Core Earnings Leaders Index in a Volatile Market | Monthly Podcast w/ David Trainer & Kyle Guske II

Our core earnings framework changes how you see reported results. Importantly, it beats the market. We'll talk about that a little bit in today's podcast. We'll get things kicked off here. This is our monthly podcast here with myself, Kyle Guskey II, and David Trainer. We've got special guests here today, Joe McCann and Kenneth Blazek. First up, the disclosures and disclaimers. New Constructs is not providing advice. We are a research publisher, so you can read these in the replay. That is the main key to take away. We are not providing advice. On the agenda, we got a lot to talk about today. It's been a while since we had our last podcast. Since we last talked, we've had some new long ideas, new danger zones. Looking, taking a deep dive on the AI spending that most people might not even realize is going on. We're in the middle of footnote seasons right now, so we've had some footnote season find reports come out. I've got some new features we'll talk about a little bit right in the middle of earnings watch parties. David's taken a deep dive looking at earnings relative to core earnings expectations and stock prices. Those are great ways to see how you can use our system around earnings season. I had a few different podcast appearances, some sector style ratings, then a whole bunch of model portfolio updates. But on today's agenda, we'll first talk about an upcoming training this afternoon. We've actually got an earnings watch party. Today at 4:30 PM Eastern, I'm gonna throw a registration link in the chat for everyone here. We'll be looking at fundamental analysis on a bunch of tickers here: FANG, Home Depot, EOG Resources, Nvidia, the big one. So sign up in the chat there if I can find the chat window. There we go. But without further ado, we'll get right into these special guests here today. The first one up is Joe McCann. Joe is with Slingshot Insights. If you've been on some prior calls, we've actually had 2 different calls with experts from Slingshot Insights, one on rare earth metals and tariffs, and then another on LNG, natural gas. I'll put links in the chat as we talk with Joe here, but those have been excellent calls on some very interesting topics. So Joe, I will turn it over to you to talk a little bit about Slingshot Insights and what you're bringing to the table.

Yeah, great. Thanks for having me on. And it's been fun getting to know you both and get some guests for your prior shows. I think it's a really good way for us to hopefully expose what expert calls can do for investors of any size.

Thanks.

Slingshot Insights is an expert network that's similar in a lot of ways to Guidepoint, GLG, TEGIS, Third Bridge, a couple others that are out there. And what we specialize in is getting really high-value conversations available to our clients quickly with subject matter experts across really any domain. Originally, our history was in the healthcare sector. So we were doing thousands of doctor interviews a year. But starting about June of last year, we purchased another competitor of ours. They've been doing every sector for 11 years. And now we offer all of our clients every sector across the board. So we're fortunate to work with you on LNG stuff. We've been doing some recent stuff around the Netflix-Warner Brothers-Paramount merger. AI infrastructure buildouts, just a broad range of topics. The beauty of the model is that our customers can come to us and ask, hey, I want to talk to somebody about X, or I have a question about Y, and do you have somebody that might be interesting for me to get an answer from? And so we work with them to identify the right person, make sure that they get onboarded to our system in a compliant way. So you don't have to worry about insider trading risks as long as you hold up your end of the bargain, make sure that the person is who they say they are, that they get paid. all that type of stuff, and really takes the challenge of finding the right viewpoint out of, out of your hands a little bit and putting it into ours. My background before starting the company was working at a hedge fund for 5 years, 4 and a half years. Now it's called Point72. Back then it was called a few different things, SAC, CR Intrinsic, Sigma, a few other smaller funds all under the same umbrella. But when I was there, I was using hundreds, if not thousands of doctor calls a year to invest in the healthcare industry globally without a healthcare background. I had a finance background, investment banking background. found those calls extremely efficient, useful, able to get different viewpoints on the same topic quickly and make my own decision on what people were telling me. When I left the firm, I started this company, and this is why I think it's interesting for this audience, is that historically our industry doesn't engage with the individual or even the super small fund because of the price point. So what we created was a platform where anybody in the world can come in and say, no, I want to talk to this person, or I have that question, and a few people have the same one. They share the cost of the expert and reduce it by 80 to 90% pretty quickly. We also were one of the first, if not the first, to have a transcript. And the industry has really moved there now, but we had the first transcript library. And so if you missed the call but you wanted to read about it, you could do that on your own schedule. And so now we have hundreds of customers who like to read them at their kids' soccer games, listen to them as podcasts on the way to, to the office in the morning, really all different kinds of things. And we're starting to lean into AI now and what can be done across the different transcripts to generate insights more quickly and take what, you know, historically has been a cumbersome product, a 30-minute unstructured interview, and make it bullet-pointed, conversational with the LLM to say, was this covered? How does this expert compare to that expert? All that type of stuff we're starting to roll out this quarter. And so that's been really fun and exciting to work with. So that's the background. That's a little bit of the use case. And I'm happy to talk about situations that have been helpful and answer questions from anybody on the line or answer questions from David and Kyle.

