Stocks I Would Trust With My Family's Money - May 2024 Training

All right, let's go here. Welcome to our latest training on the stocks I would trust with my family's money. The number one clue I look for when identifying, I think, stocks that people know they can put their head on their bed at night, on their pillow at night, and know that they can trust. This is the idea behind diligence that I've really got me started in the business. I think most of you know my history. I started as an executive compensation consultant, and my job was to go to boards of directors and make sure that they didn't pay executives for growing accounting earnings, because you can grow accounting earnings while running the business into the ground. So we put some stuff together here at New Constructs that I think is really special and really speaks to the heart of what it is we're able to do for clients. Uh, we always got to touch on the disclaimers and disclaimers and disclosures. We're not advisors. We're not here to give advice. Uh, we're here to provide good research. You guys know me. I'm David Trainer, founder of New Constructs. I've been doing this for a long time. Uh, I'm a big believer in reinforcing the integrity and supporting the integrity of the capital markets. And look, we've been doing this for a long time, 25 years, building a machine learning technology that's revolutionary. For retail investors, and we have been proven superior by many sources. Journal of Financial Economics, Harvard Business School, MIT Sloan, and SumZero ranked our stock picking number one for about 10 categories, including all-time, for about 36 months straight. Our mission at New Constructs is to provide investors with what they need to make intelligent decisions. We're the first firm, I believe, in the history of the world to really make good research accessible and affordable to the masses. It's based on a revolutionary technology that we've been developing for many years. And I believe that people deserve access to diligence. I believe in people who want to invest in a way that gives them comfort and a clear conscience. We're not into meme stocks. We're in— we're into diligence. We're into doing the work that's required to know that you've done what you need to do in order to Be able to look your clients, your family in the eye and say, this is something that makes sense and you can trust. That means, again, we're not about the short term. These are not great get-rich-quick schemes. These are ideas and research tools that are designed for professionals and those that care about doing things for the right reason and doing the hard work to get that to make that happen. It's not crypto. It's not roaring kitty. It's not options. It's not a shortcut. There's enormous amount of work that goes into making sure diligence is done right, and that's what New Constructs is about. We want to bring that to you in a way today that makes it possible for you to take advantage of not only the best data in the business, but at the best time. We just come out of came out of first quarter earnings season. My team has been going through thousands of filings, quarterly and annual filings, and just a few weeks before that, we did tons of annual filings. The filings come in at all different times of the year, but in the bulk of them for the annual reports come in in March, and then a couple months later here in May, we are looking at a bunch of Qs for the first quarter. The takeaway is we've been through millions and millions of pages of information, aggressively analyzing all parts of these so that we can give you information that is reliable and trustworthy—the kind of stuff that I trust with my family. Things that you can put your money in for long term and with confidence, because investing is not speculating. It's about being able to allocate capital to where it makes a lot of sense. And I think so much of success is not necessarily about finding these great winners. It's also about avoiding the blowups. As Ben Hogan used to say, the great golf legend, it's not so much about how well you hit your good shots. It's just as much about how well you hit the bad shots. So why am I so confident about stocks and the research we're about to talk about today? It comes down to one word: incentives. What's driving behavior? The companies that harness the power of incentives have an advantage. They, if they harness it correctly, which means they make sure that their leaders are focused on creating shareholder value. There you've got something special because compensation is what drives behavior. And if your compensation is tied to the company's financial performance, real performance, this changes everything. And this is not always the case. I remember seeing this article several months ago and kind of almost falling out of my chair. Many of you know that we've written some reports on Pinterest, Peloton, Hertz. You know, I think Hertz went bankrupt. Peloton has been a zombie stock. These CEOs were making $100 million a year while their businesses were being run into the ground, highly cash flow negative. This is called a disincentive, right? If they're making $100 million a year, my company's losing money, what's my motivation? It's clearly not to take care of investors. The problem