New Constructs' Live Monthly Podcast - 17 Jan 2025

Go ahead and kick things off. Let's start with a little quote. This one: Wall Street research looks good when markets only go up. Diligence does not matter when everything goes up. Stocks can't go up forever. Great quote. Sometimes I question it right now. see the market bounce on these past 2 days again. Seems like things can only go up for the past couple years. But all—

no news is bad news. Somehow it's always good news.

Yeah. So welcome in. This is our monthly podcast, uh, with myself, Kyle Guskey, and CEO David Trainer. Um, today is January 17th. So our regular disclosures and disclaimers: we are a publisher of research, we're not providing any advice. But feel free to read these at your time as well. They'll be in the replay. The agenda for today, as I noted, there will be a replay provided in our community. So if you've not already signed up, sign up there to get replays and a whole bunch more. We've got the slides, we've got different trainings, we've got community discussions, and we'll be talking about a lot of those in the podcast today. Our next one will be next month on February 21st.

Okay.

We've got a Nice list here of the research since the last podcast. Most recently, some of these long idea and danger zone updates, and then our sector ratings for 1Q25. We just put out the best and worst sector ETFs and mutual funds yesterday. So those are all the sectors with, you know, ratings and best and worst ETFs and mutual funds in each of those sectors. So definitely check those out. After the research, we'll move into our interesting headlines and community. We'll be talking about whole bunch of different stuff. We see it all there, you know, special webinars, new features, IPOs, community posts, and trade ideas. But we will get into that, and then at the end, if there is time, we can maybe look at one or two stocks in our rating system based on the requests you guys have. So get any requests you might want to take a look at, any ticker in the chat or Q&A, and we might be able to take a look at those at the end depending on time. And if we do, those are live only. They will not be in the replay as a thank you for attending live. But on the upcoming training front, we have 2 next Tuesday. The Truth About Wall Street: Unveiling a Trust-Based Rating System for Smarter Investing. That'll be in, I think, either 1 PM, 12 PM. Don't want to give the wrong time, but it'll be next Tuesday. Look for emails to sign up. We sent out multiple over the weekend and next week. You've already received some as well. And then the Let's Talk Long ideas would be for professional higher members only, also on Tuesday later in the afternoon. You should also receive some emails for that if you're a pro member. Also got the special section on community for pro members with some signup links in there as well.

Yeah, now let me say, if you are a pro member, that is probably one of the greatest features of, I think, the pro membership, because we do some really serious deep dives into valuation, reverse DCF, and There's some very good stock ideas that come out of that meeting. I think I was really surprised a couple weeks ago when we learned about a quantum computing stock that looked quite a bit more attractive than expected.

Great. On the next up, new features and products. Got a few. One announcement on a new feature sort of thing. We did update the research link. We've had some people ask about it. You can still get all of our research. It is now under the blog category on the website. So for anyone that wasn't sure where the research tab went, that's where it's at. It's just been renamed. You can still access it. It still looks the same, but just know that that is a slight change to the header menu there. As for new products or availability of products, our credit rating reports are now on FactSet, and then our equity and credit rating reports are now available on AlphaSense for download there. So we're excited to get those out to more locations. David, correct me if I'm wrong, but I believe those are the abridged, abbreviated portion reports. Best way to get the full entire report with all the details is still on our site. But—

Yeah, that's right. That's right. No, we can't, we can't put that much data out there. We don't trust these platforms to prevent hedge funds from feeding this stuff into large language models. So You're going to get way better reports, especially if you're a pro client. You know, the reports you get from us are much more detailed. AlphaSense is a brand new partner. We're excited to syndicate with them. We think their platform is a bit more secure. And so we're actually sharing our full credit rating report on that platform. We'll see how long that lasts. We may go to an abridged version, but for now, we want to get those credit ratings out in more places because it's just a way better credit rating. I mean, we should maybe pull that, that clip. We're going to do— we'll show the clip in, in our next training, but that clip from The Big Short movie with the S&P credit rating analyst basically admitting that they don't do ratings well. Anyway, our stuff's way better. The data is better. It's, uh, superior. It's more— it's, it's much updated much more often, and we cover a lot more companies. So excited to get the credit ratings out there. It's hard for me to stop talking about credit ratings. I apologize, Kyle.

