We Study Billionaires - The Investor’s Podcast Network - TIP599: Top Stocks for 2024 w/ Jonathan Boyar

Starting point is 00:00:00 You're listening to TIP. On today's show, I'm joined by Jonathan Boyer to discuss his newest release of the Forgotten 40, which include his firm's top 40 stocks they like going into 2024. Jonathan is the president of Boyer's intrinsic value research and is also a principle of Boyer asset management, which has been managing money utilizing a value-oriented strategy since 1983. Jonathan's team has a history of finding stocks that outperform. For example, over the past seven years, the average, the average,

Starting point is 00:00:30 average annual return of stocks profiled in their all-cap publication returned 18.9% versus 15.1% for the S&P 500. During this episode, Jonathan and I chat about how a company makes a list of the Forgotten 40, potential catalyst Jonathan looks for in his investments, why Uber remained on the forgotten 40 list after being the list top performer in 2023, Jonathan's thoughts on the underperformance of small-cap stocks since 2015, an overview of interactive broker stock, why Bill Ackman has taken a massive stake in Howard Hughes, why Jonathan likes Madison Square Garden Sports Corporation, and much more. When reading the names in the Forgotten 40, I was particularly interested in interactive brokers. It's a founder-led company with an impressive track record

Starting point is 00:01:16 of historical growth and profitability, and still appears to have a long growth runway ahead. In the past year alone, they've increased their customer base by over 20%. In over the past 10 years, the total number of accounts has increased by an average of 20%. 26% per year. They also seem to have a strong competitive moat, given their focus on investing in new technologies, and providing the lowest fees possible for their customers. Us investors here in the U.S. are pretty used to paying little-to-no fees in our investment accounts, but much of interactive brokers' customer base is abroad where oftentimes is actually illegal for brokers to charge zero fees. With the strong balance sheet they have, there's also a lot of potential

Starting point is 00:01:55 for new acquisitions on the horizon. Without further delay, I bring you today's chat with Jonathan Boyer. You are listening to The Investors Podcast. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Fink. Welcome to the Investors Podcast.

Starting point is 00:02:31 I'm your host, Clay Fink. And today, I'm thrilled to be joined by Jonathan Boyer. Jonathan, it's great to have you on the show. Thanks for having me. I'm really excited. So this past weekend, I received your annual research that your team puts out. It's known as the Forgotten 40 is what you call it. And this list, it highlights 40 of your firm's best stock ideas. And you've actually been kind enough to come on the show to discuss a few of these. And I'm super excited to dive in. Before we talk about the stocks, how about you just give a brief overview of what the forgotten 40 is, what it isn't and what it takes for a company to, make the list. You know, absolutely. Yeah, no, Forgotten 40 is one of our most popular products, and it's a little bit of an

Starting point is 00:03:15 anomaly for us. So just by way of background, you know, the firm was started by my father in 1975 as a research boutique to look for companies the way and acquire would, you know, what would Warren Buffett pay for an entire business? And that's kind of the thrust of the service. and we're long-term patient investors. In fact, Barron's once called my dad the world's most patient investor. I'm not as patient as he is, but I'm pretty patient.

Starting point is 00:03:46 And my dad's still very much involved with the firm. We do these monthly or almost monthly research reports that take a three to five year kind of time horizon, which is an anomaly with Wall Street research. But we realize not everyone is as patient as we are. So since the, really the 1990s, we've been publishing something called the Forgotten 40, which contains our 40 best ideas for the year ahead. And they're not our cheapest names. Their names, in order to get into the publication, we had to have profiled it in one of our like full length reports.

Starting point is 00:04:24 And we think there has to be a catalyst for meaningful capital appreciation in the coming year. So we do this via one-page snapshots, get sent to everyone between Christmas and New years, you know, gets printed and, you know, we're old-fashioned. We still send everything via hard copy. While these reports are one-page and length, there's a lot of meat behind it. It's not just us sitting around the table and saying, hey, Intel looks cheap, which it's not in the Forgotten 40, by the way, but just, you know, as an example, we had to have profiled Intel before. So people love utilizing it as a reference guide and it's really helpful for me as a

Starting point is 00:05:04 portfolio manager. When I starting out the year, I have a list of 40 stocks to choose from. And it's a good kind of update internally. Our team does a lot of work to do it. We have four great analysts, but myself and my father. And it's, you know, it's something we enjoy doing and it's something we think our subscribers like to receive. And part of, you know, analyzing and constructing a portfolio is turning over rocks. And having 40 names to sort of look through and take a look at is fun, especially when you have a team that, you know, does all the, a lot of the heavy lifting. And in the forgotten 40, you have the essentially a one page overview of each company. And it's super useful just because you can get a broad overview of what the

Starting point is 00:05:47 thesis is and what you guys are sort of thinking. And since you guys do this every year, I thought it would be interesting to talk about how 2023 fared for last year's issue. And it's, of the forgotten 40? Yeah, it was for a value manager, we actually did quite well. I don't know the exact in front of me. I think it was roughly we were up 15 or so percent, give or take, which significantly beat the Russell 2000 value, which was 8 percent, and it also beat the S&P 500 equal weight.

