Yet Another Value Podcast - Random Ramblings July 2024: stock price driving narrative + investing in products you don't like

Episode Date: July 25, 2024

Welcome to the July 2024 edition of Andrew's Random Ramblings on the Yet Another Value Podcast. Once a month, Andrew will share thoughts on a few topics - this episode includes: small cap performance, buybacks, stock price drives narrative, CEO changes, due diligence on companies you don't like (i.e. don't like the product or service personally), alternative data and idea dinners. Posts mentioned during pod: On the stress of market melt ups: https://www.yetanothervalueblog.com/p/weekend-thoughts-the-stress-of-market On stock prices driving narrative: https://www.yetanothervalueblog.com/p/weekend-thoughts-bonus-stock-prices Chapters: [0:00] Introduction to Andrew's Random Ramblings + Episode sponsor: Tegus [2:18] Small cap performance, buybacks [5:15] Stock price drives narrative [8:35] CEO changes [10:42] Due diligence on companies you don't like (i.e. don't like the product or service personally) [16:28] Alternative data [18:55] Idea dinners Today's sponsor: Tegus If you’ve been reading my newsletters, you know how often I rely on Tegus for my research. It’s truly revolutionized how I get up to speed on new industries and companies. Tegus has the largest transcript library in the world, with over 75% of private market transcripts. Whether you’re curious about AI, biotech, or any niche market, Tegus has the insights you need. What sets Tegus apart is its all-in-one platform. It’s packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Tegus, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you’re interested in. You’ll find perspectives from insiders and executives that you simply can’t get anywhere else. To see Tegus in action and understand why it’s my go-to resource, visit Tegus.com/value – that’s T-E-G-U-S dot com slash value. Trust me, once you try Tegus, you’ll never look back.

This episode is brought to you by Tegas, The Future of Investment Research. Look, if you've been reading my newsletters, you know how often I rely on Tegas for my research. I probably read one or two expert calls a day, you know, probably average seven a week off of Tegis. They've got the largest transcript library in the world with over 75% of the private market transcripts. Whether you're curious about AI, biotech, or any niche market, Tegas has the insights you need. What sets Tegas apart is its all-in-one-pack platform. It's packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data.

With Teegis, everything is right at your fingertips. The best part? The insights you get are from the very people-shaping the industries you're interested in. You'll find perspective from insiders and executives that you can't get anywhere else. To see Teegis in action and understand why it's one of my go-to resources, visit tegis.com slash value. That's teag-g-g-us.com slash value. Trust me. Once you try Tigis, you'll never look back. All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker.

If you like this podcast, it would mean a lot if you could rate, subscribe, review wherever you're watching or listening to it. Today, I'm going to do my monthly ramblings on the markets before I get to that. Just a quick disclaimer, nothing on this podcast is investing advice. That's always true, but particularly true today because it's just me, one guy alone in the afternoon. well, I guess my wife and dog are in the background, but just rambling about random things. So I'll touch on, I might touch on a bunch of topics. Just remember none of it's investing advice. I'm just flipping through some things.

Please do your own work and consults financial advisor. Before I get started on this month's monthly ramblings, this is my third one. And I just want to say, I told everyone, hey, if you have any feedback, I'd love to hear it. And the response has been overwhelmingly positive. Now, maybe it's one of those things where, you know, selection bias. If you hate it, you just didn't bother. But, you know, a lot of people came over to YouTube and posted. and said, hey, I only listen to these, but I just wanted to do a comment and let you know how

much I enjoyed it. Several of you have commented on the beard, the shaving, the lack thereof. One of you has really been tracking the beard on the podcast. I just want to say I really appreciate all the kind words. And the encouragement really, you know, helps you out. It makes me feel good. That's one of the reasons I do these. So let's jump into the things that are on my mind. The first thing I want to talk about, look, I am taping this at July 20th. We have had, I just put up a weekend rambling, weekend thought. So, you know, there is some bleedover. You can go read that. I'll include a link to the show notes. But I will just say the restless up like 10% in the past two weeks. The S&P 500 is down a bit. The NASDAQ is down like 5%. You know, small cap investors,

