss in one year. It's pretty remarkable. Now, there are a couple other stocks in the new list that to me

Starting point is 00:38:56 are really standing out. When I'm using our TIP finance tool, I'm coming up with double-digit forecasted yields. And we already talked about Affleck, even though it was up in the mid-20s in the last year, I'm still seeing it as a very undervalued. Science applications we already talked about as well, SAIC. So they were up 35% in 2022 still looks undervalue to me. And then there's Selenise, ticker CE. This one really jumped out to me. And not only is it a new addition, but our investing tool shows that Buffett and Tom Gainer both hold small positions in the stock. So I always perk up when I see those names attached to something. And it's already up big just in the first 10 days of this year. So give us a high level overview of what Selenis does. They make acetic acid. And that is something that has

Starting point is 00:39:48 a huge number of applications within industry that goes from paint to adheses. It's a hugely important part of the chemical industry. And they have a 25% market share. It's very, very, I wouldn't say dominant, but very strong position within the market. They also make many other chemicals as well. Now, this has been an important year for them. Let me back up and talk about DuPont, which is a company that has struggled over the last few years. And this has been in the news. Over the last five years, I think DuPont is that the market is up roughly 50% and DuPont is down 50%. So they are trying to change their direction. So they sold one of their major units. And Selenie said, yeah, we're interested. And they did a massive deal for the DuPont unit. And it costs $11 billion. So if you see

Starting point is 00:40:48 on the balance sheet right now, you see a huge cash position, I think of nine and a half. billion. And this is a, this is not just an acquisition, but they're merging with a company about their same size. So it's a huge, huge deal that they're doing. And the stock did not do well at all last year. And I think some of that was a reaction. As I look at the numbers, I think it's a good deal. But Warren Buffett is sitting on a big loss right now in Selenese. But I like it. And I think this deal can be a game changer. Again, I think they said it's going to be accretive to earning something like $4 per share this year. So the deal closed in November. They announced it in February, just closed it in November. It's a interesting company, and I think this deal will make

Starting point is 00:41:42 them even stronger. Something interesting about the company is that while it does do industrial chemicals, as you kind of mentioned, it's also acetic acid is vinegar, right? So by definition, So it goes into food and beverage products. So it's interesting that it's falling into the consumer product side as well as the industrial market. So it's hitting lots of different industries, which I find fascinating as well. All right. So shifting gears a little bit here. I'd like to talk about your newsletter because there's some upcoming news we want to definitely get into a little bit here.

Starting point is 00:42:10 But first and foremost, I'd like to raise more awareness on this newsletter. Talk a little bit more about how you started it. And I'm kind of curious just personally or selfishly is if this. This is what you used to keep your hands busy during the year. I'm not touching the dials. I don't do any trading. I understand what you're saying. Okay.

Starting point is 00:42:30 You're calling me lazy. I understand. Newsletters through Substack. I started writing the newsletter back in 2010. And it's basically the same thing. I would send it out. So there are two newsletters I do. There's a free one that goes out every Tuesday.

Starting point is 00:42:49 And then there's the premium paid one that goes out. Late Thursday night, I date it for Friday. And every once in a while, I'll have special newsletters is something important has happened that I want to talk about. The Tuesday letter is more of a general discussion about the markets and the economy where the premium version talks more about exactly how we should go about investing and what areas look good right now. And I sort of break down the companies of what I like and what I dislike. what I dislike and I enjoy it. It's a lot of fun. And it keeps me busy. 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 Vantza is a game changer.

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Starting point is 00:46:54 Analysts slashed their 2023 earnings forecast by 4.4%. That's the largest cut since 2014. Wall Street doesn't buy any of this over 5% talk from the Fed. The futures market currently expects the Fed to hike by 0.25%, 25 basis points in February and another 25 basis points in March, that would bring the target range to 4.75 to 5%. Okay, so the December CPI report comes out tomorrow. So I'm going to ask kind of a fair question, but I always love getting people's real time predictions on things like this. Where I think the market is expecting it to come into the mid-sixes, right? That seems to be kind of good sense. Yeah, 66-5. Yeah, where do you think it'll come out Do you agree with that?

