New Constructs' Friday Webinar: Intelligent Capital Allocation 19 May 2023

Welcome to our Friday webinar. It is May 19th. We're well into what feels a lot like summer here on the West Coast, which is very exciting. We do have an extra guest from the analyst team with us here today, Cody Fincher, who will be joining us momentarily. You have the usual team otherwise, myself, Kyle, and David. We're very glad that you're able to join us. We're looking forward to a very packed agenda. So I'm gonna go through the beginning here a little bit quickly so that we can dive into your questions because we're really excited about that. As usual, please do review the disclaimers. And the disclosures section. This is very important as we're not an advisory company. I want to make sure that we reiterate that. You can get replays and slides on Society. You'll always be able to do that for the previous week, so please don't hesitate to go track those down if you need to. Do ask questions throughout. As usual, please use the Q&A feature on the Zoom panel.

Thank you.

That is the easiest way for us to make sure that we're getting to your questions as soon as possible. We do want to take questions throughout rather than have you wait for any particular time. We are doing a shuffle on the agenda this year. We would like your feedback on that. We are moving the latest research to the end. We feel like you can read the research at your convenience on the website as you need to. And as you have questions about the research, please don't hesitate to ask questions about it on Society. We want to make sure that we're responding to your questions and that we're going deeper as you would like us to, but we also don't want to spend a lot of time rehashing research that you can read at any time. The other thing that we are going to be changing is, is we will be doing our stock picks live only. Those are really responsive to real-time market conditions and a best to have that conversation live. So we will be having that today at the end as well, which is always one of my favorite parts. There is a privacy post on Society that I hope that you'll familiarize yourself with since we are using a lot of your topics and questions to drive our conversation. If you have any concerns about privacy, please don't hesitate to reach out to me and we'll figure it out in a way that makes you most comfortable. I want people to feel like Society is space to ask all sorts of different questions and, and not feel like these are self-censoring when they ask their questions. Again, we're going to try and hit 45 minutes this week, so in the name of hitting 45 minutes, I'm going to kick this over to David, who is going to talk about the new name for the ETF and also an update on one of our long stocks. After David goes through that, we will be jumping into Society for much of the rest of the conversation today.

Awesome. Thanks, Tam. Yeah, excited to share that the Bloomberg New Constructs True Earnings Index is hopefully just a few weeks away from launch. We'll of course let you guys know and we'll make some announcements when that's the case. But we're excited about this partnership. We're excited to help Bloomberg grow their equity index business. And we love the name, the True Earnings Index. We think that's fitting. And the index is going to be really focused on owning stocks with minimal earnings distortion, often negative earnings distortion, and also a neutral or better rating. So it's exciting. It's outperforming all the other ETFs in that space. And so it's an exciting time for us and we can't wait to launch. And we're hoping that's going to be in the next couple weeks. So let's talk about Walmart, the bellwether for retail stocks, the bellwether for consumer spending, and a focus list stock. It has been an outperformer for us since we revisited in 2015. It's been a long idea since 2011, hasn't outperformed during that time. It's been about the same since it's been on our focus list. It has outperformed as well. It was one of our inaugural focus list positions. Tim said we're going to probably not talk about a lot of the stocks in our portfolios as much in the future, but Walmart warrants a bit of a deeper dive because I looked at this when I was asked for some comments on Walmart's earnings and I thought, wow, neutral. It's the first time in a long time that we've seen Walmart at neutral. For a really long time, I think that the price-to-economic book value ratio was really pretty low. You can see for most of the history here, the economic book value is way above the price, and now it's come back down. And I think there's a lot of real question about the structural decline in margins for Walmart. I mean, Amazon is having an impact. And remember, Amazon retail is kind of a loss leader for the rest of that business. And so I think that's kind of something to keep in mind. So what I just decided to do, because we were going to have a discussion internally, we've got a, we've already got a ticket open for, hey, should we keep Walmart on the focus list or keep it even as a long idea, or is it time to close it? And the best way to do that is to honestly get a sense of what kind of margins are required to make this an attractive stock. And that's when the reverse DCF model comes in, I think, in a really powerful way because I'm able to run through a bunch of scenarios here, and I'll show you exactly what I've done. The default scenario for us, which is going to be a pretty conservative extrapolation of what the company's done in the past— so in the past, margins have been coming down. So if that doesn't turn around at all, you're looking at, at a return on capital versus cost of capital spread that's still pretty high. And growth long term, I think consensus is Long-term growth for Walmart is around 3%. So that kind of growth and profitability for 17 years here, that seems fair. And a lot of times we like to be only in stocks for focus list long in particular, where we think market expectations are unfair, unfairly low. And so the neutral scenario, I'm looking at a slightly better margin, same revenue growth, A slightly better margin, and that's only a 10-year market implied growth appreciation period. Again, the growth appreciation period, also known as competitive advantage period. The growth appreciation period is the number of years a company has to grow profits in order to justify the price. All right, and so 10 years, that's still pretty long time. So what did I do when I created scenarios? I went in here and I created a neutral, an optimistic, and a pessimistic. You see that the The revenue growth assumptions are all the same all the way across, all the way out. And then what I did is put in 3 or 4 different scenarios here. So default is at 4.5, and you can see in the past here, 4.2, 4.7, 4.9, 4.3, 4.5. It seems pretty reasonable. You got to go back a good bit farther to get up into the 5.8 and even over 6. And then it was staying in the high 5s and 6s for quite a while, all the way back to 1998. So the question is, can Walmart get back to that? And even if it does, does that make it an attractive stock? And the beautiful thing I think about our model here is that I can give you an exact answer to that question. So you can see here, let's go with pessimistic. Pessimistic means it stays as low as it is in 2023. And I believe we're going to see in the latest Q, they just released earnings. My expectation is that margins actually deteriorated further because they beat on the top line and the bottom line. But the, the bottom line earnings number is still below where it was a year ago. I think it's a year-over-year decline. I think that's right. So even though revenue is getting better, profit's getting worse. I think that implies some margin compression. So 4.2 and then neutral is 5.0 and optimistic is 5.5. All the other assumptions in terms of cash tax rate and then working capital and fixed asset assumptions are the same. So we can see here—