All good. They're great. I think the quote, you know, when's the last time you refused a rating? We're not refusing ratings. We are rating them on the fundamentals. Wanted to bring up some pre-IPO coverage that we've added some companies to our coverage universe. IPOs obviously seem to be picking up a little bit this year, Venture Global being the next big one. We've added Venture Global as well as these other 3, Floco, ServiceTitan, and Smithfield. You can get ratings on all of them through the ratings page, through portfolios. Some of them haven't even traded yet, so you can, you know, get in ahead. Others have, you know, just recently started trading. We know that IPO coverage is hard to find because most of the Wall Street banks can't even put out research until they start trading, have a moratorium on it. So we can get ahead and give you the insights into what these IPOs actually look like, oftentimes before they even start trading. I wanted to point that out. If you're looking at IPOs, those are some you can take a look at and kind of, you know, get a judgment on before they actually go live. And usually the stocks bounce.

So, yeah, I think it's a big deal, right? I mean, I wonder— I'm sort of laughing to myself thinking back over the years, all the way back to the tech bubble and the IPO boom back then, you know, maybe it's better that they don't get to write about it before it goes public because that way they don't have to be responsible for the IPO valuation. They couldn't even say anything because a lot of these IPO valuations are ridiculous, and there may be liability for supporting that kind of evaluation before it's in the public marketplace. I don't know, but, um, it's more than a little interesting that there is a paucity of good information around IPOs.

And that will take us into interesting headlines and happenings in the community. Like I said, we've got Some mentioned earlier, we got some pro-only spaces in the community. We've also got a public community there that everyone can post, have discussions, topics, questions. So we'll touch on a few of those here, starting with a big question or key question on our mutual fund ratings methodology. Specifically, you know, how are individual stock ratings aggregated into a mutual fund score? David, I'll throw this one over to you as the creator of that mutual fund methodology. Touch on what goes into that.

Yeah, this is, you know, this is kind of very interesting because people actually ask us all the time about our stock ratings. Do we use this sort of normal distribution that you see on the screen here for stock ratings? The answer has always been no. We have certain thresholds for what we think makes a stock, you know, on an individual basis, a good buy or not, or a good sell, or, you know, bad company good stock, good company, bad stock, all that kind of stuff is done on an individualized basis, independent sort of of other stocks in some ways. In some ways it's all relative. But here we're really specific. Like we take the top 10 best and they get the very attractive rating. The top 10 worst get the very unattractive rating. And you see everything in between here very much like a normal distribution. And you may wonder, well, why did you do that? The answer is that we, when we first put the ratings together, we didn't really do that. We just said, hey, the rating of the ETF or mutual fund is going to be based on the aggregation of the ratings of the stocks it holds, period. That's just, they are what they are. But what we found is that almost all of like the ETFs and mutual funds, like, were getting a neutral rating. Everything was sort of just normal, like average, or like when you're looking at sort of the average of the ratings of all the holdings, just so much stuff just got kind of a too large a proportion of the ETFs and mutual funds were getting sort of neutral slash unattractive. And so that wasn't any— that wasn't helpful to people. People don't like— they don't like neutral ratings. They don't. So it's like, yeah, you know, so we said, you know, that's a good point. We're going to now sort of break up the ETFs and mutual funds, all of them out there, into these status or stratify into these sort of groups. And so the top 10 ETFs and mutual funds, they get a very attractive rating. And, you know, by the way, all those sort of scores that I was talking about for like risk-reward, but each component, we assign a number to that. So we get a kind of a number.

Okay.

That we, that we use in our database to, to rank and analyze things. And so there's a number there. And so we just take those numbers and we rank them all and we break them up in this way so that you've got a better sense of what's the best and what's the worst and everything in between. Any questions about that? Let me remind everybody to, yeah, get the questions in here. Anytime. We put them in early rather than later, so you got time at the end.

Yeah, and this question popped up on the community because it seemed like there could be a fund that was right on the threshold of the top 10 to top 20. It looked like it had similar holdings, but one was getting a different rating. So that's a great explanation for how that can happen and exactly how we're putting those mutual fund ratings together.

Yeah, I think with that one there was a difference in the cost too, Kyle. I'll have to look up that, look up that.