Starting point is 00:47:39 And if so, what do you think the market reaction will look like? It will be 6.517462. I don't know. But as I said, the more important is that trend. So it's been going, the peak was 7.1. And we're talking about the year over year rate has declined for the last five months in a row. And I think it's very likely that will be number six. will learn tomorrow. I'm not worried about the specific numbers, but it's the trend that inflation

Starting point is 00:48:14 appears to be receding. I'm not saying it's fully receded or we're in the safe zone yet, but the trend is going in the right direction. Part of that is due to some problems with the economy, most particularly in the housing sector. This is due to the Federal Reserve's higher interest rates. So the context of the bit that you read before was a number of Fed officials coming out with strong rhetoric, tough talk that they're going to keep rates high. They're not worried about the after effects of it and they're going to fight inflation until inflation is defeated. It's very easy for them to speak that way, to issue tough talk, but to follow through on that is much more difficult. If the economy continues to weaken through this year, which I think is very likely, I think the Federal Reserve will hold off on its interest rate increases.

Starting point is 00:49:13 And in fact, the futures market thinks that the Fed will be cutting interest rates before the end of this year. In fact, interest rates will probably be at the same place they are right now, one year from now. There'll be some minor increases and then some minor decreases. But the Fed, particularly Mr. Bostic, was very, very forthright on his comments earlier this week. I just don't see it happening. And we see it's not just me, but it's in the futures market.

Starting point is 00:49:44 It's in those analysts that you just quoted. The Fed is here and the market is here. And whenever that happens, the market or reality has a good track record of prevailing. You also wrote the unemployment rate fell to 3.5%. This was the sixth time the unemployment rate got to 3.5% since 1969. The only months that were lower came during the wars in Korea and Vietnam. In other words, this was the lowest peacetime unemployment rate in 75 years. And I know by peacetime, you just mean there's not a draft going on in the U.S. right? But do you think unemployment is the least? linchpin here as far as what we'll need to break in order for the Fed to pivot, to actually pivot, right? It's meaning decrease rates or do you see any other risks? And if so, how much do you think unemployment will have to tick up? Oh, boy, that is a really good question. I just don't know exactly. I would probably think, you know, around 5% or so to see that real. There is the

Starting point is 00:50:50 some rule for the economist, which is seeing, I think, interest rates go up by half a percent, from their low or an average of the low. So that would bring us up to about, you know, 4% or so. I think that's very possible. Now, the issue that could put a hamper into that is this disjointed nature of the economy, where we're seeing housing hit hard, but other areas of the economy are doing just well. In fact, there was just an article in the New York Times talking about how this recession may fall harshly or unevenly on white-collar workers compared to blue-collar workers. I don't know if that will be true. So that could impact how the Fed responds.

Starting point is 00:51:38 Is it the broadness? But my fear is that unemployment and the housing sector stand right between the Federal Reserve and its goals for inflation. So they are sort of the collateral damage. but we almost always know that's going to happen. My fear is that unemployment rate will rise this year and almost will have to rise this year. So another interesting point from your last newsletter was that you highlighted American Waterworks, it's ticker AWK, and you gave it a very favorable review.

Starting point is 00:52:13 It's actually, the stock has been up almost 30% since mid-October of 2022. So it's been on this tear over the last few months. I'm kind of curious why it wasn't included on the 2020 buy list. I said such nice things about it. And I did my, so in the Tuesday newsletter, I like to highlight stocks. And I want to draw lessons from that. And this is an interesting company because it's completely boring. It's a water utility company.

Starting point is 00:52:42 And nobody had any hopes for this stock whatsoever. It was spun off by a European subsidiary in 2008. And when they were going to do the IPO, there was no interest in. They talked about, would it be $25, $26 per share? No, nobody. It finally went off at $21.50. This was in 2008. And the conglomerate got rid of it because they thought it was a no-growth area.

Starting point is 00:53:11 And it was an anchor to them. Nobody on Wall Street was interested in them. And it has been a fantastic success story. It's over, I'm thinking, $160, I think, is where they are now. So up nearly eightfold. It's been a huge winner. As you said, it's been up handsomely since October. So boring stocks can be great investments.

