The Trump Economy, Interest Rates, Deficits, Supermarkets, and an Intriguing Value Stock
Summary
Election Impact: Markets priced in higher growth and rates with a sharp rally in regional banks and a notable move in the long end of the curve.
Event Driven: Expectation of a resurgence in M&A and spin-offs under a new administration, reviving classic event-driven playbooks.
Financials/Regional Banks: Discussion of stronger economy plus higher rates benefiting banks, but caution on boom-bust risks and policy whipsaws.
Energy/Fossil Fuels: Politicization implies a more supportive long-term backdrop for oil and coal despite policy swings between administrations.
Wireless Towers (AMT): Examination of Telecom Tower REITs economics, consolidation advantages, REIT structure, and technology obsolescence risks amid richer valuations.
Fair Isaac (FICO): A top-tier application software franchise trading near 100x earnings; excellent economics but significant multiple-compression risk.
Supermarkets (VLGEA, IMKTA, KR): Food retailers trade near/below reproduction value with solid cash generation; capital allocation and asset quality highlighted as key differentiators.
Seaboard (SEB): Deep value angle with shares below tangible book, cyclical commodity exposure, family control, limited disclosure, and potential for re-rating as earnings normalize.
Transcript
welcome welcome welcome how's everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff Ganon Jeff how's it going today it's going very well Andrew how's it going with you it's going great we hope it's going great with everybody else as well if this is the first time you are tuning in with us thank you so much for joining us be sure to check out all our content at Focus compound.com that we push out into the investing Universe you can go to our website hit that blog section uh to get access to investment writeups from Jeff going all the way back to 2005 if you want to stay up to date on everything that we push out into the investing Universe uh be sure to follow me on X at at focused compound um that's where I typically push everything out uh everything Focus compounding so uh be sure to follow me there and that's a good way to keep up with everything we're interested in and everything we're doing uh if you want to learn about our Money Management Services you can reach out to me at Andrea Focus compound.com or go to our website um and uh you'll get that uh special email info@ Focus compounding uh.com which will also come to me uh to learn more about everything that we are doing so in today's podcast Chef today's date is November 7th did something pretty big and meaningful happened a few days ago yes yes US presidential election so I want to get your thoughts on the election as it relates to the market okay we don't have to get political here but curious to hear your thoughts on a trump presidency obviously he was uh president in 2016 and you wrote a very interesting blog post after Trump was elected the first time about how you had thought the tax cuts were not baked into stocks so cous just and that proved to be true and a very good opportunity uh cous to hear your thoughts your view on a second Trump presidency how that could affect markets the economy perhaps interest rates he's even talking about he thinks he should control interest rates um you know what the implications are for us Equity markets and just your thoughts on that well stocks went up a lot uh Regional Banks basically went up the most yeah um so hangam was up like 15% yeah and long-term interest rates um moved a significant amount for they don't move that much each day usually so like 10 years something moved by a pretty significant amount um so I guess you could say markets expectations are higher growth higher interest rates for domestic type companies um um especially some of that could be nominal so they could be expecting more inflation uh higher deficits things like that but definitely domestically focused um smaller right I mean S&P 500 and NASDAQ actually were up a lot too but probably not as much as like Russell or something like that easier credit I was watching the Futures overnight and the Russell was up five six% at one point MH yeah I'd say a lot of banks were up 10 to 15% for no reason yeah and that's just baking in more growth what I don't know what it's baking in it's an odd uh thing to happen um so I I don't know I think it's probably it can't be very human driven and things like that those are incredible moves especially to have I mean he wasn't not favored he was maybe half chance that he would win half chance that he wouldn't would be about the extent of it but certainly I don't think there was any uh there was no I don't think anyone had predictions that the Democrats would be favored by a material amount in the election so at best it was a toss up um so and then other things that matter matter a lot Senate and House as far as we know haven't been much different than predictions the Republicans were definitely going to win the Senate the Democrats won't be competitive in the Senate till 2030 probably um if that but I mean they just mathematically they won't have a chance to take a majority in the Senate till at least then um and house the Republicans as far as we know didn't do that well for winning the presidency just like they didn't I mean the last three elections for the house the winning the party that's done better hasn't done particularly well so um four years ago the uh when Biden was elected the house result was really bad for the Democrats there wasn't much of a midterm Improvement at all for the Republicans after that and then uh and then same sort of thing here it just hasn't moved a lot for for four years or something so I mean it's pretty within the bounds of what should have been expected so if you're already pricing in some of that then those are amazing jump to have so I don't know mhhm what's the Playbook here I mean what if he takes corporate tax rates down to what's he talking about 15% it could increase the value of companies yeah not by a lot but yeah are you any what surprised or maybe not surprised is the right word but worried about deficits and all that sort of stuff I mean all I could think about at the last meeting was how much Buffett was talking about deficits and how it sounded like that's something that he was very worried about long-term for America yeah uh it's a yes so deficits there's different issues with the deficit and the debt that we could get into for political things or whatever things and we'll that and talk about the interest rate things it's so what people are mostly concerned about then would be interest rates on this podcast and it's a matter of supply and demand um as you run up debt overtime a government you vastly increase the amount of supply and then you just have to issue more and more every year so that you know that the supply will go up even with what we're talking about with the percentages here in terms of you now have yielding a meaningful amount so the question is just how much demand they'll be how much demand from the rest of the world to some extent if the world runs a trade imbalance with the United States and doesn't have anything you know China under consumes for instance so if it over produces and underc consumes it doesn't have a choice except to buy you something denominating Us doll and that's true for some other countries um and then there's also questions for you know if are other things unattractive too so you would buy bonds um so but at some point this if you're growing the supply all the time at some point unless the demand is growing all the time you run into a problem uh there's no doubt the supply will go up over time so yeah it's something like what a third of our debt is owned by other countries and those countries it seems like have been selling off treasuries for the past couple of years well one the size of the market is determined by the debtor so someone will own them no matter what two there's not much they can do um I mean you have to the reason that Japan years ago they're still a big holder but years ago was a huge holder China owns a lot is they don't have a choice they they're need us denominated assets because they're not consuming us denominated things um and they ran a trade IM balance with us so you know they can there are other things but they're not very big I mean you could own lots of some Commodities I mean you could own H you know I don't know if the United States will even let you buy things in the country for that much longer which would have been your other option uh that was a big one so you know you could buy lots of Assets in the United States and own them that may become less likely over time so yeah I've been worried since they started cutting interest rates long-term rates have just gone up and today like I said is November 7th and the FED is uh uh I mean there's like a 99% probability or something crazy like that that they're going to cut again and the economy just seems fine somewhat fine to me right and cutting into that I mean stocks are at alltime highs and when they first cut 50 basis points which by the way was the first time cutting 50 basis points that wasn't in a crisis situation MH the long end just took off and since then you've just seen rates uh step higher and I feel like our economy is so over levered especially at like a low 10year right so what if the 10e just continues to go higher and blow out I mean is the Fed GNA have to and again this is tin foil hat but you know you got to think about these things especially if you have exposure uh to interest rates in sort of a roundabout way but you know does fed are they going to be forced to do some sort of yield curve control like what happens then I mean historically that is incredibly inflationary and then you have a whole bunch of other issues as well so I don't really know what they're going to do but I do expect them to cut today and if they don't cut then you think people will be like well I guess the FED cut uh 50 basis points recently and be looked at as being too political now they're not cutting and it's just probably a route that they don't want to go so I do expect them to cut I think the market could expect them to cut something like 90 plus per. and it'll be interesting to see what the long end of the curve does um but my opinion I think you could see a scenario where the 10 year is way higher than where it's at currently so I don't know how how that flows through to stocks and everything but I mean the bonds are just melting away every single day basically they will be cutting and uh with Incredible favorable um overly loose Financial conditions into euphoric Market situation so which is you know not a good idea but they already said they'll do it so what's nominal GDP right now what is nomal GDP right now I mean I I could check predictions for what it is in the quarter we're in but it's probably two or 3% MH MH I mean sorry two or 3% real real so yeah so would make nominal probably like what five or six uh yeah depending on how you measure it yeah yeah and the 10 year being close to nominal GDP is Not Unusual that's my point history says the 10e should be at like five or six probably right track nominal GDP yes uh I I don't know how strong that theory is that's based on a very short number of years in a particular economy I think if we look longer term there's other things that matter um mainly that doesn't include a period where you had a high risk of uh poor the Creditor worthiness of the country is much lower than at any point that they're looking at for that um and then there's other factors that aren't usually taken into account by Economist such as demographic factors and things the median age of your population if you had a closed economy that you weren't trading with other countries and stuff should affect things like desire to hold things like that um I don't think that anyone has very good theories on what that should look like one thing I am excit go ahead go ahead no and then also um there there's just the issue that while that's true during that period inflation was higher than what they want you know if you're looking at when not when the 10year yield and nominal GDP were similar probably average close to 4% inflation during much of that period not two which is goal so that's something to keep in mind it's also to keep in mind with the past fed funds people mention average fed funds was 3 4% it's true in the long-term history of the series but it's also true that they overshot their inflation by more than 1% during that period one thing I am excited about is I think event driven investing in situations will probably come back into play m&a perhaps spin-offs stuff like that I think you saw a lot of that when Trump was uh presedent and uh a lot of stuff has been blocked with oh current Administration so maybe there'll be a lot more opportunity there um it funny actually Dan L I believe tweeted something out saying that like a picture of uh I can pull it up right now a picture of you could be a stock market genius and to read the book which I thought was uh aligned with my thought process ladies and gentlemen it is morning in America for event driven investing dust off your old copy of Joel green blads class classic uh so kind of excited about that but uh yeah it'll be interesting what do you think you know this whole drill baby drill do you think stuff like that affects energy and the price of oil and all of that we have some exposure to oil Buffett owns ocidental you know how do you think about that yeah longer term it affects it mostly because it's become politicized for carbon things and stuff like that so overtime oil and coal and things like that are are um better off than they were before because they became highly political issues where so there's I should say highly partisan issues so whereas previously there was more of a consensus on going away from fossil fuel things there won't be anymore which doesn't I mean it means policy will swing from Administration to Administration but it's not like a consistent consensus in the United States among politicians anymore so whereas it would have been you know 20 years ago or something with rates being where they're at and sort of just marching higher do you expect that to be a pretty good environment for banks then I mean you had mentioned the K Regional Bank index was up something like 14% you can make the case for okay strong economy plus higher interest rates does that flow through to Banks and uh is that going to be a good environment for them what's your thoughts on that I don't know I mean the the problem is that you know why you have crisis and stuff is not always because of what it looks like originally but the reaction to it which is why I would caution on these things if things go too far in a boom that actually increases the chance that you have a bust later on and so um you know the FED cutting rates is inconsistent with the kinds of reactions in the stock market and expectations for the future and stuff so you would overheat and then you would probably tighten too fast and you probably cause a crisis or something so that's the problem um the it's not like uh people aren't going to react to what they see happening they will so if things get too loose too fast and stuff then it can snap back the other way and that's what usually happens and the reverse was true too that's we've talked about the whole time with the soft laning the soft not soft laning but yeah soft Landing the perfectly setting it down is that the reason why the swings the Market are sometimes so violent is because it's not just that they have it has to be um to bring inflation down everything but also then has to be growth has to be good enough but not too good and you've seen that sometimes where the expectations overshot one way or the other probably the Market's expectation is Switched at one point from um there might be no Landing to there just coming in too hard you know yeah within a matter of six months or something so that's the that's the problem um yeah and then things like inflation and all that it takes some time to sustain much momentum in that so it could be a while before you realize that especially if when the fed you know and others make projections and everything they tend to be behind the curve then afterwards because they're surprised by that but they still keep putting in their projections even though the projections tend to be wrong over time while they're doing that and so they aren't necessarily just plotting the path that they see from actual results coming in but they keep saying we expect to come down we expect to come down and that can lead you to kind of take longer than you should so very interesting it's going to be uh very interesting four years I think there'll be a lot of opportunity which is good uh there's always opportunity in America so we're going to go over some