Starting point is 00:06:20 It didn't beat the S&P 500 is, you know, we're an equal weighted 40 stock portfolio and to beat the Magnificent Seven would have been a hard feat to do. But we were proud of the results. We've been doing this for a long time. And it's also, you know, there are times where the performance is great. There are times where it's not as good. What I would say is no one buys every stock in it. I think it's just a great kind of idea generator. And it lets people, it gives, we want people to think, you know, what's the year going to look like? What type of stocks do I want to invest? and maybe I have cash coming in the door in January.

Starting point is 00:06:58 How do I deploy it? I think it's really important. You mentioned that you have that page where you show the performance of the forgotten 40, and that's equal weighted, which is honestly unfair. Much of success in investing is how you weigh your positions. And just look at the S&P 500 is a prime example. The S&P 500 heavily weights towards the bigger companies. When you're weighed towards the Magnificent 7,

Starting point is 00:07:23 You tend to have pretty good performance with the way they've done over the past years. But remember, it also works both ways. Right before the financial crisis, I think I read it yesterday the day before I had forgotten the statistics. But the financial sector was almost a quarter of the S&P 500. So you live by the sword, you die by the sword. So I'm not saying what happened to financial stocks is going to happen to technology stocks. But when you have 10 stocks that are 32% of an index, most of which are in the technology space kind of broadly defined, things can get a little dicey.

Starting point is 00:08:00 You emphasize the long-term approach in how your team thinks. So I'd think that a good number of the companies really don't change from year to year, just because it takes time for the market to recognize the value that your team's seeing. So how many of the 40 names and this? year's report are repeat from last years? And how much does that tend to change more broadly? I'd say on average it's about 50% turnover because throughout the year we're coming up with new ideas and almost by definition if we like the ideas that we're coming up with, they'll be decently represented in the forgotten 40. Plus, you want to take blast from the past.

Starting point is 00:08:42 the things that we've, you know, might have profiled five, 10 years ago that we've been tangentially following and see that there's a catalyst in the horizon for value realization. So we just want to pick our 40 best stocks. While we're cognizant of not having 40 financial names or 40 industrial names, we just want to have the best, put the best roster out there in a variety of industries, variety of market caps. But I think it's interesting that this year's class, 19 of the 40 names are sub 10 billion in market cap, which is the high end of the Russell 2000 value. And the vast majority of those 19 are in like 5 billion or less range, you know, roughly.

Starting point is 00:09:33 So we're heavily weighted. You know, everyone's definition of small cap is a bit different. but we're of the belief that small cap is set for a renaissance. And, you know, 2024, could it be the year of the small cap, possibly? If not this year, maybe next year. But that's a big theme of ours. Another word that stuck out to me when you talked about the list was the word catalyst. And you're looking for potential catalysts in a lot of these names over the coming 12 months to see value unlocked.

Starting point is 00:10:07 And for example, this might be a company. It might be a small cap. It's a size where a private equity firm could come in, take it over, purchase it at a premium to what the market's trading at. And that's how that value ends up getting unlocked. So what have you learned in your career about investing in this manner of looking for catalysts and looking for these near-term events that unlock value? Because of the way we look at companies through the lens of an acquire and that they're cheap by an acquisition candidate's standards. A fair amount of the names that we profile end up being acquired. Actually, two from last year's lists were a company called Univar and

Starting point is 00:10:48 hostess brands were both acquired. And being a takeout is never the sole reason for owning a business or writing about a business, because that could take a long time. But you want to have a reason for owning it and my father has instilled in me, you can find the greatest company in the world selling it a cheap price, but if doesn't ascend in value, doesn't do you any good. There has to be a reason, a change, something that will make the market recognize what you're seeing. And, you know, realistically, does a catalyst happen within that one year? Who knows? I mean, that's just kind of an arbitrary calendar date. But we've found it helpful. And there's different schools of thought there are investors who I respect a lot, who think value is its own catalyst. I just happen to, you know,

Starting point is 00:11:39 I guess it's the way I was taught. I think you want to want to look for these realizations and reasons for it. So we try and tell a story. Why is the stock going to go up over a reasonable period of time? And generally, I mean, with the exception with forgotten 40, a reasonable period of time is two to three years. I can't help but think of Elon's Twitter takeover. And thinking about private equity taking over a company. Is there some sort of bias where they're looking at the share price and they're just like, hey, we're just going to tack on a 20% premium. So they're not necessarily looking at the true underlying value of the company. They're just saying, hey, we're going to buy out shareholders at a 20% premium there. What have you seen in that regards

