New Constructs' Friday Webinar: Intelligent Capital Allocation 31 March 2023

I did want to, I did want to kick things off with just a few words of support and condolences for what's happened in Nashville this week. New Constructs is headquartered in Nashville, so this hits close to home for us. It's been a tough week and we just want to let everybody who was affected that we care for them and they're in our thoughts and our prayers. And we just hope that we can make the most out of this and make it something we can grow smarter and better from and keep it from further dividing us. And with that, I think we'll, we'll jump into the rest of the meeting here. Today you've got Me and Tamara and Kyle, and we are doing the same song and dance as usual, except that this week it's going to be me emceeing except for John. John might join us as a visitor, but he's busy with some other stuff, so I'm going to run with it. So when you guys fill out the survey here at the end, please make sure and let people know what you think. So I, yeah, I love how John likes to start these things off with talking about what it is we're about. And I think, look, decision-making is probably one of the most difficult, important things we do as humans, right? Not just in our day-to-day, but importantly our resources. And a lot of bad decisions can lead to bad things and good decisions lead to good things. But at the end of the day, the only way to make a good decision is to be well-informed. Otherwise you're taking a risk. You're not really making a decision, you're just speculating. And that's what we're here to help people do more than anything. We want people to be successful. We want them to be empowered. We want them to be knowledgeable about what's really going on. And apparently there's no shortcut to that except to, to do your diligence. Disclosures and disclaimers are super important. We're not in the business necessarily of, of giving official advice. This is not what New Constructs is about. We are a publisher. And so we want to be clear that people understand our role and This situation. A couple of housekeeping notes. Planning. We are going to be rolling out pretty soon another webinar. That one is going to be free and open to the public where we talk a little bit more generally about what New Constructs does. We're calling it a bit of a demo day. And then we're going to, we're going to keep the presentations, the webinars we're doing now. And, but those are going to be moving to a clients-only status. So you're only going to be able to join these webinars in the future as a client, or if you're a client. And then one other thing, we're going to be off next week because of Good Friday. To the agenda, the fun part. What are we talking about this week? We're going to go over some headlines and things that we thought were interesting to some of the stocks in our focus— on our focus list. We're going to feature our long idea, which I think is an interesting one, especially given what's happened in the last month or so with the banking crisis. We'll talk about our model portfolios, and then we're going to get into one of my favorite products, which is Our macro work with respect to understanding how the S&P 500, all its sectors, also our all-cap index, the what we call the New Constructs 2000. We're going to take a deep look at how trends at the macro level are playing out. And we're going to also peel back the onion a little bit there and look at how certain sectors are giving us contra-indicators in terms of their performance relative to the S&P 500 and the market overall and even to each other. And then we're going to spend a couple of minutes talking about a new feature. We'll do a deeper dive on that next week or 2 weeks from now, but it's a really cool new thing that we added to our Excel models that was based on feedback we got from one of our new clients. Intel. We saw some very interesting news this week with respect to Micron and it reporting some of its worst earnings ever, its worst write-down ever, and yet it was up a lot. Intel was up a lot, and we think what we've been saying about this stock for a long time is starting to come true. Kyle, you want to— you mind going through our report here on Intel for a second? Yeah, I'll look it up as well. Bigger. But go ahead and take over the screen share whenever you're ready.

Yeah. So here's kind of our report on Intel. It's looking at semiconductor industry as a whole, and then more specifically with Intel and how it's positioned to really lead the market and also undervalued at the same time. Broad-based global semiconductor chips in everything, expecting large growth through 2030, 80% larger than what we're looking at in 2020 and 2021. More specifically, a lot of the markets that Intel is supplying those chips to personal computers, data centers, semiconductors, 5G, autonomous vehicles. All those are experiencing and expected to experience rapid growth rates. So you've got the macro tailwinds and then Intel stepping into each of these markets, working through some technical issues they've had in the past, but still being able to capture some of that market share and really grow the business moving forward. We've looked here at the non-client computing group. I was looking at revenues growing 6 consecutive years, building that different base, shifting only away from only Computer chips outlined sort of path forward exactly what the Intel picture would look like product leadership external foundries internal foundry services all ways they can build more leadership in the market especially on the U.S. side as well and we think that was the big point of this report was we've got between geopolitical wars it's back and forth some of the China chip domination people are afraid of that moving those chips back to the U.S. really puts Intel in a position to dominate moving forward and build that share with kind of some of those market tailwinds we talked about. That's what we're talking here is lowers the exposure to the geopolitical risk. 70% of sales in 2021 were generated outside of China. So you've got that big diversified regional products. And then the Achilles heel in the strategy, the innovation is something that Intel and some of the more US-based companies have always been known for. China's able to replicate some of those processes. But Intel's ability to really lead on the innovation front and grow moving forward is one of the reasons we put it as a long idea to begin with. It was, but I think jumping through here, and it's a long report, we can go through a lot of this, but I think the money chart, as we like to call it, is valuation. We looked at this back when it was at around, I believe it was, where's the current price? 48. So it's fallen since then, even with the jump in the past week to justify that current price. There was a huge decline in profits implied by the stock price. And it would look even more extreme now with the price falling. So we put together some conservative scenarios given that since 2009 they've tripled, more than tripled profits. And even if they barely get above that TM level at the time, it'd be worth somewhere $85 a share, which is even greater than that 77% upside when we wrote this report. And so it's market tailwinds, industry leadership, building out kind of a product base that expands beyond the traditional chips. And then the bringing growth into the US and the manufacturing platform of chips gives this a great growth story, especially when the stock is this undervalued.