you can feel it over the past few weeks. You're saying, it's here. It's rotation. They're beating their chest. If you look at the S&P 500 over the past year versus small caps are heaven forbid the NASDAQ or anything, they're still crushing small caps. So, you know, it's kind of like that meme where there's the guy who wins the medal and he sprays champagne and kisses the girl and then it zooms out and he's like an eighth place and there are a ton of people above him looking down. But I posted it because my wife always jokes with me. The only time I'm more miserable than when all of my stocks are going straight down is when all my stocks are going straight up. And you know, I find it pretty stressful. I run a reasonably concentrated book. I really like

the things I invest in. I'm generally a pretty bullish guy. And I find it really, I find it a little easier to be Zen when, you know, my stocks go from 10 to 9 to 8 and the market's going down and I just say, hey, I've got a fundamental view. I believe in the value case. I'm investing at 10 and I think fundamental value is 15. I think it's 20. I think it's 25. One of the reasons I love buybacks so much is because when I buy stock and I know they're out there buying stock back, you know, if the stock goes from 10 to 8 and I think it's worth 20, I kind of say, oh, great, the buyback's going to go a lot farther. It's going to create a lot more value. Now, whether the company will execute it. You know, everybody loves to buy back stock when times are good, but the number of

companies you see stop buying back stocks when times are bad, it's pretty crazy and frustrating. But that's one of the reasons to like buybacks. And it's one of the things that like kind of keeps me saying when stocks are going down, but when stocks are going up, you know, when my stock goes from 10 to 12 and I think it's worth 15 or 20, I always say, oh, Andrew, you did so much work on this. You like, you know, it can be really hard because I'm like, why was, why didn't I own more? why wasn't I'm more invested? I'm generally a pretty bullish guy. So I find that tough. It's hard enough when it's one company, but when it's all your company's just ripping, it feels tough. I find it mentally stressful or, you know, most value investors tend to be invested in a little more defensive stuff. And when markets rip up, you know, which tends to rip up, the junkier stuff or the stuff that you kind of pass on because there was this risk or that risk or because it had a lot of leverage, those tend to rip up more. So it can be really hard. You know, markets. up 10, maybe you're up eight, maybe you're up 12, but maybe you're the things that you were looking up are up 20 or up 30 and you pass on them. So I just find it mentally tough.

No real ramblings there, but I just wanted to share that thought. I'll include the full weekend piece. You know, my wife and I took the kiddo to the zoo that maybe that unplugging is the most helpful thing. But when you do this for a living, it's really hard to unplug on those things. So that's the first thing. Just wanted to ramble on that weekend thought. So second thing, I might do a companion piece to this tomorrow. And if I do, I'll do it in the show notes, a companion piece on the blog. But one of the things that's really interesting me recently is how stock price drives narrative. And everybody knows that, right? Everybody says stock drives narrative. If your stock is going up and up and up and up, you're a genius, your stock is going down and down and down. You're an idiot. And it doesn't matter if you're, you know, if your stock's down 30 and all your peers are down 90, people are still going to criticize you. If your stock's up 50 and all your peers are up 200, generally you still like, you'll do okay, right? But I was just interested in cross industry. So one thing I looked at recent, one thing I was just looking at is if you ask most people right now, they would say Nike is struggling, right?

Especially if you ask someone who maybe comes from a more conservative background, they'd be like, oh, they're too woke. The business is falling apart. It's in shambles. The stock is down 23% over the past couple months. And most of that is on the heels of a really bad earnings report they did right at the end of June, right? So most people would say, oh, the stock's in shambles.

It's just kind of interesting. If you look at Nike's fundamentals, it's actually hard to say, like, they're in shambles. Like, yes, they're not kind of growing at the rates Nike's accustomed to, but revenue is kind of going to be flatish, going to be this year, going to be flattish next year. The company trades for a little bit around 20 times price to earnings. Like, I'd have struggle pointing to anything that says the company is just an absolute travesty, right? They still own most of the NFL players, most of the basketball players work with them, right? So I have trouble, but because the stock is down, I think it's easy to paint a narrative that the company's in Shedders.

Compare that to something like Tesla. The stock has just absolutely ripped over the past three months. It's up 60% plus. And you'll hear stories about the Tesla turnaround. You know, now that Elon's got his pay package in place, Tesla is, you know, it's driving. It's full speed ahead. It's got this great turnaround, it's got the story. And I look at that and say, okay, look, the stock's up a lot.

There's no question about that. I think some of that might be short covering or other things that are happening there because if you look, Nike and Tesla are both down quite a bit on a one-year basis. You know, despite Tesla being up 60% plus over the past three months, it's down about 20% over the past year. Nike's down about 30% over the past year. And Tesla, if you went and looked at earnings estimates, anything, like they continue to come down. I'm just looking here. I've pulled up a 2006 EPS estimates.