is, and the key is that this is not necessary. We don't have to have bad incentives. In fact, in most places we don't. Think about salespeople paid on commission. It's a very common theme, right? You want to generate revenue, give people a piece of the revenue, then they're incentivized to raise revenue. Or how about scholarships that are based on academic performance? You want good grades, make sure the scholarship is tied to good grades. This is not a novel concept. It's really straightforward. The sad part is that it doesn't exist as much as it ought to. In the capital markets. But when you can find it, you can expect performance to skyrocket. That's how I find the stocks that I can trust with my family, because these executives don't get rich unless we, or you, the shareholders, get rich. Their goal needs to be to perform for you. They are the agents of your capital. You don't deserve to take on agency risk. It's not necessary. Because if you do, you're in trouble. And there are plenty of warning signals for this, right? Non-GAAP anything as a performance measure, a nightmare. Plenty of stories of this over the history of time. Enron, WorldCom, Valiant, right? These are all companies being paid or executives being paid for non-GAAP performance numbers. They make up revenue growth. Not a good metric. You can grow revenue all you want. Profits could be going through the floor. It's important to know the difference. User growth is another one of my favorites, right? Just because we're adding users assumes everything's good, right? That was part of the blowup in the last couple of years or so when all the private equity firms all of a sudden said, oh, unit economics matter. Of course they matter. Problem is a lot of executives aren't held to the task. Here are a couple more examples of zombie stocks and danger zone stocks. Where executives are getting paid huge amounts of money, huge amounts of money when their businesses are losing money. They're not creating value. They're getting paid anyway. It's a really bad thing. When this is in place, when bad incentives are in place, you know, that's part of why we like the danger zone is a big deal. It's like if bad incentives are in place, why would you ever expect them to change? And if they don't change their money-losing ways, what's the value of your equity? Likely to be zero, because too often people are paid for hype. We live in a hype world. I mean, if someone can put out a tweet of something that looks remotely like a video game and the stock go up like it did, you know, what are we— what are we talking about? All right, our zombie stock list. Those who follow my e-letter, we know we gave that out for free recently. Those are all examples of bad stocks and things and businesses you want to avoid. On the other hand, when the executive is getting paid to improve return on invested capital, then I know that eventually we're going to get paid. This is the key takeaway. We want to find companies who are incentivized to improve their return on invested capital, period. That's huge. When return on invested capital goes up, Value creation goes up. We know they're doing the right thing. They have a completely different mindset. They understand they have an amount of capital that's been trusted to them and their job is to grow it. That's the purpose of the capital markets. You don't put money into the market so it can sit there and do nothing. You put money in the market to grow it and you grow it in the right way by putting it with businesses that take a dollar and make it into $1.10 and the next year make it into $1.20. Et cetera, right? That's what people are supposed to do. That's the purpose of the capital markets, and we want executives that are incentivized to do that because that means that your capital can be trusted with them for the long term because they're about growing value. That's the kind of stocks that I would trust with my family— companies that have paid executives based on improving return on capital, based on creating shareholder value. Now the problem is, how do you find companies like this? It's not easy. Very difficult to determine. Takes a lot of work, right? Let's, let's, let's just see how much, see how much help we can get from that with ChatGPT. I asked the— I asked ChatGPT, find stocks for companies that tie ROIC to executive compensation. So I get a list of companies. Some of these have higher ROIC, some don't. In fact, I put together a little portfolio of this list in our system, right? Yeah, there are a couple high ROIC companies, right? But there's some low ROIC companies too. Not great. Okay, thanks ChatGPT. But you didn't help me at all with the question about compensation. To find the latest information about ROIC compensation. Oh yeah, thanks. It doesn't help you. Point is, we're asking the smartest AI in the world. I don't think it's the smartest, but one of, one of the more popular, how to find this. Didn't do us any good. There's no substitute for the hard work to find this stuff. Reading 10-Ks, reading 10-Qs, and reading the proxy statements. ChatGPT told us to read the proxy statements. You got to do the work to find out what the compensation plan is about. And by the way, proxy statements tend to be as long as 10-Ks and 10-Qs, which is like 