Earnings Watch Party Replay: Arista, Cadence Design, Occidental, Baidu, Toll Brothers, and Medtronic

Hello everybody, thanks for joining me today. I'm excited to be with you to talk about a bunch of stocks here that have reported recently. There's kind of a lot of different moves going on, you know, and I like it today. I think we saw a good stock— well, at least a more down-to-earth stock beat and go up. And then we've got another high-flying super stock, super expensive stock, getting crushed despite beating on the top and bottom line. So let's just jump right in as we normally do. Thanks again for joining, and please, I remind you, put your questions into the Q&A and/or the chat, and I will be sure to get to them as quickly as possible. All right, so stocks we're talking about today: Toll Brothers, Baidu, Arista Networks, Occidental, Toll Brothers, Medtronic, Cadence Design Systems. Uh, interesting stuff going on. Let's, let's jump in at the top here, the Arista Networks. I noticed the stock is down pretty heavy today, 5.6%, way more than the market. The market's pretty flat. Across the top, what happened here? Interesting. Apparently, despite the fact that they top estimates, and I think everything's looking good in terms of revenue and outlook, the reliance on Meta is creating some kind of issue. This is interesting to me. I wonder what's going on here. Overreliance on Meta revenue. Despite the company topping fourth quarter estimates, providing first quarter revenue guides. Above expectations. Concerns about customer concentration is reported 70% revenue hit from Meta. All right, well, interesting headline. Typically, you know, I don't care that much about headlines on the day of because it's mostly a bunch of marketing material, but when you're dealing with a stock like Arista, it doesn't take much to knock it down because we're talking about good company here, good profits. Right? But as you guys have heard me say before, bad stock, right? And we'll go into some details here about what we mean by bad stock. But the main thing here is valuation. The price-to-economic book value ratio says that the current stock price is 4.8 times the no-growth value of the stock. No-growth value of the stock being the value of the business if it didn't grow. So 4.8x that is the stock, which means the large The large majority of the overall stock price, over 80%, is based on future growth. Based on future growth, right? So that's a lot of risk when that much of the stock price depends on future growth. Another way to think about it is that when we extrapolate out consensus numbers, that it's going to take more than 100 years of profit growth to justify the current stock price. Keep in mind, my terminal value is a no-growth terminal value in that entire reverse DCF model. And I just did a special session with the guys, the Investing for Beginners podcast guys, Value Spotlight guys. We talked about this in particular, how so many DCF models are really terribly undermined. I don't even think they're real. I think it's a fake DCF model if you use a perpetual growth rate or have a growth rate in your terminal value. What's the point of even having a DCF model if you got perpetual growth in there? Our models don't have that. What we have is multiple forecast horizons. Anyway, I'm geeking out here on the DCF because it's important to get it right. It's important to get the numbers right. If you're going to do fundamental research, get the numbers right. Fundamental research based on bad numbers is misleading. It's propaganda. It's like going into relationship with somebody who's lying to you. It's not a good move. So this is expensive. Let's talk a second for just how expensive this is. All right. What kind of scenarios do we have in here? Just got a neutral and a default. So let's, let's try something else in here. I wonder when I created this neutral, let's make it optimistic. And that note, that means we know it's got to be even better than what's in the neutral. So these are the consensus numbers for growth. This is an extrapolation of past performance. So you got better than ever margins and much better revenue growth. So let's go and keep these margins best ever. See these best ever all time? Yeah, best ever all time. And then let's, let's jack up the revenue growth here. 30, 30, 25, 20, 20, 20 for 10 years. 20 for 15 years. Pretty much everyone has to agree that that's a very optimistic forecast. Thanks for hitting me up here in the Q&A. Another good question. How do we figure out our, our coverage universe? We're covering the most actively traded stocks in the US. So we want to cover the stocks that people care the most about. We do have plans to expand for the world. I think that's going to happen this year. Kind of depends on some partnerships we're working on, but our technology's ready. We're parsing close to 90% of filings 100% automatically. So we want to get there and quickly, and we can. And it's just really a matter of resources and priorities for us. But yeah, John, when it comes to coverage, we are getting the stuff in the US. We're really focused on where the most of the world's market cap and trading is, and like 90% of that is S&P 500. So we get all of those stocks. So anyway, so here's what you got to look at for to believe Arista is fairly valued. You got to believe that the company is going to grow revenues at 22% compounded annually. Remember, consensus maxed out at 16, and then they've got to improve their