We Study Billionaires - The Investor’s Podcast Network - TIP690: Top Stocks for 2025 & The "Buy" List w/ Eddy Elfenbein

Starting point is 00:00:00 You're listening to TIP. On today's episode, we bring back Eddie Elfenbine to discuss his buy list for 2025. Since 2006, Eddie has published his buy list of 25 stocks once per year, and since the inception, it has outperformed the S&P 500 producing returns of around 11.2% versus 10.6% for the broader market. In 2016, he also launched an ETF that closely replicates the strategy, which is referred to as the advisor shares focused equity ETF under the ticker C-D1. During this discussion, we cover Eddie's views on the current market and economy, the buy list's top performers from 2024, in overview of the names he added and removed from the list,

Starting point is 00:00:41 how Eddie balances being aware of the macro environment without letting it override his investment process and so much more. During the last third of the episode after I let Eddie go, I also outlined a stock pick I recently purchased for my own portfolio, which is Lumen Group. With that, I bring you today's episode with Eddie Elfinbine. Since 2014 and through more than 180 million downloads, we've studied 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 00:01:15 Now for your host, Playfink. Welcome to the Investors podcast. I'm your host, Clay Fink. On today's episode, I'm happy to welcome Eddie Alphen Bind back to the show. Eddie, it's so great to have you back. Great to be back. Thanks for having me. Well, I've really been looking forward to this conversation and eagerly awaiting the release

Starting point is 00:01:41 of your buy list for 2025. For those not familiar, Eddie launched the buy list back in 2006, and then he launched an ETF in 2016, which essentially just replicates the strategy with the buy list. And the buy list in the ETF, they're a bit unique in the sense that you pick 25 stocks for the year. All the stocks are equally weighted, and you only make changes to those holdings one time per year. And this brings us to today's discussion as we bring in the new year. So before we get to some of your reflections from 2024 and your picks for 2025, how about you just share a bit

Starting point is 00:02:14 about your approach and selecting the 25 stocks for the buy list? Absolutely. So what happened was people may remember years ago, Lewis Rue Kaiser. He had a Wall Street Week, and he would invite his guests on to offer stocks for the year ahead. And it was the same thing that they couldn't make any changes during the year. So when I started my blog, which was crossing Wall Street, this is now 20 years ago, I wanted to show investors that you could beat the market by doing less. And I think so much of investing involves making something far more complicated than it needs to be. So I want to say to investors, here is what we'll do. We'll make a list. We won't make any changes throughout the year, look at high-quality stocks that are going for good prices. Focus on a portfolio like

Starting point is 00:03:07 that and that you can do well. And so we just the other day released the name of our 20th buy list. You ask me, well, what kind of stocks we look for? We look for high-quality names, stocks that we know will be around for a long time. Let me also mention that each year with the buy-list, what we do is We make five changes. The five new stocks come in, five old stocks go out. So that means that on average, we hold each stock for five years. And I think that's sort of a good time period to say if a stock has turned out into a good holding or not.

Starting point is 00:03:45 It's a large part of a economic cycle. Also, I think there's sort of a people think I'm holding myself back. I actually think it's very liberating because when I choose the stocks, I have to say to myself, am I comfortable holding this stock five years from now? And a company like Stryker, it's absolutely, Moody's or ICE. Absolutely, I'm holding those for the next five years. So in many ways, it adds a level of discipline that I think helps investors. It's high-quality stocks, stocks with strong market niches, strong positions in their industry,

Starting point is 00:04:25 and usually consistent operating history, rising sales, rising earnings. Those high-quality names going for good prices, that's what we focus on with the buy list. Yeah, well, later in the discussion, I definitely wanted to get into whether some of these aspects do limit you or not. But one thing I will mention that sticks out to me is that I think since you only make five buys in five sales each year, you need to be a bit picky because if it ends up where there's seven names you really don't want to hold on to, you don't want to be in that position where you're taking out five, but you would want to take out more. So you need to be pretty picky

Starting point is 00:05:00 with what you do select. And since you can't make a single change to the portfolio during the year, I know that you're doing a lot of reading, you're keeping up on your companies and thinking about potentially what moves you want to make once the new year rolls around. In 2024 was another year where the stock market overall delivered really strong performance. Talks of a recession feels like they just sort of withered away. The U.S. economy, it remains strong. The estimated GDP growth for Q3 was around 2.8%. I'm curious what sticks out to you when looking back at 2024 for the stock market in the economy. For me, the whole story of the stock market for this past year and even longer than that has been this divergence between a very small group of very, very large

Starting point is 00:05:46 companies dominating Wall Street to an unusual degree and that everything else is everything else. So it's the famous Mag 7 and everything else feels like if you're not a member of that group, you are badly left behind. Now, we've had periods like this before, but I can't remember anyone so dramatic and with such a wide gulf between the group. There was a nifty 50 back in the early 70s. That was a good example. That came to a rough end for a lot of those stocks. But it's the incredible strength of the Mag 7 versus the rest of the market. As far as the economy and broader market goes, I feel like I'd been promised a recession that never came. And that was so widely believed 18 months ago. It was just obvious we were going to have a recession in 2024,

Starting point is 00:06:41 and it just has refused to come. So all the things that were supposed to wreck us about things happening in the Middle East, things happening in Eastern Europe, inflation, the election, all these scary headlines. And none of them really impacted the market. The market had this last year and the year before are two of the best back-to-back years we've had on record. has sailed right past the scary headlines. Yeah, well, you mentioned the Magnificent Seven there, and I'll mention that. You set a high bar for yourself in benchmarking yourself against the S&B 500, and you've still managed to outperform that benchmark since you launched the strategy in 2006.

