New Constructs' Friday Webinar: Intelligent Capital Allocation 5 May 2023

Welcome to our Friday webinar on the 5th of May, 2023, Intelligent Capital Allocation. Our phrase for the day is a phrase that David's been using for the past 20-plus years.

The goal of the original title of the New Constructs business plan was improving the integrity of the capital markets. So that's what we're here to do. That's what we're dedicated to doing. And we think the The underpinning of that is just providing people with the information you need to make intelligent investment decisions, pure and simple.

I love it. I love it. But a lot of consistency. Here's the disclosures and disclaimers. Please do review and familiarize yourself. Our agenda today, I'm going to go through a few brief welcome and announcements. I do want you to know that There are many links out on Society. If you go to the Friday webinar discussions, I'll always have the agenda as well as the deck and a video replay of our Friday webinars available there. And those are available for previous weeks as well. You can ask questions throughout. We do request that you ask questions throughout our time together. We want to make sure that we get to them, and very often they're topical about what we're talking about, so we don't want you to wait till the end. David's going to take it away on some interesting headlines. Kyle's going to go through the latest research, of which there is quite a few. And then David's going to go through a sneak peek into what's happening in filing season for Q1 so far. A lot of work this week. And then David's also going to talk about some of the interesting discussions we've been having out on Society, which are quite a number. That's really been a lot of fun to watch. that. And then Kyle will round out for us the stock pick successes. So again, please don't hesitate to ask questions as we go. And I'm going to hand it over to David for what's going on with Apple and Nvidia.

Yeah, so we got a couple questions this week around both of those stocks, and honestly a few others. And so I did a couple reverse DCF scenarios just can get a sense of what's priced in with these companies. And by the way, these numbers are incorrect. For some reason, there's a little bit of a glitch. These, these forecasts were updated yesterday, so it should show May 4th, 2023. But for whatever reason, the defaults are updating. I don't know if you noticed this before, but the dates, some for whatever reason or not. Anyway, the takeaway is that, you know, if you're looking at Apple Continue— continuing to perform in terms of margins about the same as it has performed over the last several years, really best-ever margins, and, and growth rates staying the same as they've been, you know, it's hard to justify this being much more than a $150 stock. What I got to do in order to get to a price that will— or to get the DCF to generate a price equal to the current stock price, I got to jack margins up to higher than they've ever been significantly. I'll show you exactly what I mean. Go to the forecast tab here and you'll see here's our pre-tax profit margin calculate and you'll see what it's been in the past. You can see the highest we've seen is this 31.4. And we go back all the way to 1998. Obviously those were the lower margins. That was the old Apple, right? But 31.4, best ever. Uh, and we got to jack it up to 40. You know, in terms of net operating profit after tax margin, we're talking best ever 26.6, and we're talking about going up to 29.6 in this optimistic scenario. And even the neutral scenario is a little bit better. The revenue growth Forecasts are similar in the out years, but the optimistic's also got a much higher growth rate in there. So you're talking much higher growth and a higher margin, and that's what it takes to get to this optimistic scenario. So that's 12 years of high single-digit revenue growth while maintaining a better than ever margin by a significant margin, meaningfully better margin. So that's Apple. So I would say I call that priced to perfection, right? If the current stock price is priced to perfection, is that— is already pricing in such a good scenario. So let's talk about Nvidia. You want to talk about priced for perfection, especially in the context of the new price target. I think someone put out there a price target of $350 a share. And what that means in this optimistic scenario is that the returns on capital are going to go from 15%, where they are currently, to over 200%, while also growing revenue at 18.7% or almost 20% compounded annually for 16 years. Now, again, the neutral scenario in this situation Right? That's existing. That's keeping margins where they are. And that makes it tough for you to make a straight-faced argument that the stock should be worth more than $140. Again, you can see how we are arriving at that here. You'll see the revenue growth assumptions are all the same, and this is equal to consensus, right? So we got pretty healthy numbers going out for the next 10 years. In the optimistic scenario, you got 20% for, wow, up to 15 years. And then You can see there's a big jump here in the pretax profit margin. And in fact, the neutral scenario— I had this wrong— the neutral scenario shares this super high improvement in profit margins. And we can go back over time and see what's the closest they've ever come to this 45% pretax profit margin. I think it's 2022 at 38.8%. We go back all the way to 1999. Yeah, nothing close to that during this time. So you got huge improvements in margins for both the optimistic and the neutral scenarios. What does that mean in terms of return on capital? Because we got very little capital requirements for this business. That's just a way to emphasize the best-case scenario. Should the capital be growing? at a bigger rate than what we have in here? Probably yes. But in order to emphasize just how best case this is, we leave it where it is. And so what you're looking at when you get out into the farther years is the return on invested capital going from 33.7% or even 60% to well in the 300% range on the optimistic scenario, right? So really extraordinary improvements in profitability coupled with really significant revenue growth rate. And that's where we think this gets a little bit silly. But that's what it takes, higher growth and higher margins. And that's just another way of saying it's a really expensive stock. And I'm going to sneak one more in here because I already done the work. Shopify. I did a Bloomberg interview yesterday on Shopify, and you want to talk about expensive, especially after the stock price move yesterday. This stock is implying that they're going to have 3 to 4 times the general merchandise volume of Amazon, where Amazon is today. That's what the stock's got to do. So we're still seeing— for anybody who thinks that the markets are becoming more rational, I would say think again. We don't, we don't think we're anywhere close to that. And this reverse DCF analysis, I think, gives you a very quick and clear understanding of just how crazy these are. Yeah, we got a comment. Price for fantasy. That's good. I like that. Price for fantasy. And you know what we're seeing in the bigger picture with respect to the banks, like what, what's going on here? Some stocks are getting beat down, some are, are really attractive, but there's definitely a trend where you see that there's a bias toward tech, toward fantasy. I, I did an interview earlier this week about regional bank stocks and they said, hey, why haven't people been buying the dip in the financials in the way they bought the dip everywhere else? And I said, well, cuz they haven't been buying the dip in financials for 20 years. We've only seen the share of the financial sector as a percentage of the S&P in the economy going down over this last 10 to 20 years.