David?

Yes.

I'm sorry to interrupt. Those numbers seem close to me. Are they actually further away than they seem? 5 and 5.5 and 4.2? Because you're talking about years, that's actually a big difference.

That's a great question. And then for a lot of companies, these numbers would not be different enough to matter.

Okay.

But for Walmart, where the NOPAT number is huge and a lot of these big retailers, it's all about the margins. It's a low margin business. So on a percentage level, from 5% to 5.5%, that's a 10% difference.

Okay.

So it is pretty big. But the lower the general— in general, the lower the margins, the more impactful a small change will be. But for Walmart in particular, because it's such a large company and the revenues are so huge, you get a small change in margins and that has a huge impact on what falls to the bottom line. Okay.

Thank you.

Yeah, it's a— that's a great question. It's a great question and probably what a lot of the people were wondering. Yeah, I would add to that a few basis points on $600 billion in revenue makes a big difference. Exactly, exactly. And, and our DCF, because the terminal value is a no-growth terminal value, but it's also based on NOPAT, it's going to make a big difference in that as well. And so yes, we'll see, and I'm going to demonstrate in a minute just how different they are. So we see that the difference between the 4.2 and the 4.5, pretty different. That's 7 years. Let's, let's, let's look at default versus— I'm sorry, Neutral was 5 and default is 4.5. Pretty big difference. If we drop down to pessimistic at 4.2, you can see again 24 years. So 4.2, 4.5, I think again neutral is the 4.5 pretax profit margin and then optimistic even higher. And so if we were to compare optimistic and pessimistic, you see a pretty darn big difference in terms of profitability and implied profitability and valuation, and clearly in the implied growth appreciation period. If you think Walmart can get its margins back up to pre-tax profit margin back up to 5.5%, closer to historical highs, stock looks pretty cheap to me. I mean, I would give this business at least 15, 20 years of growth appreciation period. So if we go out to 2040 with that 5.5% margin, we're looking at $185 a share. Around 30 years, $210 a share. I think Walmart's going to be around for a while. You can think long-term for Walmart. That said, if I think margins are going to stay where they are and not get any better, I mean, it's pretty fully valued. Right now at $149. That's 24 years of the margin staying the same. And I think with Walmart, you've kind of always got this existential question: how long can they maintain king of the mountain? Amazon is coming at them hard. Costco doing pretty well too. I think one thing in Walmart's favor is that I think with inflation and a slowing economy, Consumers are downshifting in the way that they spend and moving more towards the kind of goods and products and price points that Walmart is able to hit better than anybody else. So that could be positive for them. I think another negative is e-commerce. You know, that's going to hurt margins. It's a loss leader for Amazon in a lot of ways. And so they're moving into that. They got to. because Amazon has shifted the consumer preference to that so well. I don't see that as helping margins much. So anyway, very good question. It's something that we as a team are going to talk about in quite a bit of detail over the next week or so as we think about whether or not it's going to be on the list.