Starting point is 00:07:20 And of the 25 names, you don't own a single one of the Magnificent Seven. So, as to be expected, 2024 was pretty much a mixed bag when looking at the returns of the 25 stocks that you selected at the start of 2024. When I look at the top performers, I see FICO's up 77%. Miller Industries is up 59%. FISA is up 58%. Amphanol up 44%. And then I'll mention HICO is up 34%, which we'll be getting to later in the discussion. And FISA, you've actually held ever since you launched the strategy in 2006. You also shared with me that the biggest winner is the one that surprises you. And I'm not sure many investors expected FICO's P.E. to go from 60 to 100 this year. So when looking at these best performers, what are some things that stick out to you?

Starting point is 00:08:11 I never know what it's going to be. And I always get a question, people who always say, of your 25 stocks, what's your favorite? And it's like, you think you can just buy one, but that's not how it works. I'm always surprised by what it will be. And so I think FICO is number one, this year. But here's the thing, I believe it was number one last year in 2023 as well. So there's a natural tendency to think that these will regress to the mean. Didn't happen this time. It's had two stellar years. Miller Industries, it's by far our smallest stock. I love following this one. It's a tow truck company based in Tennessee. No Wall Street analysts follow it. So I just look through the 10K, and I know as much as anybody else, and I felt it was such a great bargain.

Starting point is 00:09:00 It's done well for us this year, and I think it did very well for us last year as well. So you actually called it on our show with Miller Industries. A couple of years ago, you referenced this stock. It was so small. No analysts were covering it. And since two years ago, the stock's up 150%. Is there anything that sticks out to you in terms of what they've been able to do over the past couple of years or is it just, you know, fundamentals improving? Well, the clear lesson here is that people should be listening to your podcast. What they did was during COVID, it was a very difficult time for their business, and they invested in themselves and they brought in their capacity to a very high level. I think with a small company, they were able to sort of make these dramatic moves.

Starting point is 00:09:46 At one point, they were trading at maybe five or six times earnings two years. years before, but things had dramatically fallen off during COVID. And then once COVID gave away and all the supply chain issues and such, once the economy started getting back on its feet, it was just an incredible boom time for Miller, and their earnings have been outstanding and far ahead of what they've earned in previous years, and the stock finally took off. So, Jesse Livermore said it wasn't my thinking. that made me money was my sitting. That's exactly what happened with Miller. Speaking of patience, I heard you once say that when you buy a stock, you usually have to

Starting point is 00:10:32 wait a few years to see your gains, which highlights the patients needed when buying and holding good businesses. And I know Peter Lynch actually said something very similar. He oftentimes didn't see his gains until the third, fourth, or fifth year. And I think most people just simply don't want to wait that long to see their returns. I was curious if you could talk more about this and why the market just seems to forces patience amongst us as investors. Well, it's the failures of humans. It's not the market.

Starting point is 00:10:58 You know, the saying is sometimes the best stock to own is one you, the best stock to have is one you already own. And that's so true. And particularly I go for companies that I think are under value. I wouldn't call myself a pure value investor. But it takes a while for that to be realized by the rest of the market. One of the things about stocks is they tend to behave like bunny rabbits, that they'll sit still and still and still, and then all of a sudden they'll take off. So with so many companies, those big gains come in very brief periods after earnings or some story impacting the market.

Starting point is 00:11:39 And that really does require patience. And that's why we have that five-year average holding period. It really is a benefit. And inevitably, when you select 25 stocks, there's going to be some that surprise to the downside. And one thing I really appreciate about you is that you aren't afraid to discuss your mistakes, since mistakes can serve as an opportunity to learn and improve. Well, I am afraid, but I could anyway. And it's so frustrating to talk about your failures.

Starting point is 00:12:10 But like you said, if you have 25 stocks, get ready for this because you're going to have one done and perhaps a couple duds. And then you have to hear things on social media. Oh, this guy, Eddie doesn't know what he's talking about and things. And that happens. So I had Selenese this year. It was an absolutely dreadful stock. It was down over 50%.

Starting point is 00:12:33 Another one that was a terrible start was Polaris. They make all those cool off-road vehicles and boating things. Really need company. But you've got to learn from it. And that's the important thing, is to learn from your mistakes. With Polaris, I didn't appreciate the extent to which interest rates would impact their business. And it's heavily financed.

Starting point is 00:12:59 It's a financially related stock that's a classic consumer non-cyclical. I didn't fully appreciate that, and that really damaged us this year. Fortunately, we have 25 stocks, so other stocks can do the heavy lifting. But you've got to look at your mistakes. Yeah, so for Selenese and Polaris, these actually were two of the five cells on the year. Is it simply a matter of you were wrong on your original thesis or what qualifies something entering the cell category? I would describe it like this.