Why?

Because it's not as sexy. It doesn't promise the fantasy or fantastical returns that these other stocks do. And we're seeing that manifest today. I think the markets around banks are probably getting a little bit overly skeptical, but clearly we are overly optimistic. And there's a lot of danger, a lot of risk there. And that's gonna be part of what Kyle's gonna be talking about here in the next section. We're gonna help you understand risk reward better so you can allocate capital more intelligently and avoid a lot of these potential blowups. All right, Kyle.

Awesome. I will take it away. So I'm gonna look at 2 different names we published on this week, one of them being the quality risk reward long idea, HCA Healthcare. Another one, the new latest IPO. We haven't seen many IPOs for over a year now, but Kenview IPO'd this week. And so we looked at that and what the expectations in that IPO evaluation were. We'll jump in with HCA first, and then we'll go through some of the other research we've put out this week as well. But on the HCA front, it's been a long idea for quite some time now, June 2020. was when we actually put in our See Through the Dip series of reports, which was a lot of the beaten-down companies in the COVID dip timeframe that we saw as not only going to withstand the downturn in the economy at the time, but also take market share and grow out of it. And HTA has done just that. The stock since then is up 190% while the S&P is up 33%. But best of all, we see a Conservative scenario where the stock still has significant upside. Background on the company. What's the working? We saw earnings last week. We've got consistent growth past decade plus. One Q twenty-three was no different. Strong earnings growth, strong revenue growth as well. Got same facility admissions rising across the board for the most part. We've seen Guidance being lifted on the back of that same facility admissions. Overall emergency room visits rising. COVID-related admissions were actually down, which is a little bit of a drag, but overall the lift in guidance and same facility admissions jumping is enough to keep these revenue growing, profits growing as well. Overall, it's just, you know, strong business.

Cash flows.