Okay.

Look at that.

Yeah. Would then impact the rating.

Yeah, I think that was part of it. It might have been part of it. There's a lot that goes into this stuff. So, but yes, there is that stratification. And here we go. What's the comment here? Oh, part of this was there was better allocation for one fund versus the other. So in this situation, this fund actually had a bigger allocation to neutral or better-rated stocks than the other funds. So there's a little bit of a difference in allocation, but we still have that stratification. Another question here. Are there cap styles of the market that tend to have higher or lower ratings? Yeah, the growth style tends to have lower ratings. The value style tends to have better ratings for our system. And I think what we've been seeing— otherwise, it's kind of hard to tell. I mean, a lot of the small-cap stuff has sort of looked expensive at times and some large-cap stuff. Less expensive, but that's shifted in the last year. I think there's cycles. There are definitely cycles in terms of how this stuff changes, but typically growth looks more expensive than value, and even even the traditional growth. Good question here again: How are how how frequency? How was the frequency of ratings being calculated recalculated? Stock ratings are updated every day. So every day we are uploading based on the latest stock price and understanding the expectations backed in that stock price. So. And we're sending out alerts to everybody that's a client anytime that changes. So we're keeping you on top of the market every day. We don't do intraday. I think intraday is— that's day trading. That's something else. That's not investing. That's speculating. But at the end of every day, we take the closing price. We update all of our ratings on stocks, ETFs, and mutual funds. And for a mutual fund, if the changes in the ratings of the stocks it holds are meaningful enough, or happen to a meaningful amount of the capital invested in the fund, that could change the overall fund rating. It just depends, you know, how much capital do they have in stocks whose ratings change a meaningful amount, or ratings change at all. That will, that will kind of help you understand the trickle-down effect into how much and how often ratings will change for ETF and mutual funds. In terms of how are our mutual fund ratings different from Morningstar? I mean, very different. I mean, who else is going and looking at the underlying fundamentals of every single stock in an ETF or mutual fund, or the majority of them anyway, right? We don't— we'll still cover an ETF, a mutual fund if we got over 70% of the capital of the fund. We have got ratings for that. But who else is doing that diligence? Well, so first of all, Who's doing the kind of diligence that New Constructs does on individual companies besides New Constructs? No one. We're the best in the world at fundamental research, hands down. If you care about fundamental research, we are the best place and only place to go, unless you think it's okay to make investment decisions based on bad fundamentals, in which case, be my guest, go for it, go make investments based on bad data. So I would also say then that our ETF and mutual fund ratings are the best fundamental ratings in the world and probably the only truly forward-looking ratings. Because every other rating system about ETFs and mutual funds, it's backward-looking. It's based on price performance. It's pure technical research. There is no fundamental research on ETFs and mutual funds. So it's almost like, even if you do care about technicals, do you care zero about fundamentals? Right? If you like, you like Morningstar Research, maybe it's great, but is it going to be the only thing that you pay attention to? Right? Are you going to be 100% about technicals? You know, I would caution against that. And so I would imagine that, you know, if you're a Morningstar client or any other kind of client of traditional fund research, you need new constructs in order to give you some footing in the fundamentals. Otherwise, I mean, you're sort of driving at night without headlights. I mean, you're doing that anyway without new constructs, but especially if you're fund investing, is entirely based on technicals, and that's what you're getting from any other research firm. How up to date is our info on mutual fund holdings? They only update once a quarter, and we typically get those updates within 30 to 60 days. Our data provider on that is not the greatest, so— but that's pretty much, I think, in general, how long it takes for most of these people to get the holdings out there to clients. So We have a data provider that gets us the holdings, the allocations. And so we get it, we update our system as soon as that data comes out. Typically that takes around 30 days from when they file their SG-14A or whatever filing it is that they are required to file that tell you what their holdings are. Whatever it is, it's way better than what you have on the alternative. And a lot of times Holdings don't change that much. So what we're showing about the fund is sort of the best possible representation of the fundamentals. We'd love to do it real time. If they put the data out real time, we would take it real time, but they don't. So it's the best that we can do. We can— I think we crushed it on the mutual fund stuff. We could maybe move on.