Starting point is 00:12:19 from your experience? Or is there just a wide range of premiums that industry like private equity is looking to pay? I mean, I think it's a case by case basis. I mean, private equity, I've said, some of the savvious investors there, while there's a lot of capital chasing deals, you know, they want to make money and they want to own, they have to own the underlying business. So they have to like the underlying business. So I, you know, they have to usually have some sort of premium unless it's a take under. But I think it's a case-by-case basis. And you probably, the smaller in the cap spectrum you go, the higher the probably the premium it is because it's a, it's a might not be reflected in the price. It also depends, is this an owner-operated business? They're not going to sell just for a 20% premium. They're only going to sell when they think they're really getting more than fair value for the company. You mentioned value potentially being a catalyst, and I mentioned the private equity taking over a

Starting point is 00:13:21 business and paying a premium for the company. Are there any other sort of catalysts that you seem to come up as a recurring theme? There's lots of different catalysts. I mean, there's, could they do a massive share buyback? Could they spin out a division and asset sale? Could they make an attractive acquisition? One of the names I think we'll probably talk about, you know, interactive brokers. Is there an octogenarian, an 80-year-old man with no-air or parent who owns a lot of stock,

Starting point is 00:13:51 sooner or later himself or his or her heirs sell the business? Well, the guy at interactive brokers, I think is seven. is getting close to oxygen area and status. There's lots of different reasons for a company to go up in price. You just have to try and pinpoint it. Could it be included in an index? You know, one of the things, you know, we included, we had Uber last year, and I believe one of the catalysts we cited was inclusion in the S&P 500 because they

Starting point is 00:14:20 were finally, at least we thought, going to become GAP profitable for a full year, which would lead to index inclusion. And that was a catalyst. And Uber is far from a traditional value stock. Right. I actually had a note here. I wanted to mention Uber. It was actually the biggest winner of last year's report for you.

Starting point is 00:14:41 The stock rose by over 130%. And like you mentioned, it's not your kind of traditional value type play. It's growing quite fast. And it's really in an industry that I think a lot of people view as a winner take all industry where the dominant player ends up taking most, if not all, all the profits. And Uber's market cap at the time of recording is $119 billion at the share price of $58 a share. So talk more about Uber.

Starting point is 00:15:09 I'm really curious to hear, you know, despite it being the biggest winner of last year, it still remained on this year's list. Yeah, no, we're still riding with Uber. It's can't promise another 100% game, but they're firing on all cylinders. They have great CEO and Dara. they're becoming more and more profitable. They have a huge moat. I mean, Lyft is competitively disadvantaged

Starting point is 00:15:33 because it's a network effect business. And it's certainly not as cheap as last year, but just because a stock goes up, not a reason to sell it. And just because a stock goes up is also not a reason not to include it in this year's list again because we still like the business,

Starting point is 00:15:53 we still think it's intrinsically, undervalue. There's a long runway for growth. There's lots of things that they could be doing in terms of advertising, et cetera, that we like. And, you know, it's one of these names that I think it gets thrown out a lot, but it's a long-term kind of compounding business that you want to own these for the long term. You know, stocks like these could go down 30, 40 percent, but over the long period of time, I think the trend is up into the right. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:20:37 you really talk about these broader themes going on in the economy. You aren't trying to invest. based on the macro, but you're aware of what's happening within the bigger picture. So what are some of the bigger themes you're looking at in today's market that help you decide the types of companies you want to own or the companies you want to cover in the Forgotten 40? It's, yeah, the macro is a dangerous thing because you can always scare yourself out of investing, as, you know, as Buffett famously talks about all the bad things that happened in the 20th century, yet the Dow went from 41 to whatever it went to. And, you know, people who invested the day before Black Monday or the people who invested the day before the crash of 87, you know,

Starting point is 00:21:24 as long as it held on, for a long period of time, did fine. So you try and filter out the noise as best as you can and don't let headlines scare you. Obviously, you have to be cognizant of things and I'm someone who when I'm buying stocks for myself or clients, I generally don't take a full position right away as I think, you know, as I've learned, stocks can get a heck of a lot cheaper than you ever thought they could and you want to have some dry powder there. So yeah, so I don't know if that kind of answers the questions that you were looking for, but happy to elaborate. Yeah, let's dive into one of the sections was on small cap stocks. Those have underperformed the S&P 500 since 2015 by around 6% per year.

Starting point is 00:22:13 But interestingly, over the long run, small caps have actually tended to outperform the broader market. I pulled a stat here on small caps from 1926 through July of 2023. Small cap value has produced four percentage points of alpha above the S&P 500. So I'm curious to get your take on the underperformance since 2015. Obviously, we've seen big tech sort of take over the index and lead a lot of those gains. What do you think are some of the other reasons for a four percentage point gap since 2015? Yeah, no, it's been a painful time to be in small caps.