100, 200, 300, 400, 5,000 pages. And part of the problem too is that companies call it different things. They don't always call it return on invested capital. Sometimes it's a good thing, sometimes it's a bad thing. Sometimes they'll call it return on capital employed, or return on assets, or return on net assets. And sometimes they'll call it return on invested capital, but it won't really be return on invested capital. A great example, UPS. They were so proud of their return on invested capital that they a couple years ago announced that, hey, by the way, we're going to cut our dividend so we can reallocate more capital to our high ROIC business. The stock dropped like 20% in the next 10 minutes. Why? Because the market saw through to the fact that their return on invested capital wasn't as good as they said it was. They had a convoluted calculation. So not only do we need to read these proxies and see if they mention return on invested capital or something like it, we got to make sure that they're calculating in a way that we know is right and can trust. And that is not always the case. As we, you know, we all live in a world of hype and talk, and people can talk about, hey, we, we pay people based on ROIC, but it might not be true. One of the big takeaways here is that, look, it's very difficult to get this information. You don't hear Wall Street talking about this. Name another firm that's talked about tying return on invested capital To incentive compensation, executive incentive compensation, and name another firm that does the work to put together analysis that you can benefit from that. You won't find them. You won't find them. And if you want to try to do it on your own, try hiring, I don't know, 20, 30, 40, 50 people. We just recently had a major client, one of our institutional clients, on a renewal. And literally was like, I'm happy to pay you even more because we did like a 20% improve, you know, increase. And he's like, no problem. You know what, David? You saved me so much money because I'd have to hire 50 people to do this full-time year-round to make up for what to compensate or replicate what it is you do. That's a problem. It's costing— it's— this is the value of this is millions of dollars per quarter. And even, you know, even if you could find 50 people to do it. It's going to be hard to find good 50 people because a lot of people don't want to do this work, right? Wall Street doesn't want to do it. They don't talk about that, right? Meme stocks are easier. It's easier just to try and sell you stuff because, by the way, that's how they get paid, right? Wall Street salespeople get paid commission on the stock that gets traded on their desk. Investment bankers get a commission On how much stock they sell or the size of the M&A deal, right? You never saw anybody get sued for overpaying an M&A. No, you get sued if you underpay, right? But you can overpay all you want. You can overprice an IPO all you want. Bankers are making money on that. This kind of work is not always all that appealing. Why do you think New Constructs is the only firm that does it? It's not fun. It's also super complicated and super difficult. Everything else tends to be more of a pump and dump. It's easier, right? But we have built a technology I would call a revolutionary new technology called the Robo Analyst Process, RAP for short. And it revolutionizes, I believe, the stock markets because what we're doing is making that enormous amount of work that I just talked about affordable and accessible. To non-Wall Street insiders, I think it's the only AI that really works. ChatGPT doesn't really work. You type in a ticker, get an answer in our system—that works. That's the best fundamental analysis in the world, and we leverage this technology on your path, on your behalf, to do the proper due diligence that you're just not going to find anywhere else. It's not just the normal stuff, income statements and balance sheets, whatever. It's footnotes. It's the stuff that's hard to find. It's the stuff that people can hide illegally and do very often. And it's only this with this technology that allows us to do the kind of work that we do. Great. So here I'm gonna go through some examples. Stock number 1, a consumer cyclicals company we identified in May 2023. In the last year, up 84% versus the S&P 27%. A basic materials company identified in February 2022, up 61% versus 18%. An industrials company up 47% versus 26%. This is what diligence buys you. We're not shooting the moon. Steady, strong outperformance. Because that's, I think honestly, that's the real way we create value. Yeah, people get lucky and they can have a business that's an overnight success. I'm not saying it never happens. It's rare and it's more luck than skill. I don't really like to believe in luck. I'd rather invest in the things that, that I can control. And that's how hard I work and how diligent I am and how honest I am. If I put my efforts into that, And I leave it to the universe, I leave it to God to determine the results because I've done what I need to do. Fortunately for us, our results are strong, and we're not the only ones that say that. We've got endorsements from the top minds in the world. Harvard Business School and MIT Sloan professors wrote a paper proving