Yeah, I would say speaking of the best that we can do, another post here, the state of equity analysis, and I'm not sure that they are doing the best they can do. based on these comments, a certain post about overall state of equity analysis. Now, you know, large fund managers, senior analysts on large funds didn't even know what he meant by hidden when they were having a conversation about hidden items. It was a great post, but speaks to exactly what we've been talking about a long time. And what, you know, the Harvard Business School found when they were looking at our data and they couldn't reconcile it with other data providers is that, you know, most places don't even know that items are hidden. And so this was just a nice quote to point out is, you know, hey, don't have to take our word for it. We say that often, but it's out there that analysts are looking at, you know, one set of numbers and don't even know that there's better numbers out there.

I mean, we can't— this, this, like, this was a— this post was in the community. I'm going to throw the link in here. It's called The Diamond Hill and the State of Equity Analysis. I mean, this post is like kind of a— I mean, it's a commercial for, for New Constructs because, I mean, it just flat out says like, listen, I went out there and I spent a bunch of time talking to professionals about investing and research, and basically they don't do any real research. And this is, you know, this is part of why I started New Constructs. Because when I was on, when I was on Wall Street, this was back way back, like before and during and after the tech bubble. You know, I was, I was very young and naive and kind of had a come-upping and, and sort of really was the opposite of a, of an epiphany when I saw how poor the analysis is and thought that, look, if we don't create new constructs, we don't create a new construct. For research, then the investment community is going to be effectively permanently handicapped from getting good information because the people on Wall Street aren't doing it. They're not doing this work. And I can tell you that from firsthand experience. And I think this post here from Joseph— I actually emailed Joseph, invited him to be here today to speak because I thought this was such a great post. But it speaks to the state of the market. Why can stocks trade at such ridiculous valuations? Because people are looking at that stuff. They're looking at their payment for order flow if they're a hedge fund and saying, oh, you know what, I can keep holding this because the retail interest is still strong. And when the payment for order flow indicates that sentiment is changing, I'm selling. Because I'm gonna know before all the rest of the retail people that the sentiment has changed so I can get out. Which means they can take risks that they couldn't take back when I was on Wall Street. Right? Like the big funds, they wouldn't invest in crazy overvalued stocks because they're like, oh my gosh, well, if this thing just happens to correct before I figure it out, well, then I'm gonna be sitting on a big loss this quarter, and that's gonna cause me asset— cause me to lose assets. Like, I can't take that risk. Well, now they don't have to take that risk. That risk is not a risk because they got payment for order flow to see it happening. Anyway, it's a long-winded way of me saying Nobody's doing this work. That's why I started New Constructs, and that's why we're really proud to do what we do here. We love what we do. We believe in what we do. We're happy to share it.

It leads us to the next slide perfectly.

Almost like crushing the segues today, Kyle. I don't know how you do it, man. You're crushing the segues. But yeah, man, both of us can talk about this. This is what we do. It's what Kyle and I do all day, every day, is we're writing research and we're using our research To, to try and bring to light how much better and, and why the footnotes matter. And, you know, look, we're so grateful for the, for Harvard Business School and MIT Sloan School of Management professors finding us and saying, oh my gosh, this is a major discovery, gonna boost their careers. You know, it's the equivalent of a, a physics professor finding a new planet, right? These Business school professors found a new dataset that had novel alpha based on footnotes. And, and, and it's good to have that independent validation. As Kyle said, like, you don't have to take our word for it. Take it from Ernst Young, Harvard Business School, and MIT Sloan School of Management in the Journal of Financial Economics, some of the most trusted sources in the world. But, you know, this is an article we put out this week on the blog, Whose Numbers Can You Trust? What should you do if you can't be confident in your portfolio? I mean, it's it is what it is. Check it out. You need to know, especially I think in a market like we've seen this year, down one day, up the next, down one day, up the next. We're grinding it out here. I don't think we're gonna see a big, huge, crazy correction because what's what's that gonna lead to? People buying on the dip. So I think the way that the market gets more rational. is that it just kind of grinds out for a while. What does that mean? You maybe have more time to get your portfolio right, but that you still need to get your portfolio right. And you never know when the market's going to get smart. It reserves the right to get smart at any point in time, and it could be on one of those crazy stocks that you have in your portfolio. And anyway, look, we think it's good to have good research at your disposal in good and bad markets. Smart to have good research at your disposal in good and bad markets. You want to take the next one, Kyle?

