New Constructs' Live Podcast: Intelligent Capital Allocation - 9 Aug 2024

I want to start with a quote here from David's latest e-letter. We he's been emailing these out, and we also putting them up on our site. There's a section real quick right here. David Trainers e-letters. But latest one is called Valuation Doesn't Matter. Dot dot dot until it does. And Wall Street makes money, rating agencies make money even when you lose. There's a bunch of awesome detail, nice video clip from The Big Short about the secrets behind Wall Street.

If you've not seen that video, you gotta watch that. That's like, it's a game changer. Like, it, that pulls the wool off of everybody's eyes. Like, it's, it is a just, it's such an excellent excerpt into what really happens. It's one of the best, best things in movies of all time. my opinion personally, for sure the best thing ever in a Wall Street movie.

And with that, we will kick it off. This is Intelligent Capital Allocation, uh, August 9th. Myself and David Trainer, uh, hit the disclosures and disclaimers here first. We are not providing any advice. We are publishing research. Big agenda today, a lot of announcements and research since the last update. Um, One of the announcements there. Got the dates for the upcoming podcasts here. This is monthly, so we got September, October, November, December there. We'll also be updating the Zoom link, um, so you might get updates on each of those dates if you're already registered. But we'll be holding it those dates. The research since last podcast put out a ton of great research, uh, some updates on long ideas, some new danger zones. David's put out 2 different e-letters, referenced one of them. Got the ROI research compared to FactSet. Let's talk a little bit about that later. It's a model portfolio performance, stock picking rankings done for SumZero, some ETF and mutual fund research, and then a lot of the different model portfolio updates monthly. You know, the most attractive, most dangerous, safest dividends, dividend growth, exec comp. All of those updates go out monthly and get sent, posted to the website and also emailed out to everyone. So check those out on the website for the Topics today, we'll be talking about some new features, a little bit on the valuation doesn't matter until it doesn't. And then also some updates on, like I mentioned, the ROIC research, some stock picking, and some of the parsing stats we've got coming through already. 'Cause we are in the middle of filing season right now. So plowing through all sorts of filings. And so we'll touch on that. And then at the end, if we've got time and there's any stock pick requests, we might have a chance to take a look at those quickly. But that'll be time dependent and only available on the live show. No recording of that available. So upcoming, we have some special webinars. We've got a Let's Talk Long Ideas for pro and institutional members next week on August 14th. We've also got an upcoming training, How to Profit from Wall Street and the Financial Media's Propaganda, August 15th. We've got emails going out on that for signups, so be sure to look for those. Interesting headlines. Throw this over to David because we've got some new features we want to talk about. I think David's done a little work on these as well.