Yeah, I think the main news kind of today, the catalyst, and we got a great question about Intel that I want to touch on in a second, Kyle, I want to speak to is that, look, the chip industry's coming back, right? I remember all the way back to the pre-tech bubble days, and even then, like semiconductors was a big part of the global economy. And it is cyclical, though, in a way that commodity stocks can be cyclical. And I think that speaks to how semiconductors are a modern commodity. And what was interesting about the Micron news was, yeah, worst— some of the worst ever write-downs of all time, but it was the outlook that caused the stock to jump. And I think what we're seeing with Intel is it's a great example of a company that's near the bottom of a trough. And that's why, to Mark's question in the Q&A here, Our rating on Intel is unattractive right now, and we often have positive outlooks on stocks that get an unattractive rating. It's not always about the current economics of the business. It's about the expectations for the future profits and how those compare to what the investor thinks. So historical profitability is relevant to the extent that it's a benchmark for what the market expects, is a helpful benchmark to an investor. But for people who know the business better or have a different view, your historical profitability, your current profitability isn't necessarily all that important. And the cool thing about Intel is that we got a long history and we know how profitable it can be. So a dip in the near term isn't going to make us shy away when we run our model and see that in the medium to long term, the expectations for future cash flows just aren't that great. And so what we're thinking with Intel, and as we outline in this scenario, right, what Kyle's got up on the screen today, if they grow Notepad at just 1% compounded annually for the next decade, it's worth $85 a share, practically a double from here, right? More than a double from here.

Yep.

And for reference, they've grown 4% compounded annually over the past 10 years and 10% compounded annually since 2016. So We just think the macro backdrop here is really important just for all semiconductors as the global economy gets back online. And I think that the political environment means that we're going to be onshoring a great deal more of our chip production because to the extent semiconductors are a commodity, they're super important. Everybody needs them. They're strategic though. You don't want someone building that's going to plant listening devices in there, right? And we've seen that happen. So Intel's ability to scale up and really help the US have a stable and secure source of semiconductor chips is probably really important. All righty. I'll take back the share here. Yep. Here's our rating, right? And to Mark's question, great question. Why is it unattractive right now? That's because we're seeing a dip in profitability.

Okay.

We think that dip is not going to be sustained. Fell off a cliff 2022. That's the same as it is right now because we just got the 10-K and we think it's going to get back to more historical levels, 10 times higher return on invested capital than where it is now. We just— and the stock price doesn't require it to get that, to be that good. It's just got to get about halfway and we're back in business. I think if we were to look through economic book value per share, we can see that the no growth value of the business right, in just the last few years is still way above the current stock price. We had a big drop, bad year for Intel. We think it's anomalous. That's going to make the ratings look bad historically. Right. And going to make even the valuation look a little stretched. But we think that it's, it's still very cheap. And here, even if we look at a very set of a very conservative set of expectations and the summary of our reverse DCF, you can see we're saying return on invested capital doesn't get back to anywhere near where it's been in the past. Just to be super conservative. And so that's the— I think one of the benefits of Kyle's model and the report is to provide scenarios using our reverse DCF model that give us a very different perspective on what that stock looks like, what the possibilities are. All right. Keep the questions coming. We'll try to answer as they come along, and then we'll of course leave some time here at the end. So another really, I think, a really interesting article that came out and that we focused in on Circle. We had a nice conversation on Circle about this where we pointed out an article in Barron's that was featuring Ford's recent investor presentation. And the really cool thing about the investor presentation was this is my favorite slide, and it was featured by Al Root in Barron's. I'll give him all the credit. He highlighted this. But they're changing— GM— Ford is changing the way they actually report their segments. And by that, they are focused actually on— they got regular cars, they got e-cars, and they got something else. I don't remember what it is. All right. But the main takeaway is Ford provided something that we've not seen any other electric vehicle maker— or I'm sorry, any upstart electric vehicle maker provide. And what is that? A path to profitability. And in particular, they're pointing out how their current negative 40% margin in EVs is going to go to positive 8%. And they tell us exactly how they're going to do it. And to me, this is a great reminder of why we believe that Ford and GM are going to be real competitors in the electric vehicle space. In particular, we think we've already seen some legacy automakers be really successful in the EV space. like Volkswagen, which is dominating in Europe, and Mercedes has got some really high-end cars. It's becoming a crowded market quickly. And I think these legacy guys have said they have capabilities that we've been— that Kyle and I have been talking about forever, honestly, since we first started writing about Tesla. And that's their ability to scale. And that scaling ability is going to lead to lower costs, as we're seeing right here. They're going to improve their margin by 50%. Just with scale, design and engineering, they've got great potential to grow there. They're just getting into the business. They're building out their own battery and other who knows what that is. They're just going to get better over time, but they show a path to eight percent margins. And what was pointed out in the Barron's article was that Rivian can't scale like this. They can't. Rivian, if you just look at this. as an approach from going to a highly unprofitable business to a somewhat profitable business. Rivian can't get there. That's part of why it's a zombie stock. And I would say that Tesla can't get there with the kind of scale that Ford can. And so it comes back to the thesis that we started with, with Tesla and then with the legacy automakers, is that the first mover advantage is helpful, If you keep it, and Tesla hasn't kept it, it can be harmful if you don't keep it because you spend a dis— the early movers spend a disproportionate amount of capital proving the market compared to the fast follower who jumps in after the market has been created. And that's what GM and Ford are doing. And because they're jumping in after the market's been created, they can't make enough EVs right now, and they're selling as much as possible. Selling out. And that means that as they scale, they're going to get to profitability faster. And so they get into the EV business with a whole lot less negative cash flow than Tesla did. So I think some really interesting news there, and I love how Ford effectively raised the bar for all electric vehicle makers to show the same kind of transparency into how they're going to make it to profitability. And hat tip to Al Root for pointing out how Rivian can't do it. I'd love to do this for a lot of the other upstart makers. I know I've seen articles in other places around Lucid, how they're going to have a really hard time scaling as well, because they just don't have that big a market. And anyway, we've— good to see some sort of third-party validation of an important theme in our research over the last couple of years.