Starting point is 00:53:35 And companies that nobody had any interest in, once they're cut loose from the mothership, they're free to do what they want. In many ways, they're much better at managing themselves. So the point I wanted to make to investors is that there's always a place where you could find good stocks. And the thing is when people are told, oh, here's a company to invest in, the first question I ask is, well, what do they do? And that's actually not the most important question. The most important question is, how well do they do whatever it is they do? And I almost feel so many novice investors they want to know, oh, it's involved in artificial.

Starting point is 00:54:18 artificial intelligence or it's involved in something with DNA technology or cybersecurity or blockchain. They want to get into the concepts. That's not so important. The company can be as dull as dirt. An American Waterworks certainly is. And it's been a huge, huge winner over the last 14 years. And in fact, to your point, it's pretty pricey now.

Starting point is 00:54:42 I think it's 34 times trailing earnings or maybe forward earnings. as well. Also, the earnings line or the operating earnings is nice and smooth. I really like to see that and as an investment analyst, it really helps out seeing nice with the complete opposite would be selling ease where it's all over the map. But it's a cool company just too expensive right now. I probably should have said that in the newsletter. Yeah. It's one to keep an eye on. If it does like Middleby and tanks, I'll certainly consider it. Yeah, I also wanted to highlight that the free cash flow has gone negative over the last few years as well. So it's one of those that's kind of, you know, hard to know when that's going to swing back and how to exactly evaluate that kind

Starting point is 00:55:26 of thing. But I want to talk a little bit about the buy list as a whole. So you started this in 2006 and its historical performance over its 17 year existence is 435.73%. And that's versus the S&P 500 of 33.17%. So we're talking about an outperformance of over 100%. And I believe that's an outperformance of roughly 6% or so percent per year, right? So that's pretty remarkable, right? So I'd love to talk a little bit about how this whole thesis has been playing out for you over this period of time. Obviously, I imagine you're more bullish than ever on it.

Starting point is 00:56:07 But are there any other insights or lessons you've learned over the last 17% that you feel like have led to this outperformance other than simply rebalancing once a year? You know, people ask, they treat the rules of the bylaws as if it's a hindrance. And in many ways, I see it as a benefit because, so 25 stocks, we turn over five each year. So that means it's an average holding period of five years. So when you add a sell in these or a middle B, you think, okay, if the stock market were to shut down for the next five years, on average, will I be comfortable owning Middle B five years from now? Yes, I would. It forces you to think that way because you know you are going to be married to this stock for quite some time. Affleck, it's on for its 18th year. Pfizer, that's also on for its 18th year. So having these artificial rules, I think in many ways helps me because it forces you to think about these stocks as businesses.

Starting point is 00:57:13 What truly makes them valuable? Will they continue to be around? in five years or 10 years. So that's, I think it's a benefit of having this system. Also, I don't panic. What would have happened in March 2020? What would have happened in late 2008? How would I have behaved? I don't know.

Starting point is 00:57:35 But I know at this point I can say, I just buy it held and I held right on through earnings. So, you know, stock selection is the best when it's most businesslike. And these rules forced me to be, to approach it as a business and make business-like decisions. So I'd like to learn a little bit, as much as you're willing to share, about Eddie Alfenbine's system for finding these stocks. Because, you know, and I'm more curious, actually, if it's changed over 17 years. What resources do you look to to investigate where you might find undervalued picks? I would say, you know, mostly what I do is I like to look at the annual. reports, the 10 Q's, the 10Ks, look at what they're doing and look at their competitors.

Starting point is 00:58:24 Whenever I talk with officers of a company, I always like to ask, what do they think of their competitors? That's always an interesting line of inquiry. And I, you know, talk to management, talk to the, you know, people in investor relations, see what the company is doing. I also pay a lot of attention to the stability of the business. I pay a lot of attention to their market position, for example, SAC, you know, if you're in the Pentagon, you're going to have to deal with them at some point because they're just so important to what the mission is of the Pentagon. It's companies like that that you want to find that, you know, it will be very difficult to replace them. I think I talked about how you would replace SILGIN tomorrow. It would be very, very difficult.