questions that people had emailed in if you want to uh send in a question there's my email right there Andrew Focus compounding tocom if somebody says I'm a regular listener of your podcast and also professional investor given the name of your podcast and the fact that these companies have been solid wealth generators over the long term I'm wondering if you have looked at the publicly traded wireless tower companies I know they're somewhat larger cap than the typical companies you talk about I think there's an interesting question whether they're just in a temporary growth slowdown because their customers are reducing capex or whether they've saturated the market with towers and long-term growth going forward forward will be a lot lower than in the past so have you ever looked at any Wireless Towers uh not really of the big um Tower companies no so that's like American Tower and those I mean people know these stories of them I don't know you've probably heard PAB talk about this okay I think I think he tells a story about the CFO of one of the companies I could be wrong I'm not familiar what what did you say what's the story oh then I might be wrong basically he was saying you know no you're not you got a good memory his J was just sit there and wait till the phone rings and then you know um decide you know and then buy the the smaller operator you know that's that's selling them to them but basically it's consolidation of these things over time um which has worked out really well as opposed to like funeral homes or something which had a period that was good and then um slowed down so 10year kager total return about 10% on American Tower um which I believe a structures a Reit Now American Tower yeah okay so that that might you know that's the only thing to keep in mind then is that um yeah so let's see so operating profit yeah so I mean it's trading at 25 more than that times operating profit or something so yeah people expect a lot of growth into the future um we've covered this kind of thing in the past in that this is not my area of expertise and I would be uncomfortable in this kind of thing a telecom type stuff I don't really want to have much to do with you're putting up a lot of capital and then you don't know if the capital will be obsolete later because of some change in technology or something so we've talked about cable cowboy and everything that's great but if I live through it I probably would be cautious um about which technology would be successful and which one wouldn't and that you're spending tons of money to do this well John Malone strategy was to let the other people figure that out the new technology and then go from there right he was never the first mover in the space that way yeah um but so it it leads to I don't know if you want to call it somewhat monopolistic or whatever situations because you basically need space on towers and there's going to probably be a limited number of them and then also you have the difficulty of working together from companies either for antitrust reasons or just because they don't like each other so it's more economical to put several um carriers on the same Tower but carriers won't build their own Towers doing that kind of thing it's interesting that way it's sort of like um I don't know in the uh it's very rare but in the cruise line industry something there have been dry docks that are built to be shared by different companies because it's so uneconomical for a giant because you need a dry dock for a giant giant ship which there's only a few companies in the world that would have them but it does are you going to spend that just because you have a few ships or are you going to do it with someone else but if they don't get along too well then sometimes someone else has to build it capture all the profit from it right so um it's fine if you own a bunch of businesses like that seem like by economic theory they should work out like this what veras sign we've talked about talked about F when it wasn't trading at 100 times earnings or moody or uh whatever sorts of things um you know co-art right we've talked about that there's things that have natural advantages I think in terms of the way the economic setup is this one has more risk of Technology change over time possibly um and then some other ones have possibilities of uh of legal changes and things um I kind of thought you were kind of joking around why is FICO up why is it actually no it's 100 times earnings I thought you were kidding when you said that why is it uh 91 times EV to free cash flow and why is it up 76% year that was my point about the the banks I think we have to just accept that you know some things don't make sense did something happen what the it's been a momentum type driven thing for a long time now yeah I knew that but I thought you were kidding when you said 100 times earnings no it it's 100 times so if you look on a 12month basis this is trading at over a 100 times um so we're talking about so anyone not watching the video we're talking about Fair Isaac Foo here so we' moved on from the last topic um it's trading at 100 times Peak earnings yep that's the highest earnings they've ever had in their history it's trading at 100 times it so literally look at that on the screen 100.3 that is insanity it's about a 100 not yet but it's it would have to go up another 30% or something before but it would be a 100 bagger from where I bought it or something because you can tell because the stock hasn't split I believe since I bought it um but so it shows you that if you buy these things and just hold on that can work out if it you know the the um multiple they getting in the semiconductor business is that what it is well their earnings are probably very semiconductor looking at at this point but um we look at quick FS we can see this so um we can see how big their earnings have gone up recently yeah 10 year kager 40% 5year kager 44 3E 75 goodness yeah I mean look the problem here is uh so you can see their their operating profit is you know let's say quadruple the last 10 years or something much of that being the last 5 years and then a lot of that being very recently where you had the big expansion in the operating margin so operating margin went from you know 21 22% to doubling that to the 40s without movements and the other things and revenue growth has been very slow um you know it I think what was that it increased briefly before at the start of that period 2019 2020 by you know 12 16% but then since then has been in the 2 to 10% so right in line with the long-term 10e average like 7% um doesn't take Capital to run the business so they can return in all buying back stock is some of what they do which is not a good idea when your stocks trading 100 dim earnings but you know obviously they've bought back a lot of stock yeah yeah I mean more than their cash flow from operations uh yes yeah because they've had some debt recently whereas they didn't before yeah I did like it a lot 10 years ago when it was buying back what now looks like a small amount but it was buying using all of his cash flow from operations to buy back stock and as part of the appeal as I remember from the CEO who came in there where he had been before looking at that looking at whether they would really buy back stock in the past the company had kind of done an acquisition where they use shares and things so you were worried about that it was trading at you know 10 12 times free cash flow or something at the time um I mean but the problem here is what's the Enterprise Value or market cap on the company let's see market cap 49.2 billion price value 51.2 you know you're getting to where you're trading at almost 100 times cash flow from operations right because the cash flow from operations yeah the the the funny part about that Jeff is normally companies that trade at those valuations it's it almost seems like they're always like just these crappy companies or I don't know you could look at it right away be like yeah okay like huge bubble okay but it's like fico's like a a very legitimate business and you get that value is just something that I feel like doesn't the other uh way happens way more frequently than that you know what I'm saying yeah the there's or it's like oh Nvidia right total dressable Market infinite artificial intelligence infinite you know and then they they put the multip but it's like Fair Isaac it's such sort of a sleepy company you would think you know not sleepy returns though no uh and they've had very good growth in earnings recently now there are mathematical problems that come into there if your margins are 40 or 50% and you're growing Revenue by you know amounts like they've grown recently then you can't grow by that much more now they also disclose certain things in the filing for instance I my interpretation of what they said last year or something is I I think that they raised their price by more than their increase in their revenue is my guess so if you see Revenue growth of 10% or something effectively they put through price increases of high than that and the volume declined somewhat you know um so look that's great that's the kind of business you like that way but it's the problem of people can love seize candies and stuff but if it was publicly traded could this kind of thing happen to it at some point in the 7s or 80s or whatever when it was Raising prices like it was yeah I mean I think this is like the bank thing I don't understand this kind of thing when this happens I did live through the 2000s and this you know um the the 99 2000 kind of Boom period and this kind of thing could have you did have your coca-colas your gilletts your GES that you wouldn't think would get overpriced they're pretty understandable businesses but some of them started to go like this this is a little extreme even by those standards so yeah momentum people love these kinds of things I'm sure I mean it's a it's a really good business and it has a really strong position economically obviously um but it's hard to pay 100 times I mean the reason why this puts to the test kind of the Better Business buying better businesses you know instead of cheap ones what you have to ask yourself is okay you know we can talk about what the earnings are and trying to price all that out and do the math on it about kind of a DCF but the other way of looking at is just you can buy most people listening to this are going to put some of their money in stock so you're kind of going to pick one stock or another so you could say well what are the odds this thing goes from to 200 times PE okay versus goes to 50 which is more likely in different scenarios I mean at some point is it as likely that the PE goes from 100 to 25 as from 100 to 200 I don't know there's some scenarios in which there's not a huge difference between the odds that goes from 100 to 12 as 100 to 200 not a lot of businesses go to 200 times earnings when they kind of have earnings every year and all that it could happen for a brief period of time but you start to run a very dangerous risk reward when you pay these kinds of prices so what would you do if you still held it I mean high class problem they have but yeah I mean that's been a lose that's been a losing trade but it's like come on at some point you know what I'm saying 100 times earnings for a business like it is losing that's absolutely true it's a losing trade but you know the other thing will happen the other way which is they'll come a point where it will be years and years and years where it won't do well after that you know I'm sure Cisco or something was a losing trade for you know three years of being priced like this but then you were better off for 15 years if you'd sold or something like that probably um yeah I mean let's look at EV to sales and things like that on it just to give me an idea it's up 71% over the past says 044 of a year so I mean since what's that June it's crazy here's your e to sales 30.8 times yeah and I would say 10 is pushing it for a lot of companies so I mean they have great margins and the margins could go even higher but I just want to point out like at this point if you have 10% margins you can take them you know if you have 10% margins on like a a fixed basis on something that you're just doing a little better than even but internally in the business your gross profitability your marginal uh profit gross profitability is really really high then you can quintuple it it can happen it does happen in certain businesses um so if you looked at you know I don't know what it would be but like uh you know Amazon web services or something if it's like at the moment where it's breaking even to at the moment where it's highly profitable yeah you're you could 5x your your um margins within a period of years but you can't do that once you have the margins that they have because you have to flip it and say that the part that isn't your margin you know is your cost you can't bring it down by that amount um anymore because there's not that much remaining right if you look at it and you have a 5% margin 10% margin there's 95 90% of sales left to for you to take now there isn't there's one and a half times I mean there's two and a half times um but or I should say you could would you know if you had 100% margins that would be 2.5 times increase um if you're at 40% or something so there's just other things I mean in terms of you're pushing the earnings quality in all sorts of ways like I said with the cash flow from operations with whatever it it's not even the 100 times earnings although that is a lot uh it's that the those earnings are to me look genuinely like really what the earnings you're not in underway under you're not in any way understating those earnings if you look at things like sales if you look at the operating process we looked at the actual cash flow from operations on cash basis you know those things are really important to figure out if there's something odd going on here there isn't there are other companies that trade at 100 times sales there aren't a lot that trade at 100 times sales and that's a very good indicator of their actual um like uh expected earning power now you have there that the I guess the forward earnings is expect 75 times I put up the I just put up the NTM next 12 months and that's 75 so I'm like okay what are people baking into the price I mean clearly that earnings are going to go up a bunch how about far back does this chart go this is year to date I could go back I mean as long as you want well take it back take it back take it back 20 or so we could just see and if we can show people a multiple I think that will help if we do any of these yeah if we do one of these that's multiple based do you want to do so my screen zoomed in for recording would you prefer Eevee to sales or E to uh or Price earnings price to earnings or eeve to sales it doesn't matter to me either one it's fine okay let's just do Eevee to sales okay so we'll go back 20 years 2005 and the eeve to sales it looks like was three timesh and you said you bought it out of the financial crisis correct so we'll say yeah you go forward a little bit I don't remember I could figure out the exact timing but it was a period in which it went up about 100% in 12 months so it probably would have been maybe closer to 10 than nine so you have it at the bottom there March of 2009 is kind of the bottom for FICO as as well as all stocks sort of and then um it probably if you go forward another year to 18 months or something it took them a little while to come out of that but yeah looks like maybe one to two times sales is what you bought it at yeah that would be accurate yeah definitely it's crazy and then you can see how it really took off even pretty recently I mean before Co what was it right before Co looks like it was yeah so there you go nine times yeah so something can go from nine to to 30 like what happened here when we talk about stocks it's not like there's some magic thing about the 10 but then so what happens then is you think okay so was that a good purchase and everything and maybe the stock went up a lot so if you bought it then and held for five years and sold then you did really well if you don't ever sell then that's a question so it's like what they're baking in always curious about these sort of things if I could do that on here I mean even Revenue growth it's still not they're not baking in a lot well that's I mean that's high yeah for 100 times earnings let see yeah it's it's all EPS yeah so their EPS they're expecting 20 25% 20 yeah so what do we have there 21 25 23% is the EPS growth expected so MH that's crazy I'm gonna tweet this out I had no idea I was trading at a 100 times earnings that's bizarre yeah I'm not I'm not saying short the stock or something but I'm saying it these things are very expensive I don't know necessarily why they're as expensive as has happened with them it's kind of like when we talked about the cinear Marcus