You know, at the start of this year, people thought Tesla would earn $7 per share in 2006. That sounds to $450 right now. And it's actually come down. It went from $7 to about $5 at the start of this year. And it's actually continues to drift down to $450. So that's $2,026 EPS estimate. So, yeah, the stock price is up.

But it's hard for me to say, like, look at the fundamentals there and say this company's ripping. Like, they've had to reduce a lot of pricing. I think they're having a lot of troubles. And anyway, I just think it's really interesting to businesses that a lot of people have takes on that have somehow become the center of culture wars in some way, shape, or form. And one stock is ripping. One stock is kind of sold out or dropping. But if you looked at the fundamentals, it'd be hard for me to tell which was which and why.

So I just think the stock price driving narrative. Okay. Speaking of companies that can be at the center of the cultural world, you know, one thing. I've been researching. There have been a couple companies recently where they've had a CEO change. And I'm really interested in what I call the CEO was an idiot, but the CEO was removed companies, right? And I'm interested in two ways because if I told you that the company was getting run by a monkey and the monkey is getting replaced with a actual living, breathing human, you might say, oh, great, like that's a long, right? It's going to be an improvement.

And I don't know, you know, like the classic story here would be. Steve Ballmer at Microsoft. I mean, every terrible decision they could make, Microsoft was making under Steve Balmer. They replaced them and now the stock is on this incredible run. They're doing great. They're taking over the world. That's one example. But I also hear horror stories of, hey, the CEO was terrible. There was a proxy fight to replace him. The new guys come in. They hire this really incentivized management team. Everybody thinks they got great assets. And then they come in and the internal business is just an absolute shambles. It's an absolute horror story.

And, you know, the stock has gone from 10 to 5 under the prior management. New management comes in and all of a sudden they say, oh, my God, this is a disaster. And, you know, two years later, the stock's in the pennies or it's a disaster. And I, you know, both, I've seen both happens and I don't know how to identify one or the other. Like, I wish there was a trick. I really don't know. But I've looked at a lot of these companies where the CEO's been very. replaced recently. And from the outside, it's really hard to tell which is going to be which.

And I will be honestly, you really don't know. It's not until probably nine or 12 months later that you really start seeing the results. And the stock starts going up or down or you start realizing, oh my God, this turnaround isn't going to turn or this is a turnaround that I didn't realize even needed a turn. I just thought it was a poorly managed company. And I don't know. But it's one thing that's been on my mind, and increasingly, as we're seeing a lot of CEO turnovers across the board, I don't know how to diligence that or how to kind of express that risk, but it's something I've been looking at and thinking about a lot. Speaking of diligence, another thing that's been on my mind recently is diligent seeing

ideas that you don't like. You know, I wrote something the other month about how much I love energy drinks and how if I miss another energy drink stock that goes to the moon, I'm just going to have to. I don't know, flog myself or something, but one of the best pitches on the podcast that I've read this year was I had Devin on to talk about hate, which is a distributor of nicotine pouches, the dominant distributor in Europe, they're an upstart in the U.S. I think the company's really interesting. I have some really, really smart friends who are longer, and I just find the company really

difficult to underwrite, focus on, think about. And I think one of the reasons I find it so difficult is because I don't use nicotine. I've never used nicotine or tobacco. I have no plaintiffs to. And that's no judgment on people who do or who do. That's completely fine with me. You know, you're a new person. You can do whatever you want.

But because I've never used it, I have trouble like thinking about it building the mode out of my head. And maybe that's a failure of imagination on my point. But I don't know. I've talked to friends who have used, you know, Hap's product or Nico Kick is their online set in the U.S. They've generally spoken pretty highly of it, but it's just difficult when you're not the target demographic to diligence some of these things. And why am I saying this? The two places that I think are really interesting that I know a lot of investors spend a lot of time looking at and thinking of are dating products and video games.

And I just, every time I hear someone pitch it, I wonder. if they are able to diligence it. So let me get dating products. You know, a lot of investors are looking at Match right now. Match, for those who don't know, owns Match.com. They own Tinder. They own Hinge. Those are three of the biggest dating sites out there.