return on capital versus cost of capital spread from 70-80%. You got to double that to 174%, right? And they got to do that in the next 12 years while growing revenue at 22% compounded annually. Bam! That's what it gets us. What does that mean in terms of revenue? That means revenue is going to be $64 billion. Where does that rank in the S&P 500? Let's see. Let's sort by revenue. $64 billion puts them around 60th in the S&P 500. The return on invested capital has got to go up to 265%. Look at that. Right. This is— this is, again, keep in mind, compared to past performance. We're going to see revenue pretty much skyrocket here, right? We're going to see return on invested capital pretty much skyrocket here to 265%. Where would that rank in the S&P 500? The S&P 500. So that's a pretty big jump. Let's look at what it means in terms of actual NOPAT. After-tax cash flow, they got to be up at $24 billion. Where would that rank? $24 billion in NOPAT would put them, you know, right at 10th in the S&P 500. So I think it's safe to say you got some really seriously high expectations based in Arista Networks. Not priced to see— not surprised to see the slightest bad news knock it down a good bit. All right, let's take a look at Medtronic. What's the news on Medtronic today? Believe it was nothing really too special in the results. Guess yesterday was down. Surgical unit offsets ablation and diabetes growth. So maybe yesterday the stock was down. Today it's flat. Yeah, big drop yesterday. So the results. Looks like they had some bad numbers. All right, well, what do we say? Surgical unit offsets epilation. So they came in below numbers. They missed, they missed yesterday. All right, well, we were predicting that earnings distortion score was a miss. This is an unattractive stock anyway. And so yeah, you were not surprised to see it get punished pretty badly yesterday, down, look, about 4% in a day. That's a lot, close to 5%. Flat today, up a little bit today, but yesterday, big 5% drop. Whap. So what happens with attractive stocks that have poor economics and already pretty expensive valuations? Yeah, nothing too exciting to see here. Economic earnings headed down. You can see accounting earnings looking a lot better. Return on invested capital down. Margins down. Capital turns up, free cash flow pretty solid, quite solid. You know, you're around the 2-year yield is 3, 4%. See price to economic book value, economic book value coming down. You can see stock price coming down with economic book value. We wouldn't expect this relationship to change much. The stock price is already pricing in a decent amount of growth here. as it is. So yeah, unattractive stock, uh, business not doing great, earnings not a real big surprise. I am interested to take a quick look here at Arista, and we can see like the difference between its price and economic book value. Look at that. Yeah, just taken off. This is an example of a crowded trade, my friends. Crowded trade. If you want to invest based on the herd, chase everybody else. We think the real value is going to where the Rest of the market is unaware. Finding the dark corners, that's what we recommend. All right, what's the next here? Cadence Design Systems. I think we've got a couple questions on this recently in some of our other watch parties. Let's see, CDNS. Whoa, down a lot. Soft guidance. Well, my friends, that's what happens when you're this expensive. This is an even bigger price-to-economic book value ratio than Arista Networks at 4.8. If we were to open a model and look at what kind of required performance was needed to justify this stock price, it's going to be really, really high. Really, really high. This is an expensive stock, to say the least. Poor economics. Yeah. Expected to miss. Didn't do so well. It's going to get crushed. All I can tell you is like, look, bad risk-reward, avoid. Avoid. Don't take this risk. Don't take this risk. Um, it's a dangerous stock. Returns on capital look pretty good. Economic earnings flat to down, kind of. Return on capital still pretty, you know, it's not a bad, you know, I mean, anytime we see above 20% return on capital, I'm like, that's, that's nice, you know. We see that more than we've seen that in the past, but the valuations more than account for it. And what I'm trying to say here is the difference between a good company and a good stock. Could be the greatest company in the world, but if the stock price is already predicting a future or embedding a future that's better than the best-case scenario, well, it doesn't matter how good the company is. If it can't be as good as what the stock price says, it's a bad stock. Expectations matter. Valuation matters. Valuation is about the future. So however good the company is today, if the future implied by the stock price is better than the company can be, then it's, it's a bad situation. So we've got margins and capital returns and free cash flow, everything headed down. And yet when we look at valuation, it's going up, right? Economic book value pretty flat, coming down here recently, down really the last 4 or 5 years. You know, you got to go back 6 years before the economic book value was lower than it is. Today. So that's headed down. And where's the stock price going? Up. Here's an optimistic scenario. Golly. Yeah. Optimistic scenario. I mean, that's got really crazy growth in here. What did we put in here for optimistic? 