Starting point is 00:22:51 And yet some people recently have been blaming interest rates or the rise in interest rates for that. But obviously, there were a long period of that time where interest rates were basically zero, which, you know, so that's not really the culprit in my opinion. I think you just have to go back historically. If you look at the period before the dot-com bust, there was a long period where the Russell significantly lagged the S&P 500. And then, and I'm not saying that these periods are exactly analogous, but history tends to rhyme. The period after the dot-com bust, the S&P basically did nothing and the Russell shined. And I think we're going to enter a period such as that. And that's a period where I think stock pickers like us should do quite well, especially

Starting point is 00:23:47 those who geared towards smaller cap names. And one more part on the broader theme section I thought was quite interesting. It was the presidential election year. That's 2024. There were some interesting stats on that. I'd be curious if you have those up and you'd be able to share what a presidential election year means to you as a value investor. Basically, the presidential election years are the second best performing years, I believe, in the presidential election cycle. And we had a lot of the data from, I buy each year the stock traders almanac, which is, it's a great read.

Starting point is 00:24:25 You got a lot, I mean, I'm one of these people who like statistics. And, you know, while I don't invest by it, I think it's good to kind of learn what kind of historical patterns there are. But one of the ones that I thought was interesting was regardless of which party is the ultimate victor in 16 of the past 18 presidential election years, the last seven months and total, have seen gains in the S&P 500. But there are big exceptions. The two exceptions were in 2000, where the results were delayed of the presidential election. And I really hope that's not the case this year. And the other one, it was during the 2008 financial crisis and hopes that as well. That doesn't occur as well. But the SEP does better when there's a sitting president in office running for re-election. So there's lots of things that you can glean from history. And it's worth

Starting point is 00:25:13 noting that over the last couple of years, if you had invested the way kind of the stock traders almanac had for presidential election years, you would have done quite well. So, but at the end of the day, though, I'm a stock-by-stock basis guy. I look at each individual company. What is it worth? What's the catalyst? You know, how are we going to get paid? But, you know, it's important to be aware of all these other things. I can't help but think of Munger who recently pass and just show me the incentive and I'll show you the outcome. And generally during election years, it seems that governments tend to be more accommodative to markets. Yes. And then the year after the election, I think is the worst part of the cycle because people realize all those great

Starting point is 00:25:56 promises aren't going to occur. So it's, it's amazing that this happens pretty consistently, but it does. But the one thing I would say is, 2024 does not look like a typical election. year, although maybe I don't know what a typical election year looks like. So I think all bets are out the window on it, you know, and people who are strategists, they got 2024 for the most part, uh, 20203 for the most part, dead wrong. Nothing that they said occurred would. So I would be wary of making strategic calls for the year. I think you're better off being, you know, more strategic in the stocks that you pick and not macro out. Right. I recently saw a tweet that looked at all the big banks, all these big firms in their

Starting point is 00:26:46 outlook for how the S&P 500 would end in 2023. Like hardly any of them predicted a gain of over 10% yet the S&P was up over 20% on the year. Yeah, no, if you were going, yeah, everyone let's say be defensive in in 2023 and by dividend paying stocks and all these other things that were the laggards. And I just think, there's lots of different ways to invest. I just, to me, it makes more sense to know about the companies you're investing in. One thing, you know, just going back about, you know, the outlook for the year and things such as that, that I think is important to know, you know, one of the things you might have noticed in the forgotten 40s, an absence of energy names. Those are names that we've historically have avoided over the last couple of years as energy has been,

Starting point is 00:27:36 And the favorite, I think it's the best performing sector since the market bottom. During COVID, take a 10-year view. It's been a horrible place to invest. Capital destroying businesses, cyclical. So while a lot of value investors think there is value in energy, maybe I'll be completely wrong, but it's one that I would avoid. And another reason is you have to be right twice. ideally you want to buy a stock and hold it for long periods of time and let the magic of tax

Starting point is 00:28:09 deferred compounding happen. And with energy names, kind of have to trade in and out of them. And that's tax inefficient. So it's something we avoid. Right. And there's just much more of a human element where you not only have to decide when you're going to buy, you have to decide when you're going to sell. And the more decisions you have to make the tougher things can be. I wanted to transition here to talk about one of the names on the Forgotten 40, it's interactive brokers. It really appealed to me. I'm actually an avid user of interactive brokers and I actually use it for all of my stock accounts so I firsthand can say I'm a big fan of the platform. I don't own any shares, but long term, it's actually really been a phenomenal stock. I just looked in your research. You pointed that