Starting point is 00:13:30 It's when the company is no longer the company I thought it was. The thesis was based around. And so that certainly happened with Polaris is a good example. There are often times that stocks are bought out. A good example that happened recently was Hershey had a buyout offer. This is actually their second offer they've had in recent years. And there's a family trust that owns a large part of the voting shares of Hershey. And I thought, you know, this is an offer. I didn't know the price, but I have the feeling that it was a good price for them. And the trust turned it down. And so that's not. The kind of company that I want to pull. Hershey had actually done very well for us, but then they got hurt in the past year by the global cocoa crop.

Starting point is 00:14:25 There were some heavy rains in Africa, and that severely impacted the cocoa market and Hershey's bottom line. With the stock going down, that's going to attract buyers, and they had that and they turned it down. So that was enough for me, and I thought that was a good time to exit. But like I said, up until then, it would have been a pretty good stock for, I think it may have been the number one stock in 2021 for us. I know this is going to be a popular discussion because everyone wants to know what stocks a buy. So you added five stocks to the buy list and then had five taken out as you've done in previous years.

Starting point is 00:15:02 And I was somewhat surprised to see Adobe as the first edition. I'm an Adobe user myself for the audio software we use for the podcast. and it's just one of those tools that I think is just going to be very difficult to rip out and be replaced by a competitor. When I look at the stock price, it was initially on a tear in 2023, kind of riding the AI momentum, and now we've seen it pull back from over 600 to around 450 as of the time of recording. And they've just continued to deliver double-digit revenue growth for many years. So I'm curious to get your thoughts on what makes now an interesting time for Adobe. You just made the case.

Starting point is 00:15:38 It's been growing and the stock is down. Think of a company is if Adobe didn't exist. And I wrote you a check for several billion dollars. Could you recreate it? And the odds are, I don't think you could. Because it's so strong. It has such a defined market. I love recurring revenue.

Starting point is 00:15:59 That's a great thing for any investor. Wonderful company. And it's down. And I think it's one of these about five years from now, seven years. years from now, people are still going to be using Adobe products. 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've got long days of daylight, incredible food, floating saunas on the Oslo Fjord,

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Starting point is 00:20:00 business partner, Shopify, and start hearing, sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Another one you added is Allison Transmission. And that's a stock that's up 93% year to date. And it still even trades at a reasonable multiple. and the low teens. And you had mentioned to me that you like to look for companies that aren't widely followed by analysts such as Miller Industries and potentially leads to these mispricings. Allison Transmission, it actually strikes me as one of those boring businesses that are just easy to ignore. It's not an AI play and there's no hype around it. They produce a fully

Starting point is 00:20:53 automatic transmissions and hybrid propulsion systems for vehicles. And here they have 70% market share in their core market. The more you look at it, you think, this is so much like Miller, small cap, cyclical play, domestic manufacturer. And there are so many companies, they just do an excellent job. They're not widely followed. People don't know the name. And you look, it really just dominates its industry. If you got to go through them, if you want to build transmissions for the really big troughs. But here's a good example of me not being a strict value investor. The stock did very well this year, but I still like it and I still think the valuation is more than reasonable. So a lot of people, a lot of investors

Starting point is 00:21:40 are saying, oh, it's doubled in the past year. It can't go any higher. Same thing we saw with WICO. It still can go higher. You can have a minor pullback and go even stronger. It's a wonderful little company and it may not do well in 2025. It may be another stock that won't really get on its legs until 2027 or later. Yeah, and I think my big concern with this one would just be the cyclicality. You know, Polaris got whacked in 2024 due to cyclicality and, you know, higher interest rates. And yeah, I'd be curious if how you sort of work through that risk with this one. Understand that there are cycles within the market and, in fact, you know, the economic comic cycle and so many businesses, investors understand, it's like chemicals or railroads

Starting point is 00:22:29 and home builders. You're going to get this sort of wild sign wave with the performance of these stocks and the performance of the businesses. So it's important to have kind of when you look at the cyclical, you want to have a broader time horizon on how you view its previous performance. Because sometimes, you know, it's just like Michael. I had said, there are no geniuses, there are only cycles. And that's so true, so much of Wall Street. So, within cyclicals, just be aware that it is a cyclical and that in many ways, when the valuation, it's like holding a magnet near a compass, you can get kind of screwy readings. So I tell investors, be aware, just to understand that there are some companies who follow

Starting point is 00:23:17 the broader economic cycle. It doesn't mean they're good. It doesn't mean they're bad. It's It's just something that you have to deal with as investors. So looking at the current list, one of the names that stood out to me was HICO. This year, actually, Berkshire Hathaway had been purchasing shares in HICO and it remains on your buy list, which, you know, it took me a little bit by surprise seeing some of these great investors buying into this name. I know Franchois Rochon also has a sizable position in this company and Tom Gainter also has a small position.

Starting point is 00:23:49 And when I pull up Finchat, it's showing me a piece. of 64, EV to EBIT of 38. And, you know, this has just been one of those stocks that's beaten the market by a mile over the past two decades. I'm curious if you could share what gave you the confidence to own this business despite the current valuation. So much of it, our conversation, as always come back to, you've got to fight your emotion, because your emotions are just going to make you a poor investor.