20% compounded annually for 10 years. And we're still only going to get to a stock price that's less than half the current stock price. Yes, my friends, that's a dangerous stock. It's a dangerous stock. Sure, it might keep going up. You know, momentum is great when it's going in your direction. And you know, maybe Roaring Kitty likes it too. But this is something that we would say you want to be careful. You want to be careful. All right, let's look at Occidental. How about some good news, folks? Oxy, 5.6%. It's up pretty good. What is this? What happened? They beat the numbers. I think they have more cash flow than expected. Let's see. Beats on estimates, misses on revenue. Surprise profit growth amid debt reduction focus. So what is this a story about? You've got a business, stock price already cheap. They're looking to reduce debt. What does that mean? More cash flow for you. This is a shareholder-friendly business. Right? This is part of why Warren Buffett owns it, part of why it's on our focus list long, right? We like good businesses. So a better outlook for growth than expected, and it's a cheap stock. Look, you know, these cyclical companies, you're going to see these stats look bad sometimes, right? I love it when it's green all the way across, but sometimes you just got to understand, look, we're in the low part of the cycle. But when the market expectations are that the cycle is not going to actually ever repeat its, its ups, well, then you got a good opportunity. And as I've said in the past, this is a really strong indicator. Market implied growth appreciation period less than 1. That means the stock's really cheap. The price to economic book value at 0.8. That means that the current market cap is 20% below the no growth value of the stock. The opposite of what we've been seeing where the stock price is way above the no growth value. huge amounts of growth priced in. This stock has anti-growth priced in. This price— this stock has decline in profits priced in, a 20% decline in profits, despite the fact that economic earnings are really pretty steady here. Return on capital up and down. A cyclical company, we see cyclical companies, but still pretty, you know, decent, holding steady. Margins, you know, falling but holding steady. Free cash flow, big acquisition here, big-time free cash flow, probably big acquisition here as well. And then here's price to economic book value. You can see it's above the stock price, above the stock price. So the current stock price is implying a permanent, a permanent 20% decline in profits. We like that. I'm guessing this is why Warren Buffett likes it. He also likes businesses that make real money. There's real fundamental value here. And I think that like despite tariffs and all this, Look, we want to become energy independent. I think that this administration is going to be bullish on energy stocks. I think it's a good place to be in energy. In fact, let me show you our ratings in the energy sector, our sector ratings. Where's energy? Energy is number 1. This changes every day. I think financials was 2 and cyclicals was 3 and telecom was way lower. So interesting. We're seeing a lot of movement these days. I've never seen the sector ratings move around like this. Unbelievable. But yeah, energy is our favorite sector. A lot of value there. A lot of value. And look, Oxy, Warren Buffett owns it for a reason. And look, despite the fact that they didn't meet earnings, well, guess what? Those earnings don't matter. Did they miss by 20%? Probably no. They barely missed. So that's a better than expected number despite it not being what Wall Street wants. Remember, those of you who've been to some of my trainings, And by the way, we got it. We got a big training tomorrow on a golden metric. This—it's a special ratio or situation when we're looking at at a at a at a proprietary metric in our system that when it when it's got green, it's a super strong indicator. We don't have a model portfolio for this yet. It's research that we're just now doing. It basically supercharges our rating system. So tune into that tomorrow. I'll post a link to that in the chat so you guys can sign up for that. Anyway, it's super special. We actually did this several months ago. Those stocks outperformed like crazy, and we're like, we got to do this again. So really cool idea, and it's based on the same method— methodology as what Warren Buffett cares about. I want businesses that make real money, and I want expectations to be low. Right? That's what Oxy is. It makes real money. It's in a real industry. It's got a tangible product. We know we need energy forever. If you guys have seen a lot of our long ideas, we've been writing long ideas for a long time talking about how greenwashing and ESG was kind of a scare tactic to say like, oh, all this, uh, we're going to lose out on, on fossil fuels are going away, there's going to be no demand. Wrong. Demand is not skyrocketing, but demand is not shrinking either, not for 25 years. These guys are going to be generating a lot of cash flow for a long time. Not to mention, they're the best at distributing energy, whether it's based on fossil fuels, natural gas, natural gas liquids, or wind or sun, right? I mean, they're going to give you the best deal for energy. And by the way, what fuels growth in our country and the world in general better than anything? Low energy costs. That is a boon to prosperity. Higher energy costs is a tax on prosperity. So by all means, we want to move to greener energy, but we can't do it when it's so