thing yeah that one's really shot back yeah I'm like did we out that price Discovery or what I don't even know but we didn't participate we were just talking about it because it just was baffling that way yeah but so why does one thing go up you know almost 100% in a year and one not so much there's possible explanations but I think there's just momentum into it and everything something like FICO is probably many people's favorite stock that they own I can understand that you know it's done really well for you as you own it you don't want to sell it it's really a monopoly you know let's let's be honest about it and it costs nothing right I mean they've moved in terms of the way that they charge for it and there's other things that have changed but when I originally bought it which we're talking about is you know closer to 15 years ago than 10 I did estimate that the scores business that they have had probably in excess of a 70% operating margin as best that I could tell they didn't break it out for you but if we pulled away everything else and the company was just that business it it you know would be 70% or so operating margin it maybe even a little higher less all the corporate costs and everything I didn't think that was particularly aggressive in assessing what that business is it's a it's one of the best business franchises in the world is their scores business but they had other things attached to it they had General and administrative costs and things and you know you would think if you ran like a pretty stable software business Capital light generates a ton of cash think of the names that we've spoken about on the podcast right you would that have very strong positions you would think that they would look at case studies like this and be like wow a lot of this is obviously growth from the business but you know Capital allocation too buying back a ton of stock over time you know I mean obvious we just call they're expecting eps to grow by 20 to 25% but there's still 20 years of doing the right things on the capital allocation front yeah and not and not yeah not issuing shares and all that stuff now I don't know if it's the right thing to buy back stock in the last couple of years which they've been doing but they didn't issue shares it would have been tempting for them to issue shares to acquire things at 150th of the price that the company eventually ended up at and even if I think the stock is vastly overpriced I you know I still would think that that would have been a really bad deal they giving away you know if we go back 10 15 years they'd be giving away 20 cents on the dollar or something for what their business was worth no there's no doubt when I bought it I thought it was worth you know three times or something what I was paying for it right so if I was saying I was paying you know that means I thought a free cash flow yield of 3% made sense or something in the long run yeah because you know in the very long run if they were if they business was strong and everything they would be able to track on a revenue basis something like nominal GDP which is they've done that they haven't wildly overperformed that but they've done that and they've been really good at all the other stuff there's also just other advantages to it in that if you're talking about things like price increases over time if you're talking about an intangibles heavy business it's usually easier to control costs and so you can be have more faith in cap allocation management whatever really being able to accomplish things because it's not the same as like opening new locations and adding headcount no matter how Ruthless People say they are and everything it's much harder to roll back headcount increases and things like that than it is to um have a business in which there's that's not a lot of what your business really is um so it's just funny we we've had the discussion of Costco at 50 times 55 times earnings like oh we wouldn't buy today maybe wouldn't sell it maybe you would and then uh FICO just says hold my beer you know yeah but like fico's at 100 now it was at like about 10 or something once at the bottom like we said certainly in terms of sales it's been at three times sales in 30 or whatever we just said so it's an unpleasant reality of investing in markets that you know on really great businesses certainly and sometimes on other kinds of businesses um you know 10x of a return or something could be due to expansion or contraction of the multiple you can own something it can do well and it can contract while you own it um both of those of course FICO we should like point this out more clearly you know there's probably a heavy economic aspect to that people's attitudes about well people's attitudes about what the they think credit well one would it go the other way though I don't know that they well they credit a lot of credit applications are good for FICO in the long run and uh a lot of inflation is good for FICO um more actual volume of credit decisions being made and uh higher pricing in general is always a benefit because what they're doing is taking a small percentage of what your business is basically for you to do this so it helps if it looks like a small number versus a big number and it helps if they do things to make it look like a small number that way and then they don't really have real assets and things to worry about the other way so this is a very unreal stock you know in terms of the unreal in terms of the business and every way so it it is yeah an overheated economy would be good for for FICO so you know if you could keep the economy running overheated all the time that this would be a good stock um that's probably why it was so bad back in let's say 2010 or something not just concerns about everything that happened with credit and all that but just that it could be really slow there was no inflation there was no growth credit could take an incredible long time to get back and now it feels like a different kind of world from that so crazy let's see somebody sent an email what will have a better return over the next five years build Supermarket or angles uh we can look on quick FS I my best guess would be Eng Les just because it's probably cheaper now but Village has gone up a bit so yeah it's probably up 50% not that long ago um yeah and here's the opposite here's a company that hasn't well EPs and stuff on paper look good because I don't know how it's probably the start time from that no that can't be right there's some miscalculation of the EPS thing um but here we have you know you've increased what a 50% or less let's say probably Village for people listening for Village yeah um on the other hand you know look it's selling for less than the reproduction value of the assets probably and angle definitely big time so you can see it's at like one times book it's at it's as to say four times iida six times ebit yeah I mean for free cash flow I think they're doing some meaningful cap XS we could check that uh I remember reading about what they were doing so that could be affecting it yeah yeah 63 million is very meaningful capex for them to do store you know building out of store and stuff I mean let's see uh um Ian building a supermarket is kind of some of the most expensive commercial real estate that you build out normally it has pretty high prices on it where they're building all that yeah I mean they're remodeling some things or expanding or moving some of the stores too that's all normal things though um I mean it's not that much different it's probably a little high I'd have to read the 10K and everything again to get an idea but it's actually if you adjust or what Co was before to what now is that probably gets you most of the way to that so if you have been spending between 35 and 55 million before I would guess that you now have to spend 63 million in nominal dollars because the inflation I think supermarkets are cheap as stocks generally I think people way under realize that you can't reproduce these assets for this you know um amount it would be for a competitor it would be easier to buy Engles or Village even at a premium um village is part of Co-op and stuff so there's a problem with that but it would be easier to buy entry that way than to to build it out yourself it'd be faster it' be cheaper you know you could probably pay a pretty big premium I don't know I mean I'd have to look carefully at Angles but I wouldn't be surprised if a 50% premium in a takeover price or something would be a way cheaper way to enter than trying to open competing things and then you wouldn't have the competition from them so um but this isn't unique to these businesses right we've talked about this before probably steel it's been easier in the United States for a long time to buy an existing steel um mill than to try to enter um relative to like the prices at the market has put on it at times so the market in essence lets it trade below reproduction value sometimes and I think both Village and angles are trading below reproduction value definitely what's interesting about that though is they make money every year so if an asset makes money every year should it really trade below what it would cost to produce the assets new right now you know um but let's look at their most recent I mean I think most of them have stepped up in terms of Returns on Capital since covid basically we look US capital angles I mean it's shot up obviously yeah and we can also use Roa or Roe because it's might capture it better in this case you know they they have leases and then they have debt you know and then so they own some outright this is a different situation in terms of what they each own so it's probably best to use something like that honestly okay yeah but you can see yeah so if angles their return on Equity was in the 10 to 15% range from 2014 to 2018 or something or 2019 and then Co bumped it up to 20 to over 20% but return on tangible capital is fine if you have a return on tangible Capital that's 8% or higher it's hard to see why you should always trade at Price to Book of less than one and they are trading at less than one right now um yeah actually I think it shows tangible assets per share at the bottom of that or maybe the bottom of the income statement I forget which one yeah it just priced a book oh yeah tangible asset right there tangible Book value so this is for Village so yeah so it's about $30 or something it shows there that's correct and so it's trading a bit above that now right it's trading you know 20% above that or something I think it's around $33 yeah and then um angles angles we have it saying that the um tangible Book value is $77 a sure and we're currently trading at 71 yeah um but you know when there was a period where there was concern about deflation and the grocery prices did deflate a little bit before covid for the first time in like 60 years or something um these stocks weren't so popular and everything they're pretty cheap though they're pretty cheap right now I mean how much are the stock the stocks can't they're not coming down so that means the earnings has to be going up even more I mean I do think villagers gone 50% within the last year year and a half or something probably it has to have so yeah okay so earnings basically doubled and I guess the the um stock did not double and that is that earnings from operation operational efficiency I mean you look at operating profit operating profit went up a bunch Revenue did not go up a bunch infation if you look Village like for instance Village if you look at the revenue on a real basis revenue is flat from 2018 to 2024 if you put in an inflation calculator to um billion 237 million and then asked what that would look like in nominal terms back in 2018 2019 uh it would look like that so it's it's just inflation yeah so which company do you think has a better fiveyear return potential Engles I think now it also has the ability to allocate more money in a way that you might not like that's very limited billage although Village did acquire stuff and and not they did two Acquisitions that weren't that great so they managed to do that they acquired something and then rebranded at a shop right in state that hadn't had shop rights historically Maryland and that didn't go that well and then they bought things kind of related to New York City too which was a different name than their own and that didn't really you know go that great either it was kind of competitive biding for that one too so they all can find some way to return some of the money I mean I I if you're going to sell me an existing Supermarket of either of these and promise that they want to do things with the capital I I would be very happy with either of these stocks the question is you know it's the same thing we talk about oil things or whatever there's lots of times where I would have been okay buying an oil company and didn't buy the stock because I didn't want what the oil company was uh management was probably going to allocate it to and I've been burned on that um and sometimes it works out even if that is the case if if the price is cheap enough in the future for the commodi is bright enough and everything but yeah you can buy I think you can buy supermarkets in the um stock market cheaper than you you can buy them by trying to go out there and buy them yourself or to build them so it's a cheaper way of entering the supermarket business if you want to um we could look at like competitors like Kroger and stuff to see what the multiple differences are in everything just to give people an idea Kroger's on the screen and Kroger is not really a better business I mean it's very it's very efficiently operated and there's some really strong things about it but it's locations aren't better it's you know any of that like it is not better than angles or or Village and you can see that in the record um it's a big stock a liquid stock and uh you know is operationally well done but the assets probably aren't as good as the the two companies we just looked at probably not across the whole board so you know some of it is on the Eid stuff of what it trades at the trades low for these um you know this is very Kroger six times and for the others what did we say four and five area yeah so they have low multiples you know yet Village and and Engles is at about four times zah some of that might be people thinking that that won't be sustained you know I'm a little less skeptical of that I think it's more likely it will be sustained for some period but and if it's not sustained then I don't know it's a different world than probably what you're pricing into other stocks they wouldn't do well if we went back what would be really really bad for these stocks if we went back to what we had in the you know last decade where like the internet things were growing but inflation was barely anything there wasn't a lot of growth and other real things um they there's a question about cash conversion but it's not terrible it's if you look at free cash flow divided into like ebit and stuff it's not that out of line with what um I mean the long-term averages if you look at that for any of these three companies it's not that out of line with what it is for businesses that that operate in the real world and and pay taxes like these companies do and all that um it looks pretty pretty normal um you know so if we do Eid whatever you kind of have to divide that to get another number but I mean yeah four times eaab which we were talking about before the other two yeah it's not like you're paying more than 10 times cash earnings or anything for him so like the free cash flow on average it'll be lumpy but it doesn't convert worse than that so I mean they're both pretty you could look at them both I I think I would make the decision more on which management and I liked and what they were saying about the future and all that than anything else probably because but in general if you like a business and it's pretty decent business if you can get it at less than at five times uh EBA do or less then you should be okay long term in it um and not worry which is kind of Cheaper let's talk about a stock that you had wanted to discuss on the podcast cboard Corporation why are you flagging what's what's uh tell us about this company and we could close up uh well Seaboard was on like valy investors club or something but it we just did the supermarket so it kind of plays into the same thing but this is a good example of something that is um pretty cheap and doesn't have a very good history um of Returns on Capital and all that um and you know but is in a period in which it's basically not making any money right now which sometimes can cause things like this to get very cheap um the company is probably best known I would assume to investors for its stock price although FICO also has a very high stock price but SEO hasn't split their stock in forever so it's like one of the most expensive stocks