Starting point is 00:28:52 as of October 2023, they grew their number of accounts by over 20% year over year, and they've just seen impressive growth just like top to bottom in their business. And if you're not familiar with interactive brokers, essentially it's just a digital platform to buy and sell stocks and they have great fees. And I think they do a really great job. But, you know, stock investing, there's plenty of firms that do what interactive brokers does. Like so many people are familiar with Vanguard, Fidelity, Charles Schwab, all these, you know, these names that people are a part of. But most people are probably less familiar with interactive brokers. So I'm curious to get your take on how they're able to differentiate themselves with the service and what feels sort of like a

Starting point is 00:29:33 commodity-like business. Yeah, I think he's done a fantastic job of growing this business. And it looks like they have. And going back to those word compounders, you know, years of many years of 20% plus account growth. And in the U.S., it's essentially a commoditized business with Fidelity and Schwab. But that's if you just want to kind of invest in the U.S., the interactive broker's platform, you know, is easy with currency conversions.

Starting point is 00:30:04 It's easy to invest throughout the world. Also, most of their accounts or vast majority are held outside the U.S., where people actually still do pay commissions because payment for order flow, which is how Fidelity and Schwab are able to offer zero commission trading, it's illegal. So and should remain so. And what they've noticed was they do have a model where there's free commissions, but you have within there, but you get worse execution. And they've had very little uptake on it.

Starting point is 00:30:38 So there's value in what they do. They have low cost margin lending, you know, lots of different things that make people want to use them. And their technology is fantastic. They try to automate everything possible. So it's, and they're really growing in the. the hedge fund space, especially the ones that are $50 million and below a fund. So there's lots to like about it.

Starting point is 00:31:03 And we like these businesses that can continue to grow for, like an Uber, continue to grow for years and years and years and have a huge runway for success. And it's, you know, I think, and if you can buy them at a reasonable multiple, I don't have the multiple right in front of you, but it's significantly below it's historic one. Over time, if you were a patient, generally good things happen. Yeah, your report shows a P.E. of just under 15. And this was released in December 13th, 2020. And just the 2023 growth fiscal year, revenues grew from $3 billion to $4.3 billion. Operating income grew from $2 billion to $3.1 billion. So it's a very highly profitable business. Unlike Uber, it's kind of just crossing that threshold. But Interactive Brokers has been profitable for quite a long time. Yeah. No, it's a history of profitability. They have

Starting point is 00:31:54 They also have a pristine balance sheet. It's a lazy balance sheet. I mean, they need some of it as part of their for their business. But those are also the catalyst. Maybe they increase their dividend significantly or do a big share buyback. There are things that they could do. As I said, the CEO or the founder is almost 80 years old. Does he sell this company to another one?

Starting point is 00:32:18 There's a lot to like there. And it's one of these that I think are, obviously, I wish we had this. show 10 years ago and people had invested in Interactive Brokers. This has been a fantastic performer. Yeah, the founder who's 79 years old, he owns 68% of the shares. And then Insiders overall owned 76.2% of shares. And when I was looking back at Interactive Brokers history, it seems like they've sort of gone through a transformation type period, whereas roughly a decade ago, they launched this online trading portion of their business and then they transition away from whatever they were doing prior to that.

Starting point is 00:32:56 They were an options, market maker type of a business, and they've switched, and it was the right move, and people gravitate towards them. And their marketing hasn't been particularly effective. They've just been growing via word of mouth, which is the way you want to grow your business. Obviously, you would love to have great marketing, too. But the fact that if one person tells another means you have a good product out there, and yeah, it's a name that we like.

Starting point is 00:33:19 Do you know what markets they're primarily growing in? Outside the U.S., you know, they're growing in Australia, they're growing in Europe, they're Asia, it's kind of across the board. 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.

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Starting point is 00:35:44 Billion dollar investors don't typically park their cash in high-yields. savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not

Starting point is 00:36:33 guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Yeah. And another thing that sort of sticks out to me about this industry is the switching costs seem to be somewhat high. I'm speaking from experience where I call my broker, I'm like, how the heck do I get this transferred over to interactive brokers? And they just

Starting point is 00:37:08 make you jump through all these hoops. They called five different people just to try and make it happen. So that was quite annoying, to be honest. But the stickiness, once you have a happy customer, they really have no incentive to leave when they're getting low fees. They get offered everything they need within the platform they're on at that time. Especially in one of the areas that they're trying to grow in these like RIA space where those are extremely sticky. Because once you're, you have all your clients signed up where you're now the custodian and broker. record for them that no one wants to have an excuse for a client to leave and that gives you an excuse. So it's a really good business, high switching cost.

Starting point is 00:37:53 It's a very, very different business than Fidelity and Schwab. You noted the enormous runway they have. Here I'm looking at the report. 2.5 million accounts are under interactive brokers. Charles Schwab, not a direct comparison. You're right. They have 34 million accounts. and then Fidelity has 43 million.