Starting point is 00:24:13 And I have to admit, I got wrapped up with HICO. I owned it years ago. It was on the buy list, did very well. It's gone up too much. I got to get rid of it. They just kept going up and up and up. And then I said, okay, I'm going to add it back. And it's been going up and up and up.

Starting point is 00:24:31 So exactly all my emotions, all my initial impulses have been 100% wrong. And I've been able to fight those and to do well in that. So I'm not terribly concerned about the L of APE ratio. I've not done well as timing for valuation purposes. strong companies are able to routinely make up for that. Also, when you look at a company like HICO, I don't know how well traditional metrics can work when you consider things like it's very strong market position and its management how well it's run. Does that add 10 or 15 to the PE ratio? Should it? I don't know exactly, but I know it continues to do well.

Starting point is 00:25:17 Yeah, and when I look at the 25 stocks, you know, I think there's a good balance. You know, I see like FICO and HICO, you know, might be an elevated PEs. You know, it's not 25 stocks trading at these excessively high multiples. So you have a bit of cyclicals, you know, maybe some value stocks, maybe, you know, these very high quality businesses. I think it's the set that sort of can weather through any sort of market environment. That's the idea. So you always want to make sure your portfolios broadly diversify. If I could add something, I've seen so many investors who say, I am diversify. I owned Google and Microsoft.

Starting point is 00:25:55 So, you know, I'm diversified. Well, that's not a diversification. You want to make sure you have defensive stocks, value stocks, growth stocks, all kinds of stocks that can work well in different environments. because you're not always going to have a broad baseball. There's always going to be areas. In bear markets, you're going to have areas that are doing well, and in bowl markets, you're going to have areas that are lagging. We discussed earlier that the best performer tends to be one that surprises you. But I think many people don't want to hear about an investor's fifth best or 15th best or 25th best stock idea.

Starting point is 00:26:30 And I know you follow the broader economy quite closely through your newsletter and such. Are there any stocks that you think are well positioned going into 2025, whether it be a new edition or something that's already in the portfolio? I mean, so many are. It's hard to single out anyone in particular. I think Stryker, a good example, company has always done well. Abbott Labs, they just raised their dividend for, I think, the 53rd year in a row. Moody's just a great company always seems to prosper no matter what.

Starting point is 00:27:04 The interesting name we had this past year was a new name for 2024 was McGrath Rencore. And I added it, and then by maybe January 15th or so, it was not long into the new year, they had a buyout all. And it shot up, and the fight with the government to get this deal, duh, was just dragging out and out and out. It was taking months. And then finally, the company said, we're dumb, we're not going to do this merger. Very frustrating because as soon as that merger deal was announced, I assumed that McGrath was not going to be part of the 2025 buy list. I just didn't assume, I assume that would be. That when everything fell apart, I said, and this company is still in good shape. And I think it may be one of those ironic examples where not having the deal could be quite beneficial for shareholders. It's a strong business, a consistent business. So, I think I should say I wouldn't be surprised if they do very well in 2025. It's McGrath Rent. Yeah, for those tuning in, that is ticker MGRC, if you're interested in looking further into that.

Starting point is 00:28:16 I wanted to discuss the strategy a little bit more. You know, I mentioned you are equal weighting these positions, which the first thought that comes to my mind is this is going to limit the performance of many great investors because you are able to bet bigger on your best ideas. And you're also inevitably going to trim down your winners. So when FICO goes up 77%, it's going to be pulled back in terms of the weighting. I was curious if you could share your thoughts on, you know, if you think equal weighting might hinder the performance and have you considered dropping that approach altogether. I'm finally because equal weighting, I think, is the most neutral way to go about this. So I don't want to think people think, I'm adding a layer of my own decisions if I were to, you know,

Starting point is 00:29:04 overweight companies that I think would be the best boss. As I say, within the 25, I never know what that's going to be. And the same thing would work in reverse. If I were to lighten up something, I would want to get rid of it. This system works the best. Then I think it keeps the overall risk of the portfolio lower than it would be. It is a little difficult at different points, you know, and think, oh, I would really, would I like to take some profits here and redirect it over here? Human nature, absolutely. But I think it's best just to leave it as, as it is. Does your conviction vary too much between the 25 names, or would you say it's fairly similar? It's fairly similar. It's hard to choose, which is your favorite child?

Starting point is 00:29:53 Love them all. And they all have different aspects that I appreciate about that. Another thought experiment I had is since you're only making changes once a year, there's going to be points in during the year where you just feel like you really want to make a change and now looking back, you know, you sort of wish you would have, you know, if something is sort of getting hammered in the current environment and the stock price just keeps dropping. Yeah, I was curious if you've ever considered tweaking. Always. Well, a good example is what we had just, if you remember that very beginning part of August,

Starting point is 00:30:26 It was really three days. The market dropped very sharply, and it came amidst a period of very low volatility. It was kind of shocking to get this punch from the market that, you know, in retrospect, it lasted three days. Going through it seemed very unpleasant and seemed like this might be the start of bad things. That's not what happened at all. The market kept rallying right through the end of the year. was a good point where I thought, you know, this is, this is unpleasant going through. Maybe I,

Starting point is 00:30:59 you know, I like to make some changes, but overall, I've always kept loyal to the strategy. But yeah, it does happen a lot. I mentioned your newsletter. You write quite a bit about just what's happening in the macro environment, but you're still a fundamental bottoms up investor for the most part. I was curious if you could discuss how you balance, you know, being macro aware while also not letting it override your overall investment process? Yeah, that's a good question. It's difficult to answer because the room that it deserves, because it's a good topic. I think too many investors, they invest from 30,000 feet.

