New Constructs' Live Podcast: Intelligent Capital Allocation - 01 March 2024

This is Intelligent Capital Allocation. David Trainer will jump on here in a minute. Myself, Kyle Guskey, and Hakan Salt is with us as well. Uh, got our quick disclosures and disclaimers, and we'll jump into the agenda. Got a lot on the agenda today, so I'll make a quick note that over on the side you see all the headlines. We will not get to all of these, so if you have any preferences on what we cover, please add those in the Q&A and we can take a look at each of those posts on the Society of Intelligent Investors. That's what this podcast is built on, is your guys' questions, your concerns, interests, and everything. And so we'll touch on a few things in there, but we definitely want to hear from you guys about what most interests you. Got a lot of recent research since our last podcast. We've got our model portfolio performance update that gives the 2023 performance of all our model portfolios, including Focus List Long and Short, Most Attractive, Most Dangerous, and all the other ones as well. We put out a couple updates on long ideas, put out a brand new long idea. All those are available to Pro and higher users. Couple Danger Zone updates, some new model portfolios. And like I mentioned, that filing season finds report, week 1 is out with some info on what we've done the first week and a feature on one of the companies that had some interesting adjustments that we identified. And then after the announcements on the next slide, we'll get into the headlines. We've got a few things we want to share with you guys as well, so it should be an exciting podcast here. I'm going to move to the next slide with announcements. I don't know, David, did you want to take over here? I'm going to keep going through these.

Yeah, no, I'll jump in here for a second. Did you tell everybody that they need to be voting on what we need to talk about?

You did?

All right, cool. I'm sorry for being a little bit late here. Yeah, so we're going to be doing a special webinar March 21st for Pro and Institutional only on a— we're calling it a secret metric because no one really talks about it. And we don't believe anyone else can actually calculate it with integrity. A lot of people talk about ROIC. What is that guru's site or whatever? Yeah, they do ROIC, but it's complete, you know, not reliable. And so we've got a, we've got a secret metric, you know, and it's actually pointed out to me by a colleague and we use it all the time. It's in our reports a lot. We just haven't really highlighted just how amazing that this metric, when it turns above another metric, uh, how much of a— how strong a leading indicator that is for stock price performance. And so it's, it's pretty amazing. You know, the— that's the good news. The bad news, there's not a lot of companies where this happens. It's really rare. But that's also good news, really, if you're anybody but a systematic quant trader who needs to be in, you know, in hundreds of stocks at a time. If you're really looking for a couple of really good ideas, This is one metric that's going to be a really, really good one. We're doing that on March, March 21st, 11:00 AM, pro and institutional only. Other special webinars we've had recently, we did Behind the Balance Sheet with Stephen Clapham. That went really well. I think we had a lot of you guys on that call. That was for everyone, introducing someone who specializes in, in fraud, which I think was really cool. And then we did a Let's Talk Long Ideas with our pro and institutional clients. I thought that was great. I I've gotten a lot of great feedback. Any of our pro folks that were on that call, please feel free to chime in. But we got a lot of great feedback. I thought it was an awesome call. For me, it was a lot of fun. Look, I love breaking down— we took a lot of requests, so we didn't really even talk about our own, our new ideas or many other ideas, mainly just requests. And I love breaking down a lot of these stocks. You know, some of them look cheap, some of them look expensive, but at the end of the day, it all depends on what you put into that reverse DCF. And any of you who've been on any of our prior webinars, you know we do a bunch of reverse DCF work, and it's fascinating. It's fascinating, right? Little adjustments in, in, in, in assumptions, cost of capital, margins, growth appreciation period. There are a lot of moving parts in assessing the future cash flow of a company over its life. And it makes a difference in valuation. And our reverse DCF, I think, is the best tool in the world for understanding that. And anyway, it was fun, a lot of fun. Thank you all for making that. I thought that was a great call. We're gonna, we're gonna, we're gonna try to make that a regular thing. Because it was awesome. I think everybody liked it, and we all learned a lot. Let's talk about the impact of large language models on new constructs. This is a public service announcement. We've been making a lot of these public service announcements, and we've been taking calls with and doing meetings with all of our investors— I'm sorry, and all of our clients— and about our membership changes. The bottom line is that our, our legacy membership Gold, Platinum, and Pro were ridiculously underpriced, and they are going away. We are moving everybody who's on one of those— you, you have to move off. Either you go to Stock Tracker 50 or you go to Pro. Stock Tracker 50 is a much lower level of access. It's $49 a month. We highly recommend that you complement that with access to model portfolios, which we now sell à la carte. Same with long ideas, danger zone ideas. All the things that we used to bundle up in the Gold Platinum Pro, we've disaggregated. Stock Tracker 50 is just stock, ETF, and mutual fund ratings only. Green is good, red is bad. You get the component ratings, but you don't get any data behind it. You just get the green is good and red is bad. And we think those, those ratings add as much and, and bring as much value as ever. It's based on all the same analysis. It's just that we had to make a distinction between people who just want our signal and who want the data. If you want our data, you're a professional for the most part, right? And we've had a lot of folks we know that were professionals taking advantage of these super low-cost subscriptions. And frankly, a professional subscription is still an extremely low price. We probably should be charging 10, to 20 times that. I had meetings with RIAs in the last few weeks, people who are renewing. And, you know, look, they are— I mean, they flat out tell me, David, you saved my firm from having to hire 20 to 50 analysts because that's how many it would take to analyze all the Ks and Qs that come out every quarter, update the models, put into a database, and have a system to rank and rate all of those. Companies so that you can then screen and figure out which is good or bad. You have a rating system that can rank the company in ROIC versus peers. Like, that rating is a function of so much incredible data. Anyway, we're moving access to our reports from all channels. So as of right now, we, you know, you can still get our stuff on TD, but that's not for long. I think that's only maybe another month or so, and our reports will no longer be on TD Ameritrade. At least that's what I'm hearing. You can't get them anywhere else, only from us. We used to put some reports out on Interactive Brokers. You've probably seen that we don't do that now. And yeah, that's just a part of us, you know, basically just bringing in the data that we were giving out because we also took videos from YouTube because we know the large language models are out there cranking through the data. And so we needed to make that happen.