Yeah, we always hear companies talk about path to profitability, so it's cool to actually see them lay it out and not just hypothesize about it.

Exactly. This reminds me, it's a great point, Kyle. That reminds me big time of when I was on Wall Street, how much of a premium we placed on executives, management teams that would be specific, especially with respect to M&A, about how they would achieve the synergies implied by the acquisition price. Because one of the biggest problems in all of M&A is that about 2/3 of the time, the acquirer overpays. And they get away with overpayment when that overpayment effectively implies that there's going to be some synergy between the 2 companies. Otherwise, why do you give that acquired company more cash than you're actually going to derive from the deal? It's not good business. And the work that we do in M&A, and we've done some webinars about this in the past, and Mobergson published a beautiful paper on this several years ago when I was on Wall Street called Let's Make a Deal. It's awesome. If you haven't seen it, read it. It's like the most succinct M&A handbook of all time. And by succinct, I'm talking like maybe 15, 20 pages when everything else is going to be maybe 50 to 500 pages. But the main takeaway is that synergies can be quantified as well, right? You could do this on the synergy analysis, but companies don't do it very often and executives don't do it because there isn't any there. And I think that's a good rule to live by. People and companies and management teams that are transparent, they want you to know how they're going to do what they say they're going to do. And I would always raise a red flag when people aren't as transparent, because if you got it, you shouldn't be afraid to show it. I feel that way about research too, in case you haven't noticed. Some other— so we go from, I think, a good business model to flawed business models. I think one of the interesting things that brought this to our attention this week in Circle I think was a comment or note that someone pointed out. Oh, Lyft's co-founders are resigning. And then I think we also saw, yeah, Lyft paid their CEO $24 million last year. Where does that $24 million come from? Anybody know? It's not profits. It comes from you. You're subsidizing that. And that's why what we do, why we do what we do. We don't think it's right. for executives and bankers to take money from unsuspecting investors. We want to shine a light into the dark corner that says, listen, when these guys are getting paid this much and they're not making money, that's a, that's just, it's large-scale grift, pure and simple. And not a good thing. Talking about why this business model doesn't work, this chart kind of sums it up. It's been a while since I think we've reiterated on Uber, but the cash flow burn has been nonstop. Let's take a quick look here. Let's do a deeper dive. And I'll also answer a question from one of our members here about economic book value and how to think about that. So bad rating here, right? Negative return on invested capital. I think it's been trending this way for a long time. So nothing new here. It's been bad for a long time. We did see some positive free cash flow, which is interesting. That's a good thing. Probably because I think they maybe sold off some assets. Didn't they get rid of something like a self-driving unit or something like that? That can cause a blip in free cash flow that's unsustainable. But let's dig a little deeper into economic book value for a second because we got a question. How do you use that? I, for me, economic book value is a quick shortcut, a much more robust shortcut than the other shortcuts out there, but a quick sense of like, all right, if this business were to stop growing today, what would it be worth? And so it gives you a quick way to look at All right. If I take the after-tax profit of this company and I assume that they can maintain that into perpetuity without any more CapEx or anything, we got depreciation coming out of there. So we got maintenance CapEx assumed. What's it worth? And some, a lot of times when the company's got a negative economic book value per share, as we've seen Uber's had its whole life, sometimes it's because the operating profit after tax is negative. Sometimes that's because the profits are actually positive, but they've got such huge pension liabilities or option liabilities or tax liabilities, that all that profit is going to go to somebody senior in the capital stack, to the equity shareholders. Important reminder for some of our less experienced investors, right? The equity guy, the stock market investor, you're at the end of the line, my friend. The debt guys get paid, the tax guys get paid, the employees get paid. These people all get paid. They get their money. and get paid out before you get a penny. You need to keep that in mind. So there's a lot of liabilities, a lot of other sort of investors in line in front of an equity investor before they can realize a dollar of value. That's a big part of our work in economic earnings. So economic book value doesn't look good. For dangerous companies, I think it's pretty obvious. When the economic book value's really low and the stock price is a lot higher, you're obviously getting a market price that implies an enormous amount of revenue growth. When the economic book value is negative, you're talking about reversing losses and going into profits, large profits. And that's a lot of times what we're saying in terms of valuation, Kyle, right? It's not so much that we don't think Tesla will ever be profitable. It's just that it won't be as profitable as what the stock price implies.