And one more question from the audience on Walmart about their Tax rate says their cash tax rate has averaged around 30% or almost 50% higher than the U.S. statutory tax rate. Do you guys know why that might be?

You know, the tax rate stuff is kind of— look, we go back over history, it's been all over the place, kind of. I mean, it's been in the high 30s. A lot of this— Walmart has moved international a lot over the last few years, and I don't really know the why and the wherefores on taxes. I can tell you that when I was on Wall Street and did some deep dives, taxes are a black hole for even the staunchest of CFAs and financial analysts and analysts. And so it's a real rabbit hole to figure this stuff out. And I would highly recommend people take a look on the education section of our site. at what we do for taxes and cash operating taxes. We do a ton of work in order to normalize that. I will tell you, in building models for 30 years, if you do not take some pretty drastic steps to work out the anomalies in the reported income tax, you cannot build a return on invested capital model. Can't do it. Because so many companies have so many weird things that they can do with intangibles and manipulate taxes in the short term. That it just blows up models. So we do a great job of normalizing it. I think we get a great job to what the real tax rates are. Why they may fluctuate from one period to the next so much, I wish I could help you. I don't have a good answer. I can answer the other question on Amazon's margins. That's a great question. The problem with Amazon is it's not apples to apples. So let's take a quick reminder here. No PAT margin for Walmart is here in the 3.4, 2.9 to 2.9 range. And that's the after-tax margin. I was mostly talking before— I was talking entirely before about the pre-tax margin of 4.2, but this is the after-tax margin. So let's type in a ticker for Amazon and get an answer on its margins. We'll go to the rating breakdown, scroll down here. To the margin section, and pretty close, pretty darn close. And interesting too, because AWS is supposed to be this profit-generating machine. We've long said that Amazon is not as profitable, at least leads people to believe. I think for a long time we were more conscientious of how retail was a cutthroat business for them. So even as though they went beyond books and got into other stuff, didn't mean they made a lot of money with it. And then Amazon Web Services looks good on the income statement. It does not look so good on the balance sheet. It's a very capital-intensive business. So we look at free cash flow for Amazon. How about them apples? That's over $100 billion in just the last couple of years of free cash flow burn. So yeah, Amazon is not as profitable. We've said that for a long time. It's never gotten a good rating from us. The stock's gone up a lot. Is it the original meme stock? I don't know. But people really love Amazon and loved it for a while. Cool company doing cool stuff. We would say it's extremely expensive and the margins aren't that much better than Walmart, which is something to be considered. I mean, they're having to really eat some bad margin to try to take market share from Walmart. And that speaks to the strength of Walmart's competitive position. All right. No other questions on Walmart.

Great. I'm going to go ahead and get out to society here in a second and switch gears. While I'm doing that, David, would you promote Cody, please?

Oh, yes.

He is in our audience. So I'm gonna go ahead and skip out to society because our community just generated a mountain of really interesting stuff to talk about this week. Cody's gonna jump in talking about NPW, but we're also going to get into several of the other questions that we had discussions about or haven't yet been able to have discussions about out on society. Oh, Cody, would you like to screen share or just wanna talk to this slide? For MPW. Oh, you're muted, I think.

Sorry.

Welcome. Hey, welcome, Cody. So, Tamara, just so you know, when you said promote, I thought you meant promote Cody.

Yay, Cody!

I didn't realize. Sorry about that, Cody. Didn't mean to leave you out there. Cody, you know, to promote him, let me have a second for that. Head of data. And has been with New Constructs for many years. And Cody has actually pioneered some really cool stuff. He runs a lot of our data check stuff and he was a big champion for moving our data checks in the database, which is a nerdy way of saying we could incorporate that into our parsing process better. Data checks are a really cool element of how we automatically validate our data while we're looking at it and just apply a lot of the financial expertise. That we have as a business and as humans to into the machine. Cody's done some awesome work for us and, and he's got some cool stuff to talk about here on, on the MPW front too.

It's nice to start off in the audience. You get talked up a little bit. That's good.

Yeah, absolutely.