And, and speaking important, say it's important to note on the video one though, David, that they are still on the society. So you can still access a lot of those.

That's right. Great point. We're just not making them searchable by, for free from large language models. If you go to society, all the reverse DCF case studies are still there. We're still crushing it for, for all of our people who, who care about, who want to be in the society. Society is just an increasingly active and robust group. I'm really excited about that. I got a request for Boeing and Fairfax. I think maybe that's for reverse DCF. Ken, sorry, we're not doing those today. We don't have enough time. Kyle, you want to go ahead and do, or you and Hakan going to do the 4Q23 parsing stats?

Yeah, I'll pass it over to Hakan for that. And the Boeing and Fairfax are also on Society as well.

So yeah, so talking about the filing season, the 10-K that Kyle was mentioning earlier started, we started on February 13th and about the last end of it right now. To this day, with conservative assumptions, assumptions being it takes 9 hours to file up, to parse a filing, and it takes about a $100 per hour worker to do it. To this day, we created $1.3 million of value just this filing season. So with conservative assumptions, this is how much work our analysts are putting in. So it's good to note that we're creating this value for our clients.

Yeah, I think it's also that middle column, filings parsed and updated. We've got multiple days near, you know, 200, 194, 174, 231 filings parsed in a single day. So the analyst team is cranking through those, creating massive value and updating all the models you see on our site.

Yeah, it's— look, there's, there's no, there's no way to match the comparability Or the the the incredible amount of value added in doing that work. It's amazing. It's amazing. And we are we are handling everything the day it comes out. It's turned around. There's been no backlog. So this this you know I can't say this enough. The cost of you to do this on your own, and that's just the manpower to parse the filings. Does not take into account the model to analyze the data. The The technology to organize it all and produce reports and the model to do the analysis and provide a rating to put it all together. This is just the raw manpower to parse it at a very low cost. You're going to pay people a lot more to figure out the taxonomy, the ontology, the rating system, the technology to drive it all. You get the idea. And that's why, that's why we're talking about, you know, the number of full-time employees to get this stuff done in a short amount of time. It's That's a lot. We're saving people a lot, a lot of money, manpower. Forget, you know, forget just the cost of what I'm talking about. Then you got the HR cost to deal with all this stuff, right? Like HR to, you know, hire, fire, train, whatever, you know. Anyway, good stuff.