Yes. Yes. Let me get that open here. The main thing, the best part is this new reverse discounted cash flow modeling capability. Super powerful. So let me pull this up for one of our favorite super expensive stocks. I will share my screen here as it's coming up. But the main thing is, is that I sent out a little— where did I— who did I send this to? Did I— I posted in Society, I think, right? This, this new feature that allows people to zoom in and zoom out and look at different time horizons, and not just for our implied share prices but for the future required return on capital or free cash flow or NOPAT. And, and this is something that's— it's been, it's been in the system for a while. We've had it, just the charting was kind of weak, and We've never tried to be really like make ourselves big chart creators because there's so many firms that do that better. We're really more focused on the data and and getting the basic tools to do whatever you want because charting is potentially an infinite activity, and that you can have a million kinds of charts and doing a million kinds of different things. So, but with that, let me let me show people what here what I'm talking about. I'll share my screen, and what we're talking about here is is a. Tool that is available to institutional clients is the company model button. There's also this download XLS button, which I will go ahead and click that because I'm going to show something. Well, I'll do that in a second. So anyway, when we're looking at the decision page in a reverse DCF model, a lot of times, you know, we're you know we're looking at different kinds of forecasts that produce different results. But the full model goes out for 100 years. But when you're not looking out past, like, you know, 15, 20 years, you know, this 100-year timeframe gets to be, to be honest, to be troublesome. It's troublesome. So if we can reduce this timeframe down on the x-axis, well, then it looks— it's a lot more meaningful. Like, okay, here's the implied share prices based on different trajectories. So for example, in this optimistic scenario for NVIDIA, we got 100% revenue growth rate going for like the first 5 years or so, right? And then that's what causes the implied shares to go nuts. So like if you're looking, you know, 15 years out, you know, we're talking potentially about up to close to $1,000 again where it was before, you know, pre-split. And otherwise, you know, it's going to take 15 years to justify— 15 years of growth to justify the current stock price if you're talking about something closer to a 30% revenue growth rate. So you can do it in 3 years if you're growing 100% compounded annually. 15 years if you're growing 30% compounded annually. 30% is still a big number, but 100%, you know, you, you, you create a lot of value in a short amount of time. Now, where I think that this, this capability has gotten even more helpful and more interesting is in this chart, which is what Kyle puts into all of our research reports. Either way, we always look at past NOPAT, future NOPAT, past revenue, future revenue. So when we do that here, what's really cool is you can see You know where revenue's been in the past for Nvidia, and then here's the chart for like what it's got to do in the future. You can see it's it what they got to do in the future makes makes us looks what they've done in the past like nothing. But I think if we reduce this down to three years, you can still see this three-year number. 100% for three years is is a is a big number. They're at 133. I'm sorry, we're around. $80 billion now, and this would assume they're going to get up to close to $500 billion. And scenario 2, which is still quite optimistic— I'm calling it pessimistic because I'm just filling out numbers in different, different options, but you get the idea— it's still a pretty big number. You're going to go from $80, you know, out to, you know, doubling. You know, in the next few years either way, which is pretty impressive. And then the same thing can be done with the operating profit after tax. You know, again, I think a super cool thing, you know, where you can look at the forecast based on scenario 1 or scenario 2. And, you know, here you see where the numbers go and you can see, you know, that again, pretty really skyrocketing. And same is true for return on invested capital. So what kind of return on capital are we talking about And it's interesting to see the shapes of these curves, right? Whereas return on capital kind of flattens out, revenue growth gets parabolic when you look at it for a long period of time. But it's, you know, it's really pretty interesting to see, you know, where the returns on capital have been, which have been really impressive up in the round 70, 80, you know, as high as 174% here recently. But when you're talking about that 100% growth for 3 years, you're also talking about return on capital you know, nearly tripling to 600%. And, and if you're going to take 30% growth over a long period of time, you're in, you know, assuming continued improvements in capital efficiency, which is baked into the model, you know, you're looking at close to, you know, 940% return on invested capital. So, you know, and what I'm, what I'm trying to say is that embedded in these really impressive revenue growth Scenarios is also improvements in return on capital, and these charts just do a great job of demonstrating that. I think bringing that to life, I think that's super cool. Really excited about those changes. I've been looking at the model with those kinds of those charts for like you know twenty years, man. So, and we've needed that kind of dynamism, I think, for a while, especially in that bottom chart. In fact, when, whenever, whenever Lee was rolling that out, he told me, he's like, yeah, that bottom chart always needed that capability. It really wasn't that useful without it. And I was like, yeah, true. Still useful. I mean, like—

That's part of the reason we put it in the reports on the shorter timeframe was because it was much more useful if you could change the timeframe.