Yeah, guys, everybody out there, put in any questions you have in the chat or the Q&A. And I just want to say that when I first met Joe, I was skeptical that you could get good experts at the non-institutional level because I know that even the institutional market, it's difficult to get good experts. It's a very competitive marketplace. But the model in terms of getting a good expert to a group of people as opposed to one client, because all the institutions want People want all their conversations to be private. They don't want a transcript. They don't want any of that. And so, it's a different kind of model for what Joe's had. But I would say, man, the 2 experts we had, those 2 freebies that Joe gave us, if you haven't listened to those calls, you were missing out. Those were awesome. We learned a lot about LNG, what made some of these stock picks we had maybe a little bit better, maybe a little bit worse than we thought. And then, the rare earth metals and tariffs was just fascinating.

Yeah.

And I think in some of these really complex, nuanced situations, which almost all investments are, right? If it were obvious, everybody would get it right. Having access to experts like what Joe's able to put together is a serious value add. And I think he's— we've got another slide here, Kyle. I think Joe's been offering a very generous special offer to people from New Constructs to get access to this. Look, 3 months for free. Be silly not to try this. If this is not part of your process, you should make it part of your process. If it is, I don't think you're going to find a better deal than what you're getting from Slingshots here.

Yeah, great. Thank you. And like I said, I came into the investing world with a finance background, not understanding healthcare generally to any degree. And I remember one of the early times when I was working with a new topic and the first day of the week I was Googling what kind of doctor treats kidney disease and nephrologists. And by the end of the 12th call that I had done that week, a doctor was asking where I did my rounds. Thinking that I had gone to med school for nephrology, and that really just came from maybe eight or nine phone interviews and then preparing for them. I was speaking to the company, looked at the company slides, maybe read their slide deck and formulated some questions. And so these kind of calls can really get you up to speed on super nuanced topics. And like David said, if it wasn't nuanced, we probably wouldn't make a lot of money on it. So I think the thing that I've learned now moving outside of healthcare is that this can be even be helpful for sector calls when you're trying to think about what is the play in rare earth. what is the play in LNG and is that the copper? I'm trying to understand the dynamics of supply chains, understand the dynamics of the marketplace that is opaque to somebody who's not in it every day or doesn't have a— you don't have a seat that sees all the different pieces, right? So you can get on the phone and get those pieces, put them together, and then you're the one who understands it. So I found them incredibly useful. I would say a lot of our healthcare clients are doctors or PhDs themselves. So that shows even in the healthcare space, when you have that level of expertise, you still want to get on the phone with the guy at Johns Hopkins who sees the most patients or that community doctor is going to be writing the prescription. So I think there's value even for the experts in speaking to other experts.

Yeah.

And I think, look, this is the one, like what you're doing of all the businesses that are AI threatened, you are not. This is where AI falls down, right? AI does not have subject matter expertise at any depth in almost any vertical. I don't think maybe in the ones where everything is free, like media. Because it's just all out there. But this is, these kinds of insights are exactly, this is what you gotta do to get insights that the rest of the world doesn't have. And I'm, I gotta say, I'm impressed that Joe's put this together in this kind of a model for retail. This is in many ways doing for access to experts for the broader public in the markets as what New Constructs is doing for access to the truth about profitability and valuation. So we've been proud to work with Joe and Slingshot. We don't, we've never done this before on a podcast where we like recommended anything or anybody. That's a big deal. You guys should pay attention.

Yeah.

No, thank you. And I really appreciate it. We got introduced through a kind of a mutual connection, and it's been fun to learn about what you guys are doing and really happy to be able to speak to your membership. Obviously a group of people who understand that with a little bit of reflection and thinking, there's ways to make money in the market that's not just the, the S&P ETF. So excited to be part of it and get to meet everybody.

Thank you, Joe. Thank you. Hopefully, if you look, if you're ever willing to give us another freebie, we'll take it.

You know what? I want to get going. That's a routine, one of these where—

Yeah, that's right.

They're always happening every week, but no, I think we could definitely do something quarterly.

Once a month or something like that. I'll circle back with you for sure.

But yeah, I'd love to be able to give you guys some experts every once in a while and really just keep driving home how valuable it can be. Great.

Thank you.