Yeah, I'm gonna move to the next slide. I'll leave you to introduce this one. We've had an upcoming special offer we'll email out to people, but I know you and did a lot of work on this, some of the videos and stuff. So we want to talk about the Value Investing Accelerator.

Yes, yes. So look, you know, there's a big trend in training these days, and, and I partnered up with Pete Renzulli of Stock Trading Pro, does a lot of cool stuff. And we've got a special offer for where you can, you can go and access these. There's 4-hour-long-plus videos around how to apply value investing, how to apply some of Pete's training techniques like order flow, technical analysis. I think the combination of our data with technical analysis is super powerful, and that's what Pete and I spend a lot of time talking about. But you can see you get a bunch here. You get courses, you get transcripts, you get, you get training sessions. You know, this stuff is, you know, it's better than what you get at Harvard Business School. You know how I know? Because I just got done as being part of a Harvard Business School class for the business analysis and valuation class. Just this morning, the amount of detail we went into, Pete and I, 10 times more. And, and I, and I've done a lot of these guest lectures at, at business schools. And let me tell you, it's very high level. It's very high level. I mean, these folks, it's, you know, you, you're in business school, you're, you're doing a lot more networking than you are actually learning how to crunch the numbers. And in fact, one of the, you know, questions in the, in the class were like, why do people even need to do this work? Does it even matter? Does new constructs even add any value? Like, do we even need new constructs? Right? So this training is, is, is worth what you'd pay to go to Harvard Business School. You get in one training session, you get probably at least a full year of Harvard Business School education. I'm not gonna say it's better than like the, the, how, how, how many years is an MBA? 2 or 3?

I'm not even sure. I think it's 2 minimum.

Yeah. You know? Yeah. So let's say an MBA at Harvard costs a million bucks. It's $500,000 worth of value. Repeat me.

And I will, I'll put this sign up here link in the chat as well, and it'll also be available on the slides after when we post the replay to the Society.

And then we'll probably have it in ICYMI that's going out.

Yeah, we'll be sending out some emails for people as well.

Probably do a blog post on it so it's there too.

Yeah. Yes, exactly. And with that, I'm going to, we'll jump out to Society. We've got, again, a ton of stuff here. I'm going to exit out of the slideshow for now, um, and let's jump into society here.

Um, let's see, we got one vote, Boeing and Fairfax.

Yep, I can jump right to— as this loads up here, uh, the Boeing—

Yeah, Circle's been moving pretty slow recently. I was on there trying to type something in or do an answer to, to our man Bob Brammer He's always got great questions about reverse DCF models, and it was all messed up yesterday. Like, it gave me a hard time.

Who knows? There we go. Yeah, Boeing was a post from Panaki, who's active on here a lot. There's some good conversations on, you know, the stock being up, and Panaki thought that could be moving down in the near future. I know we've looked at a lot of the impact on airlines, you know, Southwest, Delta, those business models. And how Boeing's issues have impacted those as well. I think, I think kind of the conversation here—

Yeah, man, I think big with Boeing— sorry to interrupt you, buddy— the, the—

nope, you're good.

Big issue with Boeing is how much of a conflict do we have between a business that is shareholder profit-driven and also public safety Responsible.

Yep.

Because it feels pretty clear that management at Boeing has pushed so hard on profitability that it's come at the expense of some safety. And that's why these planes keep screwing up. And, you know, it's one thing when your video game console screws up. It's a whole nother thing when your plane screws up.

Right?

Yeah. They're both pretty complicated machines. So I think there's a lot of question. I think that was Panaki's point, you know, is it like, hey, do we have a, do we have an existential problem with this business? Should it be a public utility? You know, how do we do this? Like, and, and, and, and does it also speak to just the, the absolutely ravenous and mercenary nature of our capital markets these days? You know, it's all eat or be eaten. And, and I think, you know, and ESG was a big head fake on trying to fix all that because The ESG information was just a joke and now people are like, damn it, that was a waste of time. We were misallocating based on stats that didn't, weren't true. You know, it's part of why New Constructs is around. We're giving you the truth about profitability and evaluation. And that's probably the most important part of ESG because that's the G. But yeah, I think that, yeah, that was the takeaway. Pinaki is great point, great point, great post and some great observations. Let's go to Fairfax, Kyle.

Yep. I think I saw that one up a little higher. This was a short report from Muddy Waters there. I know they've been very detailed on some of their past ones.