Yeah. No, no, let's talk.

Let's talk about each one of those articles, man. Let's go back. Like, okay, resolutions that work. How about one that you just don't buy, buy, buy, right? Like, I mean, that's Wall Street. That's Kramer. Buy, buy, buy. Yeah, he throws a few spells in there every now and then. But look, you got to remember, these folks don't make money. They don't have a living. They don't have a job if they're— if the markets aren't up. If people are paying for advertising to watch CNBC, and if markets are down and people are pessimistic and upset, CNBC can't sell advertising, and they can't pay Jim Cramer to come on and say buy, buy, buy and act like a maniac.

There's, there's not an inverse Cramer strategy for no reason, right? People say that, yeah, there could be value in going the exact opposite, because if he's just screaming buy all the time, is there actually any diligence and delineation between good and Exactly.

Exactly. And on the stock market crash, you know, we had a great client session a few weeks ago, and man, that was the first question coming out. We hit it hard. And I thought it was fun to start off the year asking the hard questions and answering the hard questions. And in that interview, I think I provide some great insight. I already shared some of it today. But yeah, look, there's a lot of bubbles out there.

Yeah.

And the overall market is looking increasingly like a bubble. And I, I just don't know where we're going to find any more catalysts, right? You know, it was, it was, it was blockchain, it was AI, it's quantum computing. Like, you know, what, what's next? I don't know, aliens, you know, Ozempic, what else? While, while there are a lot of other risks out there, a lot of other, other risk like moral hazard in terms of the way we invest and just how much capital gets allocated to bankers and people who run companies that aren't creating value.

Right. I'll jump to the next one because we've been talking about overarching, you know, themes and whatnot, but we also have a lot of individual trade discussions, one from one member in particular on most of these. And we also had another one talking about VRTX up top here. But in the community, there's a bunch of options discussion that you can layer over our research with some option strategies as well. Um, so definitely say, you know, check these out, see if it's something that you would be interested in, um, have, you know, more conversations about them. We don't specifically do options, but we love to have members in our community that do and can talk about them in a way that, you know, uses our fundamental research with a more technical strategy as well. There's some great ideas being posted on the tickers.

Yeah, these are like tutorials on how to trade options with New Constructs information. With new contract research, right? I mean, they're not official. It's from a just a member of our community, very smart, and he seems to do quite well, and he's all about the options. In fact, if he keeps up like this, he might just have to be. We might just have to start a new franchise for this guy under the new contracts umbrella with respect to options, and so it's really cool. I mean, I know a lot of you all out there are interested in options, and these posts are. tutorials on how to build option strategies based on New Constructs research. So we recommend anybody who's interested in options definitely take a look at those.

I think that's it for the topics here. We've got any stock pick requests, we can take a look at those real quick. If there's anything that you wanted to talk about more, David?

Um, yeah, we got a couple more questions here that I'll take in. If, if we, uh, we'll see what kind of other requests we get on, on, on the ticker front. How does— another question— how does the Power Gauge system used by Mark Chaikin differ from our Wave Rating stocks? I mean, it's just about— it's about different data, better data, I would say. Our, our data from the footnotes just gives you a better perspective. And so it's, it's not as much technical-oriented, technically driven, I believe, as the Power Gauge. And the fundamental analysis is going to be more robust. It's going to be more rigorous. The Power Gauge and Mark Chaikin franchise have been super successful, so don't want to take anything away from, from that. Mark's a great guy. I've talked to him in the past, incredible marketer, would love to work with him someday. And I think New Constructs ratings are very complementary because the Power Gauge is, is way more technically oriented. It's got a little bit of fundamental, but it's way more technically oriented because we've been in a very technical market, right? Fundamentals haven't mattered as much. And, and so we think that working with a guy like Mark or complementing the Power Gauge with the New Constructs Fundamentals makes a lot of sense.

I think that'll do it. Thank you everybody for tuning in. Like I said at the top, the replay will be available on our community. If you want to sign up there, you can go to newconstructs.com/society if you're not already. Part of that community. And then we will see you guys out on the community and next time.

Thanks for being with us. Good to see everybody.