Thank you, everybody. Yeah, please reach out over email as well. And just, I'm happy to get on the phone with anybody on the line now and have a 5-minute conversation about everything.

Yep. Okay.

Thanks guys.

Thank you, Joe. Awesome.

Thank you. All right, we'll go. Got another guest with us today, Kenneth Blazek. Kenneth is the Chief Investment Officer for Horizon Financial. I've got a little bit of info on him here, but I'll let him speak for himself here. Welcome in, Kenneth.

Thank you. Thanks for having me.

Yeah, and I'll jump in here too, because Kenneth and I have known each other for a while and You guys all know that we've recently got into the index business and know about core earnings leaders. And Kenneth and I were talking and I thought, the guy who came up with the idea, we got to have him on the pod because this is a big deal. Kenneth Blazek is the guy who came up with the idea to create a core earnings leaders index. And so, this is where it all got started. And when we first met, We were introduced indirectly, and then when we met in person in Nashville at the Four Seasons, it was just, okay, here we go. Kenneth had this vision around a superior way of picking stocks and putting together an ETF concept, and we had the data. And without Kenneth, the Core Earnings Leaders Index and related would not exist. Really excited to have Kenneth here and share a little bit about what he thinks about core earnings and how he came up with the idea and give you guys some background on why he thinks it's a good thing.

Sure. And I, again, thanks for having me. I, you make it sound like I'm a lot smarter than I am, but I appreciate that. When it came to the idea of the core earnings leaders and the index and all, it wasn't, it certainly wasn't just, I have this idea and here's how it works. What it really was sort of developed a little bit over time and that I started to notice things in earnings reports and stuff like that, right? I started to see that the difference between what companies were reported as reported earnings and what they're reporting as GAAP earnings, the distance between those 2 things started to get bigger and bigger. And that sent me down the core earnings rabbit hole, as I think of it. And you and I have talked about this, from the financial shenanigans to CFROI and expectations investing. And after you go down the rabbit hole, you really figure out that there's really just one fundamental piece to investing. And that is, it is simply, if I give you money, How do I get back? Right? It's really quite that simple. If I give you a dollar, I want a dollar ten back. Is that an attractive investment for me? And it's all about the cash flow and real cash flow. And when I say that, that's the kind of piece that we started to notice was off. Financials are hard enough as they are, but as you get into things and you start to realize that it's very difficult to parse through all of these different financial reports and everything else and really get a good idea as to what a company is doing, where they're generating revenue, how much of that is profit, and what they're doing with those profits. It really is quite convoluted. And so what I really set out to find was an index that was based on GAAP earnings as opposed to just reported earnings. And it turns out that's not really a thing either, because I, at the time, I didn't think anything like new constructs existed. Right? This is before the ChatGPTs and stuff like that came out, and I didn't think anything was possible to really dive into each individual company and come up with the economic earnings the way you guys do for the index. So I said, if I got to pick between these two, if I got to pick between what you're— the company's reporting to me and what the company's reporting to the government and paying taxes on, I'm going to pick the number you're paying taxes on. That's just, if I have to pick between those 2, that one makes more sense to me. And so I went looking for that and it didn't exist. And so through some of our mutual contacts, you and I got in contact with each other and came up with the sort of the core earnings. When I really went through and how you guys do all the things that you do, backing up all of the stock-based compensation and all of that kind of stuff, and really figuring out what a company's generating on earnings and then investing accordingly. It just made complete sense to me once you were able to show me that you can look in the footnotes and do all that stuff at scale in order to create this index. And that was really that kicking off point where it was like, okay, we can actually come up with something that is based on what companies are really earning and producing. And that just, to me, that makes a world of difference because in investing, at the end of the day, that is what you are looking for. You are looking for a company that you invest a dollar in. They make a profit and you get a return. And to have that available at scale and at an index level is just a very useful tool for any investor, let alone someone like us who we have an RIA and we have plenty of clients and being able to invest on their behalf is certainly a useful thing for us.

Yeah.

And one of the things I've enjoyed most when we had that breakfast was just how many advisors like you had been skeptical about earnings numbers for a long time and had just was looking for what we were doing. And would you speak to what you think about the larger kind of community and your history in the business and what you think that means about how many people have taken the red pill yet? How many people are still yet to understand that you need to do more than just trust what the company's put on paper?