Starting point is 00:38:13 I'm curious to get your take on, obviously, the U.S. competitive landscape is pretty tricky given we can have zero trading fees at a lot of these firms. What does the competitive landscape look like outside the U.S. and how that looks, given that zero commission trading is illegal in many of these markets? Yeah, it significantly advantages interactive brokers because they're the low-cost provider as they built the infrastructure. They've built the technology. and they have a great platform.

Starting point is 00:38:43 So it's favorable. They're growing much faster, high single-digit growth, you know, in the U.S., which is far below what it is outside the U.S. So it's something that will continue to grow it. I wanted to also mention Howard Hughes, another company outlined in your report, is ticker HHS. Bill Ackman has actually been quite active in this. stock at the end of Q3, 20203,

Starting point is 00:39:14 Akman's firm, Pershing Square, had a $1.2 billion stake in the company, and he's been purchasing shares throughout the year. And it looks like over half of his shares were accumulated in the drop in March of 2020 when the stock got hammered from $120 all the way to as low as 40. And according to your report, Akman's firm, Pershing Square, owns 37% of Howard Hughes. So talk to us about what you're seeing in this name. This is a name that Ackman made a lot of money in, it was from general growth properties and after the financial crisis. And Howard Hughes is a master plan, community developer in really favorable areas of the country.

Starting point is 00:39:55 Texas, Nevada, Phoenix, lost Hawaii. And you'd mentioned that he bought a lot of his shares during COVID. And that was thinking out of an abundance of caution, the company did. didn't want to have any liquidity issues. So he's chairman of the company. They issued shares and he was by far the largest buyer of it and he got it. He bought it in the 50s. It's now in the 80s. In retrospect, it wasn't a great deal, but like you didn't know what was happening with COVID at the time and he wanted to make sure the company was alive to fight another day. And shareholders were given the same opportunity to buy shares as well. So he's allowed to buy up to, I believe,

Starting point is 00:40:39 40% of the company. Every time the stock gets below 75, it seems that he buys more. So there's sort of an act been put in the $75 range. It wouldn't shock us if he takes the company private or if he merges it with his open-ended, publicly traded fund because he wants that to be listed in the US and you need an operating business. I don't know exactly. how the mechanics said that would work, but that's been a long rumored thing that would happen. But either way, they have tons of, they have 30, I think 36,000 acres of raw land to develop, 36,000 acres. They have a long runway to increase net operating income for years to come.

Starting point is 00:41:30 There's also the catalyst where they also own the South Street Seaport in Manhattan and some other assets in Las Vegas, that they're supposed. spinning those out into a separately publicly traded company in 2024. And that should make it a pure play master plan community, which, you know, hopefully we'll give it a higher valuation. And maybe instead of spinning it out, someone ends up buying it. Who knows? I'm talking about the spun off part.

Starting point is 00:41:58 And it's also, it's not particularly well covered on Wall Street. About five analysts cover it. And if you look at other home builders or, you know, other. You know, reits, they're significantly more. I mean, and they're not a home builder. They really are a seller of land, but they have much less coverage, which leads to valuation discrepancies. You mentioned 37,000 acres of raw land. And it's quite interesting to think about that aspect, because it requires some digging to figure out, okay, how much is all this land worth? You got Phoenix, Nevada, Hawaii. How much research do you guys do in terms of figuring out how much all this is really

Starting point is 00:42:39 worth and figuring out a fair value for the overall company because I think some investors can sort of get into trouble and assume, okay, in Nevada land, it's probably worth this much. And, you know, just kind of oversimplifying things and land values just across, you know, different areas of a city can just, you know, change so, so much. So, yeah, talk more about the land. Well, yeah, and land is, you know, at historical cost. So the balance is not much help. But we, in our initial initiation report, we went through all the different properties and what they're worth. And yeah, I know it's a ton of digging. It's a ton of work.

Starting point is 00:43:11 Our team does a fantastic job with that. And generally, we use very conservative assumptions. We'd rather be surprised from the upside. And do they generally just reinvest everything back into redeveloping these? Or how does the capital allocation look? Well, that's what also makes them unique. They're not a re. So they don't have to dividend back everything.

Starting point is 00:43:35 So they invested into the company, which is also. a competitive advantage and they do it and they grow it and it's a virtuous cycle where they're able to control the supply of land within an individual community. So they build one of these master plan communities. They make it nice and sell X amount of land to developers, which then and commercial operations, which then makes the raw land. They have there even more valuable and they keep doing that. So they keep a tight lid on supply and demand of supply of the roll land.

Starting point is 00:44:11 So they're very strategic of what they do. And one of the things is it probably shouldn't be a public company because you have to take a 10, 15, 20 year time horizon for these type of investments. But it's selling it a decent discount to what we perceive NAV to be. And I think NAV will grow significantly over time as they develop more land. And then is there any more near-term catalysts that stand out to you? I could see some investors just looking at the current net operating income and plugging a multiple on that.