the superior superiority of our data and our core earnings analysis. That paper got published in the number three. Peer-reviewed journal in the world, in the world, the Journal of Financial Economics. And don't get me wrong, it took a while because guess what? The status quo, all the professors, they weren't exactly welcoming a new data set that would— that potentially says all that research you did on this poor data set or the lesser data set for the last 50 years, maybe not as good as you think. It was hard to get this done, but we did because the results speak for themselves. Ernst Young wrote a paper proving our models are better. In fact, the paper they wrote is Getting ROIC Right. The paper basically says nobody measures return on invested capital better than new constructs. Why is that metric important? As I said before, it's about taking value, taking capital and creating value with it. And then our ratings. Harvard Business School wrote another paper that proved the superiority, proved the superiority of our ratings. So it's not just about The data and models. It's about the ratings, right? You got to put that data together in some way. There's a lot of data out there. ChatGPT is a great example. Some of it's true, some of it's not true, but you got to put it together in a way that adds value. And that's what we're able to do in addition to just gathering good data. Think about it as an antidote to all the, the BS that's out there, the mainstream narrative, right? It's independent. You have an opportunity to to turn the tables on Wall Street, right? We know where their incentives are. Sell meme stocks, sell IPOs. You don't have to fall prey to that. You can actually get smart, transcend that, invest in real companies, ignore it. I think you deserve it. I think you deserve that diligence. I think your family and clients deserve that diligence. I think our society deserves that diligence. So we have something special. It's a model portfolio that does all the things that I just talked about. It's my favorite model portfolio, I have to admit. A new set of stocks based on the latest data, and it's called our Executive Compensation Aligned with ROIC Model Portfolio, right? Pretty obvious, but these are all stocks that do what I was talking about was most important, right? And this is a model portfolio I want to make clear is for serious investors. It's not for people that are looking for quick hits. This is for people who care about long-term investing, not stuff that's based on hype, not stuff that's based on the Mag 7. If you're looking to invest in solid companies that have a strong likelihood of outperforming, this is what you want to find. This is why I say these are the kind of stocks I would trust with my family's money. And when I'm talking about return on invested capital, the reason we focus on that is because it is the single biggest driver of value creation. This is what Warren Buffett has talked about forever. Ben Graham before him, right? This great paper written by my mentor when I first got to Wall Street. Plus ça change, plus c'est purée. I know my French accent isn't great. 1996, the entire research report. And you can get it in the link here. Kyle, if you want to put that in the chat, that'd be great. But that entire report, all it does is show that return on invested capital is the single biggest driver of valuation back in 1996, right? I've written other papers on that. Ernst Young wrote a paper on the same thing, right? And then here's a great regression analysis. I've been doing these for 25 years. Here on the x-axis, return on invested capital. On the y-axis, enterprise value divided by invested capital. Think about that as a fancy, more sophisticated price-to-book ratio. This is the S&P 500 all through here. Look at the correlation, 75%. The way you read this statistically is to say 75% of the changes in the enterprise value to invested capital ratio, or the fancy price-to-book ratio, are explained by return on invested capital. 75% of the changes in valuation are explained by return on invested capital. When I say it's the single biggest driver, I think 75 out of 100, right? That doesn't leave room for much of anything else. For those that are wondering, we'll talk about that on, on another webinar, what the rest of the drivers are. But yeah, ROIC is by far the most important. Now, for a stock to make our executive compensation aligned with ROIC model portfolio, you got to have 2 things in place. It has to have an attractive or better rating. So all the research we do on the fundamentals and valuation, got to have that as a check. And then the compensation for the executives has to be tied to return on invested capital. The best of both worlds. Now, as you— most of you probably know, in order to be and get an attractive rating, right, you've got to have excellent fundamentals and cheap valuations. And we do all the work to explain and, and, and, and analyze that. Again, that's what we do better than anybody else in the world, hands down. And that's been proven. Nothing— no one else can match this work because of the AI, the technology, proven superior data. That's what it's about. Not to mention the fact that our portfolios, model portfolios, are trusted by some of the best investors and RIAs in