Have been great and continue to look great. You see here, $23.3 billion in free cash flow over the past 5 years. They've generated positive free cash flow in each of the past 15 years. So it's not just a recent phenomenon or recent success. HCA has been high quality for many years, cash-generating business. And then on top of that, they do lead the industry by a wide margin as far as scale and profitability. You see here, ROIC up at 18%. More than double competitors here. No-PAT margins not quite as, as big as the lead there, but we've got high invested capital turns. So we've got combination of operational efficiency, balance sheet efficiency leads to that high ROIC. We see that in the growth in both revenue and no-PAT. We looked at the breakdown of peers' growth compared to HCA growth. We see they're not only growing revenues faster than peers, they're also growing profits faster than peers. peers. And you put it all together with a growing business, not only in top line, but also bottom line. And then we look at some of the expectations in the stock price and we can model in, you know, we get this what's not working section. You know, skilled labor is still difficult. We do see labor costs as being potential headwinds to the business, but we can put that into those DCF scenarios and see what that means for the stock. But when we look at it, we see that at current price scenario looks pretty pessimistic to justify the current price. Got NOPAT margins falling to 9% versus 12% average in the past 5 years. Revenue growing at 6.5%, just where they've grown for compound annually since 2017. And that gets it to the current stock price today around $281, $285 range. In that scenario, HCA's NOPAT is actually only growing 3% compound annually for the next decade. They've grown NOPAT by 8% past 5 years and 7% compound annually over the past decade. So a significant drop in, you know, NOPAT growth over the next decade. And that's just the current price. If that scenario looks pessimistic with that big cut in margins, we can do something a little more optimistic but still conservative. And we look at a scenario where NOPAT margins still fall. Some of that labor cost eats down from, you know, 12% average to an 11% margin. Revenue growth stays the same. We're looking at $384 a share today, you know, 35% upside. And even in this scenario, NOPAT's still only growing 5% compound annually for the next 10 years, which is less than they've done over the past 5 and the past decade. And so we've got a scenario where if historical growth continues, they'd be even worth more than that $384. And even if we have a scenario where growth falls a little bit with margins falling from some of the recent averages, we've still got significant upside in the stock here. And so it's really a situation where David pointed out with the Nvidia, Shopify, the expectations are huge. In this case, expectations aren't. There's lower expectations at the current price. And then even in a conservative growth scenario, we've got big upside in the current Price. You can see that chart, the historical NOPAT, current price has the big drop. If we have a little less of a drop, we continue that trajectory and we've seen 35% plus upside in the current stock price. The other report, which is always fun because they don't give us a ton of time, once we jump in and go as quick as we can on getting them out before the IPO so you guys can know about the company. Canview in this case is actually different than some of the IPOs we've done in the past. We've seen IPOs, DoorDash, WeWork, that didn't actually happen. A lot of the tech companies in 2021 that were priced for, we could say priced for fantasy. They were going to take 100% plus market share in this case, and they were also unprofitable at the time. Canview is different in that it is actually profitable. They've got upwards of $2 billion in NOPAT for the past few years. Mixed bag as far as revenue and profit trends, some up, some down. But even with that profitability, the valuation still looks fully valued at this point. At the midpoint was $21.50. They opened, I think, $25, $26 range. That's a little more expensive than that midpoint that we were expecting, but there's not much upside in that $21.50. And we'll dig into that as we get towards the end of this report, but It's a scenario where profitable company, expensive stock, good company, bad stock situation here. They've got profit growth, revenue growth. Industry itself has strong tailwinds with health-conscious preventative healthcare, emerging markets growing as well as the middle class increases. We've got scenarios where revenue could range from 3 to 4%. Some other third-party analysis estimates the industry could be growing at 7% through 2028. Got some strong growth. Kendu itself has some of the best-known brands in consumer health: Tylenol, Zyrtec, Neutrogena, Band-Aid, Johnson's. Like we said in the beginning here, profit company that's likely going to continue to be profitable. Geographically diversified, 45% of sales in the United States, the rest elsewhere. Downside is competition. We've talked about a lot of these consumer goods companies in the past faced competition, not only from other consumer goods companies, but also the private labels. We looked at Kroger and they were, I think, one of the biggest actual private label companies for not consumer goods, health goods in this case, but their products and packaged goods. We've got big risks of not only other competitors, but private labels as well. And Kendu right now has some of the lower ROICs in the industry. We look at Colgate, Procter Gamble, Kimberly-Clark, companies like that where Can be ranks lower. Nope, margins not quite as low within that ROIC with that low invested capital turn. We see it's down here with Clorox on the profitability side. Again, the important spot being valuation. We look all that, take it in, combine it and see what does the implied growth for that stock price. Now we looked at the midpoint of the IPO, which again was $21.50. And to justify that, these would be a little bit higher now. They would have to immediately improve.

$26 now.

$26.

Okay.

Yep. And so these would be even higher. We can actually maybe jump into the DCF and see what it would look like on $26. But at the midpoint, we were looking at no-bet margins improving to 15.7%, which was a 3-year average, a little bit higher than 2022, and then growing revenue by 7% compounded annually, which was equal to that high-end industry projection. In that scenario, we'd be looking at $24 billion in revenue, $3.8 billion in NOPAT growth, well above what they've done in the past. In this scenario, they'd have to grow NOPAT by 7% compound annually through 2029. They— NOPAT's actually fallen 5% compound annually over the 3 years we've got data. And so we looked at it on the downside as well. If NOPAT margins, they still see that improvement, revenue grows 4% compound annually, which is actually management's estimate through 2025, still looking at a company worth $18 a share today. In this scenario, we're still looking at NOPAT growing 4% compounded annually. So again, greater than what they've done in the past couple years. And so it's a scenario where profitable company, but the expectations, even though they're not growth of 20+% every year in an industry that might only grow 3 to 7%, This stock is fully priced at that $21. And so we can get in here and actually put together a scenario of what the current price implies on the forecast here. We've got our optimistic scenario.

Go ahead, Kyle. Go ahead, man. Put in another—

I was just gonna start putting some higher margin or higher revenue growth in this optimistic here. We were looking at 7% growth out through 10 years. And so if we were to put in maybe, you know, 10%, let's see where that puts us. We can run that margins stay the same and see what that looks like on a current stock price.

I like the juxtaposition of what we did today, starting out with super expensive and then cheap and then middle of the road. I think in particular with each one of these groups of stocks, whether it's tech stocks, defensive healthcare stocks, and defensive consumer staples stocks, You're seeing how this analysis can bring together and synthesize so many elements of the investment decision process. It's the existing profitability, it's the expected profitability, it's the valuation, it's the competitive position, it's the intensity of rivalry among the competitors. And all that stuff is what you need in order to make intelligent investment decisions and understand how future profits will or will not pan out. And these reports and this analysis does a remarkably good job of bringing that all together under one roof.

