Podcast Summary
Discussing Value Investing Picks: Diamond Hill (DHIL): Identify undervalued, well-run businesses for potential gains through growth in AUM, performance improvement, and stock price appreciation, even during market downturns.
The group of investors on The Investor's Podcast, including Toby Carlisle and Hari Ramachandra, discussed their stock market picks and the reasoning behind their value. Toby presented his pick, Diamond Hill (DHIL), a value investor with a market cap of $420 million and a return on equity of about 30%. The business is well-executed, at the bottom of its business cycle, and undervalued, making it an attractive opportunity for investors who believe in value. The investment in Diamond Hill offers potential gains through the growth of its assets under management (AUM), improvement in performance, and the appreciation of its stock price. The investors also discussed the challenges faced by value investors in the current market and the potential for a turnaround in value's fortunes. Overall, the group's discussion highlights the importance of identifying undervalued, well-run businesses and the potential rewards of investing in them, even during industry downturns.
Assessing potential of value investing companies: Examine gross margins and scalability for value investing companies' potential. Despite challenges, strong fundamentals and market rebound can make them attractive.
While the top line performance of a value investing company can be impacted by external factors like COVID-19, the real key to assessing its potential lies in examining its gross margins and scalability. The business model of asset management allows for fat gross margins and the ability to control costs, making it a scalable business. However, the current environment presents challenges for value investing companies due to the dominance of passive investing and low interest rates, which can make it difficult to outperform the market and justify high fees. Despite these concerns, the value of the company can still be attractive due to its strong fundamentals and the potential for a rebound as market conditions change.
SMN's attractive business model and potential for value investing recovery: SMN's high margins, minimal capital expenditures, attractive valuation, and potential for value investing recovery make it an attractive investment option with high dividends and yield.
SMN's business model, which is based on generating high margins with minimal capital expenditures, makes it an attractive investment opportunity, especially in the current market environment. However, the concern is that if value investing does not recover, the returns from this investment may be lower. The speakers also emphasized the high dividends and yield that value portfolios offer, which could make them a better choice than Big Tech stocks. The valuation of SMN is considered attractive, with a high dividend yield and significant growth potential. Despite the current market conditions, the speakers are optimistic about the future performance of value portfolios and believe that they will outperform, with or without multiple expansion. Overall, SMN's business fundamentals and the potential for value investing to rebound make it a compelling investment option.
Value investing remains a viable strategy despite market momentum and expectations for continued interventions: Focus on business fundamentals, challenges for high-fee asset managers, opportunities in small/micro cap value stocks, and potential negative real returns for index investors make actively managed value strategies appealing.
Despite the current market momentum and expectations for continued monetary policy interventions, value investing remains a viable strategy for generating strong returns. The speakers in this discussion emphasized the importance of focusing on the underlying fundamentals of a business rather than the stock price trajectory, which is largely out of an investor's control. They also highlighted the challenges faced by traditional asset management firms with high fees, as more investors turn to low-cost index funds. However, they also see opportunities in small and micro cap value stocks, where prices have been crushed and yields are attractive. The speakers also agreed that the amount of money being printed by central banks will likely lead to negative real returns for index investors, making actively managed value strategies even more appealing.
Investors expressing confidence in investments despite market's perception: Despite market uncertainty, investors like Toby Radcliffe, Trey Lockerbie, Hari Sitaraman, Sahil Bloom, and Stig Brodersen believe in the potential returns and dividends from their investments in Bitcoin and specific companies, acknowledging the risks and volatility but remaining optimistic.
Several investors are expressing their confidence in the value and potential returns from various investments, including Bitcoin and specific companies, despite the market's current perception of their worth. Toby Radcliffe and Trey Lockerbie believe that the dividends and returns from their investments outweigh the alternatives, even without market recognition. Hari Sitaraman and Sahil Bloom acknowledged their lack of expertise in certain areas but expressed interest. Stig Brodersen is bullish on Bitcoin, predicting significant price increases in the next year and beyond, while also acknowledging the high volatility and recommending dollar cost averaging. Preston Pysh, in a challenging question, asked Stig to consider potential bear cases for his Bitcoin prediction, recognizing the importance of considering opposing viewpoints. Overall, the investors express a strong belief in the value of their investments and a willingness to navigate the volatility and potential challenges.
Bitcoin's potential value and attractiveness as an alternative currency: Bitcoin's decentralized nature, transactability, and scarcity make it an attractive alternative to traditional currencies, potentially benefiting from government fiscal irresponsibility and expected tax policies under the Biden administration, leading to increased demand and potentially higher prices.
Bitcoin's potential value lies in its utility and market cap, which is significantly less than that of gold but can serve similar purposes more effectively. Bitcoin's decentralized nature, transactability, and increasing scarcity due to its limited supply make it an attractive alternative to traditional currencies, especially in the context of potential government fiscal irresponsibility and debasement of fiat currencies. Furthermore, the expected tax policies under the Biden administration may lead to increased holding and less selling of Bitcoin, potentially reducing its supply and increasing its price. The discussion also hinted at the potential for a shift in investor behavior, with supporters of Biden, who are often Bitcoin backers, potentially leading to more demand for Bitcoin rather than gold.
