The Dangers of False Dividend Stocks and Earnings Recap on CrowdStrike, Dollar General, and More

I'm excited here to talk to you guys about some new work we've been doing on dividend investing. Turns out it's not as easy as people think. I think that there used to be a mentality that dividend investing was simple, right? Go out there and buy stocks that pay good dividends. It's not that simple. Because a lot of companies are faking dividends, have false dividends, and are dividend traps. And today we're going to be covering false dividends. Last week we covered fake. Next week we're going to be covering the dividend traps. Let me share my screen here and we'll get started. We're also doing earnings watch, so I'll be sharing that in just a second. We're going to go over CrowdStrike. CrowdStrike. MongoDB, Dollar General, Dollar Tree, and Broadcom. As usual, typical disclosures here: we are not investment advisors. We do not give out investment advice. We're helping you make more intelligent investment decisions. Now I want to hear from you in the chat. All right, is this your first time with us? I want to know that. Let me know what kind of investor you are, and if you have a ticker that you want us to analyze, I will try to get to at least one or two of those before the end of the show. One of the things I like to talk about that we have covered last week as well, but that I think is important to know, especially when it comes to investing, is that it's a lot like golf. Your overall success is going to be a lot less about how well you hit your good shots and more about how badly you hit the bad shots. If you've played any golf, I think you know exactly what I mean. So let's just, let's jump into our earnings watch here. Let's go into The stocks that have reported this week that are big stocks. Here we go. Let's start with the retail folks. We think some since some seen some good stuff here from these companies. Let's go DLTR and Dollar General compared to. So we can see both Dollar General and Dollar Tree looking really good here. And these are stocks that have been interesting to us for a while as well. The one that I think has been more on our screen, Dollar General, it's been on our focus list. We've liked this over time. We can see if we go through the rating breakdown— sorry, the rating history— very attractive and attractive, and it's taken a bit of a turn here recently for the worse, as I think Some kind of competition hit in on them a little bit. They grew really fast. But we believe that what we're seeing today is some depressed profits. But we're seeing a return, I believe, to these businesses as we've seen in the headlines. Shoppers are shifting down and going more to Dollar Tree, Dollar General than they are even to a Walmart or Target or Lowe's or Home Depot, even though Lowe's and Home Depot probably aren't going to be competing as much. But you get the idea. Lowe's and Home Depot, that's higher-end spending. That's refinishing your home, not buying staples. And so we're not surprised to see these 2 firms doing really well. We think it's interesting to take a look at Walmart and Lowe's at the same time here. Let's see here. Let's go up a little. WTHD. Dollar Tree and Dollar General, Looking pretty good here year to date. So outperforming Walmart, outperforming Home Depot, outperforming Lowe's. I think that's interesting. And both of these stocks in our system look a lot cheaper than, than them. Both Dollar Tree and Dollar General looking a lot cheaper. I told you this market implied growth appreciation period is a really low number. This has been on our focus list and for, for quite a while. And what we're seeing is, is a rough patch in some economics, but still playing out. So this is one we've liked, I think, versus the overall retail universe. If you're going to be in it, Dollar Tree and Dollar General are in a good spot in a way I think that has surprised some people, but not us. Let's take a look now at some super overpriced stocks. How about that? Let's go with Broadcom. You know, it's just funny, man. I've been watching this company for like many, many years. It's been It's had different tickers, I believe. And it's been, man, it's been a serial profit shareholder value destroyer. You can see here, not a very good company, very expensive stock. The valuation is way up out there. Very expensive. Greater than 100 years, 7.2 price-to-economic book value. I think that's why we've seen that Despite, I think, a decent earnings report, you know, the stock is down quite a bit. Beats on earnings and revenue, but I think they had Broadcom slips as earnings only slightly beat Wall Street's estimates. Okay, so when you have a stock that's as expensive as this, you've got to do more than just beat. And we've got a slide later I've shared before that shows For a lot of these really expensive stocks in particular, the earnings estimates that we're talking about are a drop in the bucket compared to the overall free cash flows required to justify the stock price. Nobody talks about that. Wall Street doesn't want you to think like that, because if you do, you have to turn and run from these stocks, because the future cash flows required to justify the price are absurdly high. Absurdly high. And look, you might make the argument that, yeah, you know what, but this company's going to be the next Nvidia. But when you look at how many companies have these extremely high valuations, they can't all be winners. They're all priced to dominate the market in a way that nobody's dominating today. Even Nvidia's valuation implies that its revenue is going to be bigger than the GDP of Japan Assuming the GDP of Japan grows at 4% compounded annually for 10 