Starbird got involved with it recently. And if you read their deck, they basically say, hey, you're the dominant dating company and you're trading pretty cheaply. We want you to buy back shares and maybe go private if you can't figure this out. But they don't really have huge operational improvements. But, you know, match is interesting because the people who call me up who want to go longer and who are interested in it, I'll ask and I'll be like, hey, you know, how are you looking at the product? And they'll say, oh, you know, I've read some calls or I've seen some things about people dating online. And I just think it's dangerous. Like, if you're looking at a dating product and you're not using that product, it's kind of dating. A long time ago when my wife and I were just starting to date, we've been dating like six months. I was looking at the owner of a J-Dade. And I remember I told my wife, I was like, hey, I've got to download J-Date and see, like, how the product looks and feels. And that was received with, that had mixed signals and mixed reception, but, you know, you've got to download the product and at least look at it.

And a lot of the people I talk to, you know, most investors are not in their 20s anymore. They're in their 30s. They're in their 40s. They're in their 50s. They're married. They have kids. They're in serious relationships. You know, they're older than the target demographic for the most part of a dating product. And a lot of them, especially met their wives in person, IRL. as the kids would say. And if you never used a dating app or if you haven't used a dating app in five or seven years, you know, I think it's really tough to understand the dating product market. So, you know, you can read the 10K. You can hear how the company talks about it. But unless you're

actively using the product and out there kind of seeing how it works and seeing what the trends are, it's tough for me to say that you are the right person to go buy a dating product. I don't know if I'm thinking about that correctly or incorrectly because, you know, if I'm not flying to the moon, if I'm not flying defense jet fighters, am I the right person to buy Lockheed Martin or look at a defense contractor? Well, I would say, yeah, you can't be at a fighter jet pilot and buy Lockheed Martin, but it does feel like Lockheed Martin, them have a lot more lock-end than something like a dating product. So, anyway, that's one that I thought about, the other I thought about is video games. You know, I know a lot of investors love video game companies.

Nintendo is a ever-popular pitch among value investors. E.A. Take two. as a fantastic CEO. That's been a huge pitch. And I hear that there's, you know, I think you buy a video game for $60 and you might spend 500 hours inside the video game world. Like there's probably a lot of pricing power there. And the company has gotten increasingly good at this, you know, micromanization and subscriptions and all that. I get it. I get it. But I do wonder if you are not playing video games actively, if you're really the person to buy a video game product. Again, maybe this is the fighter jet product, but let me, let me give you one example, Square Enix, which owns Final Fantasy. And Final Fantasy was my favorite video game

running up, but they have Final Fantasy online. And I know a lot of people who pitch Square Enix. And when they talk, like, they say, hey, Final Fantasy online is worth the whole company. I'll say, okay, cool. Like, how do you track, how do you track engagement? And let's say, oh, well, you know, we look at all these statistics and stuff. And I don't know. Like, I feel like if you were an active Final Fantasy player, you would be able to tell if Final Fantasy Online was having an inflection up or down to the negative way before you could kind of see it if you were just following some statistics or something. I feel like wrestling, to give an example, I would hear from wrestling, France, hey, the product's getting kind of steal, hey, AEW is really

making inroads. And you would see that like six months before kind of the financial analyst would really pick up on it. So again, I don't know, but diligent in products that you're not into investing in companies that maybe the product isn't for you. It's just something on my mind I've been thinking about a lot. All right, we're running along. There are two more things I want to talk about. Speaking of diligence, alt data, you know, every time you buy, especially a consumer focus company these days, you will, if you talk about it with another investor, they will say, hey, what's the all data look like? What's the quarter look like? All this sort of stuff. Hey, I'm looking at buying retailer X and they'll say, ooh, retailer X, I've got credit card data that

says this quarter is going to be bad. Maybe you want to wait till the quarter comes, all this sort of stuff. And look, that's great. Knowing how the quarters look and thinking about that and you know, if the stock's at 10 and you really like it, but you know the quarter is going to miss and the stock's going to be at 8, you could buy, you know, 20% more of it if you can wait for the miss. Nobody wants to take a 20% drawdown. But I do wonder, you know, are there edge cases where the alt data is telling you something wrong and there's ways to take advantage of that? because, you know, alt data is getting so heavily used in quant models, things that I think are a little more unthinking, not, maybe not unthinking, but more rigid and rules-based. And I wonder if there are places where alt data is kind of failing and it's got a, it's got potential for a thoughtful value investor, someone who's really going to dig into it and think through it to do, do a lot of work and generate alpha.