Yeah, we see here, I put in 10% there for the revenue growth and we get 25, almost 26 a share in that same 2029 period. So to justify current stock price, they've actually gotta grow revenue faster than even the high-end industry expectations, 10% revenue growth per out for 7 years, that's the same margin. We're looking at NOPAT upwards of $4.6 billion. I believe they're at $2.1 billion right now. Looking at a doubling of NOPAT, revenue upwards of $29 billion to justify the current price. So again, it's a scenario where just because a company is profitable, especially just because an IPO is profitable, because that is rare in the recent years, doesn't necessarily mean it is a cheap stock. they've gotta do significant profit growth, revenue growth to justify that valuation. In case of a profitable company, but the stock price isn't justified by the fundamentals, that's one where you've really gotta dig in and quantify that to understand what is baked into that IPO valuation or the IPO pop after it starts trading.

It's good to see another IPO, right? I mean, functioning markets, healthy And it's for sure way better than the IPOs we saw over the last few years. I mean, to name a few of those that Kyle already mentioned, most of those IPOs are zombie stocks and have been horrific underperformers. And they spoke to the environment of people just willing to throw good money after bad. Fortunately, I think we're getting into a more favorable, healthier Higher integrity environment, but we're still got a long way to go. There is a lot of excess to be squeezed out of the market. They got an IPO over the finish line. Good for Wall Street. It's but it's still a very good deal for the people who are selling the stock, and we would not recommend buying it.

Do you think it's also telling that the one they were able to get over is an actual business model that makes money? They had to reverse the. Trends of the past. I just scroll through that IPO research tab there. You see names, Sweetgreen, Giovanni actually didn't make it to IPO, Rivian, Allbirds. Those are some of the ones that we saw most recently. DD Global.

Yeah.

Not only losing money, but questionable business models. So the first one to finally make it out, but any size, is an actual profitable business. Definitely shows that, that habits have changed, but not all the way. There's still room for significant improvement.

Yeah. And I really think the dichotomy these days in the markets with respect to financials and tech stocks, it's really interesting. And we've been seeing this for a while, Kyle. I mean, I think how many years ago was it when we were writing the micro bubble reports?

Where we were saying, hey, look, 2016, 2017, I think.