years. That's how extreme it's going to be, extreme the valuation is. Let me just say that we're talking about stocks priced for unbelievably prosperous futures, so many of them priced for prosperous futures that it's impossible for all of them to come true, to achieve the expectations baked into the stock price. So Broadcom, yeah, great, you know, good earnings report, not good enough. Guess what? Because the valuation of the stock is absurd. I got a slide here in a minute though that explains that. MongoDB, similar situation. It's suspended because we made some changes to some— from some profitability metrics. I think it's gone negative in terms of profitability. See, economic earnings have always been negative. Let's see, is the NOPAT margin ever get positive here? No. So yeah, anyway, it's— and maybe someday this business scales. See, free cash flow, it's got a little bit better here. Maybe someday the business scales. But when you look at what's priced into the stock price in terms of what it means to justify the stock price, you're getting a valuation that's just way too high. So all the good news is priced in. This is the thing that I'm going to show in a second here, is that there's a difference between a good company and a good stock and an expensive stock and an absolutely absurdly overpriced stock. And what we're talking about here is absurdly overpriced. Now, does that mean it can't go up more? No. Once you're a little bit absurd, why not be more absurd? That's the whole meme stock strategy, right? Valuation has nothing to do with it. Let's just go crazy. But for me and my money, I don't really want to take that risk. It's like playing, it's like doubling down on blackjack every time you get 2 of the same cards, splitting your hand. I forget the term. You guys know what I mean. Maybe help me out here in the chat. But it's like just doing that in blackjack over and over and over and over and over and over, just assuming that it's going to work out and that it's just going to keep going up for the sake of it going up. I think more and more investors are recognizing that In this market, with this political environment, with our current monetary policy position and our fiscal policy position, we are headed against a cliff or a brick wall. We cannot continue to borrow and spend, and we cannot continue to keep rates low. Those 2 things do not live together. And we are seeing it fought out in the public sphere right now that these things are irreconcilable. which means the fuel that fired the meme stock phenomenon is dwindling. It's coming to an end, which means that these absurd valuations are not likely to continue. All right, CrowdStrike. Same story, different stock. You're getting an unattractive rating here because you've got a bad business and an extremely expensive valuation. I mean, this 54.9 price-to-economic book value, That's really high. We've got 35.8 for MongoDB, 17.2 for Broadcom. These are extremely high valuations. These are so high that if anybody ever in Wall Street did fundamental analysis, there would be no way they could publish that report, because there would be no way they can make a straight-faced argument that this should be anything but sold. If they were to do that work, they would be in a breach of their fiduciary duty And that's why they don't do this work, because if Wall Street ever even started to do a little bit of real work, they would be so far in breach of their fiduciary duties to their clients that they would have to put sells on all kinds of stuff, and that would just crash the market. So let's get back to our message about dividends. I want to do a little bit of an earnings watch because there's some big companies out there. But, you know, the segue here is that There's a lot of misinformation in the marketplace. And whether it comes to regular stocks or dividend stocks, there's a very important element that gets overlooked when it comes to making successful portfolios and creating successful investment strategies. And that's doing your diligence. What I'm talking about for these super expensive tech stocks is about doing diligence, understanding valuation. And the key thing to take away here is that we have a solution for AI to do diligence at scale. And what it allows us to do in this particular situation is to pinpoint the true and the false dividend stocks. We talked last week about fake dividends. This week it's going to be false dividends. Dividends are not the safe havens that investors think. Anyone thinking that dividend stocks are a good strategy to succeed in these turbulent markets needs to think twice and tune in. Now, key points on bad dividend stocks. Not all dividend stocks are good. You got fake dividend stocks, false dividend stocks, and dividend trap stocks. False dividend stocks. We talked about fake dividend stocks last week. False dividend stocks pay a dividend, but the company doesn't generate enough cash flow to afford that dividend. So the high risk of seeing the dividend cut more than offsets the potential gains investors might get from the dividend. It's just simple math. Because when that dividend gets cut, the stock price is likely to get crushed because people hate that. And you take that into account along with a falling dividend, you're going to end up losing. Your capital gains loss is going to exceed what is now a dwindling or potentially disappearing dividend. So our AI is able to identify all of these kinds of bad dividend stocks. Here's an example of a false dividend stock. I'm highlighting this because it's got a nice-looking 5.9% dividend yield, but this also gets a very unattractive rating. You can see they paid $5.6 billion in dividends with $4.7— negative $4.7 billion in