Yeah, I think what happened here, I'm trying to remember, this was a while back. This was right after we had our last call. I'm trying to see what's going on here.

Yeah, it was a lot of value destroyed through transactions, overinflating of assets. Would that be picked up by, you know, our parsing and overall ratings and everything?

Trying to see. I think that the— looks like the internet's having a problem.

Fairfax.

Yeah, one of the deals with like outright fraud is it's hard for us to know. Uh, but I'm not sure, did the Muddy Waters report on Fairfax get taken down or is that still up? Who knows? Does anyone know off the top of their head?

This one, we can get it right here.

Is it—

so it's—

well, that's somebody downloaded, but is it still on their site?

Oh, that I don't know.

Yeah, the GE of Canada. So yeah, our ratings show that the economics of this business look good, but that said, you know, with respect to fraud, you just don't know. That's the problem with fraud. Like, they can put— cutting about putting out good numbers. We saw that with a lot of small-cap Chinese companies that And that caught us a little bit flat-footed a few years ago when we, we added a bunch of those to coverage because people are interested. And we knew that they were like questionable companies, but we didn't really have a system to tag them as such. And a bunch of them turned out to be frauds. They all looked great. They all looked really profitable, really cheap.

Yep.

But they were lying about their financials. And we knew there was an issue because they weren't required to adhere to GAAP or to a lot of the scrutiny that all US companies are Are required to adhere to, right? How about how about that for a little loophole? Hey China, we love you, and yeah, you can you can put companies on our exchange with zero financial oversight. That sounds really smart. Thank you, government, for allowing Chinese folks to just steal. So anyway, we knew about that, and we didn't properly communicate about it really because we didn't have it in the system, and that was a big error. We have since changed our system. And we dropped a bunch of those companies from coverage. And, and now if we cover something like that, you'll see it in the analyst notes. It'll be a suspended rating. And so we have a bunch of cool stuff on suspended ratings to, to touch on all that stuff now. So that's— I think that's helpful, but good question there.

I was going to move to the— this post here by Julia on the market breadth of the S&P 500, largely because it goes hand in hand with some of our Sector research. We've seen here that, you know, the top stocks are driving so much of the S&P 500 returns and, you know, stock price. And we actually see a similar phenomenon with profitability. We've looked at the, you know, tech sector over the past few quarters, and it is so much, so heavily driven by, you know, 5, 6 stocks at most. I think when we did our last macro update, it was, you know, 5 tech stocks were 60% of the core earnings in the tech sector. So I think it's interesting to see how not only is it in the profits, but it's actually driving the market as well. You know, some of those similar companies with the massive market caps that they have, and then also the massive profitability and profit machines that they've built. Not so much maybe with some of the price action in Nvidia, because we've seen that one go wild, but it was interesting to juxtapose that with the actual profitability of the sector as well. Let me see, looking through this list here. We actually have a question that comes upon what you just mentioned. I don't know, David, do you know if the SEC requires foreign companies to follow GAAP or other requirements in their reporting?

You know, I know there's been some back and forth on that. I don't remember the exact, but I do know, I know the Chinese companies are still held to a, a lot of them are definitely held to a lower standard. But I, I don't remember if they have to now. I think non-Chinese, they got to follow IFRS, International Financial Regulatory Reporting Standards. So I know that, but I think they still be maybe making— letting some, some of the Chinese folks in. The issue with that, the big companies from China, is that you can't have 2 sets of books. So if it's trading in China, it's a big company, They're making sure they know what's going on. And, and, you know, like if it's an Alibaba or Tencent, right? You, we know the numbers we're getting are good there because they couldn't, they couldn't have 2 sets of, of financials. So the big ones are good. It's the small ones. I think we maybe are probably avoiding a lot of the smaller companies these days from China in general because it's just pure speculation. Good question, Steven.

I think one, if we want to touch on, there's a lot of comments on this taking profits post. So people haven't seen this. I think there's a good conversation here. on when people should take profits, you know, what, when they, what they use in their own strategies. Obviously it's different for everyone, but I thought there was a lot of great back and forth here. Just if you've got a big winner, what do you do? Because that is ultimately the question everyone has to ask, hopefully at some point, if you've got big winners.