Yeah. Where our point was, hey, we're not trying to say the whole market needs to implode here and Armageddon's coming, but there are some really expensive stocks out there. And I think we're seeing the same thing. It's a bit of a shame to see some of these bank stocks get picked on the way they are. We got a really good question in Circle this week around the regional bank stocks, how some of those stocks had very attractive ratings. And they've gone down 50%. And, you know, I think the answer to that question is, and I've said this multiple places, is it's difficult to forecast sentiment and the degree to which people are going to act irrational around how a bank should work. Certainly we live in a different world these days where money moves a lot faster. And that's changing the dynamic. You don't have to wait in line at a bank branch and assume that a teller is going to hand out the money. And with a few clicks, people can make a run on a bank. And the banking business models are definitely under stress, but the confidence is more of an issue here than anything else. And the problem is that that confidence can push a bank under. I mean, the Silicon Valley Bank was effectively— it was almost a coup. for their own clients. Their own clients killed them off by creating the hysteria that led to a run on the bank. If you let those held-to-maturity assets mature over time, they're fine. It doesn't matter that they're currently trading at a 30% discount, because if you wait till they mature, they're going to pay out at 100% eventually. It's just that in the meantime, because interest rates go up, their current trading value is less. And in the old days, there was plenty of time for companies to hold the assets to maturity. Held to maturity, that's the accounting classification. HTM is the acronym, and that used to be out there for a reason. These days you just can't trust that. Yeah. Another great quote from, from our audience. There's a reason banks used to be called trust companies. It's all based on trust. And I'm going to jump on my soapbox for a minute and say, look, the entire capital markets is based on trust. And that's why the title of my business plan originally for New Constructs was to improve the integrity of the capital markets. What I meant by that is that if we don't trust Wall Street, the companies that are selling us stock, if the rest of America decides they're just not going to trust this system and our capital market implodes, we're in a bad place. As I share with all of our new analysts in the training program, Much of the success of the United States is attributable to its ability to allocate capital more effectively, or in other words, earn higher returns on capital than other countries. That's the reason I think that we went from newcomer to the world stage just a couple hundred years ago to the most successful and largest economy in the world in a very short amount of time. We went from bottom of the heap to the top of the heap. And a lot of that is because of our capital markets and the ability for ideas and capital to flow to their highest and best use. That's ultimately what makes a liberal democratic society successful. And to the extent that we can't trust the underlying mechanism there, then our economy really suffers. Standards of living suffer because if we're not taking a certain amount of capital and growing that into bigger capital, which is what happens when you have intelligent capital allocation, if instead That capital's being siphoned off to a wealthy few. That's bad for society. That's fleecing people. And all too often, I think that's what's going on, especially when we go through those old IPOs. I mean, this was a fleecing of America in a lot of ways, of middle America. You're luring unsuspecting folks into the market so that you can take advantage of them. And this inflation problem doesn't make it any better. Asset owners aren't hurt by inflation. People who don't own assets are hurt by inflation. And those too often are the folks being targeted to jump into the stock market in an effort to keep up, only to get fleeced once again. So we believe in what we're doing here, and we think it's for the greater good, um, no question. And we're proud to do it. And, and I— and Kyle, I mean, the research you guys put out this week, we put out this week, is amazing. And I think that our ability to bring so many parts of the investment decision process together under one roof is, is really amazing. And, um, with that, I'm going to transition to some other things we're doing to bring more intelligence to the research process. So let's talk about how much value we create, like money saving you if you're a professional in any way, or if you're not a professional. How many people would it take for you to replicate the amount of work that we have done just in the last couple of weeks? So this is just a quick analysis on how many queues we've been parsing over the last couple of weeks. The dotted line marks today. We got in 394. Okay, that's a big number. We're going to get that. We'll get that all knocked out. I'm sorry. No, no. We got in 350 today. 394 people. that you'd need to analyze all those, assuming about 9 hours per filing. How much would those cost you per day? This is the amount it would cost you per day if you wanted to keep up and analyze all these Qs that are coming in, right? And so cumulatively, if you, if you were to, from the beginning of 10-Q filing season, if you were to try to replicate what New Constructs does and hire a group of people educated and skilled enough to do this work, I'm telling you it would have cost you at least $370,000, $371,000 through the end of today, at least. That doesn't, that doesn't take into account how long it would take somebody to be educated and all the stuff you got to do to get those. We're getting some, you can get these people at $100 an hour, and it doesn't take into account somebody building the models. It doesn't take into account somebody looking at the accounting statements and the accounting rules to make sure your models are being kept up with. It doesn't take into account any of the technology or the website used to in turn distribute this data. So I'm trying to be conservative, but yeah, we're delivering a lot of value. That's the number of people you see in this column is how many people we believe you'd have to have on hand to try to replicate what we do. And that's before building the website and the rest of the technology. So we believe we're adding a lot of value. We're not just trying, we're adding a lot of value. And through the end of this filing season, we think when it's all said and done, we're going to have delivered around $610,000 of value. And I would say that applies to every single customer, even the Gold users, the legacy Gold users, right? Looking at 25 tickers a quarter. Those ratings, every single one of those ratings, even if you're just looking at one company, are only valuable relative to the ratings we have on all the other companies. Investing is a relative business. You're never going to go out there and just invest in a company or stock based on how good that individual stock is. You might. I wouldn't recommend it. You want to invest in the best stocks and avoid the worst stocks. That's the whole point of what we've been doing this morning, is to identify some of the worst stocks and some of the best stocks and something in between, right? And, and that's a big part of what investing is, because it all boils down to risk-reward. Why does it boil down to risk-reward? Well, because unless you got a crystal ball and can predict the future, you're taking a risk every time you make an investment. So if you're taking a risk, you should logically balance that risk with the best possible reward. Right? So risk reward. Apple, Nvidia, Shopify— not good risk reward. HCA— great risk reward. Again, that risk reward though, we don't know that it's good unless we compare it to other risk reward in the market on, on individual stocks. So my point is, we got to do this work on all of the most actively traded companies in the U.S. stock market in order to be able to pick which stocks are the best and the worst. Because if we only do it on a handful of few, we don't really know if those are the best or worst because we haven't done the other diligence. My point being, you got to look at all the filings, and you got to look, of course, through every element of the filing, including the footnotes, if you want to get to the real truth. And, and we're the only firm we believe that is doing that today. I'm just going to pause for a second, see if there's any questions. We've had surprisingly few questions and comments. Speak now, forever hold your peace, or let us know in the chat or something if the questions aren't working. We did get some great questions on society this week. We had some great discussions. We had a post on Icahn and Hindenburg. We had a post on Bread Financial from one of our investors slash fans being added to the most attractive list. We talked about Meta. We talked about a bunch of cool stuff. This is a great conversation just happened here in the last day or so, which— so we didn't get it into the slides on ICL. And we're, you know, there's a lot of conversation these days around some of these most attractive stocks because they're cheap and sometimes they just keep getting cheaper. And, and that's tough, right? Investing is a tough business. And, and so what's one of the cool things about circles? We got some, you know, we got each other's back here a little bit. Julio made a great point here, you know, in terms of following on my point about how you got to, you know, you got to have the stomach to deal with the noise, right? The noise traders. And we're certainly seeing noise traders when we're looking at Nvidia and Apple and just the extreme expectations. That are required to justify some of these stock prices, right? And and so, Guilio, I hope I'm pronouncing that correctly, came in with an awesome quote: "Be fearful when others are greedy, and greedy when others are fearful." It's one of the best, right? And I think to that end, right, truth is most valuable when lies are their cheapest, right? And and so that to me is just another way saying we believe what we're doing. We think it's the right thing. That's not to say there won't be some some some times of of challenge, and when some of the stocks we think are good are going down, and that's tough. But we live in crazy times. There are crazy people. There are meme stocks. There are Bored Apes. These are things when I got into the business I thought would never exist. I mean, it just blows my mind. I was just talking about on this call before our meeting today with some folks about AMC and just the, the utter rip-off, utter rip-off scheme that is, is really upsetting. So. But the ICL conversation is really cool. Stephen here came in with an awesome comment about where this business is going and the new facility they're building in St. Louis. You know, I read stuff like this and I'm like, goodness gracious, this is something maybe we really want to think about for a long idea or focus list. Because when stocks are this cheap and they're actually growing and they got great dividends, there's some pretty tremendous opportunity here. I'm going to take a question that just came in around competitors for new constructs. Do we have any competitors following our lead with valuation variations on our models? If no imitators, why not? We have a lot of imitators. GuruFocus, even Morningstar, Credit Suisse Holtz. There are a lot of imitators, and that is part of the reason why Whenever we are doing our research, we like to focus on things like the reverse DCF. And like Kyle was showing, going through and showing you exactly how the optimistic scenario, scenario here shows us the calculation that we use to get to the actual current stock price. It's also the reason why we like to show you things like the marked-up filings and show you how we got the data going all the way back to 1998. And if you want to see where the adjustments come in, we will show you where you can find adjustments, where you can find things in footnotes. And the reason we do that is because we want you to know that the imitators don't actually imitate the good stuff. They can easily gloss over, hey, we got a rating too, and we look at return on invested capital. We're rigorous, and we look, you know, we adjust earnings. And you should always ask how. And see if they give you a good answer. You know, part of the problem these days is that nobody asks how, right? They just want answers. They want what's going to go up today, tomorrow. They want to know green is good and red is bad. We'll give you that, but it means nothing without substance, and the substance is in the footnotes. So I, I, I highly challenge you to ask any of our imitators, and there are many, many people talk about return on invested capital. Morningstar likes to talk about moats and competitive moats. That's the same thing as the market implied competitive advantage period that we— and growth appreciation period that we talk about. We don't just talk about it, we measure it, we quantify it. So you can actually see what the market's implications are, the market's guesses for these very sophisticated concepts. We've made it simple. We've put it in terms that people can understand and to model and to touch and to feel and to play with, with the transparency and the integrity to back it up. And I would tell you that without the integrity to back it up, the analysis is pretty worthless. Because if you think the company's got a wide moat because the return on invested capital is 50% and the Morningstar data is overlooking a lot of off-balance sheet debt and the return on invested capital is actually closer to 5%, well, then your whole model and everything about your valuation is way off. So is your competitive analysis and your understanding of the company and the industry. So everything starts with good numbers. You don't have good numbers to start, Garbage in, garbage out. Question, is there any progress on a new constructs ETF? Yes, we're hoping to launch in June. Good news. That's the plan. I just had a meeting with our partner Bloomberg here this week and they are on track. I got an update today that the— they're going through and evaluating the alpha and the data and that continues to look strong.