on New York Stock Exchange or something um they bought back some stock from the family at one point um and they they have when they've done that they haven't bought back at uh premiums and stuff so so that's helped with the price to to tangent Book value of it um we could check that what they say that is it's complicated a little bit with this company but if we look on the uh that will give you some idea of what I'm talking about is if we look at what the um tangible book value per share is here there you go so tangal Book value is uh 4,000,000 yeah so about 4,000 and it was let's 10 years ago it was 2,300 right uh per share the P the Share account numbers have changed a little bit so actually if I look at yeah not by that much so that's fine we can go with that so if we look at back at the stock price what we're saying is that basically this company is trading at a pretty big discount2 $2,700 a share versus um it's tangible Book value but also it's not trading that differently from what the tangible Book value was like 10 years ago right um so why is it like this one there's no promotion to the company at all so we should always keep that in mind it's a closely held company to some extent and it for a company this size um it doesn't communicate anything ever it's actually pretty secretive it looks like it's the cheapest the tangible Book value has really ever been according to Kin yeah it's very been a public trading company for a very long time so click on all or 20 years or something so we can see how long back this can go I'm actually reading a book right now called dynasties of the sea which sort of ties into I mean kind of I mean to this company uh so that's interesting that we brought it up but yeah okay so in 2000 it was very cheap which is my memory right on price to tangible how cheap did it go there looks like four yeah yeah so my memory of this stock in the very long term which could be wrong is that it generally trades uh in a way that won't be helpful to Value investors because it trades as a value stock inverse to Euphoria and growth and all that so at the moment at which it tends to hit a very low tangental Book value at moments in which value is really out of favor and then it tends to do well when value is in favor um I mean yeah and some of that is the businesses that it's in which can go over I don't think anyone would recognize any of the business except their part owner of Butterball you know the Turkey um brand yeah so but pork processing um there's some power generation things in it there's I mean there is a description in the quick FS that will give you exactly kind of what's in the 10K um total commodity things um but it was interesting because they they kind of lost money and stuff which is which can be really good for uh if it's a highly cyclical stock if you're buying on things like Price to Book or something because people will look at the PE and everything but they can get turned off now if you look at it right you pull it up on quick f f and you see this it's ugly enough that you might not really look into it any further yeah the Market's extrapolate so they take that Mo Money losing situation and kill the stock but for cyclicals obviously that could be an interesting time yeah I do not think it's particularly great competitive position of the markets that it's in and I think the markets are not good markets that it's in how much is the family owner of this company a lot but they just sold a lot so we let's see um where could I see that uh I can pull it up probably but it was a lot that they sold um let's see this would be uh was 75% something like that but they but I'm just trying to figure out where it says that how much they sold um I don't remember the date on which the sales took place and stuff but it was in the last year so it could definitely be that it's not updated in this um uh you know most recent filing for the the proxy and everything yeah so but that's another factor which means that as it gets really cheap which can be let's say that theoretically the the Insiders own 2third or three4 of the company or something right if that's true then you look at the um the market cap what are we down to now because when we drop that much 2.66 billion yeah so if you know when that happens that can mean that the actual float is 700 million or something you know um so and that doesn't sound like a big difference but then of course if you go back to where it was what it was five times the price to book back in the 2000 to 2010 period or 2000 now there's other reasons that people might not want to own this so one it's not liquid enough and all that two it doesn't give a lot of disclosures three family controlled for the kinds of businesses and aren't very attractive as businesses on top of that though they aren't the kinds of businesses that people want to hear that you're in and that the company is doing what it's doing so it also doesn't score very well on your like ESG type stuff I mean um you know some of the processing plants and stuff are going to you know um use a lot of very very low wage labor in in r random towns in out in the middle of nowhere that wasn't much of a town probably before they built a plant there and everything you know it's not wildly different than some of the things that Tyson or Pilgrim or something has either but they have a brand and everything to go with it um this definitely looks like an asset you would not want to hold it's more of a tradable asset I mean look at even over the past 20 years it's underperformed past 10 years it's gotone smoked just disgustingly underperformed yeah well if we look that that's possible I obviously in the very long-term history of the company it hasn't done that badly um but it doesn't have particularly good returns that's true um I'm not saying you can't make money I mean the point to buy is when it's at 0 five times tangible Book value kind of like where it's at right now but I do think there are some assets that you trade right on like maybe a two or three year basis and said you're like okay said it and forget it I wouldn't coffee can this no but we saw the problems of if you coffee can FICO it could go to 100 times PE too I mean that's a great that's the situation you want that is what I'm saying you're like okay 20 years this thing this is a yeah you can have you can have it go either way in terms of uh it's one of the first times in their history they've lost money I mean it's not a high credit risk uh stock nor I mean we we could look at like what the free cash flow has been over time and everything it owns the variety of different assets um that generally tend to be somewhat generative of cash yeah so you know you have high capb back spending and high Acquisitions sometimes that can cause you to not generate cash but as we saw cash flow from operations has been positive for a long time here I can't remember the last time that they had an operating loss I think that it has happened before um and you could look into exactly why that is it's driven by a few different commodity things I won't get into a long description of the company we could go quick so I could just say a few of the lines of what it does but there's a reason why I'm not describing that um it operates in many different places so this is the easiest way to say it it operates through six segments pork commodity trading and Milling Marine sugar and alcohol power and turkey but then in addition to that you have things like the the power segment is an independent power producer that generates electricity for the Grid in the Dominican rep public some of the other things are also related to each other um how they got into it so they talk about it's a terminal um you know so um uh I it it's I don't remember when we talked about this before but basically it is one of these where I don't know in the future if uh if if it will be priced high enough in public markets and stuff in the future but it might be like you know if we are in a world in which there's not a lot of active investing and not a lot of active investing is something that has a float this size and not trying to learn about a company that doesn't put out a lot of information now there's no reason the family can sell whenever they want to although they got a discounted price when they sell to back to the company um but you know it's it is one of these things that I think might have become less efficiently priced over time which is a interesting question to ask you know what causes people to recognize something might be too cheap and what to do about it since it's a control type situation that's probably a big part of what causes there not to be a lot of interest in looking at oh what would the assets be if we broke it up and that kind of thing do you ever think companies that own like this is one of those situations 70% right you said 75% something like that do you ever think to themselves like in a situation like this maybe we could just take it private I mean Hunter Douglas did that um I don't know and I do Wonder too if it's like could you could you could you think about okay so they own 75% which is a weird amount to own of a public company in my opinion right that that's a lot right and if you're looking at it could you be like are they ever going to buy back a ton of stock or do anything else do they want to continue to make their their ownership go up is that the plan I mean it just it's I don't know it's it's bizarre that way like why are these guys even public at this point well hun dougl have the same issue there's a few possible reasons right the biggest one is you'd have to buy other people out here's the problem who do you think owns the we don't know who owns the stock but who probably at any time owns the stock probably people who know that it's worth more than you know um but then there's also issues of if you've been public for this amount of time and stuff do you just go private doing this some do Hunter Doug has tried all sorts of things to to to get rid of shareholders um at lower prices because they tried opportunistic tenders over time to do it so yeah you can take advantage of people certainly if you own a large enough part of the the stock and especially like I said as as it becomes less active over time and all of that there's possibilities um but then there there's also the issues of like do you want to take it private for some reason I don't know you could if if your goal is to like just make a little more money I mean one thing from a family perspective or something one you have shares so I mean that's helpful really helpful in planning things and stuff I mean I think a lot of families that have a lot of money would benefit if they were publicly traded but owned almost all the public company um so that's really helpful there's a market that it creates for that that you can use you can basically exit anytime you want by having the company buy back your stock um even though like I said it's at a less attractive price and what does it matter to you if the stock languishes for long periods of time you could sell the whole company um it doesn't really matter to you you just don't care dayto day what the Stock's at but in the long run you would care to be able to exit and everything but what difference does it make sometimes it trades at three times tangible book sometimes at you know not three but like whatever we just saw two and a half times or something sometimes at half yeah um let's see it has um let's see uh I'm sure it's been written up in detail uh in detail on Valley investor Club more than once because this is not at all an obscure company in terms of people knowing about it it just doesn't put out a lot of information um I researched it a lot for um a long time ago and decided that I just didn't want to write it up yeah it would have been back in 200 [Music] in the 2009 to 2010 period um basically I decided that it was um too difficult to to write a good report about it I didn't decide that it wasn't a good company or wasn't something interesting to write about but it just wouldn't have enough sources I could site that would be confident and stuff but I did some research on things to find out more things about interview things that aren't from um the the public investors might not know about legal things that they've had problems with communities whatever so like I I looked into some stuff to figure out what they're really up to and everything um as far as this goes from 1993 to today the stock and the S&P are the same they they've had the same returns for the last 30 years or something so that was obviously because it did better in the 90s and then obviously your exit amount is important here so we don't know because I didn't check what the entry level point was but if you you know obviously if we the date that we have for exit is super significant here so I'm always cautious when telling people about look at the long-term stock chart because there's a tendency to think it's doing really well or really badly because of changes in the multiple this is I mean what's that uh let's see when is the S&P traded at higher prices to tangible book or EVD but I mean it's near some of the highest levels it's ever been at and this company is near some of the lowest levels it's ever been at so [Music] um obviously it's possible that that things could just improve if it you know reports some earnings in the future years um and has levels where it's almost um you know uh where basically it's losing it's losing money on an operating basis right now it's reporting no earnings and then if it reported some earnings it would do better maybe I just don't know if there'll ever be much interest in this kind of stock in the future unless you know how the market works and stuff changes um kind of like what I was saying is you know Marcus's family control company or whatever would there really be a change at some point people might just assume that it would trade more in line with cinear but you kind of have to have enough people believe that and bet on that and believe that other people will believe that even if no one ultimately believes that they're all betting on other people believing it maybe it'll still happen um I follow all those company all those theater stock they all just sort of move at the same like they all move together iMac Cinemark Marcus a few others yeah and the banks uh like we talked about all moved a huge amount in one day because it didn't matter if it was Frost or hangam or whatever they're very different in terms of future for things but they all move together they're all in the same sort of category that way what's interesting about these I think for the future with like a seaboard is like um I do wonder about the ones that what group is this in like I mean for industry purposes this is are they putting it in this is labeled as food it is so it's the middle of the chain in food that's correct commodity it's a commodity food so what you're dealing with even where they talk about the pork and all those things it's commodity food products and it's really in the middle of the chain um so it that's something that I don't know like yeah it's consumer staple sector right that's what it says there which is crazy when you look at what they're actually in so they're very driven by commodity prices not by the price of the end user um yeah but I do Wonder like will people seek out a company like this learn about it write it up so I said it because I believe I it was written up on Valley investors club which just stood out to me way back not not recently I mean this year but not recently um yeah it was written up in July so and it wasn't some huge detailed um description of it or something but it was interesting to me that it was was actually written up and they went into things like the ownership and all of that um they did make the point okay so it was mid 2023 so this so when I cited that before [Music] um it was mid 2023 that they did the transaction so this is helpful that's including the value invest just write up in mid 2023 the company repurchased 20% of the family stake which was 16% of shares outstanding so they own 75% a 14% discount to the market price and 24% discount tangible book um they did a similar transaction in 2002 the company repurchased 15 shares 15% of shares outstanding at $22 so like you know obviously it's gone up a lot since then which was also at 60% of Book value and within three years Book value doubled and so um it I don't know because there the information going back that you could find out on the company to me kind of predates what current management and stuff is you can read the valy investors Club thing to get some ideas about who died and who inherited things and all that but you're kind of assuming that something the last things that we got much communication to have philosophy about things are like 15 years ago so you're just assuming that because people happen to have the same family name they're going to do the same sort of things um cool well I want to thank everybody so much for tuning in with the both of us on the focus compounding podcast if you have a question you would like for us to go over email it to me at Android Focus compound.com if you're interested in learning more about our Money Management Services reach out to me via email and of course be sure to hit the Subscribe button wherever you're watching or listening to us here today I want to thank everybody so much for all the support that you've shown to focus compounding over the years and we will see you in the next podcast take care