Yeah. I think Uber and Lyft are some of the kind of quote unquote fun ones, just because some of the expectations in their stocks have always been so outlandish. I think when we last updated this, we put it in as a zombie stock. Uber needed to take 178% of their addressable market to justify the current price. And so it's even if we give them credit for improving margins, credit for growing at the same rates they have been in the past, or maybe even higher, there's still not a case to be made that There's value in the company at the current price. And so it's a great way to really analyze what it's trading for and what it should be trading for. Yeah, this one, it's the projection here. It's always fun to look at and it just shows you can speculate about the future. You can give 'em the best case possible and there's still no value in that current stock price. And that's what we're trying to do in these scenarios. We're not trying to be super punishing them for having to grow and spend money. It's like, and we want to give best case scenario, and that's exactly what we're doing here. And they still have to get 178% of the market to equal the current price at the time.

Yeah, I think that's a great point, Kyle. You do a great job of— whenever it comes to a danger zone or zombie stock, when we run scenarios through the model, we try to make them as best case as possible. We're not like pulling punches in terms of, oh, we're going to make a really bad forecast for this company to make it look bad. No, we love to be able to say things like, hey, to justify the current stock price, Uber at its current delivery mobility take rate of 19% would have to be at $1.4 trillion of bookings or 170% of the total addressable market by 2031 to justify its current stock price. If that's not optimistic enough for you, please let us know. Make a comment in Circle or you can ask a question here. You get the idea. And the opposite is true on the long ideas. We try to be really pessimistic about, hey, if even if things are this bad, The stock still has upside. It's all about really informing you in terms of what is good risk reward at the end of the day.

Yeah.

The other thing in here is that they've gotta grow revenue 20% compounded. What is it? Oh, revenue 31% compounded annually through 2031. That was at $32 a share. What's it at?

It's right around $31 right now.

So it's $31. It's moved its margin to positive 4% from negative 6%. And anyone who has ever run a business knows that like going from a negative margin to a positive margin, that's not an easy thing. People don't choose to have negative margins for fun. You know what I mean? If they could get positive, I think they would. They can't. And then to do that while simultaneously growing revenue at 31% compounded annually for 10 years, good luck. Talk about high expectations, bad risk reward. Quick question on the name of the author, Michael Mauboussin, and Let's Make a Deal. Is the name of the report. I believe you can Google it. If not, hit us up on Circle. We'll attach a copy if that's something we need to follow up on. A question, how does the equity risk premium get incorporated into your models? Does it increase the cost of equity in the WACC? Where are your assumptions in the current environment? Great question. I actually have a model open and we can go to the WACC page so you can see all the detail that goes into our weighted average cost of capital. Let me make this a little bit bigger.

Yep.

Is that good, Kyle? You see that okay? Pam?

Yeah.