Totally, totally. Like, I mean, I feel like we should pull up a report and just show that. 'Cause yeah, we had to, we had to do it. We had to create it by manual. You're right, Kyle. The other thing I wanted to point out is in the download XLS feature for institutional clients, you're going to see a lot more detail, especially in the default forecast section around all these reference points. So what we've done, because the download to Excel stuff is quirky in the way Excel works, you used to have to have links to a data file to show everything, and you couldn't actually make it link inside itself to other tabs and stuff, which seems really silly. If you've ever used an Excel file on your own with multiple tabs, you know, you link to stuff all the time and it's fine. But in these download templates, it didn't work. So, and we had some clients that had questions about that. Like, hey, so why can't I, I don't understand how you're getting some of these numbers. And so what we did is we brought in a bunch of data down at the bottom, which still goes back to, to other tabs. I'm sorry, a data tab, which is not ideal. But if you ever wanted to validate it back to one of the tabs in this file, you could easily. But what it does allow you to do is see exactly how these forecast data points are calculated. You can see exactly. So you can see the actual data here. And so it's transparent, more transparent in terms of how these things work. That's all I got. Cool.

Keep it moving. Make sure— jump back to the slides here. We'll go to the next one and mention some stock picking. We're back on the August update from SumZero. Now we're back in the number 1 all-time, number 1 in a bunch of other categories as well. I've had 39 straight months of number 1 stock picking, and we're using the data that David just showed, you know, the DCF model, quantifying valuations, building models with superior data. And so we're very proud of that. And we wanted to feature one of these big picks today because it's not having a great day for Danger Zone pick Five9. It was actually the Danger Zone report last week and they're down 26% today, 51% since we named it Danger Zone and Zombie Stock in December 2022. Today was earnings. They beat earnings, they beat revenue, and they lowered guidance. So the market's punishing that guidance cut because it's ultimately a growth story. for an unprofitable business. And without that growth, you have nothing but big losses at the end of the day. So we wanted to feature that one as a recent pick. A lot of the times, SumZero can be some of the longer-term ones as well, but they're every day— some of these are dropping and could drop much further. You know, we've featured some of these zombie stocks that have fallen 50% and still have, you know, 60%, 70%, 80% downside. So this is a welcome sign, but it's not the end. of some of these stocks.

Valuation matters. Valuation matters. And we, you know, the Danger Zone stock coming out next week is another company, another stock that's like massively underperformed and been a great zombie stock, been a great Danger Zone pick in terms of our, our performance on that. But it's still got a long way to go down, man. You know, it's still like a $40, $50 stock. So yeah. And when you do anything other than assume like an incredible improvement in margins, You know, it's hard to make a case for this to be more than a you know somewhat something in the single digits. So there's a lot of really expensive stocks out there, and valuation seems to matter these days. So diligence matters.

Valuation mattering is a welcome change as well. Yeah, quick question about how long it hasn't.

I'm sorry, Kyle. I just got a quick. I want to take this quick question about cash buybacks and and then briefly talk about the ETF too. So. Cash buybacks, you know, they did— they, they, they don't necessarily reduce shares outstanding if companies are issuing more options than they're, than they're buying back shares. You know, a lot of times I think people think buybacks are all good, but, you know, when you're buying back your stock, it's because you've got excess capital that you cannot deploy in the business to actually make money. And if you're buying back really expensive stocks like, you know, some of these really expensive companies, that's not great allocation of capital. You know, I didn't, I didn't invest in, in your company, Mr. Tim Cook, for Apple, for you to take my money and just buy back your shares. If I want more Apple shares, I'll buy them myself. Now, that said, there are good cases for, for buybacks, there are bad cases for buybacks, and they only decrease the number of shares outstanding if they're not issuing more shares at a greater rate. And then on the ETF, we're in a quiet period. We're not really supposed to be talking about it much. Back to you, Kyle.

Cool. Get into, like I said, right in the middle of filing season. So far we've gotten through almost 1,900 filings. If you look at these numbers on the daily, we've got, you know, 323 filings yesterday, 293 the day before. The analyst team is pumping through these with the help of the roboanalyst. Adds up to, you know, $1.7 million in value so far. We've got probably another week of filings. We'll end up right probably around 3,000 filings updated. from all the 10-Qs that just came out. And so we've got all the models being updated, new data, getting, you know, that latest 10-Q into the model and seeing what it looks like. So the team is working very hard to get all this out to you as quick as possible. I don't know if you want to add anything else there, David, but if not, we'll keep it going.