Starting point is 00:31:39 So they'll say, oh, I don't like, you know, what's happening in politics, I don't like the Federal Reserve, I don't like tax, this or that. And that really can have very little impact on the overall. investment picture. They said, I think the stock market went up 75% from two years and three months ago until one month ago. Enormous returns. I don't think many people were seeing that. Now, there are areas that I do like to look at, in particular the interplay between interest rates and the stock market. So we see, as we talked about before, the cycle between value and growth. That's often determined by the direction of short-term interest rates.

Starting point is 00:32:24 In fact, it can be so sensitive that we've seen recently, just the promise of lower interest rates has been paired back, and that has strongly impacted growth versus value. So these ways where the macro environment can seep in and affect broader trends within the stock market. I also like to look at the interplay between defensive stocks and cyclical stocks. And that's usually driven in large part or it is related to long-term interest rates. So in that sense, I like to look at what's happening with the economy. It really comes down to the measurement of risk. That's really what it is. And I like to see how the economy impacts those areas of the market. You referenced a quote from your newsletter that I wanted to read here. You wrote, I feel as if

Starting point is 00:33:17 I was promised a recession for this year and we're not going to get one. That news is far more upsetting to some people than I would have expected. I think one thing that's sort of surprising to me, you know, in investing in this type of environment is that things are just always changing and they're always different. So people will look at, you know, various indicators and say there's going to be a recession, but the market doesn't always respond how it did in the past. And I think one thing that's sort of impacting today's market, who knows how much validity it is, but it's just like the federal government's fiscal spending and that being injected into

Starting point is 00:33:52 the economy. And it seems to have just really fueled like that magnificent seven. It's been sort of a talking point that these top big tech companies are, you know, continuing to dominate. And that's been a talking point for many, many years. I'm not sure if you have more to add related to the current market environment. It seems as a very unusual environment in that, as I said before, everything is the mag seven. And it seems like everything else. And you you look around and you can see some pretty compelling valuations that maybe they're waiting for a catalyst, maybe they're waiting for if the economy suddenly slums. Always be aware is that there's no one stock market. There are thousands of thousands of stocks, and they all

Starting point is 00:34:37 can be doing different things at different times. So always be wary when the various bills become all about politics, all about the Fed, and all about the market. So the vast majority of investors I speak with here on the show, they manage their own fund and typically have an entire team around them. You know, think managers like Francois Rochon, Dev Contasaria, Andrew Brinton. But interestingly, you run an ETF. So anyone listening to this can go out and buy a share of that ETF for call it $64 as of this time of recording. I'd be curious to hear more about your experience in managing a portfolio in this ETF structure and why you felt that was the best route to go for you.

Starting point is 00:35:20 So what had happened was I had been publishing the buy list for a number of years. And I just built up, it was on my blog and had more and more followers over the years. They said, we really like your approach. We love what you do. We love the returns. Do you have a product that we can do, invest in? Do you have a hedge fund or anything? And for some of the years, I said, no, there was no way you can do that.

Starting point is 00:35:45 And I was able to connect with advisor shares, man named Noah Hammett at advisory shares. I met with them. We talked about it. We said, is there a product, an investable product that we could offer people? And we looked at it. We did queries. We pulled readers. And we said, yeah, we think there is something.

Starting point is 00:36:05 So, he launched the ETF and I was able to get CWS, is the ticker symbol, for crossing Wall Street. I've never chosen a ticker symbol before. And I think it was a good product for us. We came at the right time in the ETS industry, which I think it was more open to kind of different ideas, maybe out of left field ideas. I think that the industry has changed and it's less willing to get an off-the-beaten path kind of fun. There's a hump to get over around 20 to 25 million, depending on the structure of the fund. And it's very unprofitable when you're below the hump.

Starting point is 00:36:50 But when you're above it, it can be very profitable. And for us, it just took a long time, just convincing more and more people that it was a good fund to invest in. We got a fifth star, the Morning Star, So it's starting to be a pretty sizable product. I think we're at the top maybe 30% size-wise of ETFs. Getting the five-star from Mortystar was a huge up. And just being open to people talking to different investors and offering a product that

Starting point is 00:37:22 we don't think you can get anywhere else to buy one share of all of the stocks on the buy list I think is $4,000 or $5,000. We offer it all in a stock that's around $66 per share. 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 00:40:50 be found in the income fund fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. One common thing amongst many portfolio managers is that they put a pretty big emphasis on their investor base and ensuring they're partnering with people that think long term and stick with them for the long term. Have you found that liquidity to ever be an issue from your end in terms of, you know, you often hear that a lot of investors in Kathy Woods Fund, for example, would buy the top and sell the bottom so that even if she's doing well at certain points than, you know, a lot of our investors are underperforming the fund itself. Have you found the liquidity to ever be an issue?