expensive that it puts too much of our world in a poorhouse. That's a bad move. The better move is to raise standards of living as fast as we can with little cheap, cheap energy, so we can get more technology to get smarter and bring green energy online when it's ready, not when it's going to tax our people. Anyway, that's my rant on that. But Occidental is a great example of a, you know, a great, a great investment, a great way to think about stocks, which is why we believe Warren Buffett loves it. And yeah, so it's, it's a, it's a business that cares about its shareholders. How about that? Right. Most of the time we look at all these crazy expensive stocks, especially the ones that have IPO'd recently. You know how much they care about their shareholders? So much that they give them no voting rights. We're going to sell you stock so you give me money. And the one thing I'm supposed to get back for buying stock in your company is the right to vote. And they basically dilute that voting right to something so low that it doesn't even count. So you want to invest in these stocks? Be my guest. Good luck. I don't think it's going to end well for you. My friend Jay Fosby is dropping hints out there. Be careful, Jay. Don't give— don't steal too much of my thunder, please. All right, let's look at— let's look at Baidu. Attractive rated stock. You know, I got to tell you though, I, I get a little bit nervous about the Chinese stocks and companies. But attractive rated, it's got a similar price to economic book value, 0.8. And look, the bottom line, you know, with these Chinese companies is that they are not their own masters, right? They all basically serve at the pleasure of Chinese government, which means things can change quickly. And I'll be completely candid, I always blew my mind about how Charlie Munger was about a lot of these Chinese stocks. I think maybe there was going to— he believed there's going to be enough of a run-up in the short term that it wasn't going to matter. But yeah, I think you just got to be careful here, you know. And these AI stocks, like, things could be good today, bad tomorrow. but they're going to see more competition. Uh, revenue falls less than expected. It's not happy. Uh, and this is a good example of where, you know, they— it looks maybe cheap but could get cheaper because the competitive position of this company is in peril. Anytime you serve a master other than your shareholders, investors got to be on alert. If their job is not to create value For you, U.S. investor, then I just say be careful. Be careful because they can wake up one day and say, "Oh, guess what? We're shutting this down. All the money is going to go to the government." They can do that. Would there be an uproar? Yeah. Would people be upset? They can do that. China's not exactly made it clear that they are our friends. If you read, you know, any of the Heads of the State Department and those folks on whatever side of the aisle that you want to check, they all say the same message. China believes that they should rule the world. They believe that is the long-term way it should be, and they will do whatever they can do to get there. And they were playing the long game. So Baidu revenue falls less than expected, stock down a fair amount. You know, look, I think the market's getting more rational. I think the market is getting more rational. I think we're moving back to a world that's a bit more rational. There are a lot of crazy things we were told. Criminals could go free. Money could be wasted. We were told that was good. You know, we had all kinds of crazy, wild narratives out there that were untrue, and you were shamed if you stood up against them. And, and sometimes I felt shame for standing up against overpriced stocks. I think we're moving to a world where things are going to be more rational. It's in the best interest of our country. All right, let's talk about Toll Brothers. So we had a great meeting yesterday or earlier this week. I don't remember exactly what day it was, but it was with our— as a client meeting, our professional and institutional investors. And someone said, hey, David, let's do a worst-case scenario model on Toll Brothers. Because, you know, there's been some bad news around margins. You know what's going on in the industry? Like, I mean, it's tight. It's tight. You know, margins are going to be tight. Let's go in and see what happens if we knock 250 basis points off of margins. So we went in, we put together a couple of scenarios here. We left growth the same as consensus and we said, all right, our model says margins are 18.4%. They were at 19.3%. But we're going to knock 240 basis points off and then 440 basis points off. So as much as our clients said to knock off and then double it pretty much, and see what that means for the valuation of the stock. We'll leave everything else the same. So we've got the pessimistic and neutral scenarios here. And you can see in the neutral scenario, the stock still looks cheap. So you take 240 basis points off. And you're still looking at a stock that, you know, at $138, well above the current stock price. And then similar, if you go even if you knock 440 basis points off, you know, all you're looking at is 5 years of growth at a 4.7% rate with, again, a much lower return on capital versus cost of capital spread. So, you know, it's, it's still super cheap. Right? So we go back in here and look at Toll Brothers. Yeah, this is a lot of green across the