Yeah, come— I guess industry-wide, I think we've become accustomed to buzzwords and things that sound good and PE ratios or whatever is in the next report, and also going more or less quarter by quarter, right? It's all about who's going to do what in the next 2 or 3 months, and can we make 10% or 20% in this quick time period? That's not— to me, that's not really being That's not really investing. Investing is looking at a company that turns a profit and reinvests those profits and continues to grow and produce. And from a whole standpoint, you have to be able to see that. And companies, that's not necessarily what they're trying to show you in those financials. And I don't mean that in they're doing something shady kind of way. It's just when you look through financials, there's rhymes and reasons. Like something I mentioned, stock-based compensation. If you're— if the whole company only has billion-dollar company and the CEO's making $100,000 in stock-based compensation, it makes sense. That's not a big— that backing that out makes somewhat sense. But when most of your employees are getting 30 or 40% of their compensation in stock, then I'm going to argue that's a cost. And according to the way they report earnings, it's not. And that's where those things start to get convoluted. And you have to have a systematic way to go through each individual report, level the playing field, and really start to look at the companies that Warren Buffett talks about. And when the tide goes out, you see who's swimming without a bathing suit. Instead of waiting for the tide to go out, you can use some of the methods and the indexes to find who is actually producing. And in a lot of cases, you can find companies that are very much underappreciated for what they're actually producing in cash flow. And that can be for a wide variety of reasons. And I think as a whole, the industry is stuck to the ETFs and things like that where it's, what was your number last month? What's your 1, 3, 5 number? It's not, what do you do? How do you do it? Where's the return coming from? What are the drivers of performance? How does your whole portfolio fit together? All of those things that I view as important, I think get lost a little bit in the shuffle when it comes to especially looking at just individual company reports and trying to Really figure out what it is they're truly doing. Yeah, companies these days just aren't that straightforward.

No, it's not. And I think, like, I've been looking at these filings for 30-plus years, and it— I was in my early 20s still when I realized that this is not accidental. Companies could be way more forthright than they are. We've seen this happen in so many ways. It's nothing— I'm not saying what they're doing is illegal. Sometimes there's some illegal stuff. But most of it's really just unethical. And it's almost— I stretch a little bit to even say that because it's a tree falling in the woods and nobody hears. Like, it's unethical, but nobody notices, so who cares? One of the big ones is— and look, I can say this because we see companies do it right. Great example is when the operating lease rules changed. And there were some companies that disclosed what was going on and they did it beautifully. Microsoft, I remember, as an example. Oh, okay, great. They were one of the— they adopted the new rules early and they were really explicit about what was going on. So, we started changing our database and our systems to collect this new set of data largely around what we were anticipating other companies to do like Microsoft.

Wrong.

Microsoft was an outlier. A lot of companies didn't adopt it until late. They adopted with a lot less disclosure. They adopted with a lot less clarity. It was all over the place. It was wild, the Wild West. And guess what?

Yeah.

You can't trust the SEC to monitor that.

No, not at all. It's a kind of a punchline and everything else, but then the SEC investigated like Madoff a bunch of times before they actually convicted him of anything. And you can go back and read about Enron or any of those. It's, you find out stuff was going on for a decade before it actually comes to light. And all the behind-the-scenes stuff and analysts getting fired from jobs because they wouldn't put on buy ratings and things like that. It's, it's any industry, right? People, they'll protect their profits and their stock prices as much as they humanly possibly can. Their future and their livelihood depends on it, and they don't want to report bad earnings. And you know what, if I can make my earnings look the way they should by paying you in stock and then backing that out, or by not recording my operating lease, by making it a financing lease or fudging my CapEx a little bit. That's how it starts. And then things, like I said, with Enron, and you start to look at it, then it starts to escalate and escalate. And by the end of it, you're just, you're left sitting there going, how did nobody know this? How is this even, how does this even get to this level without a single person Saying a word, you talk about going back. For me, it was 2008. 2008 was my first year in the business. January fifth, 2008, I started my first job in this business, and by October, I'm laying concrete on the weekends to make ends meet. Right? And everybody told me you couldn't have seen this coming. And how is that possible? How can you not see the greatest financial crisis in history not coming? And then when you find out the ninja loans and all of the stuff that they were doing off balance sheet financing and all of the stuff. You're like, it's all right here. It's all just there. You just have to look, you have to read it, and you have to not look through sort of those rose-colored glasses. I joke a lot with especially the guys on my team that economics matter, but at the same time, I went to the Thornton Mellon School of Economics. I don't know if you know who Thornton Mellon is, but he's played by Rodney Dangerfield in the movie Back to School, right? And he goes into school and the professor's teaching about opening a business. And he said, what are you making? He says widgets. He says, what's a widget? He says, it's a fictional product. He says, tell that to the bank. There's a reality here and there's a reality in investing and you have to stay grounded in that. And I'm not saying some of the things that companies talk about can't be achieved or aren't real, but at the same time, you have to put them through a filter of just the reality. How many steps are they going to take? We see all this stuff with AI now and how it's changing. No white-collar jobs in the next 18 months. That's just, that's hard to get your head around when it, yeah, we can scrape the information from footnotes and everything else, but it can't make those decisions. And then just your last guess, you, how are you going to pick the sector or the area and let alone the company, right? It starts to get pretty complicated the further you go.