Starting point is 00:59:12 I like to look for companies with management I trust. So I like to hear companies do not have to give earnings forecasts. There's nothing in the rules that say they have to do that. But I like companies that do and I like companies that you know that these earnings forecasts are reasonably accurate. I don't need them to be right. I just need them to understand the problems. I like to hear companies talk about the problems that they're having. Also, if you just read them. iterate earnings, that's often dismissed, but I think that's a good news to say, companies saying things are going to plan as planned this year, and they still are going to plan. So I never overlook a reiteration of earnings. I want to just have a great deal of trust

Starting point is 00:59:59 in the management. You can never be 100% perfect, but the AMS family that runs AFAC. These are people I really have a high degree of faith in. I remember when the terrible earthquake happened in Japan. And Dan Amos, the CEO, said on Monday morning, when we go to work, we plan for exactly what is happening now. So we have this covered. And having that is such an enormous benefit when you go about investing the level of trust that you can place in management like that. For those who want to follow along with the strategy, obviously there's the ETF, the ticker is CWS, which is crossing Wall Street. also, you know, the blog and website that this is all based on. So I really want to give you

Starting point is 01:00:46 the opportunity to hand off to the audience about where they can find more on crossing Wall Street, the ETF, your newsletters, all of those things. Sure. I'll give, I promise I won't give you the hard sell on the ETF, but the ticker symbol is CWS. And I started this with my business partner. I never thought, I think you just start an ETF, but we did if we are able to get. And I think I looked at the latest numbers. I think every year, hundreds of ETF's close-up shop. We're in our seventh year. I looked at the numbers earlier today.

Starting point is 01:01:19 I think we're going to close at an all-time high for AUM assets under management. So we are growing and thriving. We beat the market. We just got our fifth star from Morning Star. We were also in the first ETF in the history of the world to have a fulcrum fee. So the fee, if we don't beat the market, then the fees go down. If we do beat the market, then I get a little bonus. The fees go up.

Starting point is 01:01:47 So it all depends. Basically, if we do well, I do well. If we don't do well, I don't do well. So my interests are aligned with yours. We're this tiny fund and we were the first ones. They're open-ended funds, but we were the first ETF to do that. I never chose a ticker symbol before. So that was something, a unique experience.

Starting point is 01:02:08 So CWS was open. So we jumped on that. It's traded on the New York. It's called the New York Arca. So those you may remember, that was the archipelago, which was bought by the NYSE, which is owned by ICE, which is another buy list stock. If you were to buy one share of each of the 25 stocks on the buy list, that would run about $4,500.

Starting point is 01:02:32 But you can get the whole thing in one package. I think it's right now about $47, $48 for share. We started at 25 back in September of 2016, and so we're just growing, thriving, getting more converts out there. So it's been a great learning experience. Now, we can also have, I'm on Twitter at Eddie Elfinbine, at Eddie Elfinbine, and then at Substack,

Starting point is 01:03:03 it's cws. Sack.com, where I have my newsletters, the free newsletter, if you just want to try that out, that comes out every Tuesday. And then if you want to join us for the premium letter, that's $20 a month or $200 for a whole year. And that comes out. I did it for Friday morning. And I've been doing that for a couple of years now, and I really enjoy it. So. And you are one of my favorite follows on Twitter. So I highly recommend people do follow your human. is always like a refreshing a part of my feed. So Eddie, I just love everything you're doing here.

Starting point is 01:03:40 I think it's incredible. I'm so honored you came back on the show a year later. I hope we can make it an annual tradition at this point. Maybe we can keep following up and going over because I love this strategy and I think it's so fascinating. So thanks again. And I hope I'll see you in 2024. This is fun.

Starting point is 01:03:55 So thanks for having me. All right, everybody, that's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerby. And don't forget to check out all of the amazing resources we've built for you at the investors podcast.com.

Starting point is 01:04:14 You can also simply Google TIP Finance and it should pop right up. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to the Investors Podcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before

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We Study Billionaires - The Investor’s Podcast Network - TIP518: The "Buy" List for 2023 w/ Eddy Elfenbein

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