board. You know, we've been bullish on, on a lot of housing companies. There's a housing firm that's been in our focus list and one of our top performers for a while. Not giving that away, but it's got similar stats to this. And, and, you know, look, you can see a price-to-economic book value of 0.8, 20% Decline in profits predicted. That makes it really cheap. Toll Brothers, yeah, down a lot. Why? Missed the numbers. It's a great example where the market's got it wrong. The market's pricing in way lower, way lower long term. The market is pricing in way more profit destruction than I think is going to happen in this business. So great example of the market missing the point. In the short term, that doesn't help us. I get it. But as the market gets more rational, stocks like Toll Brothers have an opportunity to fly, to fly, right? How high can it get? I mean, let's, let's assume margins drop 440 basis points and in 10 years they're back up. I mean, you're looking at 100 and, you know, 100 and let's see, 10 years from now, that would be 2025, 2035. $157, $158 a share. That's assuming margins stay super low. If margins get higher or only go drop 240 basis points and we want to go out 10 years, we're looking at $157 a share. What did I say down here? That's $130 a share. Sorry, $157 a share if margins only— and they still permanently fall by 240 basis points. So, and if you're looking at margins to say in range with where they've been, whoops, the default scenario is here. You know, you go out 10 years, you're looking at $180 a share. Margins don't permanently fall. So that's what we think about Toll Brothers. Yeah, we had a great call about this. This was yesterday. Someone said, hey, what happens? And it was pretty awesome timing for this client because Potentially they're bullish on Toll Brothers. And we looked at this for a bunch of other housing stocks and they all came out the same, more than pricing in significant margin decline. It's more than priced in. Stock's still really cheap. And so I think that helped our client maybe make a decision around whether or not he or she should hold. So really cool meeting is our long idea. Let's talk long ideas with our professional institutional clients. It's a great time to get to do deep dives on, on particular stocks. All right. I've got time for one request before we take off here. I'm going to do this. This was actually emailed in and in the chat. So let's, let's take a look here. So let's look at the DIA ETF. Is that what it is? There are DIA ETF. Is that, is that the name? Ruby, give me the ticker. I think otherwise it's not going to be Oh, there it is. Okay. DIA versus SPY. So this is very attractive and SPY is just attractive. So the question is, why is it better? Sometimes— let's see, we got— well, DI's got a higher return on capital. It's got a similar free cash flow yield, similar price, a better, better price to economic book value. The worst market implied growth appreciation period, about the same cost. So mainly it's a much better return on invested capital instead of a neutral rated return on invested capital. Whoops, let me take that back. We're looking at SPY. Okay, so it's the only thing that's better for DIA versus SPY. Apologies, I was on the wrong row. The only thing that's better for SPY versus DIA is this price to economic book value. So instead of, you know, light green, dark green, yellow, orange, red, SPY is red, red. So that's the difference. But I have to point out to you that when it comes to our mutual fund and ETF rating methodology, this is how we have to break it out. 10% get very attractive, 20% of the best get attractive, 40% equals neutral, 20% attractive, 10% Very unattractive. The reason for that is because since the majority of stocks are rated neutral in our system, which makes sense, right? If a market's a fairly moderately efficient, a semi-efficient market, you're going to get most stocks right. And so most get a neutral rating. In that world, fortunately, since that's most stocks, it also means that most, almost like not too many ETFs and mutual funds got a neutral rating because the majority of stocks are neutral, they're already neutral stocks. So it kind of just everything sort of got watered down, and we decided it would be much more helpful to rank them all based on more specific criteria, not just the overall rating, and then break them up into these segments. And so you'll see sometimes some funds that are really pretty similar but will have a slightly better rating. That's because maybe they're right on the border between very attractive and attractive, and a slight change in the score here. Or the actual value will bump them up or down. That's what's going on with the ETF and mutual fund ratings. Alrighty, thanks so much. We're going to do one more of these today. There's only 2 this week. I got to travel, unfortunately, for a national wrestling tournament for my middle boy. Congratulations to him. Qualified. Excited about that. Excited about more of these. We'll probably be doing some more next week as well. Make sure you show up to that training tomorrow. I will put the link back in here. It's a special training. It's a secret golden metric that only we calculate because no one else does the put notes as well as we do. Sign up for that. Enjoy. And thank you for being with me today. And let me know if there's anything we can do. Send us an email at support. Contact us at any time. We'd love to hear from you. Have a great day.