No, it totally does. And I think you bring up a really good point around How a lot of what we're doing here with the Core Earnings Leaders is getting back to the basics. And it makes sense because the world has become so obsessed with everything but the basics, whether it's family or politics or whatever. Like everything's extreme, everything's crazy, and everything is focused oftentimes on just conjecture. Tesla, autonomous vehicles, robots. And rarely are people grounding things back in reality anymore. And that's what we're doing with this concept. So we're just coming back and saying, do what, just exactly what you said. You gotta make us some money. You gotta take the dollar we give you and make something of it. And we want to invest in companies that are willing to do that. The more plainly and clearly that we can make that the case, the better we like those companies. And that's all we're talking about doing. And it turns out that we live in a world where it takes an enormous amount of technology and expertise to actually do that at scale.

Yes. And I think that you touched on one of the things, another thing that I talk about a lot is I think I actually think AI is going to end the, what I think of as like the hack mentality that we have, right? Everybody wants to hack everything, hack your day, you know, a 4-hour work week, 4-hour workout, 20-minute abs, whatever. It's, there's this shortcut. And I think what AI is going to do on a broad scale is make it so that you're going to have to truly understand the ins and outs of everything, your subject matter, because AI presents stuff so polished, so well done, and it sounds good and the numbers look good. But it's not as accurate as you think it is. And you need to understand and really truly get whatever it is you're talking about, whatever subject it is, if you are getting into that AI world. And I think as we go into an AI world, you are going to have to, definitely going to have to make sure that subject matter is truly understood. Otherwise, AI will trick you. And because it's not built to say, I don't know. And I think that the idea that you can learn something in a weekend is not— and be an expert at it is not true. I think what happens is you take an expert and then you add AI to them and they become 2, 3x more efficient, 2, 3x more productive. But you need an expert first, and that's— you're gonna have to understand all of the fundamentals when it comes to investing. You're gonna have to truly understand what drives a company forward and makes it money. And at the end of the day, it's what we've been talking about. It's taking money, making a profit, reinvesting that profit for more money, and returning capital to shareholders, whether it is from capital appreciation or from income. That at the end of the day, that's what matters.

Agreed. And in terms of marrying deep subject matter expertise with technology, that's exactly what we did with Google Cloud and Finsights and our AI. And that was Their plan, they paid us and built this because they wanted to show the art of the possible when you could combine real expertise with technology. And now it's the art of the actual. And I know we've been talking about it for a while, but we're going to be starting, hopefully rolling that out early next month to some of our early clients. And then I think to the public, we can do a bigger thing hopefully later in the month. We're working on it.

Beautiful.

It all works. All the work is just to get the daggum Like Google marketing stuff to work. Crazy, but true.

Oh yeah.

Great. We're coming here to the end of our 30 minutes here. Kenneth, thanks so much for being with us.

Thanks for having me.

Yeah. Kyle, you got a few more things you want to cover before we wrap it up here?

Yeah, we can jump right back to these slides here. Put a nice little bow on the core earnings discussion because core earnings deliver alpha. We're talking about how much money a company makes. What it gives back to you, the New Constructs Core Earnings Leader Index was up 27% last year, S&P was up 18%. We always say proof is in performance. So I wanted to bring that kind of the end of the discussion here.

Not too shabby.

Yeah. Beyond that, I did want to mention we do have some new features for our Pro and Institutional members. We've added GAAP earnings distortion score to the portfolios page. I'm talking about the difference between GAAP and core earnings there. So that's now on the portfolio page. And then we also updated the screeners So you can screen by GAAP earnings distortion as well as economic versus reported EPS. So there's 2 new data points that enhance the screeners and the portfolio page as well. But I think that is it. We'll go do a quick little update on the community. Got a lot of ideas out there, a bunch of different trade and option discussion going on. You can see some names there, people discussing potential strategies they're looking at currently enacting. It's a great way to Get involved with the community. It is free to join. And so we will send out a link in the replay here. We'll put this replay up there, but that is all we have for you guys today. Hope you enjoyed the conversation. Like I said, the next one of these will be March 13th. So we look forward to seeing you there.

Thanks.

Thanks for joining us, Kenneth.

Thanks for having me.