free cash flow. As a percent of revenue, the difference between the dividends paid and the free cash flow That's what they got to come up with, is like $10 billion. But that's 60% of the last trailing 12 months revenue on a business with a margin that's probably in the— if we're lucky, in the teens. So, what does that mean? Negative $1.1 billion in free cash flow over the trailing 12 months, negative $4.7 billion in free cash flow over the last 5 years. Dividends paid, $5.6 billion. That's $10.3 billion, and that's 60% of revenue. Those are the numbers here. And we look at this on a chart, you can see free cash flow negative. Oh, but they're paying this dividend. Free cash flow negative, paying this dividend. Positive, but then that's more than offset about when they lose in the last few years. What's the takeaway here? Well, I mean, if it's going to take them 80% of their revenue to make up for— to bridge the gap here, This business is not going to work. They're going to have something that's going to have to give. They can't afford for dividends to be 80% of revenue. They're going to have to find some other way to fund this. And when we did the work over the last few years, they've been adding a lot of debt and selling shares. So you're getting diluted, even though probably at a rate that offsets whatever you're getting for dividend anyway. Does that make sense? Right? The incremental dilution for 30% more debt and 7% more shares outstanding is greater than that 5.9% yield. That's the crazy takeaway. We have 2 other, what I would call extremely risky false dividend stocks. We're going to put those out on a report on Monday. But if you think EIX looks bad, wait till you see these other companies. Their dividend deficit as a percent of revenue Is way worse than 60%. It's a scary world out there when it comes to dividends, my friends. Now we have solutions for this. We have the safest dividend yield stock and our dividend growth stocks. Let me put these links into the chat for you so you can see exactly what we mean. Dividend growth stocks, safest dividend yield stocks. These are stocks where we've done the diligence on the free cash flows. Safest dividend yield stocks in particular. We've done the diligence on the free cash flow to make sure these companies can afford to pay their dividend. And then for the dividend growers, these guys got enough cash flow to actually grow their dividends even better. And we also like to see a history of dividends growing. And then all the stocks in these model portfolios get an attractive or very attractive rating. So here's the takeaway. There's a lot of bad dividend stocks out there. It's very difficult to figure out which dividend stocks are good, which dividend stocks are bad. You've got to do real deep diligence on the cash flows because they may be paying a dividend for a long amount of time, for 5 years, but that could end abruptly if they're no longer able to borrow money or continue to issue shares. And in a stock market that where the FOMO and things just aren't just going up all the time, That could be an issue, borrowing more money and issuing more shares. So why is our research something you should focus on and consider to be reliable? Well, we have something very different, something that earns accolades that no other firm has ever earned before that I know of. If you've got any ideas, please put them in the chat. I'm happy to talk about any other firm that has the kind of success rate that we have. Have papers from some of the top business schools in the world have been written on us, vetting and validating the superiority of our research. And then we've got performance of actual live-traded indexes that are on Bloomberg that are run as active indices. You have the Very Attractive Stocks Index. That's just what holds our very attractive stocks. That's it. That's the concept. Hold the New Constructs very attractive stocks, beat the S&P 500. by 9% in the first quarter. It has beat the S&P 500 by over 80% in the last 5 years. The core earnings weighted S&P 500 index. This is just an enhanced version of the S&P 500. We just take the same stocks. We don't even need to pick the stocks to outperform. We'll let someone else pick the stocks and we'll just weight them according to core earnings. I think this is important because it proves that there's alpha. And the core earnings number by itself. It's that unique. That's how much diligence we're doing. You can take just one of our numbers for measuring profitability for a company and get alpha in that. That's why these very attractive rated stocks do so well. That's why our stock ratings are so successful. That's why our dividend model portfolios, I think, are so valuable because they not only do they have strong dividends and cash flows to pay those dividends, they get an attractive or very attractive rating. The core earnings weighted S&P 500 index has beaten the S&P by 33% over the last 5 years. We also have the core earnings leaders index. This is just a portfolio of the highest core earnings power companies, the core earnings leaders, the ones whose core earnings exceed reported earnings by the most. So these guys have understated earnings as far as Wall Street is concerned. We're identifying them as being more profitable than people And that model, that index outperformed the S&P by 5% in the first quarter, and it's outperformed by 43% over the last 5 years. Keep in mind, these strategies, in my opinion, are just based on fundamentals. They're not based on some crazy speculative scheme, whether it's Bitcoin or something like that. They're based on fundamentals. Now, it's important to understand these indices are managed by Bloomberg. They're not available