Roger.

My late question on Shopify. One reason for the recent price bump was the sale of the logistics business, which I believe they bought for, for cash but are selling for an equity interest in Flexport. Will there, or has there been an adjustment to the model to see whether the change is meaningful? Roger, no, we haven't really adjusted the model. You could do that pretty easily in the forecast section by going in here and assuming some negative growth in fixed assets. We've already got zero in the Shopify model. It's a pretty super optimistic scenario. You could do that. I think the takeaway honestly is that, you know, what they're doing is they're getting rid of revenue and I don't know, man, if there are any profits or not. If they were losing money in it, then it's good they got rid of it. The, the, the point of it is, is that this is, this is A flea on an elephant's rear move by the company. Directionally, it's positive that they are retrenching to what they do best, which is SaaS. But even if they kick some ass in SaaS, it's not going to help you with the price for fantasy already in the stock price. What's my view on the preponderance of speculating or betting in the capital markets today? Is it skewing the markets fundamentally? Yes, it is. And I think that the Fed is looking to gradually pull that out, but it's going to take some time. And I think that's the only way to do it, because if we were to follow the traditional Fed playbook and jack rates up and cause the market to crash and cause the economy to crash, we'd be back where we were in COVID, which was buy the dip, and we'd be back right where we are. And so the, you know, there's really— the only way to really tame inflation is to tame it Slowly and gradually over a long period of time. And that means I think we're looking more at a, as opposed to Volcker chopping the head off the crazy noise traders, we're doing a sleeper hold. You know, we're gonna, we're gonna slowly try to, to, to calm them down, which means that we're gonna continually see some speculation. And Kyle's gonna get to some slides here later that show you how we've seen the, you know, the, the speculation, the pig going through the snake, and we're not done. But we're making progress. So more back, more back to Circle. We had a ton of great comments. I loved what Stephen said about ICL. Other discussions— oh, the Apple earnings preview, I put that in here. Their most attractive, most dangerous stocks are out this week. That's just an advertisement by New Constructs. SRTS, you know, another great conversation about most attractive stocks that really got hit recently. And, you know, a great comment here from Luke on how SRTS might be providing some really impressive medical solutions, lower cost and better outcome that could really help with their status in Medicare. And we all know Medicare is always looking to cut costs. So That makes this, I think, some— a really pretty insightful discussion. And that's part of, you know, we can't do it all at New Constructs. We're crunching the numbers. I think we're delivering the value in terms of the filings and understanding the underlying profitability, competitive position, valuation of the business. But then we're bringing in experts from all over the place. Luke's a neurosurgeon, and maybe he knows a little bit about what STRS can do in skin radiotherapy. And that's incredible insight around one of our most attractive stocks. Some other good comments in here as well. The Icahn Enterprises comment from Garrett was great. Garrett's got a bunch of great comments. You guys have seen him, and he's the one who introduced and pioneered or worked on the download CSV or download XLS capability. But yeah, apparently, yeah, we've got an unattractive rating on Icahn Enterprises too. Doesn't look so great for a guy who's supposed to be value investor. What I've found in my experience over the years, candidly, is that everybody's in the business of trying to make as much money as they possibly can. And that means even if they're a value investor, they don't want to find their— fall behind their peers. And so they're going to be working to fleece people as much as anybody. So that's just the cold hard truth on that front. Kyle, I think with that, I'm going to pass it over to you. To talk about some stock picks.