Okay. Yeah, I've probably spent more time thinking about weighted average cost of capital than I would care to admit and that any of you would ever probably want in your life because it was such a central part of honestly the success of the work I did when I was on Wall Street. And then I knew would be really important to the success of what we do with New Constructs because to the question we just got today, from Malcolm around equity risk premium. Look, if the WACC assumptions that we're using in our system are whacked, pun intended, it all falls apart. It all falls apart. And it's really easy for your WACC to become terrible if you're using off-the-shelf numbers. And I'm not talking about financial statement stuff. I'm really talking about beta. And I remember when I was at Credit Suisse, We would look up the betas for companies. We'd go to the Bloomberg terminal and get the beta from there because, you know, I don't want to make up the beta on my own. And when we get a beta of 4 or -2, you try putting that into a cost of equity calculation and it's a disaster. So there's a lot of things over the last 25 years that I've learned in practice about how to keep your WACC normal. And by normal, I just mean not volatile. And unusual that it really undermines the whole point of the exercise of what it is we're doing. WACC needs to stay in its lane. And to Malcolm's question, so does equity risk premium. So we have a sort of very long-term view on equity risk premium. We don't change it a lot. And one of the things you'll also see in our WACC calculation is we update this like, I think, a monthly basis. We're taking a look at all these numbers to make sure that they're current. But a lot of cases, things like equity risk premium, you'll see that we blast back the same value over time. And that's important because if you are looking at economic earnings or your return on capital versus cost of capital spread and you say, oh my gosh, their economic earnings went way up, we don't want people to open a model and see a rating and see economic earnings moving up just to find out that it's all because we lower the equity risk premium. Or that the beta went down. We want to highlight operational changes in the performance of businesses, not changes in our assumptions. That's a trick I learned a while ago. I think the other thing to Malcolm's question, just the bigger picture about equity risk premium, is the fact that we use the capital asset pricing model for our cost of equity calculation. And look, we're getting really nerdy here and I don't want to put people to sleep here too early on a Friday. So real fast, I've looked at way more complicated arbitrage pricing theory and other models for the cost of equity. And as Mobison, a long time ago, said to me, and he's actually, I think he's written a book about this, right? There's no reason to go more complex if you don't get additional accuracy. There's a trade-off there. Doing things that are really sophisticated or complex that don't yield any incremental accuracy are a waste of time. And so what we found is that These more sophisticated or complicated ways of trying to predict what equity risk premium was tended not to yield results that different from what we got in less, more simple and approach ways, simple ways. So CASP, the capital asset pricing model, perfect example of that. It's a simple, direct approach. It's not a black box. Beta is an issue for sure. It carries way too much analytical weight than what it deserves. But we're going to use this as a construct for cost of equity because it's simple and we get to numbers that make sense. Wow, we really got off on from Uber and Lyft. I think you get the idea back to the business models and the economic book value for Uber and Lyft being negative, and that's a really bad sign. One of the things I did want to check in on here on Uber was how big the liabilities are, and in this section— I'm scrolling too fast, I apologize— the GAAP reconciliation section of the rating page. It's really cool here is you're going to see all the things, all the adjustments we make to the income statement. They're summarized. There's not a ton of detail here, but you get to see where most of them come from, where they all come from. And then if you open a model, you get more detail as to what goes into each one of these. And then the balance sheet will show you all the adjustments we're making here. Again, if you open our model, you get a ton more details to how exactly we calculate invested capital. And then in the bottom section, you get a sense of the liabilities. And so what you're seeing here is that, yeah, you got $13 billion in debt and minority interest is a small number, option liability, small number. The large majority here is of liability is $13.3 billion in debt, $2.3 billion of that being off balance sheet. So it's a little bit more than people think. All right. Banking. Kyle, this is an awesome long idea. I'm gonna let you take this one. Cool.

Let me share screen here.

So we thought it was a good idea to, to bring back JP Morgan, a focus list stock, one that's done very well for us in the current environment. Some good meat on the bone here.