the world, some of the biggest names out there. And our stock, our stock picks based on these ratings and research has been ranked number 1, as I mentioned before, by SumZero every month for 3 straight years. I think this is just— yeah, this is the May 2024 results. Not bad. As I mentioned before, it's the same research that's been lauded by some of the top firms in the world, the most respected institutions in the world. So when serious professionals and investors ask me, You know, for one of our reports, you know, that, that's, that's what they want to understand. They want to know what the best and most brightest minds in the world are saying about the best stocks in the world. And they know they can trust it because it's been based on the best diligence. And then they know that management teams are going to be those that care about your capital. Executives are getting paid for value creation. We're finding companies that have great fundamentals, stocks that are cheap, and the executives are paid to change that directly. So your risk of downside is way less because you got executives that care about your capital, they care about creating shareholder value, and you got a cheap stock price, so it's not recognized yet. And by the way, when I talk to other professionals in the field, all right, other FinTwit or gurus, right? A lot of times I'll let them have access to our website, but you know what I don't give them access to is our research on which companies are paying for ROIC and which aren't. And it's not just like to have again identified that list, it's the people that you know that are paying for them, not just with real metrics but in a material way. In a material way. Because a lot of people can say, oh yeah, we, we link, uh, return on invested capital to Executive compensation for one hundredth of their annual salary, right? That doesn't count. It needs to be a real metric and a material amount. And the fact that this isn't required by law—it's a mystery to me. It's a mystery. And if an executive resists the idea of having their pay tied to creating shareholder value, why would we want to give them any money? Like, why does this even happen? It's not right. Think about like, this is like an FBI background check for a company, right? Are the executives in it for them? Are they in it for you? It's a big difference. So let's get a little more specific. There are about 15 stocks in the portfolio every month, sometimes a little bit less. Why? Because we drop companies out if they're not working. We're not there. Just to put anything in there without a close scrutiny, right? We're careful. That's what you pay us for, to do the diligence, to be discerning. And the performance here is strong over the past 6 months. The models outperform the S&P, and we think it's even better positioned in a market that we all know is frothy, right? I mean, if, if the meme stocks are coming back, I think that was like a real sign Right back in 2021, meme stocks, things blowing up. We saw what happened after that. Things aren't setting up real well for the stock market. I'm getting friends, economists sending me papers about how they think things are going to blow up. Been hearing it for a while. A lot of folks have been talking about for a while the market's expensive. And yet even in this environment, we've seen stocks in this portfolio do really well. I think the fact that these stocks can do well in a crazy growth meme stock environment Is a really a super strong testament to the value of the research. The great news is we think they'll do well in every environment, every environment, and you can trust that even if things go to hell and back, right? You've invested in a business that long term is about creating value, an executive team that cares about creating shareholder value. They've got good fundamentals, and it's something that is going to build value over time. I think there's a value to peace of mind that is hard to measure, not to mention the fact that we're updating numbers on all the holdings. This portfolio is updated every month, and yet every day, you know, we are updating our systems, and you can track this portfolio on our site. You'll see here, if you're a return— if you're a professional member, you'll see that the executive compensation aligned with portfolio. Is right here. There's 3 different groups, usually about 5 stocks each. I won't show you what it is, but that's something you'll have direct access to, as well as the report that you can get emailed to you every day. This deal will give you the report. Professional clients are the only ones that can access it through the website, just to be clear. It's like finding good red wine is, is easy because you can pay through the nose. Finding affordable good red wine It's tough, which is why the executive compensation aligned with ROIC model portfolio I think is so great, because you get affordable, attractive, and very attractive rated stocks, companies with great fundamentals, cheap valuations, and they have the ROIC alignment. So that's why it's such a very special curated list, why it's my favorite, and why I think it's, you know, in many ways sort of the, the poster child for for just how valuable the work that we do at New Constructs is. All right, thanks very much.