Yeah. So we had a great question on Society about this company MPW. Somebody was interested in it because it's a very cheap stock right now, but it might be cheap with With some good reason. We looked into this. So MPW Medical Properties Trust is a real estate investing investment company that has seen a pretty significant dip in the stock price here lately. And it seems like what that's primarily driven by is the fact that they have 2 of their larger tenants are having some financial difficulty. They're both trying to restructure their debt, and that's led to MPW not receiving rental payments from one of those companies in the latest quarter. So this is a great opportunity to look at the reverse DCF because you're in that situation where it's cheap, but you're trying to figure out, well, is it cheap enough to where I can justify owning this stock even if their revenues might take a hit here in the, in the near term? So I'll go through the reverse DCF in a similar way to David did with Walmart. So you can see here on the decision page, we're showing kind of 2 different scenarios. This blue line here, the one, the one on top is— this is the default scenario based on the best approximations of, of the inputs that we can have and the best consensus estimates for revenue. And you can see this is showing basically a gap year of less than 1. This stock price is currently trading at less than $8 a share, and we're kind of starting this forecast at between $11 and $12. So under the current expectations, this stock looks super cheap. The question here is, well, what if this bad scenario they have with their 2 tenants turns into something really bad where they Stop receiving rental payments for an extended period of time. Looking in the filing for this company, you can see that these 2 specific tenants make up about 30% of revenue, so a huge chunk. So it gives us a good opportunity to just run through kind of a worst-case scenario and see, could I hold this stock and kind of get through a worst-case scenario if that's what happened? So what I did there is I changed some of the Default assumptions here on the forecast page, the consensus is that this company is going to see a small hit in their revenue, going to go down about 6.6%. And in my kind of worst case, I put that all the way down at 30%, basically not receiving any rental payments from those 2 tenants, 2 of their largest. And then things kind of stabilizing after that from that kind of lower revenue base. I also knocked down margins pretty significantly, going from 46% to 34%. I'm sorry, 44% to 34%. This is a pretty high margin company. You can see that they've sustained that pretty well for the past five years, consistently being above 40%. So a 10% hit for that company would be pretty drastic. Yeah. So what you can see here is that that. Gets us this yellow line down here on the bottom. Not quite as attractive as this blue line, but you can see they have a gap year of 2036. That's a little bit out into the future. But even in a worst-case scenario, this company does not look tremendously expensive. Even most companies, if you ding their revenue 30%, they're going to start looking pretty expensive. So I don't know that that means that this is an outright buy. To respond to the initial question on society. But I think the cool thing about the reverse DCF tool is it allows you to quantify some of that uncertainty. If I was interested in MPW as an investor, I might look at it and say, oh, it's super cheap. Yeah, this trades at a 0.6 price-to-book, but there's a lot of uncertainty and I just might just leave it alone because of that uncertainty. But what I can do with reverse DCF is start to quantify a lot of that uncertainty and get myself to where I can be a more confident decision maker from an investment perspective. So for this, it doesn't look too bad. So even in the worst case, when a company doesn't look too bad, that's usually a good sign.

And it's a great example, Cody, of how with a reverse DCF you can answer these kinds of difficult questions with a level of precision and data math that I think is so much more comforting than any other approach. A lot of people are kind of guessing, but we can really quantify the impact of, well, what happens if they lose this on the valuation? And I just think that's a— I find that very comforting when we're doing our own work.

As you guys are looking at stocks, I'm starting to really clearly understand that fairly priced stocks are not that interesting, and what you're interested in is unfairly priced stocks in one direction or the other. What percentage in general historically do you guys see that are usually fairly priced? What do you think about that?

That's a good question. We haven't done that in a while where we look at the distribution of ratings. I think on average, and this is by design, new constructs. The rating system, when I designed it a long time ago, and just with Cody on the call, I've got to give him some props for having some very good critiques about the rating system for many, many years. And we have ideas about new rating systems that we would create. And we are kind of doing that with the Bloomberg ETF in some ways and with some of our model portfolios. But Long time ago, in a place not so far away from our current office, when we created the rating system, I purposely designed it so that a pretty small fraction of companies would get an attractive and a very attractive rating.

It's—

there's not a normal distribution. I think the large majority of companies get a neutral and unattractive rating, and that the pockets of, of real kind of opportunity, like you said, TAM exactly. We want them unfairly undervalued and unfairly overvalued, and we want to find the extremes because that's where to play. You know, I think that's around 15 to 20, 10 to 15% on each side.