Yeah. As the article title there, Trust Is Back in Vogue. As people kind of flight to safety, avoid some of that risk, we think JP Morgan's really positioned well to benefit from the current crisis and long-term. But we start out the report looking at overall banking. Obviously the concern is a crisis of confidence. Will this spread to other banks? Will this spread to the entire industry? And so we kind of looked at banks are strong in general. JP Morgan is leading one of those, being one of the strongest ones. Seen a huge increase rebound from the 2020, 2021 lows. already. Net interest margin, which we're seeing some of that strength in the kind of banking industry in general. JP Morgan's $20+ billion in net interest income in 4Q22 alone, which is 48% year-over-year growth. So you've got good strong growth there on the capitalized side, financial soundness indicator that's been trending up for the past decade. There's a dip here, but kind of the overall trend line, expect this as people again move to safety. JP Morgan's well positioned there. They got Set 1 ratio of 13.4 in 4Q22 above the requirement of 4.5. And then again, overall banks still well above, I think it's the 6% required. And so we've got strength in the industry, strength at JP Morgan specifically. And then on top of it, it's not the kind of same crisis this time around and not 2008. Again, you've got delinquencies on credit card, all loans here being at all-time lows still. We haven't seen a huge spike, a little bit there. But nothing significant as we saw in 2008, 2009. On the lending standards, again, trending up, tightening quickly. The rates and everything have changed. This is looking at credit card loans. We've got tightening standards, low delinquencies. Banks aren't being as reckless as we might have expected in the past, or kind of as we found out in the past. And that kind of, again, backdrop of the entire industry. I think we'll touch on it a little bit later as well. We looked at the kind of GAAP versus economic earnings for the entire S&P 500, and financials is actually one of the strongest. GAAP earnings fell $61 billion, but economic earnings actually rose $25 billion in the trailing 12 months for Q22. So it's got 2022 earnings were much stronger than GAAP would have you believe, and there's a lot of adjustments going into that. And so we think financials as a whole are stronger, and then JP Morgan's well positioned to kind of take in these deposits. We're already seeing reports that smaller banks are losing some of the deposits and putting it into money market funds, putting it into the bigger banks. For the week ended This March 15th, deposits fell, but that was mostly out of small banks. The large banks were actually gaining deposits and we're starting seeing that money move to these larger banks with JP Morgan being best in class. So we've got a couple different banks here looking at top ROIC, top NOPAT margin above some of the big banks, some of the investment banks as well. And so it's strong macro, strong specific company fundamentals, and it gets into The valuation, what's not working? A few things here. Non-interest revenue, tougher regulation is definitely a risk here if we see some big changes based on Silicon Valley Bank, some of that stuff. But again, that's always going to be a risk with banking. So in that case, go for the top, go for the best, and in that case would be JP Morgan. And so we look at kind of valuation right now, justify the current scenario. NoPEP margins need to fall 8.5% versus 25% 10-year average. Revenue would only grow 3% compounded annually. The next decade, and that would be the current price. So you've got big fall with that big drop in margins. Don't even return to kind of 2021, 2022 levels for that current price. And so with conservative growth, NOPAT margins still falling 21% versus 27% in 2022. Revenue grows just 4% compounded annually the next decade. You're looking at $157 a share today, a 22% upside. And that's in a conservative scenario. That's NOPAT growing 2% compounded annually. the next decade versus 8% in the past 10 years. So if we see a return to that historical growth rate, the stock's got even more upside. And so again, it's, we wanted to reiterate, while there is a crisis at the regional level, some of those banks, people freaking out, concerned, the kind of larger banks and specifically JP Morgan are much better positioned to weather through it and see that upside potential in the stock price.

Yeah, great stuff, Kyle. And what a great kind of juxtaposition to Uber and Lyft, right? You've got extremely high expectations baked into stock prices on business models that are questionable at best. And but with JP Morgan, you've got a price-to-economic book value of 0.8. So that's effectively a value that is— that's a price that it's implying cash flows are going to permanently decline on top of what is a pretty amazing business in comparison to Uber and Lyft. rideshare and food delivery and scooters. All right, Sam, thanks for the reminder. We got a lot to cover in a short amount of time, so we're gonna, we're gonna hit on this. I'm gonna do it a little bit faster than normal. Wait, did I skip? Oh, almost skipped these model portfolio updates. Uh, in case you didn't see them, we published 2 new reports this week on, or 2 updates for the model portfolios, dividend growth stocks and executive compensation aligned with ROIC. Kyle, I'll take these and I'll let you do the sector trend stuff. Dividend growth stocks, right? What are we helping people understand? Mostly that these firms can afford to pay their dividends. So we're going to make sure that the free cash flow is there. So whenever we feature a stock, you'll see that report. People even who aren't clients get to see a free example, free insight into how the cash flows for that business exceed their dividend payments. We think that's a good thing. And then executive compensation aligned with ROIC. This is one of my favorites, near and dear to my heart. It speaks to like The point I made before about executives who are willing to be transparent about what they're doing with shareholder capital when they make an acquisition. I think executives that are transparent about how they should get paid, it's another good thing. So if an executive is going to benchmark his or her compensation to a metric that creates value for investors, all day long, baby, that is a great thing, right? Another big red flag you could talk about with Uber is like how their Goal is to this EBITDA number, and before that it was an adjusted EBITDA number that just I think six or eight months ago they to admit was a bad number because it did not reflect profitability. They said that out loud. Oh, by the way, we're no longer going to use adjusted EBITDA because it does not really reflect profitability. Great. Glad to know that's what you've been focused on all this time. I love trusting you with my money. Pay that guy twenty four million bucks. Anyway, exec comp. The stocks on the exec comp list are don't have that problem. And they all have also attractive or very attractive ratings. Kyle, you want to jump in here? I just want to, yeah, as you're talking about it, I can scroll through here what we did on Circle.

Yeah, I was going to go straight there because that kind of pulls in some of the biggest findings we were looking at. So here we, in the reports, we start with kind of the S&P 500 or our NC 2000, and that gives a 30,000-foot view. But when we dig in at the sector levels, we see a lot of different trends, even if the S&P might be trending up or trending down. And so in this case, we're looking at economic book value versus the market cap and kind of some of these sectors with large decline or maybe small increases. Utilities had this huge decrease in economic book value. A lot of that is, can be attributed to rising rates, rising WACC. It puts a damper on their industry. Industrials in this case, David just switched there, a slight increase in economic book value. It varies across the different markets and different sectors. You can see differences from the S&P. And so it's interesting to understand where the actual sectors are moving, like technology back there, economic book value was falling, which some people might expect, some people not with technology driving such of the market lately. I think it's even more interesting on the kind of economic earnings side to really see the disconnects in some of the GAAP versus economic earnings numbers we see.