This is— this leads into the next slide, Kyle, which is, look, this work that we do matters. We sent a— we published a couple reports here in the last— since the last webinar. One of them is on a comparison of our data with FactSet and a comparison of our data with Morningstar. And I want to share those with you guys because it's some pretty interesting stuff. So let me, let me share my screen real fast. Get that. So we've done 2 of these and, and, you know, it's hard for us to do these all the time because we don't buy subscriptions to these other firms. It's not really, you know, our thing. And, and I like to take it from a public source anyway because, you know, otherwise who knows how we're making it up. So when I get, when I get something like an article we got here from MarketWatch and they've got a bunch of FactSet data with 10-year average ROICs and 3-year average ROICs, I'm like, okay, well, let's see how that data compares to ours. And I did that here. You can see the 10-year average ROICs for this list of companies. I don't remember how they chose the list, but they did. And you can see there's like really huge differences. One case there's not, but you know, even if you're talking about 2% on a 27% return on capital, you know, that's, that's a significant difference. You know, 3% on top of 25%, that's, that's like, you know, it's not, it's It's between 5% and 10% difference, and that's a 10-year average. You'd think over 10 years you wouldn't be that different, but it's huge. You go to a shorter timeframe, we see just as many differences and just about as big. The point is all that work we're doing makes a difference. The footnotes, the cash flow statement, the management discussion and analysis, All that stuff makes a big difference, and it's worth it. Our proprietary fundamental data makes our research very different in a very good way. And then I'll show you the Morningstar report. Similar situation, except they had return on invested capital, ROE, and ratings. So we did comparisons on their return on invested capital, and you can see huge differences in Morningstar's ROIC, our ROIC. Even big differences in ROE. You'd think like, oh, that's just accounting data, unscrubbed accounting data. We're not doing anything special for ROE. We're just taking it, the data off income statement, balance sheet, and it's still like a big number. Now, a lot of them are pretty close, not too big a difference, right? Not bad at all, but still some big differences. It's like, whoa, what's going on? How do they get numbers wrong? Don't know. And then at the end of the day, ratings. None of our— only 2 of our ratings were similar to theirs. Again, data makes a difference. Quick question on buybacks. I'm going to be real fast. Malcolm, this is kind of a complex question. It's probably better for you to put that into the society because this is going to take up a lot of time to speak to, like buybacks as an expense in a notepad. The short answer is no. It depends on how they expense it. But yeah, short answer is no. All right, Kyle, what's next? What's our next slide?

Next up, we jumping into the community. If you wanted to talk anything about the recent e-letter and then any of the posts on there.

Yeah, so John Fallensby has been very generous and throwing a bunch of really cool stuff in there about his options trades. We, you know, we don't, we don't really think about options much or do options, and, and a lot of that's because Well, you know, look, we're focused on the underlying and we're not doing anything for advice. And so we're not really about trading. But there's some cool stuff. Like, I'm not going to deny, like, there's some very cool stuff that, that a lot of folks have approached us about doing using our data with options. And so I think John does some good stuff here. For any of you all that are using options, I would check it out. He's a great client, been with us for a while and has put some cool stuff in here. Steven put in a question about a couple stocks. We'll see if we have time for that. And let's see, got a new, new, new member here, Ben Jackson. We did it. We got it. We did a private session with clients going through details on stocks. These are for our pro and institutional clients. This one, this article was great in case you didn't see it. I want to— I do want to double-click on this. How Markets Keep Bullying Central Banks. I mean, it was awesome. I think I pulled out a quote here that really captures what's going on. The more often central banks concede, the higher the moral hazard and the greater they have empowered markets to demand policy changes that favor them immediately, even when in conflict with the requirements of economic health. It's a pretty good example, pretty good way to explain what's been going on with all this excess liquidity pouring into the market. Pretty, pretty awesome. I mean, this is something like Kyle and I talk about all the time. I feel like I've talked about with a lot of friends and folks in general. And it's just great to see this written in big print on a big platform like this. Another great community post by Giulio, as usual. Snap, I think Snap has had a Pretty rough go of it here recently. It's one of our downers.