Starting point is 00:41:33 That's a very good question because that really was a mystery. We didn't know what was going to happen when we had downturned. And I've been pleasantly surprised that it's a very sticky fund. And we haven't had the massive drawdowns that you have in other funds. So we've had a few brief periods, for example, for coach, But we knew that wasn't only us. And there have been some other periods, but I've been surprised that when bad things have come, and they've had over the last eight and a half years, they've been very sticky.

Starting point is 00:42:08 And I guess we've taken a long time to craft our message and to get the idea that we're following the system out there. So people are loyal to it. Well, wonderful, Eddie. I really appreciate you joining us here again today to discuss the buy list and all the updates. to bring in the new year. I'd like to give you a chance to give a handoff to the audience on how they can learn more about you, your blog, and the ETF. Well, you can go to the blog, which is crossing wallstreet.com. I also have a substack. So that's cWS.w.s.com. And so I send out

Starting point is 00:42:45 two issues each week. I send out an issue on Tuesday, and that's a free issue. It's more of a general market commentary and talking about different things going on in the market. I like to feature an interesting stock that maybe people don't know about. And then on, I said it late Thursday, I dated Friday. There's the premium. That's where I talk more in-depth about what's going on with the buy list and the stops, the news, and the more nitty-gritty of investing. As far as the ETF, so a ticker symbol is CWS, and it's the advisor shares, focused equity ETF. We have lots of data. I do quarterly summaries about what's going on. So we have all the interesting news and events. We have to have even just a tiny amount of cash and a fund just to

Starting point is 00:43:36 keep it running. We can't say we mimic the buy list, but it's based off the buy list and we do it as best we can. And it really does imagine. So if you want to follow the buy list and see the different stocks we have in there, certainly you can do that. There's a buy list. There's a on this page at the blog. Advisory shares has been a great partner for us. Eight and a half years, have a great bunch of partners who have invested with us. We're going to keep doing what we've been doing. Wonderful.

Starting point is 00:44:06 Thanks so much for joining me. I really appreciate it and really enjoyed this chat and diving into some of these names. Thank you. All right. So that wraps up the first segment with Eddie Elfineine. During this next segment, I'll outline one of my more recent stock purchases, which is Lumine. It should go without saying, but me sharing.

Starting point is 00:44:23 this name should not constitute a buy or sell recommendation. It's for informational purposes only. I bought this stock in October of 2024. The ticker is L-M-N. It trades on the Canadian Venture Exchange. I acquired shares of Lumine at an average price of $32.88 Canadian dollars, and as of the time we're recording, the stock trades for around 41.1 Canadian dollars. To understand Lumine, we first need to understand the company that they spun out of, which is constantly, Software. Constellation is led by Mark Leonard, who was the founder and president of the company. Back in March of 2023, I released a podcast on Mark Leonard's letters on episode 531, and during that episode, I shared why I believed that he was one of the best capital allocators I had

Starting point is 00:45:10 ever come across, as he's consistently generated a return on invested capital of around 30% and reinvested virtually all of the company's cash flows. So I purchased my first shares of Constellation at $2361 Canadian dollars, and here at the time of recording, shares trade for 4,450. If only, I would have wizened up and not been so timid with my initial purchase, but I'm happy to have added more shares along the way. For those of you who use mainstream brokers like Fidelity and Vanguard, you might find that you can't purchase Lumine or Constellation with these brokers. If you'd like access to international stocks, I'd highly recommend interactive brokers, which I can get linked in the show notes below.

Starting point is 00:45:51 Interactive brokers offers access to essentially any stock I could have ever wanted access to, and they offer very competitive fees to the best of my knowledge. In short, Constellation Software is a serial acquirer that buys vertical market software companies and holds them forever. You can think of a vertical market software product as something that caters to a very specific niche or vertical. This might be something like software that caters to a golf course and managing reservations or managing a golf tournament, for example.

Starting point is 00:46:20 On the other hand, a horizontal software product can apply to really anything, such as Microsoft Excel. Constellation is based in Toronto. It trades under the ticker CSU on the Toronto Stock Exchange. Leonard started the company in 1995, and since then, they've completed well over 700 acquisitions. The typical deal size of these acquisitions is only around $5 million. But as they've scaled up, they've occasionally done these larger deals, some as large as $700 million. Now, these VMS companies were attractive to Leonard for a number of reasons, a few of which I'll list here.

Starting point is 00:46:54 They provide mission-critical services to their customers. They have high recurring revenue. They represent a very small amount of the overall expenses for these customers, so there's very little incentive for these customers to switch to a competitor. They tend to dominate their niche, which also tends to be very small, so there's little competition. And Leonard was also able to buy these small VMS companies at attractive prices and provide a forever home to them. And this strategy has generated a 25 to 30% return typically on these purchases.