The Trump Economy, Interest Rates, Deficits, Supermarkets, and an Intriguing Value Stock
Summary
Transcript
welcome welcome welcome how's everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff Ganon Jeff how's it going today it's going very well Andrew how's it going with you it's going great we hope it's going great with everybody else as well if this is the first time you are tuning in with us thank you so much for joining us be sure to check out all our content at Focus compound.com that we push out into the investing Universe you can go to our website hit that blog section uh to get access to investment writeups from Jeff going all the way back to 2005 if you want to stay up to date on everything that we push out into the investing Universe uh be sure to follow me on X at at focused compound um that's where I typically push everything out uh everything Focus compounding so uh be sure to follow me there and that's a good way to keep up with everything we're interested in and everything we're doing uh if you want to learn about our Money Management Services you can reach out to me at Andrea Focus compound.com or go to our website um and uh you'll get that uh special email info@ Focus compounding uh.com which will also come to me uh to learn more about everything that we are doing so in today's podcast Chef today's date is November 7th did something pretty big and meaningful happened a few days ago yes yes US presidential election so I want to get your thoughts on the election as it relates to the market okay we don't have to get political here but curious to hear your thoughts on a trump presidency obviously he was uh president in 2016 and you wrote a very interesting blog post after Trump was elected the first time about how you had thought the tax cuts were not baked into stocks so cous just and that proved to be true and a very good opportunity uh cous to hear your thoughts your view on a second Trump presidency how that could affect markets the economy perhaps interest rates he's even talking about he thinks he should control interest rates um you know what the implications are for us Equity markets and just your thoughts on that well stocks went up a lot uh Regional Banks basically went up the most yeah um so hangam was up like 15% yeah and long-term interest rates um moved a significant amount for they don't move that much each day usually so like 10 years something moved by a pretty significant amount um so I guess you could say markets expectations are higher growth higher interest rates for domestic type companies um um especially some of that could be nominal so they could be expecting more inflation uh higher deficits things like that but definitely domestically focused um smaller right I mean S&P 500 and NASDAQ actually were up a lot too but probably not as much as like Russell or something like that easier credit I was watching the Futures overnight and the Russell was up five six% at one point MH yeah I'd say a lot of banks were up 10 to 15% for no reason yeah and that's just baking in more growth what I don't know what it's baking in it's an odd uh thing to happen um so I I don't know I think it's probably it can't be very human driven and things like that those are incredible moves especially to have I mean he wasn't not favored he was maybe half chance that he would win half chance that he wouldn't would be about the extent of it but certainly I don't think there was any uh there was no I don't think anyone had predictions that the Democrats would be favored by a material amount in the election so at best it was a toss up um so and then other things that matter matter a lot Senate and House as far as we know haven't been much different than predictions the Republicans were definitely going to win the Senate the Democrats won't be competitive in the Senate till 2030 probably um if that but I mean they just mathematically they won't have a chance to take a majority in the Senate till at least then um and house the Republicans as far as we know didn't do that well for winning the presidency just like they didn't I mean the last three elections for the house the winning the party that's done better hasn't done particularly well so um four years ago the uh when Biden was elected the house result was really bad for the Democrats there wasn't much of a midterm Improvement at all for the Republicans after that and then uh and then same sort of thing here it just hasn't moved a lot for for four years or something so I mean it's pretty within the bounds of what should have been expected so if you're already pricing in some of that then those are amazing jump to have so I don't know mhhm what's the Playbook here I mean what if he takes corporate tax rates down to what's he talking about 15% it could increase the value of companies yeah not by a lot but yeah are you any what surprised or maybe not surprised is the right word but worried about deficits and all that sort of stuff I mean all I could think about at the last meeting was how much Buffett was talking about deficits and how it sounded like that's something that he was very worried about long-term for America yeah uh it's a yes so deficits there's different issues with the deficit and the debt that we could get into for political things or whatever things and we'll that and talk about the interest rate things it's so what people are mostly concerned about then would be interest rates on this podcast and it's a matter of supply and demand um as you run up debt overtime a government you vastly increase the amount of supply and then you just have to issue more and more every year so that you know that the supply will go up even with what we're talking about with the percentages here in terms of you now have yielding a meaningful amount so the question is just how much demand they'll be how much demand from the rest of the world to some extent if the world runs a trade imbalance with the United States and doesn't have anything you know China under consumes for instance so if it over produces and underc consumes it doesn't have a choice except to buy you something denominating Us doll and that's true for some other countries um and then there's also questions for you know if are other things unattractive too so you would buy bonds um so but at some point this if you're growing the supply all the time at some point unless the demand is growing all the time you run into a problem uh there's no doubt the supply will go up over time so yeah it's something like what a third of our debt is owned by other countries and those countries it seems like have been selling off treasuries for the past couple of years well one the size of the market is determined by the debtor so someone will own them no matter what two there's not much they can do um I mean you have to the reason that Japan years ago they're still a big holder but years ago was a huge holder China owns a lot is they don't have a choice they they're need us denominated assets because they're not consuming us denominated things um and they ran a trade IM balance with us so you know they can there are other things but they're not very big I mean you could own lots of some Commodities I mean you could own H you know I don't know if the United States will even let you buy things in the country for that much longer which would have been your other option uh that was a big one so you know you could buy lots of Assets in the United States and own them that may become less likely over time so yeah I've been worried since they started cutting interest rates long-term rates have just gone up and today like I said is November 7th and the FED is uh uh I mean there's like a 99% probability or something crazy like that that they're going to cut again and the economy just seems fine somewhat fine to me right and cutting into that I mean stocks are at alltime highs and when they first cut 50 basis points which by the way was the first time cutting 50 basis points that wasn't in a crisis situation MH the long end just took off and since then you've just seen rates uh step higher and I feel like our economy is so over levered especially at like a low 10year right so what if the 10e just continues to go higher and blow out I mean is the Fed GNA have to and again this is tin foil hat but you know you got to think about these things especially if you have exposure uh to interest rates in sort of a roundabout way but you know does fed are they going to be forced to do some sort of yield curve control like what happens then I mean historically that is incredibly inflationary and then you have a whole bunch of other issues as well so I don't really know what they're going to do but I do expect them to cut today and if they don't cut then you think people will be like well I guess the FED cut uh 50 basis points recently and be looked at as being too political now they're not cutting and it's just probably a route that they don't want to go so I do expect them to cut I think the market could expect them to cut something like 90 plus per. and it'll be interesting to see what the long end of the curve does um but my opinion I think you could see a scenario where the 10 year is way higher than where it's at currently so I don't know how how that flows through to stocks and everything but I mean the bonds are just melting away every single day basically they will be cutting and uh with Incredible favorable um overly loose Financial conditions into euphoric Market situation so which is you know not a good idea but they already said they'll do it so what's nominal GDP right now what is nomal GDP right now I mean I I could check predictions for what it is in the quarter we're in but it's probably two or 3% MH MH I mean sorry two or 3% real real so yeah so would make nominal probably like what five or six uh yeah depending on how you measure it yeah yeah and the 10 year being close to nominal GDP is Not Unusual that's my point history says the 10e should be at like five or six probably right track nominal GDP yes uh I I don't know how strong that theory is that's based on a very short number of years in a particular economy I think if we look longer term there's other things that matter um mainly that doesn't include a period where you had a high risk of uh poor the Creditor worthiness of the country is much lower than at any point that they're looking at for that um and then there's other factors that aren't usually taken into account by Economist such as demographic factors and things the median age of your population if you had a closed economy that you weren't trading with other countries and stuff should affect things like desire to hold things like that um I don't think that anyone has very good theories on what that should look like one thing I am excit go ahead go ahead no and then also um there there's just the issue that while that's true during that period inflation was higher than what they want you know if you're looking at when not when the 10year yield and nominal GDP were similar probably average close to 4% inflation during much of that period not two which is goal so that's something to keep in mind it's also to keep in mind with the past fed funds people mention average fed funds was 3 4% it's true in the long-term history of the series but it's also true that they overshot their inflation by more than 1% during that period one thing I am excited about is I think event driven investing in situations will probably come back into play m&a perhaps spin-offs stuff like that I think you saw a lot of that when Trump was uh presedent and uh a lot of stuff has been blocked with oh current Administration so maybe there'll be a lot more opportunity there um it funny actually Dan L I believe tweeted something out saying that like a picture of uh I can pull it up right now a picture of you could be a stock market genius and to read the book which I thought was uh aligned with my thought process ladies and gentlemen it is morning in America for event driven investing dust off your old copy of Joel green blads class classic uh so kind of excited about that but uh yeah it'll be interesting what do you think you know this whole drill baby drill do you think stuff like that affects energy and the price of oil and all of that we have some exposure to oil Buffett owns ocidental you know how do you think about that yeah longer term it affects it mostly because it's become politicized for carbon things and stuff like that so overtime oil and coal and things like that are are um better off than they were before because they became highly political issues where so there's I should say highly partisan issues so whereas previously there was more of a consensus on going away from fossil fuel things there won't be anymore which doesn't I mean it means policy will swing from Administration to Administration but it's not like a consistent consensus in the United States among politicians anymore so whereas it would have been you know 20 years ago or something with rates being where they're at and sort of just marching higher do you expect that to be a pretty good environment for banks then I mean you had mentioned the K Regional Bank index was up something like 14% you can make the case for okay strong economy plus higher interest rates does that flow through to Banks and uh is that going to be a good environment for them what's your thoughts on that I don't know I mean the the problem is that you know why you have crisis and stuff is not always because of what it looks like originally but the reaction to it which is why I would caution on these things if things go too far in a boom that actually increases the chance that you have a bust later on and so um you know the FED cutting rates is inconsistent with the kinds of reactions in the stock market and expectations for the future and stuff so you would overheat and then you would probably tighten too fast and you probably cause a crisis or something so that's the problem um the it's not like uh people aren't going to react to what they see happening they will so if things get too loose too fast and stuff then it can snap back the other way and that's what usually happens and the reverse was true too that's we've talked about the whole time with the soft laning the soft not soft laning but yeah soft Landing the perfectly setting it down is that the reason why the swings the Market are sometimes so violent is because it's not just that they have it has to be um to bring inflation down everything but also then has to be growth has to be good enough but not too good and you've seen that sometimes where the expectations overshot one way or the other probably the Market's expectation is Switched at one point from um there might be no Landing to there just coming in too hard you know yeah within a matter of six months or something so that's the that's the problem um yeah and then things like inflation and all that it takes some time to sustain much momentum in that so it could be a while before you realize that especially if when the fed you know and others make projections and everything they tend to be behind the curve then afterwards because they're surprised by that but they still keep putting in their projections even though the projections tend to be wrong over time while they're doing that and so they aren't necessarily just plotting the path that they see from actual results coming in but they keep saying we expect to come down we expect to come down and that can lead you to kind of take longer than you should so very interesting it's going to be uh very interesting four years I think there'll be a lot of opportunity which is good uh there's always opportunity in America so we're going to go over some questions that people had emailed in if you want to uh send in a question there's my email right there Andrew Focus compounding tocom if somebody says I'm a regular listener of your podcast and also professional investor given the name of your podcast and the fact that these companies have been solid wealth generators over the long term I'm wondering if you have looked at the publicly traded wireless tower companies I know they're somewhat larger cap than the typical companies you talk about I think there's an interesting question whether they're just in a temporary growth slowdown because their customers are reducing capex