They were down, down big recently on earnings as well.

Yeah, I think you guys had some good comments and suggestions for Ryan Mitz here on portfolio tracking tools. That's honestly something if we had more resources, we'd probably do some of that too. It's not hard. We got it all in there. I know you guys are probably thinking the same thing. Track performance. We've got something that's a little bit like that in our do-it-yourself. ETF model, but not quite. The Sahm Rule recession. This has been the topic of a lot of controversy recently because even Miss Sahm has said close but no cigar because we're— the context is a little bit different this time around for the Sahm Rule. And so it doesn't quite apply maybe as much as people think. Super interesting. Boring steel pipe for energy. We love boring. We love boring. What else do we have here? Yeah, I don't know much more about this stock. Julio, do you give us a ticker?

TS ticker? Yes, it's TS.

Yeah. Let's see what's for Julio. This way for me to get to. Looks pretty good. All greens. We might have something pretty good there. Yeah, we may even want to take note of that ourselves. I think one of the first, you know, one of some of the, one of our better ideas in the last couple of years came from a comment in here about Warrior Met Coal. I don't remember who made that suggestion, but that was, that was a good call. I think with Ford, you know, Ford and GM, I just, I feel like that there's such a, they are victims as Disney has been in a lot of ways, though Disney I think has done itself wrong a bunch here recently. But I think they're just kind of a victim of like the capital misallocation where too much capital is going to the wrong companies. And so it's stolen from the good ones. And, you know, for, for a while that was Netflix versus Disney. And now it's like Tesla and these EV companies stealing capital from the legacy firms because legacy firms are doing great. I think the fact that Ford and GM are putting the brakes on EV production is smart. Because it's pretty clear that demand is coming down and margins are coming way down. It's not a great place to allocate a bunch of capital. Why do you just need to build a bunch of EVs? Because everyone says to build EVs, right? It's just like we're learning, like, all this ESG stuff isn't necessarily that helpful. It's making energy more expensive. Coal's not so terrible. It's like we're switching back and forth, you know, and Ford's been a little bit more slow to react. And I think they're making more deliberate, intelligent decisions around some of that stuff. It's nothing wrong with that. It's a good thing. Very good thing. Yeah, this is one of my— this was the e-letter, and I hope you guys— I'd love feedback on the e-letters for sure, because it's a new product that we've been putting out there to help our clients get a better sense of what it is we do and sort of the ethos around new constructs and make us just, you know, a little more conversational. But this article is really about all that liquidity that's gone into it and I love it. Julio saw it, came in and gave us another great chart showing just, just how much total debt has just gone up. Total public debt. Not a good thing. Not a good thing. I mean, look at this. This is like we're like, I mean, what's the multiple on this? I don't even know. Almost needs to be like logarithmic. But you can see this big spike here. And then we had another big spike and it's like What? Like, not healthy. Not healthy. I'm back to— we got a question about this Bloomberg article. I'll put it into the chat so you guys can see it. You can also get it off community. Nancy, you should log into the community and you pull it off there easily. Kyle, I think I'm— I think I'm done here. You want to take back the mantle?

Yeah, I think that's all we've got.

So feel free to sign up to community. If you have questions we didn't get to today, we can get you there. That's super easy. You just go to newconstructs.circle.home. And if you need to sign up, I will put the link to how to sign up to the community in the chat here. So that was to everyone. Click on that and you can get into the community and we can answer questions for you in between these monthly webinars. Otherwise, I think we're going to go.

Also, we'll also post replays of this to there as well, so you can check out the video.

Let's talk about yes, all the replays. Boom, right here. So if you miss one because you're out of town, you're at the beach, don't worry, we got you covered. All right, thanks everybody.