Starting point is 00:47:24 With that said, there are a lot of companies in the market today buying these types of businesses, so Constellation is also very disciplined in the types of companies they will buy, but what they will pay as well. In my view, their discipline in ensuring they are earning a high return on capital is one of the most valuable parts of this business. They aren't going to go out and take unnecessary risks, and they likely aren't going to lower their hurdle rates just for the sake of getting capital deployed. Leonard implemented this strategy successfully for a number of years. The stock went public in 2006, and it's essentially been a straight ride up for shareholders as they've essentially reinvested 100% of their cash flows along the way at that high rate

Starting point is 00:48:06 of return, around 30%, excluding some dividends that were paid out along the way. Now, in recent years, Constellation has done a couple of spinoffs. In 2021, they spun off Topicus.com, which is another stock in my portfolio. Topicus is a carbon copy of Constellation, except it's run by its own management team, and they make these acquisitions primarily in Europe. So they can go into any vertical, but they're generally contained to Europe. In 2023, Constellation performed their second spinoff, which was Lumen Group, otherwise known as Lumine, which trades under the ticker LMN on the Canadian Venture Exchange.

Starting point is 00:48:41 And before I forget, I'd also like to give a big shout out to my friend Cochran from the Seeking winners substack for helping me better understand this company. He was extremely helpful in helping me sift through the accounting jargon in the complexities of the spinoff transaction, and he also put together a wonderful free write-up that I'll be sure to get linked in the description below for those interested. Now, instead of going into just any vertical, Lomime purchases companies in one vertical specifically, which is the media and communications vertical. So they aren't constrained by geography like Topicus is, they can look for companies in this one vertical all over the world. In one of the statements related to Lumine's spinoff, Mark Leonard

Starting point is 00:49:21 stated, I look forward to having CSI's long-term shareholders become long-term shareholders of Lumine. I hope my grandkids are still holding Lumine shares 50 years from now. Now, talk about someone who thinks long-term. You just don't hear public statements like that from most managers, or at least I haven't. From a high level, Lumine is a strategic acquirer and developer of vertical market software businesses within the global communications and media industry. Their core mission lies in identifying and acquiring high potential VMS companies with a focus on the specific needs of customers in various communications and media segments. The companies led by CEO David Nyland.

Starting point is 00:50:02 He joined Valeris in 2014, which is an operating group within Constellation to help build the communications vertical. As of the time of recording, Lumine owns around 30 companies. They acquire around two to six businesses per year. The average purchase price paid per acquisition is around $11 million. That was at least prior to the spinoff transaction where they made a big purchase with wide orbit. And what I also like to see is that businesses that Lumin owns are mission critical.

Starting point is 00:50:31 In the end, markets are also essential. So you think about things like the internet or mobile phone connectivity. These are just industries that just aren't going away. They look for companies that are typically number one. one or number two in their niche market, and they also tend to look for a diversified customer base to ensure that they're not dependent on a small number of customers to deliver those strong financial results. Following each acquisition, LUMINE strategically invests in these businesses, bolstering their core functionalities and unlocking opportunities for international expansion

Starting point is 00:51:03 by taking advantage of a playbook of over 250-plus best practices that leads to organic growth. Now, the investment case for Lumine is as follows, which is something that I pulled from the Seeking Winner's Substack, which I thought was very well put together. The playbook really is to acquire VMS businesses in the media and communications verticals, while achieving a high return on invested capital on these acquisitions. Typically, the company's going to aim for an return on investic capital of 20 to 25 percent based on the net operating profit after taxes. Over time, they want to generate consistent, low, single-digit, organic,

Starting point is 00:51:39 growth rates with limited wasted spend on research and development and sales slash marketing. Next, they'll use the free cash flow generated from their existing businesses and redeploy as much as possible back into acquisitions. So this is really the engine of buying these great businesses and taking the cash flows and going out and buying more great businesses at good prices. Next year, continue to take advantage of quote unquote carve out deals. These can be really attractive to Lumine because of the low valuations they're able to get in the technical expertise that is needed, which means limited competition from other buyers. And finally, take advantage of the slowing communication in media industry to acquire cheap

Starting point is 00:52:21 companies and use best practices to improve the organic growth rates and margin profiles of those acquired companies. Since Lumine specializes in this vertical, they may be able to recognize unique opportunities that exist in making these acquisitions that many other buyers might overlook or undervalue. Additionally, if many businesses in this space are low growth or declining, that might mean that there isn't a lot of competition from private equity and these other buyers. Now, part of the attractiveness of Lumine for me is simply their focus on compounding the long-term growth and the intrinsic value of the business. Mark Leonard in his shareholder letters outlined that shareholders can estimate the per-share growth

Starting point is 00:53:01 and intrinsic value as the return on invested capital plus the organic growth rate. You know, this does not apply to every business, but I do think it's a good measure when thinking about the growth and the intrinsic value of Lumine. In recent years, Lumine has been growing the intrinsic value of their business at around 25 to 30 percent per annum due to their continued reinvestment engine and the organic growth rates. If they're able to continue to grow their intrinsic value at 25 percent or more for the years that lie ahead, I think that shareholders are going to be quite happy with the result as very, very few companies are able to do that over long periods of time. Another one of my favorite things about Lumine is the skin in the game in the alignment of incentives.

Starting point is 00:53:45 Constellation is oftentimes referred to as the gold standard when it comes to incentives. One thing they do is when cash bonuses are paid out, key managers are required to invest anywhere between 50 to 75% of that bonus into shares on the open market, which are locked up for three to five years. This incentivizes the key managers to think like owners and share in the company's long-term success. The same goes for the board members as well. They have to invest at least 50% of their bonus directly into shares. Now, this template from Constellation carries right over to both Topicus and Lumine, the two spinoffs.