or whether they've saturated the market with towers and long-term growth going forward forward will be a lot lower than in the past so have you ever looked at any Wireless Towers uh not really of the big um Tower companies no so that's like American Tower and those I mean people know these stories of them I don't know you've probably heard PAB talk about this okay I think I think he tells a story about the CFO of one of the companies I could be wrong I'm not familiar what what did you say what's the story oh then I might be wrong basically he was saying you know no you're not you got a good memory his J was just sit there and wait till the phone rings and then you know um decide you know and then buy the the smaller operator you know that's that's selling them to them but basically it's consolidation of these things over time um which has worked out really well as opposed to like funeral homes or something which had a period that was good and then um slowed down so 10year kager total return about 10% on American Tower um which I believe a structures a Reit Now American Tower yeah okay so that that might you know that's the only thing to keep in mind then is that um yeah so let's see so operating profit yeah so I mean it's trading at 25 more than that times operating profit or something so yeah people expect a lot of growth into the future um we've covered this kind of thing in the past in that this is not my area of expertise and I would be uncomfortable in this kind of thing a telecom type stuff I don't really want to have much to do with you're putting up a lot of capital and then you don't know if the capital will be obsolete later because of some change in technology or something so we've talked about cable cowboy and everything that's great but if I live through it I probably would be cautious um about which technology would be successful and which one wouldn't and that you're spending tons of money to do this well John Malone strategy was to let the other people figure that out the new technology and then go from there right he was never the first mover in the space that way yeah um but so it it leads to I don't know if you want to call it somewhat monopolistic or whatever situations because you basically need space on towers and there's going to probably be a limited number of them and then also you have the difficulty of working together from companies either for antitrust reasons or just because they don't like each other so it's more economical to put several um carriers on the same Tower but carriers won't build their own Towers doing that kind of thing it's interesting that way it's sort of like um I don't know in the uh it's very rare but in the cruise line industry something there have been dry docks that are built to be shared by different companies because it's so uneconomical for a giant because you need a dry dock for a giant giant ship which there's only a few companies in the world that would have them but it does are you going to spend that just because you have a few ships or are you going to do it with someone else but if they don't get along too well then sometimes someone else has to build it capture all the profit from it right so um it's fine if you own a bunch of businesses like that seem like by economic theory they should work out like this what veras sign we've talked about talked about F when it wasn't trading at 100 times earnings or moody or uh whatever sorts of things um you know co-art right we've talked about that there's things that have natural advantages I think in terms of the way the economic setup is this one has more risk of Technology change over time possibly um and then some other ones have possibilities of uh of legal changes and things um I kind of thought you were kind of joking around why is FICO up why is it actually no it's 100 times earnings I thought you were kidding when you said that why is it uh 91 times EV to free cash flow and why is it up 76% year that was my point about the the banks I think we have to just accept that you know some things don't make sense did something happen what the it's been a momentum type driven thing for a long time now yeah I knew that but I thought you were kidding when you said 100 times earnings no it it's 100 times so if you look on a 12month basis this is trading at over a 100 times um so we're talking about so anyone not watching the video we're talking about Fair Isaac Foo here so we' moved on from the last topic um it's trading at 100 times Peak earnings yep that's the highest earnings they've ever had in their history it's trading at 100 times it so literally look at that on the screen 100.3 that is insanity it's about a 100 not yet but it's it would have to go up another 30% or something before but it would be a 100 bagger from where I bought it or something because you can tell because the stock hasn't split I believe since I bought it um but so it shows you that if you buy these things and just hold on that can work out if it you know the the um multiple they getting in the semiconductor business is that what it is well their earnings are probably very semiconductor looking at at this point but um we look at quick FS we can see this so um we can see how big their earnings have gone up recently yeah 10 year kager 40% 5year kager 44 3E 75 goodness yeah I mean look the problem here is uh so you can see their their operating profit is you know let's say quadruple the last 10 years or something much of that being the last 5 years and then a lot of that being very recently where you had the big expansion in the operating margin so operating margin went from you know 21 22% to doubling that to the 40s without movements and the other things and revenue growth has been very slow um you know it I think what was that it increased briefly before at the start of that period 2019 2020 by you know 12 16% but then since then has been in the 2 to 10% so right in line with the long-term 10e average like 7% um doesn't take Capital to run the business so they can return in all buying back stock is some of what they do which is not a good idea when your stocks trading 100 dim earnings but you know obviously they've bought back a lot of stock yeah yeah I mean more than their cash flow from operations uh yes yeah because they've had some debt recently whereas they didn't before yeah I did like it a lot 10 years ago when it was buying back what now looks like a small amount but it was buying using all of his cash flow from operations to buy back stock and as part of the appeal as I remember from the CEO who came in there where he had been before looking at that looking at whether they would really buy back stock in the past the company had kind of done an acquisition where they use shares and things so you were worried about that it was trading at you know 10 12 times free cash flow or something at the time um I mean but the problem here is what's the Enterprise Value or market cap on the company let's see market cap 49.2 billion price value 51.2 you know you're getting to where you're trading at almost 100 times cash flow from operations right because the cash flow from operations yeah the the the funny part about that Jeff is normally companies that trade at those valuations it's it almost seems like they're always like just these crappy companies or I don't know you could look at it right away be like yeah okay like huge bubble okay but it's like fico's like a a very legitimate business and you get that value is just something that I feel like doesn't the other uh way happens way more frequently than that you know what I'm saying yeah the there's or it's like oh Nvidia right total dressable Market infinite artificial intelligence infinite you know and then they they put the multip but it's like Fair Isaac it's such sort of a sleepy company you would think you know not sleepy returns though no uh and they've had very good growth in earnings recently now there are mathematical problems that come into there if your margins are 40 or 50% and you're growing Revenue by you know amounts like they've grown recently then you can't grow by that much more now they also disclose certain things in the filing for instance I my interpretation of what they said last year or something is I I think that they raised their price by more than their increase in their revenue is my guess so if you see Revenue growth of 10% or something effectively they put through price increases of high than that and the volume declined somewhat you know um so look that's great that's the kind of business you like that way but it's the problem of people can love seize candies and stuff but if it was publicly traded could this kind of thing happen to it at some point in the 7s or 80s or whatever when it was Raising prices like it was yeah I mean I think this is like the bank thing I don't understand this kind of thing when this happens I did live through the 2000s and this you know um the the 99 2000 kind of Boom period and this kind of thing could have you did have your coca-colas your gilletts your GES that you wouldn't think would get overpriced they're pretty understandable businesses but some of them started to go like this this is a little extreme even by those standards so yeah momentum people love these kinds of things I'm sure I mean it's a it's a really good business and it has a really strong position economically obviously um but it's hard to pay 100 times I mean the reason why this puts to the test kind of the Better Business buying better businesses you know instead of cheap ones what you have to ask yourself is okay you know we can talk about what the earnings are and trying to price all that out and do the math on it about kind of a DCF but the other way of looking at is just you can buy most people listening to this are going to put some of their money in stock so you're kind of going to pick one stock or another so you could say well what are the odds this thing goes from to 200 times PE okay versus goes to 50 which is more likely in different scenarios I mean at some point is it as likely that the PE goes from 100 to 25 as from 100 to 200 I don't know there's some scenarios in which there's not a huge difference between the odds that goes from 100 to 12 as 100 to 200 not a lot of businesses go to 200 times earnings when they kind of have earnings every year and all that it could happen for a brief period of time but you start to run a very dangerous risk reward when you pay these kinds of prices so what would you do if you still held it I mean high class problem they have but yeah I mean that's been a lose that's been a losing trade but it's like come on at some point you know what I'm saying 100 times earnings for a business like it is losing that's absolutely true it's a losing trade but you know the other thing will happen the other way which is they'll come a point where it will be years and years and years where it won't do well after that you know I'm sure Cisco or something was a losing trade for you know three years of being priced like this but then you were better off for 15 years if you'd sold or something like that probably um yeah I mean let's look at EV to sales and things like that on it just to give me an idea it's up 71% over the past says 044 of a year so I mean since what's that June it's crazy here's your e to sales 30.8 times yeah and I would say 10 is pushing it for a lot of companies so I mean they have great margins and the margins could go even higher but I just want to point out like at this point if you have 10% margins you can take them you know if you have 10% margins on like a a fixed basis on something that you're just doing a little better than even but internally in the business your gross profitability your marginal uh profit gross profitability is really really high then you can quintuple it it can happen it does happen in certain businesses um so if you looked at you know I don't know what it would be but like uh you know Amazon web services or something if it's like at the moment where it's breaking even to at the moment where it's highly profitable yeah you're you could 5x your your um margins within a period of years but you can't do that once you have the margins that they have because you have to flip it and say that the part that isn't your margin you know is your cost you can't bring it down by that amount um anymore because there's not that much remaining right if you look at it and you have a 5% margin 10% margin there's 95 90% of sales left to for you to take now there isn't there's one and a half times I mean there's two and a half times um but or I should say you could would you know if you had 100% margins that would be 2.5 times increase um if you're at 40% or something so there's just other things I mean in terms of you're pushing the earnings quality in all sorts of ways like I said with the cash flow from operations with whatever it it's not even the 100 times earnings although that is a lot uh it's that the those earnings are to me look genuinely like really what the earnings you're not in underway under you're not in any way understating those earnings if you look at things like sales if you look at the operating process we looked at the actual cash flow from operations on cash basis you know those things are really important to figure out if there's something odd going on here there isn't there are other companies that trade at 100 times sales there aren't a lot that trade at 100 times sales and that's a very good indicator of their actual um like uh expected earning power now you have there that the I guess the forward earnings is expect 75 times I put up the I just put up the NTM next 12 months and that's 75 so I'm like okay what are people baking into the price I mean clearly that earnings are going to go up a bunch how about far back does this chart go this is year to date I could go back I mean as long as you want well take it back take it back take it back 20 or so we could just see and if we can show people a multiple I think that will help if we do any of these yeah if we do one of these that's multiple based do you want to do so my screen zoomed in for recording would you prefer Eevee to sales or E to uh or Price earnings price to earnings or eeve to sales it doesn't matter to me either one it's fine okay let's just do Eevee to sales okay so we'll go back 20 years 2005 and the eeve to sales it looks like was three timesh and you said you bought it out of the financial crisis correct so we'll say yeah you go forward a little bit I don't remember I could figure out the exact timing but it was a period in which it went up about 100% in 12 months so it probably would have been maybe closer to 10 than nine so you have it at the bottom there March of 2009 is kind of the bottom for FICO as as well as all stocks sort of and then um it probably if you go forward another year to 18 months or something it took them a little while to come out of that but yeah looks like maybe one to two times sales is what you bought it at yeah that would be accurate yeah definitely it's crazy and then you can see how it really took off even pretty recently I mean before Co what was it right before Co looks like it was yeah so there you go nine times yeah so something can go from nine to to 30 like what happened here when we talk about stocks it's not like there's some magic thing about the 10 but then so what happens then is you think okay so was that a good purchase and everything and maybe the stock went up a lot so if you bought it then and held for five years and sold then you did really well if you don't ever sell then that's a question so it's like what they're baking in always curious about these sort of things if I could do that on here I mean even Revenue growth it's still not they're not baking in a lot well that's I mean that's high yeah for 100 times earnings let see yeah it's it's all EPS yeah so their EPS they're expecting 20 25% 20 yeah so what do we have there 21 25 23% is the EPS growth expected so MH that's crazy I'm gonna tweet this out I had no idea I was trading at a 100 times earnings that's bizarre yeah I'm not I'm not saying short the stock or something but I'm saying it these things are very expensive I don't know necessarily why they're as expensive as has happened with them it's kind of like when we talked about the cinear Marcus thing yeah that one's really shot back yeah I'm like did we out that price Discovery or what I don't even know but we didn't participate we were just talking about it because it just was baffling that way yeah but so why does one thing go up you know almost 100% in a year and one not so much there's possible explanations but I think there's just momentum into it and everything something like FICO is probably many people's favorite stock that they own I can understand that you know it's done really well for you as you own it you don't want to sell it it's really a monopoly you know let's let's be honest about it and