Starting point is 00:44:44 Is there anything with, you know, maybe in the near term, that might be more so of a catalyst outside of a takeover? Yeah, well, I think they're spinning out the South Street Seaport this year as well as some assets they own in Vegas, including a part of a minor league baseball team, I believe. So that's a catalyst and that could make it more of a pure, like, type of company and analysts can do a better job of figuring out what it's worth. There were a couple of other names I wanted to mention that I was sort of just looking at the valuation of some of these names. One of them was Markell. It seemed to be one of the more undervalued names on your list.

Starting point is 00:45:24 And at the time of your research, you estimated the intrinsic value of Markell to be around 2488. and that valuation was based on some of the parts and the share price at the time of publication was 1388. So that implies potential upside of 79%. And immediately my mind thinks about how companies like Markell and Berkshire Hathaway have sort of always had this conglomerate discount. So I'm curious to get your thoughts more generally on investing in this manner of some of the parts or discount to intrinsic value,

Starting point is 00:45:56 how that tends to work out over time, given you guys have done this type of research since the 90s? I mean, the two examples you gave of conglomerate discounts, people have owned Markell or and certainly Berkshire for 30 years, even if it traded at a discount to what it should be, you know, as a piece of conglomerate, I've still been handsomely rewarded. So, you know, if you buy great companies, generally good things will happen. You just want to make sure you have good stewards of capital. I'm Gainer, who runs Markell, good investor.

Starting point is 00:46:30 very conservative, runs a good operation. They started something called Markell Ventures, I don't know, roughly 10 years ago or so, where they're investing in private companies and they're dubbed a baby Berkshire. And it's one of these, they're growing book value over time. And, you know, in a conservative, prudent manner, they have a nice stock portfolio that's done quite well. And I think the private equity part of the business, the ventures part, will become more and more meaningful. They just need to do a better job of underwriting as it hasn't been ideal for them. And we had talked outside of this that we're both friends with Chris Mayer and Chris mentioned on our show that he solely focuses on compounders and he quit investing in names

Starting point is 00:47:18 based on some of the parts, discount to peers, etc. He said it took him quite a bit of time to sort to make that transition and it's quite interesting just learning about all these different approaches of how people think about risk and valuation and time horizon, all that. Well, Chris is a great guy and a great investor. And, you know, he wrote a fantastic book called 100 Baggers, which I recommend everyone read. And he's right. You know, you want to invest in these compounders.

Starting point is 00:47:48 And I don't want to invest in something that's a sum of the part story that's a mediocre business. That's just one part of it, you know, in some ways, you know, Markell. I mean, sorry, Howard Hughes is a sum of the part play business, but I also like, it's something at a discount, but I also like the underlying business in this growth prospect. So you can, you can have your cake and eat it too in this. You just have to be very selective. Chris has the advantage of running an extremely concentrated portfolio where I think he probably

Starting point is 00:48:15 has 10 or 15 stocks in it. So when you have to pick 40, it's a little harder to do that. But yeah, I fully agree. You want, it's not just, oh, this is selling a stock, is selling. selling at 15 times earning it is historically sold at 20. It's peers sell at 20. Let's buy it in hopes that there's mean reversion. Well, it could also go the other way where their peers just don't do as well.

Starting point is 00:48:41 So it's you want to have a reason for owning the underlying business, not just these special situations. I fully agree. It's why I wanted to mention interactive brokers and Markell. Like Markell especially, they have a, you know, these diversified revenue streams. You have Tom Gainer, just a very long track record of treating shareholders fairly and being a good capital allocator. And then they have the stock portfolio. And then one point you made in your report in regarding to the venture side is they haven't been able to make as many deals with lower interest rates and just so much competition.

Starting point is 00:49:16 But now with higher interest rates and the really strong balance sheet they have, it's their time to be more opportunistic and finding those deals and putting that cash to work. Yeah, and what I like about them is they didn't chase things. They didn't try and buy. It's not like a private equity firm where they have to invest the money. You know, they were fine, just being prudent and waiting for their time and their time will come where there'll be less competition for private equity. People would want to sell to them and they'll be the buyer of choice. So yeah, it's a great operation and they're doing a good job. And they're, they're doing a good job. they're becoming more and more wisely known kind of in investing circles as well. So it was interesting to read about some of these very public assets in your report. You know, companies that people see in the limelight, but they just don't really think to invest in or even know it's an option to invest in these. One of which is Madison Square Garden Sports Corporation, which you state, based on the intrinsic value calculation,

Starting point is 00:50:18 you see around 99% upside from the $171 level. Talk to us about what you're seeing in this one. Madison Square Garden is a name we've known for a long period of time. It's controlled by the Dolan family, and it suffers from the quote-unquote Dolan discount. It was initially part of cable vision, and they've done a variety of spinouts. And Madison Square Garden Sports owns the Knicks and the Rangers or the primary assets of it. And you may or may not have noticed there's been a lot of activity in publicly traded sports teams. teams or trade in sports teams, private equities that got involved in a big way.