for the public to purchase. The only way to get this research is through us. The slide I wanted to talk about is the gap between what estimates are on Wall Street and what the valuation of a stock really is, because there's a huge gap between what the valuation of a stock implies and the estimates that are out there. And this is a quick slide to show you, look, when we're talking about Dividends, and we're talking about earnings. These are numbers that people throw around without really understanding what's going on with respect to valuation. When your valuation implies that your free cash flow per share is going to get to here, and your analyst estimates are only here, there's a huge disconnect between what Wall Street's talking about the company doing and what it actually has to do to justify the price. Why does Wall Street want to have that disconnect? Anybody want to— able to answer that question for me? Why does Wall Street have this disconnect? Why don't they just tell you, hey, look, here's what the valuation implies? Anyone have any guesses? Because if they did, they wouldn't be able to sell you stock. And Wall Street is in the business of selling stock. Right? How does Wall Street make their money? Anyone know what percentage of revenues come from their research departments? Yeah. Trading makes the money. The real money, Stephen, actually comes from the investment bankers. It's the IPOs. Those are the most profitable. The investment bankers. So transactions, trading is a big part of it as well. The main thing is that research doesn't make any money. They're not looking to make money. Research, research is a loss leader for investment banking and for trading. So keep that in mind in terms of incentives. Alrighty. Any questions about false dividends? No. Any questions about valuation? Any questions about our indices? All right, I'll take a couple few seconds here. We'll take a couple of requests that came in. Let's jump in here. Go to the rating page. R. So this one is a very interesting stock. It's super cheap. Super cheap. It has been on a focus list. So we like this stock, and we think there's a lot of political risk in this. But we think ultimately it's so cheap that it, that it pays off. We did a great report on this, Doomsday Valuation Misses Persistent— Persisting Oil Demand. There's a lot of interesting work in terms of really where the demand for fossil fuels is going to go compared to what a lot of the media and impression is about where it's going. You know, most of you probably know this, but fossil fuels aren't really going to go away anytime soon. So this is one we like. All right, the first request today, Tractor Supply. Their headquarters are actually right near us. We walked by their office the other day, just doing doing our our walk, our our daily walk here. So good company, expensive stock. Not like a tech stock, but expensive. Let me tell you folks, finding cheap stocks is hard these days. We've got a long idea just came out this week, one of the best long ideas that I've seen in the marketplace. I think all of our deep dive long ideas are amazing. There's a very, very high threshold for review for a deep dive stock or for a long idea to make it through our system. It'll look like this. New long ideas look really attractive. It's hard to find because the market's been flooded with money. To the same way that our government is borrowing, borrowed, and spent, borrowed, and spent, so is all of America. So Tractor Supply, good company, expensive stock, that balances out to a neutral rating. We'll do one more here before we go. Verizon. It's a good dividend stock. You know, I was talking to one of our clients about this, one of our pro clients, in our long ideas webinar. We, what we do every month with our, with our, our pro clients, we have a meeting just to discuss stocks and we do deep dives on, on individual stocks. a smaller number of people for more focused and curated Q&A. And Verizon came up. And in our discussion, we said attractive, but we're wondering about the growth here. Is this— where's the competitive advantage? And at one point in time, we liked Verizon because they'd invested in live entertainment, which I thought was sort of the last frontier of entertainment that could be monetized. With the margin, because I think everything else is commoditized on Netflix and every other place. There's not a lot of money in that. But with Verizon, you know, you've got a great network, super competitive, right? They're just kind of giving market share back and forth. AT&T, Verizon, T-Mobile, Sprint, all this stuff is like, it's all commoditized. It's an oligopoly. Where are they growing? What are they doing that's different? Don't know. Tough question to answer. And so this is one I see attractive, but I'm like, yeah, I don't know. Maybe the stock price, or maybe profits don't really go anywhere over the next few years. The current valuation implies profits will permanently decline by 20%. In a commoditized business, maybe that's the case. Maybe there's not as much margin in phones because they're just going to be too expensive. People don't want to buy an expensive phone because of tariffs. Or phones are good enough, they don't need to replace them that often. Anyway, it's tough because it seems like an increasingly commoditized business. All right, folks. Thanks very much for being with me today. I hope you've enjoyed this analysis on false dividends and understanding just kind of how risky these businesses can be, how risky these dividends are. And I encourage you to strongly consider, if you're not a Pro customer, you don't already have access, I encourage you to, to, to purchase one of these dividend model portfolios.