Starting point is 00:54:21 Now, we've seen how well this incentive structure has played out for Consolation over the past 20-plus years, so I'm excited to see how well it ends up working for the two spinoffs as well. Another piece that's interesting is that the bonuses are calculated based on the company's performance. More specifically, the difference between the return on invested capital and the cost of capital. So this means there's no bonus payout unless the company creates shareholder value. And while many tech companies issue quite a bit of stock-based compensation, Constellation and Lumine don't issue any new shares. So rest assured that existing shareholders won't see any dilution at all.

Starting point is 00:54:57 Perhaps in the future, they will issue shares if it's really attractive to do so, but it isn't something that we've seen so far, not something that I would typically expect. The Luma and portfolio has around 30 companies. The CEO, David Nyland, has described the pipeline as in the low thousands of potential acquisition targets, and they're in conversation with hundreds of them. So there's a very long runway for growth in continued reinvestment. Historically, they've completed anywhere from one to two to six acquisitions per year, and they make larger acquisitions than Constellations, smaller bread and butter type purchases,

Starting point is 00:55:33 you know, around that $5 million range. Lumein's purchases are a bit bigger, so we can expect the cadence of acquisitions for Lumein to be a little bit lumpier. They lean towards making these carve-out purchases, which is essentially buying an orphan company from a larger business who sort of just wants to get rid of it. There's less competition in this arena due to the technical skills that are required to complete these types of transactions. Now, let's turn to the valuation here.

Starting point is 00:56:00 The stock has run up over the past few months, so the valuation isn't quite as appealing as it was earlier this year. Who knows how the stock is going to do in 2025, but I expect it's going to do well over, say, the next five years, which is, of course, why I still have it in my portfolio. As of the time of recording, Lumein's market cap is $7.5 billion U.S. dollars, with an estimated at $194 million in EBIT for 2024, that gives us a multiple of around 45, so the company trades at a significant premium to the overall market. The S&P 500, as of the time we're recording, trades at a multiple around 25, but I'm of the opinion that LUMINE is also a significantly

Starting point is 00:56:40 higher quality business than the average company in the S&P 500, as the company has a very high return on invested capital, and they have a lot of room to reinvest that capital and grow. The key factors to think about on if this will be a successful investment or not is can they continue to reinvest the majority of their cash flows? Can they continue to achieve a return on invested capital in excess of 20%? Can they achieve a positive organic growth rate? And can they do all of this for at least the next five to 10 years? When I project out revenue growth of around 30% for five years, which then tapers down

Starting point is 00:57:16 over the following five years, I come up with an intrinsic value that's above the current market price, but as with any model, you can make the valuation say whatever you really wanted to say, which is why I'd rather highlight those key variables of things like continued reinvestment, a high return on invested capital, solid organic growth rates, and a long reinvestment runway. The bottom line is that I believe that management will continue to grow the intrinsic value at a satisfactory level over the long term, which is why I decided to enter a position and put more emphasis on that business quality rather than trying to pinpoint the exact valuation I think the company should be trading at or the exact valuation I should be entering

Starting point is 00:57:57 the stock. A lot of times, it's just better to enter a high-quality name and average in over time rather than waiting for bargain prices that might never come. With that said, listeners can plug in their own assumptions for what they deem to be reasonable and find a price that makes most sense to them. A couple of other things I'll mention that I like about this business. First is that, I like that the stock flies a bit under the radar. Among some quality investor circles, the company's well-known, but I would argue that the circles are quite small. The management team also isn't promotional, so you won't see them promoting the company out in the public much at all. Even when I mention the name Consolation Software to some people, a lot of people

Starting point is 00:58:36 will say it's a very well-known name, but I'm also surprised by the number of investors I talk to that have never even heard of it or never looked into it. The second thing I like is the counter positioning of the business. If a recession were to hit, I think it could actually be beneficial to Lumein. Since they have these very sticky customers and a high-quality revenue base, they're likely to continue to see business as usual, and they may be able to make some really attractive acquisitions from a desperate seller. This hopefully makes my portfolio a bit more resilient in both good times and bad times. So that outlines my pick for 2025. we'll see how well they're able to continue to deploy capital and execute this year and hopefully

Starting point is 00:59:16 all own shares alongside Mark Leonard's grandchildren many years down the line. Thanks for tuning in to today's episode. If you're interested in collaborating with TIP hosts and other Vetted members of our audience, you may be interested in joining our TIP Mastermind community. The TIP Mastermind Community is the community we put together for portfolio managers, private investors and high net worth individuals who want to network with others, talk stocks, or join our weekly live Zoom discussions. We also host a number of live events for the community in Omaha, New York City, and London.

Starting point is 00:59:49 If this sounds interesting to you, be sure to join the waitlist at theinvestorspodcast.com slash mastermind. Or simply shoot me an email at clay at theinvestorspodcast.com. You can also find a link to the community in the show notes below. don't wait as we're approaching our limit of 150 members. With that, thanks so much for tuning in, and I hope to see you again next week. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment

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We Study Billionaires - The Investor’s Podcast Network - TIP690: Top Stocks for 2025 & The "Buy" List w/ Eddy Elfenbein

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