it costs nothing right I mean they've moved in terms of the way that they charge for it and there's other things that have changed but when I originally bought it which we're talking about is you know closer to 15 years ago than 10 I did estimate that the scores business that they have had probably in excess of a 70% operating margin as best that I could tell they didn't break it out for you but if we pulled away everything else and the company was just that business it it you know would be 70% or so operating margin it maybe even a little higher less all the corporate costs and everything I didn't think that was particularly aggressive in assessing what that business is it's a it's one of the best business franchises in the world is their scores business but they had other things attached to it they had General and administrative costs and things and you know you would think if you ran like a pretty stable software business Capital light generates a ton of cash think of the names that we've spoken about on the podcast right you would that have very strong positions you would think that they would look at case studies like this and be like wow a lot of this is obviously growth from the business but you know Capital allocation too buying back a ton of stock over time you know I mean obvious we just call they're expecting eps to grow by 20 to 25% but there's still 20 years of doing the right things on the capital allocation front yeah and not and not yeah not issuing shares and all that stuff now I don't know if it's the right thing to buy back stock in the last couple of years which they've been doing but they didn't issue shares it would have been tempting for them to issue shares to acquire things at 150th of the price that the company eventually ended up at and even if I think the stock is vastly overpriced I you know I still would think that that would have been a really bad deal they giving away you know if we go back 10 15 years they'd be giving away 20 cents on the dollar or something for what their business was worth no there's no doubt when I bought it I thought it was worth you know three times or something what I was paying for it right so if I was saying I was paying you know that means I thought a free cash flow yield of 3% made sense or something in the long run yeah because you know in the very long run if they were if they business was strong and everything they would be able to track on a revenue basis something like nominal GDP which is they've done that they haven't wildly overperformed that but they've done that and they've been really good at all the other stuff there's also just other advantages to it in that if you're talking about things like price increases over time if you're talking about an intangibles heavy business it's usually easier to control costs and so you can be have more faith in cap allocation management whatever really being able to accomplish things because it's not the same as like opening new locations and adding headcount no matter how Ruthless People say they are and everything it's much harder to roll back headcount increases and things like that than it is to um have a business in which there's that's not a lot of what your business really is um so it's just funny we we've had the discussion of Costco at 50 times 55 times earnings like oh we wouldn't buy today maybe wouldn't sell it maybe you would and then uh FICO just says hold my beer you know yeah but like fico's at 100 now it was at like about 10 or something once at the bottom like we said certainly in terms of sales it's been at three times sales in 30 or whatever we just said so it's an unpleasant reality of investing in markets that you know on really great businesses certainly and sometimes on other kinds of businesses um you know 10x of a return or something could be due to expansion or contraction of the multiple you can own something it can do well and it can contract while you own it um both of those of course FICO we should like point this out more clearly you know there's probably a heavy economic aspect to that people's attitudes about well people's attitudes about what the they think credit well one would it go the other way though I don't know that they well they credit a lot of credit applications are good for FICO in the long run and uh a lot of inflation is good for FICO um more actual volume of credit decisions being made and uh higher pricing in general is always a benefit because what they're doing is taking a small percentage of what your business is basically for you to do this so it helps if it looks like a small number versus a big number and it helps if they do things to make it look like a small number that way and then they don't really have real assets and things to worry about the other way so this is a very unreal stock you know in terms of the unreal in terms of the business and every way so it it is yeah an overheated economy would be good for for FICO so you know if you could keep the economy running overheated all the time that this would be a good stock um that's probably why it was so bad back in let's say 2010 or something not just concerns about everything that happened with credit and all that but just that it could be really slow there was no inflation there was no growth credit could take an incredible long time to get back and now it feels like a different kind of world from that so crazy let's see somebody sent an email what will have a better return over the next five years build Supermarket or angles uh we can look on quick FS I my best guess would be Eng Les just because it's probably cheaper now but Village has gone up a bit so yeah it's probably up 50% not that long ago um yeah and here's the opposite here's a company that hasn't well EPs and stuff on paper look good because I don't know how it's probably the start time from that no that can't be right there's some miscalculation of the EPS thing um but here we have you know you've increased what a 50% or less let's say probably Village for people listening for Village yeah um on the other hand you know look it's selling for less than the reproduction value of the assets probably and angle definitely big time so you can see it's at like one times book it's at it's as to say four times iida six times ebit yeah I mean for free cash flow I think they're doing some meaningful cap XS we could check that uh I remember reading about what they were doing so that could be affecting it yeah yeah 63 million is very meaningful capex for them to do store you know building out of store and stuff I mean let's see uh um Ian building a supermarket is kind of some of the most expensive commercial real estate that you build out normally it has pretty high prices on it where they're building all that yeah I mean they're remodeling some things or expanding or moving some of the stores too that's all normal things though um I mean it's not that much different it's probably a little high I'd have to read the 10K and everything again to get an idea but it's actually if you adjust or what Co was before to what now is that probably gets you most of the way to that so if you have been spending between 35 and 55 million before I would guess that you now have to spend 63 million in nominal dollars because the inflation I think supermarkets are cheap as stocks generally I think people way under realize that you can't reproduce these assets for this you know um amount it would be for a competitor it would be easier to buy Engles or Village even at a premium um village is part of Co-op and stuff so there's a problem with that but it would be easier to buy entry that way than to to build it out yourself it'd be faster it' be cheaper you know you could probably pay a pretty big premium I don't know I mean I'd have to look carefully at Angles but I wouldn't be surprised if a 50% premium in a takeover price or something would be a way cheaper way to enter than trying to open competing things and then you wouldn't have the competition from them so um but this isn't unique to these businesses right we've talked about this before probably steel it's been easier in the United States for a long time to buy an existing steel um mill than to try to enter um relative to like the prices at the market has put on it at times so the market in essence lets it trade below reproduction value sometimes and I think both Village and angles are trading below reproduction value definitely what's interesting about that though is they make money every year so if an asset makes money every year should it really trade below what it would cost to produce the assets new right now you know um but let's look at their most recent I mean I think most of them have stepped up in terms of Returns on Capital since covid basically we look US capital angles I mean it's shot up obviously yeah and we can also use Roa or Roe because it's might capture it better in this case you know they they have leases and then they have debt you know and then so they own some outright this is a different situation in terms of what they each own so it's probably best to use something like that honestly okay yeah but you can see yeah so if angles their return on Equity was in the 10 to 15% range from 2014 to 2018 or something or 2019 and then Co bumped it up to 20 to over 20% but return on tangible capital is fine if you have a return on tangible Capital that's 8% or higher it's hard to see why you should always trade at Price to Book of less than one and they are trading at less than one right now um yeah actually I think it shows tangible assets per share at the bottom of that or maybe the bottom of the income statement I forget which one yeah it just priced a book oh yeah tangible asset right there tangible Book value so this is for Village so yeah so it's about $30 or something it shows there that's correct and so it's trading a bit above that now right it's trading you know 20% above that or something I think it's around $33 yeah and then um angles angles we have it saying that the um tangible Book value is $77 a sure and we're currently trading at 71 yeah um but you know when there was a period where there was concern about deflation and the grocery prices did deflate a little bit before covid for the first time in like 60 years or something um these stocks weren't so popular and everything they're pretty cheap though they're pretty cheap right now I mean how much are the stock the stocks can't they're not coming down so that means the earnings has to be going up even more I mean I do think villagers gone 50% within the last year year and a half or something probably it has to have so yeah okay so earnings basically doubled and I guess the the um stock did not double and that is that earnings from operation operational efficiency I mean you look at operating profit operating profit went up a bunch Revenue did not go up a bunch infation if you look Village like for instance Village if you look at the revenue on a real basis revenue is flat from 2018 to 2024 if you put in an inflation calculator to um billion 237 million and then asked what that would look like in nominal terms back in 2018 2019 uh it would look like that so it's it's just inflation yeah so which company do you think has a better fiveyear return potential Engles I think now it also has the ability to allocate more money in a way that you might not like that's very limited billage although Village did acquire stuff and and not they did two Acquisitions that weren't that great so they managed to do that they acquired something and then rebranded at a shop right in state that hadn't had shop rights historically Maryland and that didn't go that well and then they bought things kind of related to New York City too which was a different name than their own and that didn't really you know go that great either it was kind of competitive biding for that one too so they all can find some way to return some of the money I mean I I if you're going to sell me an existing Supermarket of either of these and promise that they want to do things with the capital I I would be very happy with either of these stocks the question is you know it's the same thing we talk about oil things or whatever there's lots of times where I would have been okay buying an oil company and didn't buy the stock because I didn't want what the oil company was uh management was probably going to allocate it to and I've been burned on that um and sometimes it works out even if that is the case if if the price is cheap enough in the future for the commodi is bright enough and everything but yeah you can buy I think you can buy supermarkets in the um stock market cheaper than you you can buy them by trying to go out there and buy them yourself or to build them so it's a cheaper way of entering the supermarket business if you want to um we could look at like competitors like Kroger and stuff to see what the multiple differences are in everything just to give people an idea Kroger's on the screen and Kroger is not really a better business I mean it's very it's very efficiently operated and there's some really strong things about it but it's locations aren't better it's you know any of that like it is not better than angles or or Village and you can see that in the record um it's a big stock a liquid stock and uh you know is operationally well done but the assets probably aren't as good as the the two companies we just looked at probably not across the whole board so you know some of it is on the Eid stuff of what it trades at the trades low for these um you know this is very Kroger six times and for the others what did we say four and five area yeah so they have low multiples you know yet Village and and Engles is at about four times zah some of that might be people thinking that that won't be sustained you know I'm a little less skeptical of that I think it's more likely it will be sustained for some period but and if it's not sustained then I don't know it's a different world than probably what you're pricing into other stocks they wouldn't do well if we went back what would be really really bad for these stocks if we went back to what we had in the you know last decade where like the internet things were growing but inflation was barely anything there wasn't a lot of growth and other real things um they there's a question about cash conversion but it's not terrible it's if you look at free cash flow divided into like ebit and stuff it's not that out of line with what um I mean the long-term averages if you look at that for any of these three companies it's not that out of line with what it is for businesses that that operate in the real world and and pay taxes like these companies do and all that um it looks pretty pretty normal um you know so if we do Eid whatever you kind of have to divide that to get another number but I mean yeah four times eaab which we were talking about before the other two yeah it's not like you're paying more than 10 times cash earnings or anything for him so like the free cash flow on average it'll be lumpy but it doesn't convert worse than that so I mean they're both pretty you could look at them both I I think I would make the decision more on which management and I liked and what they were saying about the future and all that than anything else probably because but in general if you like a business and it's pretty decent business if you can get it at less than at five times uh EBA do or less then you should be okay long term in it um and not worry which is kind of Cheaper let's talk about a stock that you had wanted to discuss on the podcast cboard Corporation why are you flagging what's what's uh tell us about this company and we could close up uh well Seaboard was on like valy investors club or something but it we just did the supermarket so it kind of plays into the same thing but this is a good example of something that is um pretty cheap and doesn't have a very good history um of Returns on Capital and all that um and you know but is in a period in which it's basically not making any money right now which sometimes can cause things like this to get very cheap um the company is probably best known I would assume to investors for its stock price although FICO also has a very high stock price but SEO hasn't split their stock in forever so it's like one of the most expensive stocks on New York Stock Exchange or something um they bought back some stock from the family at one point um and they they have when they've done that they haven't bought back at uh premiums and stuff so so that's helped with the price to to tangent Book value of it um we could check that what they say that is it's complicated a little bit with this company but if we look on the uh that will give you some idea of what I'm talking about is if we look at what the um tangible book value per share is here there you go so tangal Book value is uh 4,000,000 yeah so about 4,000 and it was let's 10 years ago it was 2,300 right uh per