Interesting.

Not too hard to get.

Not a lot.

Yeah, it's not too hard actually to get that data from the screener for professional users. You just go and download all the ratings and then do a distribution analysis on that account.

David, how many—

It's going to be super fun for somebody's Friday night.

How many companies do we hold in the focus list?

We've got, um, we added a couple and we took— we added a couple. We've got quite a few. Kyle, it's right around 50 on both the long and the short side right now. Wow.

Yeah, but that might provide some context that New Constructs, we have close to 3,000 companies in our coverage universe to choose from, and we've chosen 50. So a pretty small percentage that I think people can actually get really excited about from an investment opportunity perspective.

Well, and then that's the nature of the business. I mean, you want to focus on where you've got the most opportunity. And that's, I think that's what New Constructs is designed to help people do, is to do the research on all these stocks. So you know the truth about all of them. And so you can faithfully understand where valuations are most unfair on the short and the long side. And that's the idea.

Tim, should we take a look?

Oh, did you— are there some questions?

There's a couple questions from Tim on Michael Mauboussin and his book Expectations Investing. Should you read it? Absolutely. You should read that book. It's one of the best books on investing. And when you see us apply this reverse DCF, you see expectations investing applied. MobaZen does a great job of providing a conceptual framework around why expectations investing is important. We espouse that exact same framework and we implement it, I think, with a better set of tools than anybody else in the world. Clearly, we've got better data to drive everything, but then our reverse DCF models are as high quality and high fidelity as there are in the business. And as you guys know, they're also transparent, so you can see everything going on. But we effectively take expectations investing off the bookshelf and put it on the street for people to enjoy and apply. And then how do new constructs come up with different buckets for each of the price to EBV? I'm not sure what is meant by buckets there.

David, I think that might be how we think about the rating.

Oh yeah. So when it comes to the ratings, a lot of that was done honestly a bit by— based on some analysis and some on gut. If I look at the rating for price to economic book value, if it's greater than 3.5, that's an expensive stock, really expensive. Greater than 2.4, that's pretty expensive too. And then when it comes to between -1 and 0, it turns out when your notepad is negative and the way the ratio works, that the worst price to economic book values are between 0 and -1. So that's why that's at the worst ranking. Worse than -1 is, is then unattractive. And then really that 0 to 1.1 is pretty cheap. Obviously, when the stock price implies profits are going to permanently decline, that's a low-risk situation. And so that's a kind of brief takeaway on the buckets. Thanks, guys, for helping me understand what that meant.

Speaking of some perhaps fairly priced stocks, there are some questions about Zoom and Google being downgraded. Did you guys have any comments that you wanted to make on either Zoom or Google?

How are we doing on time here? Are we up?

We've got a few. I got a few more minutes.

Okay. Yeah, I think we had some— this was a, this was a great example here on Circle, one of the many great discussions we had this week of where a good company isn't always a good stock. And when the price goes up, And profits are going down, the ratings are going to change. And that's what we saw with Zoom and then with Google as well. Profits are kind of declining a little bit, not as much, but the valuation on Google is pretty high. I mean, it's been a really good performing stock. And Zoom has always been pretty expensive, but when its profits go down and the valuation remains elevated, that's a great example where the reverse DCF would just give you the skinny on it. And there was a bunch of questions about kind of our earnings versus what's shown on TD Ameritrade there for— and that also, and it's that— that's to be clear, our reports and our analytics are going to focus on reported earnings or the GAAP earnings. And that's because we always want to be able to reconcile and give people the ability to audit the reconciliation between our NOPAT and our core earnings and a number that is posted and official. So that's what we show in our reports because we can provide a detailed and faithful reconciliation between those, those kinds of numbers. TD Ameritrade showing Wall Street earnings, we can't reverse engineer what those are. Nobody can. Nobody knows what goes into them really. So that's what they're showing. We're not showing Wall Street numbers and anything except some of our earnings distortion score analysis and reports where We do provide some predictions on which stocks we think are most likely to beat or miss Wall Street estimates.

Just maybe one or two more questions on society before we move on. Kent had a question about how the credit rating factors into the safest dividend process. Do you have any comments about that? I know we also wanted to talk a little bit about the Berkshire Hathaway Question from Craig Brown as well.