Starting point is 00:50:58 Sovereign wealth funds have gotten involved in a big way. And right now, the enterprise value of Madison Square Garden Sports is roughly $4.5 billion or so. The NICS alone, you know, Forbes values at like $6.5 billion. The Rangers are close to three, utilizing what historical premiums to Forbes value. You got a much, much higher stock price. And people will say, oh, well, Dolan will never sell the team. One, I would say never say never. He did sell cable vision at a great price, by the way, at a great time.

Starting point is 00:51:37 And two, if Mark Cuban can sell the Dallas Mavericks, who everyone thought he would be a or sell a majority stake in the Dallas Mavericks, it's not far-fetched. So I think that James Dolan can do the same thing. But there are other ways that they can unlock shareholder value, absent a sale. they could sell one of the teams. They could sell a stake in one of the teams, which is what's happening with the Toronto Maple Leafs organization. And there's lots of ways to win. They can buy back a lot of shares.

Starting point is 00:52:07 They've already paid one special dividend. They can pay another one. So there's a lot to like. I think you have downside protection. And these are valuable assets. And at least in my opinion, as long as there are billionaires with big egos, the price of these sports teams are just. going to increase in value. They're a scarce asset.

Starting point is 00:52:27 There's only roughly 30 NBA teams. And that's also a catalyst where, you know, there's rumored that they're going to do expand by one or two teams and that there's going to be an expansion fee. And that will be divvied up by all the teams. And the NICS will share in that revenue stream. In addition, they have, I believe, in a year or so, their media rights for the NBA come up. It hasn't been renegotiated in about 10 years.

Starting point is 00:53:01 It's going to be a significant bump up there. So there's lots of reasons why the stock could go up significantly, even absent a sale of the teams. Talk more about the Dolan discount. Is it just a factor of him not wanting to sell, or is there something else there? Oh, I mean, for those of your listeners who are in the New York area, they know all too well.

Starting point is 00:53:23 The trials and tribulations of James Dolan is actually a great podcast series out there called Rain of Error, which details the Dolan Empire and what they have done. And, you know, they've been terrible, terrible operators of at least the Knicks. They've been, you know, until recently, they've had terrible record. They've owned the team since the 1990s. and he's probably one of the least liked people in New York. He's done things like, yeah, you might have seen his stories with facial recognition going into Madison Square Garden or anyone who is suing them or worked at a law firm

Starting point is 00:54:04 that is suing them can't go in. He does not get good press and that gets reflected in the stock price. But I look at, you know, as we followed Cablevision and owned Cablevision for long periods of time, we made a lot of money and our clients. made a lot of money in Cablevision and he eventually sold it. I think if you take a longer term perspective, these discounts can turn into opportunities. Great. Well, Jonathan, I really appreciate you joining me on the show today. Before I let you go, I want to give you a handoff to how the audience can learn more about the forgotten 40 and learn more about your firm and any other resources you like

Starting point is 00:54:42 to share. First, it was a pleasure being on your show. It was a lot of fun. And I can't believe, you know, an hour or whatever it is. It kind of just flew by. Yeah, for those want to know more about the Forgotten 40, if you just go to Boyer Research.com forward slash 2024, you get all the information you need about the Forgotten 40 and including some samples from this year's. And, you know, one of the things that we did, it's new to Boyer in in 2023 was we started a substack that has paid in premium content. And it's, we put it up basically a stock. idea a month for paid subscribers. And that said, boyureresearch.substack.com. Yeah, I'd encourage people to go there or just go to boyarvalue group.com to learn more about what we do. And, you know,

Starting point is 00:55:32 we're very different than traditional Wall Street. And, you know, we'd love to hear from you. Well, if anyone who's listening enjoyed the chat and they're interested in Forgotten 40, I'll be sure to get that linked in the show notes. So, Jonathan, thanks again for joining me. I really enjoyed reading through your research. And it was great having you on the show. It's always fun as a stock picker to be able to look through a list of that has a ton of research behind it. And you can kind of pick and choose the types of companies you're looking for, which is amazing because you have quite a variety to pick from. And just thank you for coming on. And thank you for all that you did.

Starting point is 00:56:06 Thank you. It was a pleasure. And I look forward to staying in touch. And thanks for your time. And this was a lot of fun. 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.

Starting point is 00:56:24 To access our show notes, transcripts or courses, go to theinvestorspodcast.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 syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP599: Top Stocks for 2024 w/ Jonathan Boyar

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