Yeah, we've had some good ones recently. This past week we updated, we got the recent SumZero rankings. We're number 1 in 11 categories in May. We've ranked number 1 in multiple categories for 2 years straight now, which is pretty awesome to be in a group of, I think they've advertised 16,000 to 19,000 different analysts. Um, and we're, you know, number 1 in long, short, value, all-time, a bunch of different categories there. That post is on the research tab if you want to go check that out as well. But beyond the general rankings, we wanted to look at some big movers in the past week, past month, on both the short and the long side. For reference there, the S&P 500's been down 2% past week, down 1% over the past month. This was as of yesterday's close, and we've seen big names take some big hits. Zombie stocks, um, Peloton, Compass, Snap. We've seen big drops in not only the weekly but also the monthly performance, you know, 30%, 20% ranging. A lot of these are zombie stocks as well. Actually, all of them are zombie stocks and danger zone. I think most of them are focusless stocks as well. And we see where people have realized, you know, at least this past month, hey, these companies, a lot of 'em actually saw a lot of run-up in the prior month where people, things started to look a little crazy again. People were bidding up some of these companies on poor earnings or nothing, you know, no news at all. And so it's nice to see that a little bit of sanity came back in some of these names where there's a real risk of going to zero. And they've seen some big drops recently. On the flip side, if you wanna go to the next screen there, long ideas. Again, Skechers, Owens Corning, D.R. Horton, all these are focus list stocks. That's some big months. Not so much on the weekly performance, but big moves over the past month. I think we've seen recently and in the past, the long ideas tend to move slower. The value in those gets recognized over the long term. A lot of the volatility we see in the zombie stocks is definitely more drastic, you know, with those 30% drops in a week. Long ideas, again, long-term plays. These are companies that are undervalued and investors need to recognize, and sometimes that takes longer. But we've seen here some of the names with some good 1-month performance and even, you know, outperforming the S&P over the past week as well.

And Kyle, I mean, take us— take a second to pause and look at the difference between the companies outperforming versus the companies underperforming, right? I mean, the quality products, good competitive position, super cheap, you know, AutoZone, O'Reilly, D.R. Horton, Owens Corning, Skechers, you know, nothing sexy about these. But if you go back to the last slide, right, Yep. Peloton, Compass, all trying to sell us on something like magical. It's all narrative driven, right? We had a great comment on Circle, I think last week, about how someone appreciated our data and math driven narrative as opposed to fantasy driven narrative. Beyond Meat, still trying to get over that. That's just beyond me on how people thought that was actually going to be a successful business. Especially when you look at competitive position. Blue Apron is another one. Snap. Anyway, you get the idea. So I think it's, you know, in some ways it's even a little simpler, right? I mean, you know, just invest in businesses that have real business and real products, not based on fantasy narrative. And you're going to be better off than I think you are on these zombie-type companies and stocks. You want to get to some of these charts? I love the charts.

Yeah, we can dig through. These are all in order of those shorts and longs there. So we've got, you know, the charts of each of those companies, you know, down 13% past week, 31% the past month. We can scroll through different ones here. We got Peloton, Compass, all sorts of different ones. I think the—

How did you— do you have any year-to-date charts in here?

These are all one month.

Ah, okay.

Yeah, yeah.