The answer to the quick question to Kent is like, not really. I mean, Starwood's— look, the REITs are, they're heavily indebted businesses, so it's not unusual for them to, to not necessarily have as strong a credit rating, but it's, it doesn't affect the, the stock rating at all. Yeah. And I would, I would add on the safest dividend, that one's looking more at free cash flow. than the specific credit rating or anything. Let's get into this Berkshire thing, Tam. We may have to go over on this one and just cut some stuff off the end because this is—

We can do that.

We can do that.

This is a really cool discussion, and Cody and I both had some good stuff in here. Go ahead and expand the comments if you don't mind.

Oh yeah, I'd be happy to.

So, you know, this brings up a question that we've had— we discussed internally. And, and I'll make a point, then I'll let Cody kind of jump in here. It's an insurance company technically. And, and then when— if you scroll down, Tam, if you don't mind, you can click on that picture I have there, right there. Can we make that a little bigger? So what I'm pointing out here is that, is that for an insurance company or a financial company in general, Berkshire has a relatively low amount of investment liabilities or low amount of funding for its cash and liquid assets, so to speak. Not all entirely liquid, but for its investment assets. And one of the differences has been models for financial companies versus industrial companies. And this was something that I had— I really enjoyed working on when I was on Wall Street because nobody had done it before, really. They said you couldn't calculate return on invested capital. You couldn't calculate EVA for financial companies. Well, you can. You just have to recognize that The treatment of cash is different. For an industrial company, cash is just to pay the bills. It's not an asset that's used to generate profits. So that's why we have excess cash. If a company's got a bunch of cash in the books, we don't include that in invested capital. Microsoft's a great example. They've got so much cash and Apple's got so much cash. If we include that in invested capital, we don't have a good sense of the company's incremental return on capital because we're burdening that capital base with all the profits they've generated in the past. We don't want to do that. So we identify that cash that's over and above what's needed to run the business as excess. We pull it out of invested capital and out of our return on invested capital calculation. Well, you can't do that with a financial company because a financial company, cash is their inventory and interest is like a cost of goods sold. And so When we look at insurance company or a bank or certain kinds of REITs, all the cash is included in invested capital. Interest expense becomes an operating expense, not just a financing expense. And so that's the bucket that Berkshire falls in. That's the kind of business it is. Now, could you make an argument that it's not really an insurance business, that it's in some ways kind of a private equity or kind of a LBO kind of business almost. Yeah, you can make an argument for that. And if you do want to make that argument, you then pull out around $200 or $300 billion of capital out of the asset base. And if you go to my next chart, Tam, I think you just click on that arrow. Yeah. I did that in our model. So there's an overrides feature in our, in our models that allows people to go in and change them however they wish. We're not in the business of selling religion at New Constructs. We're just here to give you better data. So if you disagree with how we've categorized the data or built the models, change them. Cool thing is, every time you open a model, we've done the work and we're treating things consistently. So with this override feature, though, I can test what the return on invested capital is if we pull out that excess cash. from the Berkshire Hathaway version of an insurance company? And the answer is the return on invested capital is almost double. So when I— you can see there, 10.5 is what we show in the TTM before removing that excess cash. The return on invested capital, 6.0. And then in 2022, we have a 9.1% return on invested capital. And before removing excess cash, we're at 5.3%. So the idea is we want to provide models that are the best in the world. We want to provide them that are consistent. We're not going to do a lot of fancy tweaks to our models because we have some unique view on the business. We're going to leave it as is in a consistent way. So you're always getting apples to apples. But for clients that want to go in and make those tweaks on their own based on their own personal opinions about how the data should be treated or how the model should work, we absolutely support that through the override function. I'm going to pass to Cody to talk about why it may not matter that the return on invested capital is lower.