So there's the S&P. Sorry, Kyle. Then I'll go to the sectors.

Yeah. S&P looks to be moving in line with GAAP there for the overall market. And then at the sector level, much different. Basic materials here, GAAP earnings flat, economic earnings have fallen past couple quarters. Economic earnings, GAAP has actually risen the past couple quarters. I said flat for the last most recent period, but over the past year or so, a big disconnect here. And so you've got underlying profits aren't as much as high as you might think. I mentioned with JP Morgan, financials kind of the opposite, huge decrease in GAAP earnings. And then the most recent period, economic earnings actually improved. So we're seeing better profitability in the sector as a whole than you would if you're just looking at GAAP earnings. Industrials, similar, big increase in GAAP, slight increase in economic earnings. That's again, in a scenario where S&P might be falling, but the industrial sector actually looks more positive than the overall market. And I think it's just more insight into what's actually underlying the market. Because a lot of people talk about, when we say the market in general, but there's always insights to be gathered from the actual sectors. You've got funds from operations in the real estate falling with economic earnings, or funds from operation rising, economic earnings falling. And then yeah, that utilities sector on the last one there, the most stark Decline in the past few quarters. And again, a lot of that can be if profits remain flat and rising rates, you're going to look at economic earnings are going to fall. And that's what we're seeing with utilities there.

Yeah, utilities look bad. The real estate, to like to tag on this with a question we're getting from a client here, the office space industry is looking pretty rough. And I think there's a lot of money in REITs tied up in office space. Industrial and residential are holding value, as Roger points out. Banks do provide sufficient disclosure to the regulators about what's in their portfolio. That's one of the most surprising things about Silicon Valley Bank is that their portfolio was a train wreck, like going back over a year. Their chief risk officer left over a year ago, and yet nothing was done. They— that's the job of the regulators, honestly, is to make sure that the portfolios of the banks aren't putting the deposits at risk. That's their one job. One job. They're not always doing it. Great stuff here, I think, on the macro work. I love our macro work. It's really special. No one else in the world does that, and certainly no one does it with the quality of data we have driving it.

Yeah, and we just rolled out all the NC2000 this morning, so be sure to check those out.

Yep. If you go to the research section of the site, to Kyle's point, we do this work on the macro level for the S&P 500, and then we do it for the broader group of companies as well. And so you'll see here's the economic earnings analysis for the NC2000. Not surprisingly, it's not that different from the S&P 500. I think the S&P 500 makes up something like 78 to 84% of the overall market cap in the US. So these smaller companies, like in some of— that's why we don't all cover every single company in the US at this point, right? It's because like a lot of them just don't matter. If there's a small company you need us to cover, always let us know. We can do that. But we're focusing on what matters and where you can put your money. And a lot of these small companies, You really can't even buy into them without driving the price up because there's so little liquidity and volume. And this, this will go into the sector detail as well, as much as you, as much as you'd like in terms of sector-by-sector breakout, just like we showed in Circle of what's going on here for basic materials versus consumer cyclicals. And then consumer non-cyclicals, and then we'll see a big difference in energy. Tremendous insights for people who are looking to identify those sectors that might have the most tailwinds for their business and the best place to start for looking for individual stocks or even sector ETFs. Next on our list is the download the DCF feature in our system and what we added there. We're going to do a deeper dive on this, but there's a blog post on the site. If you want to get more information, and in the, and in this PDF, which I believe Tam is going to post to Circle after the call today, there's a link here. We're going to try to make these slides available in Circle going forward. We're going to make sure the replays get up there as well, everybody. But yeah, this is a really cool feature that one of our clients I mentioned before asked us about. You get access, you get access to everything in our models in Excel here. You can see that on the ratings page here, right? And what that looks like is an Excel file. that gives you everything that's in a model in Excel. And the really cool thing about this new version of the download XLS is that the discounted cash flow model, the reverse DCF model, is entirely interactive. So you can run reverse DCF scenarios in this model. You see everything in yellow is where we've got drivers. So if you wanted to come in and say, okay, what does the reverse DCF for JPMorgan look like? If I go with a 10% cost of capital, you'll see all the numbers change. We'll go into more detail on this next week, but it's a really cool additional feature for institutional clients who want modeling tools. We want to make things as easy as possible for people to use, and that's one of the ways we do it. All right. Ken asked, Intel laid out some very aggressive capital investments over the next few years. Just curious how that fits into your analysis. Also made me think about ASML, one of their competitors. I think it's a great question, right? And I think Intel's commitment, and I believe they got a little bit of government support on this, right? I think that there's part of that with what's going on recently. I think it is a very strong signal to a business that has an excellent track record for return on invested capital that it believes they're going to not earn a 2% return on that capital, but they're going to get back to earning a 15% or 16% return on that capital. And that's going to be an enormous amount of value creation for them in the future. They're leaning into what they know is going to be a lot of growth. That capital expenditure is a very, I think, bullish signal for a good business model. When zombie stocks announce that they're going to invest a lot of capital, or other companies that have historically always had low returns on invested capital and low prospects for returns on invested capital. You don't want them allocating or planning to allocate a lot of capital or invest a lot. You want good companies to do that. And it's bullish when good companies do that. That's how we create value in society. We take a dollar here and we put it into something that makes $1.50 or $2. That's what we want.