I put the I put the year-to-date charts in in in the task for for reason because you know what's really interesting for a lot of these if you're going year-to-date you're gonna see you know again that's that was my idea on the the the pig passing through the snake you're gonna see. A huge run-up in the beginning of the year. So let's, let's take, for example, Beyond Meat, and we go year to date, right? So we started the year and we got kind of nuts. And this is a similar pattern from what we've seen with all these zombie stocks. Things went way up, and but they came right back down. And this is a pattern I think that is pervasive today, right? I mean, we know this is a bad business. We know it's an expensive stock. Does that mean it's going to go way up or won't go way up? No, it doesn't. And same is true, I think, for some of these attractive stocks. We're going to see them head down and get beat down before maybe they come back, because you can't have both. You can't have irrational and rational winning the day. And I think to a question we had earlier in the meeting, we are definitely seeing irrational, I think.

Yeah.

hold the day for the most part. But yeah, charts in the 1-month look good for a lot of these stocks. But the, the year all in, seen a lot of volatility. We've seen a lot of things go up and come down. And like Beyond Meat's a great one, it's just a ton of volatility. So another benefit to being in good companies or good risk-reward is the volatility tends to be a lot less. I think that brings us to the end. Kyle, I'm sorry to jump in there. I wanted to show that. Year-to-date perspective.

No, that's totally fine.

Oh, we got a question about TruePanyon. Let's take a look at what's going on with TruePanyon. Kyle, you can—

Yeah, TruePanyon being the most recent zombie stock. Been jumping on the webinar, so I hadn't seen the news this morning.

Yeah, it looks like it's down 20% today. I would call this a narrative business.

Right.

Insurance for pets.

Yeah.

And we looked at the zombie stock report. It's possibly a great service for consumers, but not a great business. They've, you know, it's a history of unprofitable growth. They've been growing revenue good, but profits have been getting worse. Looks like we've got Earnings out last night on this one missed by significant margin. So that's driving the price today. Yeah, we've got significant cash burn, no profits, and a valuation that implied the exact opposite— significant growth, revenue, profitability.

Kyle, is it a good thing when expenses are greater than revenue?

Definitely don't want it that way. Which I think was actually the— I was going to jump in on Beyond Meat. Actually, I think their most recent quarter, their gross margin was actually negative, which was, you know, cost of goods sold higher than revenue.

I mean, who would think that like ground vegetables would somehow be a narrative stock anyway? Yeah, I like your point here. This is a great, great section. Differentiation that loses money is not good business. Just because you're differentiated doesn't help you. And this is again where going through the footnotes and doing your diligence is important, because a lot of times when you're watching or using other research services or watching CNBC, the narrative is going to talk about it's a great business. And I'm sure there are a lot of people that talk about Trupanion was a great business feeding into the growth and, and wealth and people taking care of their pets better. But is it a great business? No, it's not. It's not a great business, not if it doesn't really make people money or, or create value for shareholders. It could be a great business for the executives because they're getting paid a lot of money. The bankers, they're getting paid a lot of money to get an IPO done. Great business for them.

And it could be a great business for consumers if they're getting something below cost.

That's a great point. That's a great point, right? You know, just because it's good for the buyer doesn't mean it's good for the investor. That's a great point. That was what we used to say about Teslas back when it was only the Model S. Like, hey, you know, would you buy a Tesla? Like, heck yeah, you're getting something below cost, man. Go for it. But yeah, the true panyon valuation. Woo! I mean, bonkers, baby. Like going from a highly negative NOPAT heading down to like super huge improvement. But they got a negative margin. They're going to go to 3.2 and grow revenue by consensus at 16, 13, and then 13.5% through 2032. Right? Didn't we? There's like some great research out there that shows like the number of companies in the history of the world that have grown. revenue or profits at a double-digit clip for more than 10 years is like very few, very rare.

I think it's actually linked in the section right above there.

Yeah, yeah. Love this. I don't know how I came across it, like on Twitter or something. I saw this like, we got to put this in our reports, help people understand just how ridiculous things, things are. But I think it goes through exactly how rare it is Whoops. Let me get off this guy's site. How rare it is for companies to grow for that extended period of time, and yet that's priced in all the time. Yep.

I think the scenarios there, that one you highlighted was for $18 a share. So even with TruePenny falling, they're at $29 today. There's still downside there.

Oh yeah. That, and that's, that's part of why we, you know, we're saying this thing can go to zero. I mean, the economic book value is negative $14 a share.

Yeah, right.

So, you know, what, what does that mean? Right. Again, transparency, economic book value. So if you want to get a sense of like how that happens, well, it happens first of all because your profits are negative, right? And in fact, the NOPAT is not that different from net income.

Interesting.

But then there's a lot of liabilities. They got $69, $70 million in debt. And then they've got another $15 million in option liabilities. And by the way, this number gets bigger when the stock goes up. The more the stock goes up, the more that gets diluted to the option holders. So, all right, we're running up against the, the hour here. Any other questions? Put them in Circle and we'll get to them there. As Tam mentioned at the beginning, she's got the slides and the replay will be there, I think, by the end of the day. So. Got more there. We'll see you there during the week. And until then, we'll see you— or, or until next week, we'll see you in Circle.

Have a great weekend.

Bye.