It's a great, great— you're right, Kyle, this is a great conversation. It also reminds me of the Discover conversation. We, we should tap into that one too. But this is a great conversation. We definitely recommend people take a look at this taking profits because, as Kyle said, it's different for everybody. We don't give out any investment advice, period, and we won't, and we don't want to, we don't intend to. It's not for us to do. And I don't think this is what this is asking for necessarily anyway, but just wanted to be clear on that one front. But in general, yeah, this is an existential question. There's no right answer. It all depends on the individual and your risk tolerance.

Yep.

You know, we have a system, a rating system that's really strict. You know, when things get expensive, you know, the valuation metrics will change and you'll see it go from green, yellow to orange and red when it gets too expensive. And, you know, we've kept that in place for a long time because if we were changing our rating system all the time, then it wouldn't be reliable. But yeah, I mean, you know, what's expensive today is very different than what, what used to be expensive. There are whole new levels of expensiveness that we see now. And, and I don't even know what to say about that except that it's, it's crazy. And it all depends on your risk tolerance. I mean, look, we were early in Nvidia. It was a long idea for us many years ago. We closed it out and it's kept going up a whole lot. So, you know, take that for what it's worth. We think there's a lot of risk there. I think the current stock price implies revenues are going to be something like twice the GDP of Mexico.

So it's way up there.

Yeah. So yeah, you know, but great discussion. And I think this is one of the things that makes the community great. You're going to get a lot. We got 13 comments on this one topic. You're going to just get a lot of great feedback and perspectives from a lot of really smart people. And I love— we got a lot of folks that do options on here, and there's a lot of cool perspective on that. We got— I guess we got time to talk about Discover, and then maybe we're going to go to stock picks. Kyle, is that it for time-wise?

Yeah. We go ahead and do that. Scroll up here on Discover.

So Discover news of the acquisition. Yeah, focus list stock, long idea for us, done really well. Just announced they're going to be acquired by Capital One. Very accretive deal. And a lot of questions around, okay, now should I sell? And, you know, we— you know, the stock has been suspended, right? Stock rating has been suspended because of the impending acquisition. Because most of the trading and direction of the trade is going to be— you can click on the comments there so people can see some of those comments.

Yeah.

So it's been suspended. This rating's been suspended because the movement of the stock is be— is going to be more about whether or not the deal gets done than it is the underlying fundamentals. Right. And, and when the stock trades at the, at the acquisition price, that means there's, you know, like very high assurance or belief that the deal was going to get done. As long as there's a, there's a gap there, that's a discount on effectively the deal closing. So, you know, then it becomes a gamble now, like, oh, do I think the deal's going to get done or not? And we're not really in a position in understanding the fundamentals to answer that question. So we, with the stocks suspended and, you know, we're taking our time in like closing out the position, but we're probably going to, you know, do a little bit of looking into how likely we think it's going to be closed and we'll probably Close the position because at the end of the day, there's not a lot of upside left, right? I mean, it's—

Yeah. You mentioned the discount, you know, right now it, the market is discounting a bit. I think it was trading in the low 120, 122, and the deal valued it up in near 140, I believe. So there's a little bit of a gap there at the moment, but the upside from, you know, 122 to 140 isn't as much as the jump that it had the day that it was announced, you know, when the initial premium was announced.

Yeah, we got another great question here I want to take real, real fast, and that is, does the SEC still allow broker-dealers and market makers to sell naked calls on stocks they haven't borrowed? I have no idea. Good question. I think there's a lot of manipulation in the stock market, on the options market, you know, just buying up tons of calls just to push stock prices up. I know that people have demonstrated the gamma squeeze in certain stocks like Tesla. Because look, if you buy a call to buy a stock at a certain amount, that's, you know, the call option to buy 100 shares is cheaper than probably buying 1 share. So you can do a lot of damage in terms of forcing somebody to buy the underlying stock because you bought a call option to buy it from them at a certain price. So just a little way to— another way to sort of manipulate the market and, you know, give people leading indicators as to how stock prices are going to move. Leading indicators that institutions take advantage of to front run.

Thank you guys for joining us. Um, I think the next one is scheduled for the beginning of April, about a month from now. We'll see you guys there and also out on Society. And if you have any questions or anything, shoot us an email at support@newconstructs. Be glad to help you out, get any questions you have answered. Um, and we will see you next time.

Bye, everybody.