Yeah, absolutely. So I think one of the things that was interesting about your analysis here, David, in response to the initial question was even at 10% compared to 6%, It's still not that massive number that some people might expect to see out of Berkshire Hathaway. Warren Buffett's supposed to be one of the best stewards of capital in the world. How come they're not seeing 60% like Apple does? I think the easiest answer to that question is just the massive amounts of invested capital that Berkshire has. So if you're a company that has been going for a while and say you have 20% ROIC on your existing investments, you're going to keep looking for those things, those 20% return opportunities. But if you can't find them, you're going to start looking for 19% and then 18% and then 17%. And you should continue to be willing to lower that threshold as long as it remains above your cost of capital. So even if you're at 20%, the Example I gave in my comment here was if you could find something that's 7% and your cost of capital is 6%, you should still go after that opportunity because you're increasing your economic earnings. From a screener perspective, your ROIC will come down. That might not look as attractive, but economic earnings is really, in my opinion, the number that you want to be elevating as much as you can. And I think the reality is there's really just not that many 20% opportunities out in the world. So once you get to be the size of Berkshire Hathaway to where they're trying to invest $500 billion, excuse me, they're going to have to accept some lower returning projects with the goal of keeping it above their cost of capital. One thing that I thought was really interesting that kind of supports that is that when you look at the top 11 companies in our coverage universe in terms of invested capital, almost all of them are lower than 10%. There are a couple outliers, the biggest one being ExxonMobil at 16%, but there's really just not a lot of opportunity to continue to invest hundreds of billions of dollars At 20% returns. So historically, Berkshire has done a great job of getting the economic earnings number up. And I think that should be probably the main story. There's another piece of the story here that I didn't get into as much, I think is an interesting conversation. And that's, you might get close to that return on— or that cost of capital number And then what happens when that cost of capital number starts going up? And that's what we've seen here lately, where Berkshire used to be able to accept 6% return projects because their cost of capital was 5%. But as the economic environment changes, that number could go to 7%. And then maybe some of those projects don't look like great investments anymore. Yeah, but it's a super interesting question. I really liked kind of the comparison that the initial question had to Apple at 60%. Apple, Berkshire, they're both fantastic companies, fantastic stocks historically. But the one criticism that you could probably make of Apple is that they're not able to get all of their cash invested. They have $160 or maybe $150 billion of invested capital. They have more cash than that. You know, they could theoretically double their invested capital number if they could just find some way to get that money invested. And they should be willing to invest it at below 60%, obviously, whether it's 20% or 10%. But yeah, Apple could theoretically be a more profitable company if they were to maybe lower their investment standards a little bit.

That's a great point. Any questions on that concept? It's a super important concept that as long as you're growing economic earnings, that's the goal. And super high ROIC is not necessarily more important than that. Having both is great, but the law of competition effectively requires that you have to make that choice at some point.

Yeah.

Tam, do we want to just quickly touch on the additions to the website and the accounting report and then we'll close out?

Okay, that sounds great. Absolutely.

So we made a couple— we added some new metrics to the website a little while ago. We're finally getting around to kind of showing and writing a blog post on that. But we added a new version of free cash flow to the website. You can see here it's free cash flow. calculated as NOPAT minus CapEx minus dividends. That was based on a client request. You can find that in the dynamic data screener where I show here on this picture. And then you can also find it in the models on the free cash flow page there at the bottom. And so anyway, this is just a way to tell people, look, we're not about selling religion. We got better data. If you want free cash flow calculated in a different way as an institutional client, Let us know. We're happy to do it. We've got the best data in the world and we are agnostic as to how we calculate things. And then—

Although you guys do like to argue about it a lot.

We do. We make certain numbers. We, the numbers we use internally for our own ratings, we take, spend a lot of time talking about making sure we got those right. And then the last thing you'll see on our website, and these reports are free, is the Accounting Standards Review from May. And there's a section on our site that we call the FASB Tracker. And basically what we do is we track everything that comes out of FASB so that people don't have to worry about getting caught flat-footed about a big accounting rule change that's going to change disclosure and all of a sudden FUBAR all of your models. That happened a couple of years ago when FASB changed the way operating leases were reported. For a long time, all of operating leases were off balance sheet. Then all of a sudden they were on, and debt-to-total capital ratios and all the credit rating ratios were messed up by a lot of people who didn't see that coming, because all of a sudden there was a whole bunch of debt on the balance sheet that didn't exist. And if you didn't retroactively fix your models historically, you had apples and oranges between the, the data and the disclosures post that accounting rule change and prior to that accounting rule change. So in the Accounting Standards Review for May, we review, I think, 3 or 4 different new pronouncements and rule changes and how they do or do not affect models. Fortunately, this time around, nothing looks very model-affecting, but we are paying attention and following. I can tell you, as a former member of the Investment Advisory Committee for FASB, there's a large volume of noise coming out, and I think The service we provide to determine the signal from the noise there is super valuable.

I think that's going to be it for us today. Any last questions or anything else that you guys wanted to make sure that we hit today before we let these fine people go?

That's it. Have a great weekend, everybody. Thank you.

Take care, guys. Bye-bye.