share the P the Share account numbers have changed a little bit so actually if I look at yeah not by that much so that's fine we can go with that so if we look at back at the stock price what we're saying is that basically this company is trading at a pretty big discount2 $2,700 a share versus um it's tangible Book value but also it's not trading that differently from what the tangible Book value was like 10 years ago right um so why is it like this one there's no promotion to the company at all so we should always keep that in mind it's a closely held company to some extent and it for a company this size um it doesn't communicate anything ever it's actually pretty secretive it looks like it's the cheapest the tangible Book value has really ever been according to Kin yeah it's very been a public trading company for a very long time so click on all or 20 years or something so we can see how long back this can go I'm actually reading a book right now called dynasties of the sea which sort of ties into I mean kind of I mean to this company uh so that's interesting that we brought it up but yeah okay so in 2000 it was very cheap which is my memory right on price to tangible how cheap did it go there looks like four yeah yeah so my memory of this stock in the very long term which could be wrong is that it generally trades uh in a way that won't be helpful to Value investors because it trades as a value stock inverse to Euphoria and growth and all that so at the moment at which it tends to hit a very low tangental Book value at moments in which value is really out of favor and then it tends to do well when value is in favor um I mean yeah and some of that is the businesses that it's in which can go over I don't think anyone would recognize any of the business except their part owner of Butterball you know the Turkey um brand yeah so but pork processing um there's some power generation things in it there's I mean there is a description in the quick FS that will give you exactly kind of what's in the 10K um total commodity things um but it was interesting because they they kind of lost money and stuff which is which can be really good for uh if it's a highly cyclical stock if you're buying on things like Price to Book or something because people will look at the PE and everything but they can get turned off now if you look at it right you pull it up on quick f f and you see this it's ugly enough that you might not really look into it any further yeah the Market's extrapolate so they take that Mo Money losing situation and kill the stock but for cyclicals obviously that could be an interesting time yeah I do not think it's particularly great competitive position of the markets that it's in and I think the markets are not good markets that it's in how much is the family owner of this company a lot but they just sold a lot so we let's see um where could I see that uh I can pull it up probably but it was a lot that they sold um let's see this would be uh was 75% something like that but they but I'm just trying to figure out where it says that how much they sold um I don't remember the date on which the sales took place and stuff but it was in the last year so it could definitely be that it's not updated in this um uh you know most recent filing for the the proxy and everything yeah so but that's another factor which means that as it gets really cheap which can be let's say that theoretically the the Insiders own 2third or three4 of the company or something right if that's true then you look at the um the market cap what are we down to now because when we drop that much 2.66 billion yeah so if you know when that happens that can mean that the actual float is 700 million or something you know um so and that doesn't sound like a big difference but then of course if you go back to where it was what it was five times the price to book back in the 2000 to 2010 period or 2000 now there's other reasons that people might not want to own this so one it's not liquid enough and all that two it doesn't give a lot of disclosures three family controlled for the kinds of businesses and aren't very attractive as businesses on top of that though they aren't the kinds of businesses that people want to hear that you're in and that the company is doing what it's doing so it also doesn't score very well on your like ESG type stuff I mean um you know some of the processing plants and stuff are going to you know um use a lot of very very low wage labor in in r random towns in out in the middle of nowhere that wasn't much of a town probably before they built a plant there and everything you know it's not wildly different than some of the things that Tyson or Pilgrim or something has either but they have a brand and everything to go with it um this definitely looks like an asset you would not want to hold it's more of a tradable asset I mean look at even over the past 20 years it's underperformed past 10 years it's gotone smoked just disgustingly underperformed yeah well if we look that that's possible I obviously in the very long-term history of the company it hasn't done that badly um but it doesn't have particularly good returns that's true um I'm not saying you can't make money I mean the point to buy is when it's at 0 five times tangible Book value kind of like where it's at right now but I do think there are some assets that you trade right on like maybe a two or three year basis and said you're like okay said it and forget it I wouldn't coffee can this no but we saw the problems of if you coffee can FICO it could go to 100 times PE too I mean that's a great that's the situation you want that is what I'm saying you're like okay 20 years this thing this is a yeah you can have you can have it go either way in terms of uh it's one of the first times in their history they've lost money I mean it's not a high credit risk uh stock nor I mean we we could look at like what the free cash flow has been over time and everything it owns the variety of different assets um that generally tend to be somewhat generative of cash yeah so you know you have high capb back spending and high Acquisitions sometimes that can cause you to not generate cash but as we saw cash flow from operations has been positive for a long time here I can't remember the last time that they had an operating loss I think that it has happened before um and you could look into exactly why that is it's driven by a few different commodity things I won't get into a long description of the company we could go quick so I could just say a few of the lines of what it does but there's a reason why I'm not describing that um it operates in many different places so this is the easiest way to say it it operates through six segments pork commodity trading and Milling Marine sugar and alcohol power and turkey but then in addition to that you have things like the the power segment is an independent power producer that generates electricity for the Grid in the Dominican rep public some of the other things are also related to each other um how they got into it so they talk about it's a terminal um you know so um uh I it it's I don't remember when we talked about this before but basically it is one of these where I don't know in the future if uh if if it will be priced high enough in public markets and stuff in the future but it might be like you know if we are in a world in which there's not a lot of active investing and not a lot of active investing is something that has a float this size and not trying to learn about a company that doesn't put out a lot of information now there's no reason the family can sell whenever they want to although they got a discounted price when they sell to back to the company um but you know it's it is one of these things that I think might have become less efficiently priced over time which is a interesting question to ask you know what causes people to recognize something might be too cheap and what to do about it since it's a control type situation that's probably a big part of what causes there not to be a lot of interest in looking at oh what would the assets be if we broke it up and that kind of thing do you ever think companies that own like this is one of those situations 70% right you said 75% something like that do you ever think to themselves like in a situation like this maybe we could just take it private I mean Hunter Douglas did that um I don't know and I do Wonder too if it's like could you could you could you think about okay so they own 75% which is a weird amount to own of a public company in my opinion right that that's a lot right and if you're looking at it could you be like are they ever going to buy back a ton of stock or do anything else do they want to continue to make their their ownership go up is that the plan I mean it just it's I don't know it's it's bizarre that way like why are these guys even public at this point well hun dougl have the same issue there's a few possible reasons right the biggest one is you'd have to buy other people out here's the problem who do you think owns the we don't know who owns the stock but who probably at any time owns the stock probably people who know that it's worth more than you know um but then there's also issues of if you've been public for this amount of time and stuff do you just go private doing this some do Hunter Doug has tried all sorts of things to to to get rid of shareholders um at lower prices because they tried opportunistic tenders over time to do it so yeah you can take advantage of people certainly if you own a large enough part of the the stock and especially like I said as as it becomes less active over time and all of that there's possibilities um but then there there's also the issues of like do you want to take it private for some reason I don't know you could if if your goal is to like just make a little more money I mean one thing from a family perspective or something one you have shares so I mean that's helpful really helpful in planning things and stuff I mean I think a lot of families that have a lot of money would benefit if they were publicly traded but owned almost all the public company um so that's really helpful there's a market that it creates for that that you can use you can basically exit anytime you want by having the company buy back your stock um even though like I said it's at a less attractive price and what does it matter to you if the stock languishes for long periods of time you could sell the whole company um it doesn't really matter to you you just don't care dayto day what the Stock's at but in the long run you would care to be able to exit and everything but what difference does it make sometimes it trades at three times tangible book sometimes at you know not three but like whatever we just saw two and a half times or something sometimes at half yeah um let's see it has um let's see uh I'm sure it's been written up in detail uh in detail on Valley investor Club more than once because this is not at all an obscure company in terms of people knowing about it it just doesn't put out a lot of information um I researched it a lot for um a long time ago and decided that I just didn't want to write it up yeah it would have been back in 200 [Music] in the 2009 to 2010 period um basically I decided that it was um too difficult to to write a good report about it I didn't decide that it wasn't a good company or wasn't something interesting to write about but it just wouldn't have enough sources I could site that would be confident and stuff but I did some research on things to find out more things about interview things that aren't from um the the public investors might not know about legal things that they've had problems with communities whatever so like I I looked into some stuff to figure out what they're really up to and everything um as far as this goes from 1993 to today the stock and the S&P are the same they they've had the same returns for the last 30 years or something so that was obviously because it did better in the 90s and then obviously your exit amount is important here so we don't know because I didn't check what the entry level point was but if you you know obviously if we the date that we have for exit is super significant here so I'm always cautious when telling people about look at the long-term stock chart because there's a tendency to think it's doing really well or really badly because of changes in the multiple this is I mean what's that uh let's see when is the S&P traded at higher prices to tangible book or EVD but I mean it's near some of the highest levels it's ever been at and this company is near some of the lowest levels it's ever been at so [Music] um obviously it's possible that that things could just improve if it you know reports some earnings in the future years um and has levels where it's almost um you know uh where basically it's losing it's losing money on an operating basis right now it's reporting no earnings and then if it reported some earnings it would do better maybe I just don't know if there'll ever be much interest in this kind of stock in the future unless you know how the market works and stuff changes um kind of like what I was saying is you know Marcus's family control company or whatever would there really be a change at some point people might just assume that it would trade more in line with cinear but you kind of have to have enough people believe that and bet on that and believe that other people will believe that even if no one ultimately believes that they're all betting on other people believing it maybe it'll still happen um I follow all those company all those theater stock they all just sort of move at the same like they all move together iMac Cinemark Marcus a few others yeah and the banks uh like we talked about all moved a huge amount in one day because it didn't matter if it was Frost or hangam or whatever they're very different in terms of future for things but they all move together they're all in the same sort of category that way what's interesting about these I think for the future with like a seaboard is like um I do wonder about the ones that what group is this in like I mean for industry purposes this is are they putting it in this is labeled as food it is so it's the middle of the chain in food that's correct commodity it's a commodity food so what you're dealing with even where they talk about the pork and all those things it's commodity food products and it's really in the middle of the chain um so it that's something that I don't know like yeah it's consumer staple sector right that's what it says there which is crazy when you look at what they're actually in so they're very driven by commodity prices not by the price of the end user um yeah but I do Wonder like will people seek out a company like this learn about it write it up so I said it because I believe I it was written up on Valley investors club which just stood out to me way back not not recently I mean this year but not recently um yeah it was written up in July so and it wasn't some huge detailed um description of it or something but it was interesting to me that it was was actually written up and they went into things like the ownership and all of that um they did make the point okay so it was mid 2023 so this so when I cited that before [Music] um it was mid 2023 that they did the transaction so this is helpful that's including the value invest just write up in mid 2023 the company repurchased 20% of the family stake which was 16% of shares outstanding so they own 75% a 14% discount to the market price and 24% discount tangible book um they did a similar transaction in 2002 the company repurchased 15 shares 15% of shares outstanding at $22 so like you know obviously it's gone up a lot since then which was also at 60% of Book value and within three years Book value doubled and so um it I don't know because there the information going back that you could find out on the company to me kind of predates what current management and stuff is you can read the valy investors Club thing to get some ideas about who died and who inherited things and all that but you're kind of assuming that something the last things that we got much communication to have philosophy about things are like 15 years ago so you're just assuming that because people happen to have the same family name they're going to do the same sort of things um cool well I want to thank everybody so much for tuning in with the both of us on the focus compounding podcast if you have a question you would like for us to go over email it to me at Android Focus compound.com if you're interested in learning more about our Money Management Services reach out to me via email and of course be sure to hit the Subscribe button wherever you're watching or listening to us here today I want to thank everybody so much for all the support that you've shown to focus compounding over the years and we will see you in the next podcast take care