So I'll just give one example. So you've got a company and, you know, it becomes clear from the alt data that analysts are estimating that sales are going to drop 5% and it becomes clear from the alt data that, no, sales are going to be down 10%. Obviously, that's pretty bad. Obviously, I say obviously in quotes, that's probably pretty bad. And the stock will probably drop on that quarter. But, you know, if every peer is seeing their sales go down 30% in that quarter, that company is taking enormous share. And I wonder if there's proof that the alt data is actually showing, hey, yes, the industry is really soft, but this company has discovered a better mousetrap, right? They are taking tons and tons of share. And if and when things flip, the stock is the stock, the company, whatever, is going to be a rocket ship because they're taking so much share. I don't know.

I don't have any firm examples of that. But that's just another thing I've thought of. It's just one example I've thought of where, hey, everybody's so focused on this quarterly, this monthly, this very short-term alt data. and, you know, I tend to take a longer-term focus. I tend to look more at the fundamentals, not be trading on quarters. And I've just been thinking of what are ways that individual investors with a longer-term focus can actually, you know, take the strength of all data and turn it into a weakness or use it against it. And that's one case.

Okay, last thing I want to talk about idea dinners. I co-hosted a really nice one last night, or not last night, last month. We had an absolutely awesome time. idea dinners can be kind of hit or miss but if you get the right group of people going it's really fun it can be really informative it can be refreshing the idea exchange you can get there is something different about having a group of you know four people come together and ask different questions and bring different angles about and again you need the right people and kind of the right mixes and stuff but it it can be a lot of fun it can be a lot of

really refreshing and i find if you've got the right group and you talk to the right people you know come to work a little bit more energized and refreshed the next day and just wanting to be a little bit better investor. So I'm always looking for ways I've mentioned a few times. I think we're going to do a yet another value podcast event in person at some point in the future. Hopefully I'll be able to talk to that more next month. But you know, always looking for new idea dinner types of things. So if anybody's got ideas, I don't know if I can host too many on the regular or if I can commit too many, but always looking for stuff like that. So if anybody's got networking ideas that they found have like kind of energized them as an

investor or anything, I'm open to them, whether pitching in to kind of help organize or just showing up and, you know, eating some appetizers and chatting. But just mentioning, you know, I think investing a lot of, it's very easy, particularly for value investors to fall into, hey, I, and I've certainly done this myself, hey, all I do is read 10Ks and earnings calls. And all I do is I'm a bookworm for 10 to, 14 hours a day, and that's it. And maybe that worked, I think Walter Schlaas famously, that's kind of what he did.

You know, dark room, no windows, just went and read and he'd buy companies in a book. But maybe that works. I don't know if that works as well in modern markets where I think computers have probably picked over most of the really easy quantative stuff. I think it's really helpful to go kind of talk to other people, make new connections, both connections in terms of people and connections in terms of mental connections of, oh, I never thought of applying an industrial lens to this retailer, but maybe that or that type of thing.

So anyway, this has been probably my most rambling of the monthly ramblings. I appreciate everyone listening. I look forward to, it is July. I look forward to seeing you guys kind of sometime mid-August as we wrap through summer with some more ramblings. And I'll try to maybe be a little bit more our focus because I feel like I was really rambling on this one. But appreciate everyone listening and looking forward to that. this episode is brought to you by tegis the future of investment research if you follow my newsletters you know that tegis is one of the things i use most often almost every post i have

has a some clip from an expert call or some quote from a management transcript that i've got off bmc that you know it's because of tegis that i've got access to all of that it's revolutionized how i get up to speed on new industries and companies i've been a happy subscriber of it for over three years now and i tell you i use probably every day I'm logging on to Tegas to look at an expert call transcript and I certainly know. I mean, my BMSCC, I'm glad that it's unlimited because I am looking at BMSEC all the time. I'm looking at my Google Chrome right now and I have 30 tabs open and I'd say 18 of them are from BMSEC.

So between Tegas and BAMSCC, I am a very devoted user here. Look, it's one platform where you can dive into expert call transcripts, management checks, panel calls, and detailed financial data. no more fragmented data sources or endless searching. TIGUS brings everything together, giving you a crystal clear view of the industries and companies that matter most. If you're ready to supercharge your research, visit tigis.com slash value. That's Tegus.com slash value.

Trust me, once you've experienced Tegis, you won't go back to your old way of doing research. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. please do your own work and consult a financial advisor. Thanks.