I think also to our point earlier on, when we put together those scenarios, we try and be conservative on the long idea side. When we actually put together the Intel one, we were projecting forward capital expenditures and invested capital increase so that ROIC was around 16%, which historically they've been around 17%, 18%. So we weren't even saying they'd maintain ROIC, that would actually fall a little bit, not as far as it did in 2022, but we weren't projecting a huge increase in ROIC to get that valuation. And so we want to give Be conservative and assume things might stay the same or even get a little worse on the capital side and the company's still well undervalued.

Yeah. Yeah, you could. Our model's going back to 1998 showing your return on invested capital from Intel been in the high 40s, 20s. Again, we had a, this was the tech crash, right? So a dip there. Again, rebounded back very strongly up into the high 20s, mid-teens, 20, 20, 18, 33. You get the idea. We've seen this movie before and we think Intel's going to make a strong comeback. So that's what we think. They get back to, again, as Kyle said, just 16%, you're going to see a lot of upside and they could do a lot better. The world is using more semiconductors, not less, more computer chips, not less, more computer power, not less, downloading more data, not less. I think another thing that's pretty cool, you look at the 5-year average return on invested capital, Right? And even with the current sort of huge dip, you're looking at 14%. But the 5-year average pretty consistently over time, well above 17%, close to 18% the last few years. And going back in time, obviously significantly higher. We crunch the numbers here with good data. Another question on held-to-maturity exposure, liquidation and duration risk for banks. What do we have for that? Actually, Hunter Anderson made an excellent post on this a couple of weeks ago where we were tracking accumulated changes in accumulated other comprehensive income, which was, which was basically a leading indicator to— let me know if I've passed this.

Nope. Still, I think it was right around here.

Yeah. Yeah, it was. That's right. I was out of town. So this was a great way to track what was going on with the, with the issue that took down Silicon Valley Bank. Actually, the issue that took down Silicon Valley Bank wasn't its balance sheet. That was a leading indicator, which I mentioned before, the regulators should have seen well over a year ago. It was really the confidence in people just calling on the deposits like a run on a bank is going to take any bank down because no, no bank keeps enough cash on hand to give back their depositors all their money at one time. But what this was tracking Was the biggest increases in accumulated other comprehensive income, which tracks unrealized losses, which tracks how a bank's balance sheet is doing in terms of how much losses they're going to have to incur in the future. And you can see here that there's— Silicon Valley is not the only one. There are a couple on this list that have been in the headlines as well. And so that's how we track that. That's part of— that's one of the adjustments we've been making in our models since back in 2003 when we started this. We think it's a very— it's important thing to track in terms of understanding the economics of the business, and those who are clients can see what's going on.

All right.

And one other question. Thoughts on Schwab? We'll take one more here and then we will wish you all a happy weekend. So Schwab is a good-looking business. I think it is Absolutely getting unfairly treated in the current environment. Is there anything that's a bigger difference, Kyle, that you can think of? Schwab versus Silicon Valley Bank? Maybe JP Morgan versus Silicon Valley Bank.

Yeah.

Yeah. It's anyway, yeah. So we like this. We are rating, we believe the stock is more attractive now than it was before the recent downfall. We like Schwab. We think it's We think it's a good business. I like what Schwab does. One of my great buddies from college is a pretty senior guy over there at Schwab, and he's very proud of what he does. He's got a similar outlook as we do, which is he loves helping people make more intelligent investment decisions. I think Schwab's focus on index funds and non-speculative investment behavior has been good for society. And this is a company that's grown for good reason. They're making the world a better place, and now's a good chance to scoop them up at a good price, because this stock typically trades at a premium and for good reason. It's got a really high-quality set of financials and it's got a good business mission and they execute well. As far as I know, that's what we can see. All right. If there are any more questions, please don't hesitate to hit us up on Circle. Ask them there. We love getting that. If you need an invite to Circle, get in touch with us at support@newconstructs.com. We want to get people over there to engage with us and the Society of Intelligent Investors because we make each other— we think we've got a good starting point and we want to support folks as much as possible, but we've been really pleased to see a very exciting level engagement in the society where a lot of times questions posed about our website or how to think about things or how to think about certain strategies are getting answered by other members of the community before even a new constructs person gets a chance to answer. So thank you for that. Continue and continue that level of engagement. And please, everybody join us on Circle. And in 2 weeks we'll be back with another webinar. Thanks and have a great weekend.

See you. Happy weekend.