Leveraging Communities and Financial Knowledge for Personal and Professional Growth: Building a community of like-minded individuals can boost growth. Understand inflation's impact on assets. Stay informed via reliable financial news sources. Oracle earns from cloud services and licensing support.
Building and nurturing a community of like-minded individuals can significantly enhance personal and professional growth, as exemplified by the TIP Mastermind. Another key takeaway is the importance of understanding the concept of inflation and its potential impact on asset valuation, as discussed by Stig Brodersen. Furthermore, utilizing reliable financial news sources, such as Yahoo Finance, is essential for staying informed and making informed investment decisions. Lastly, Oracle, a well-known business-to-business company, derives a significant portion of its revenue from cloud services and licensing support.
Oracle's Main Sources of Revenue and Long-Term Challenges: Oracle's steady revenue from software and IP, high margins, but concerns over innovation, attracting talent, and past acquisitions impacting growth; long-term challenges include failure to capture cloud market and leadership changes.
Oracle's revenue comes mainly from software and intellectual property, with only a small percentage coming from hardware and services. The company's numbers have been steady over the long term, with high double-digit margins per share. However, there are concerns about Oracle's ability to innovate and attract top talent, as well as its past acquisitions, such as Sun Microsystems, not panning out as expected. The company's main strength lies in its relational database, but its failure to capture the cloud market and leadership changes are potential long-term challenges. Despite being a cash cow in the short term, investors may want to consider these factors before investing in Oracle.
Oracle's Stickiness in the Face of Competition: Oracle's strong network effect and established customer base keep it competitive despite slower growth and lack of creativity in the cloud computing space.
Despite the advances of tech giants like Amazon, Microsoft, and Google in the cloud computing space, Oracle continues to hold steady with its significant market cap and strong network effect. However, its lack of creativity and slow growth compared to cloud computing companies may limit its long-term potential. The challenge for companies in migrating away from Oracle lies in the complexity and time-consuming nature of refactoring or reimplementing their software to adjust to new databases. This stickiness keeps Oracle relevant in the face of competition from big tech. While Oracle may not be an exciting pick, it generates consistent cash flow and maintains its position in the market through its established customer base and database offerings.
Foot Locker's Significant Cash Flow from Narrow Growth Prospects: Foot Locker, with a 25% margin after tax, is a stable investment for cash flow despite narrow growth prospects. Its strong brand and direct ownership of stores make it less vulnerable to Amazon's competition.
Foot Locker, a well-known retailer with a market cap of 11 billion dollars, has a significant cash flow despite having narrow growth prospects. The company, which primarily sells footwear with over 3,100 stores in 27 countries, has a large portion of its revenue coming from Nike products. While Amazon is a significant competitor in the shoe market, Foot Locker's strong brand and direct ownership of most stores make it less vulnerable to Amazon's dominance. The company's margin after tax is a substantial 25%, making it an attractive investment for those seeking stable cash flow. However, the concern raised in the discussion is that as competitors emerge, these large margins may be under threat. Additionally, the discussion touched upon the idea that older tech companies with high margins may face challenges as investors look for companies with promising growth prospects.
Foot Locker's role as a trusted intermediary in the footwear industry: Foot Locker's partnership with major footwear brands allows it to act as an approachable showroom and distribution system, maintaining profitability despite limited growth potential due to brand control.
Foot Locker's partnership with major footwear brands like Nike, Adidas, and Under Armour is a symbiotic relationship that extends beyond traditional retail. Foot Locker serves as an approachable showroom and distribution system for these brands, particularly for consumers who may not shop at their flagship stores. However, Foot Locker's growth potential is limited due to the tight control major footwear companies have over pricing and product distribution. Despite this, Foot Locker has maintained profitability and offers a decent return for value investors, with potential for flat growth resulting in a double-digit return. The company's role as a trusted intermediary in the footwear industry, along with its integration into brand apps and loyalty programs, makes it an essential player in the market.
Foot Locker's Stock Buybacks Boosted Revenue Growth: Foot Locker's stock buybacks expanded its reach beyond Nike, catering to price-conscious shoppers, while Nike benefited from increased product accessibility and appeal to a broader audience.
Foot Locker's stock buybacks have contributed significantly to the company's revenue growth over the past decade. This strategy has allowed Foot Locker to expand its reach beyond what Nike can offer on its own, catering to price-conscious shoppers who prefer not to shop at Nike stores. Nike, in turn, benefits from Foot Locker's ability to make its products more accessible and appealing to a broader audience. Despite concerns about potential conflicts of interest, the partnership between the two companies seems mutually beneficial, with each focusing on its core strengths. This symbiotic relationship has enabled Foot Locker to thrive in the retail industry, even amidst the challenges faced by traditional mall-based retailers.
Foot Locker's Financial Stability Amidst Retail Challenges: Foot Locker's financial strength, effective management, and large cash reserves make it an attractive investment opportunity despite retail industry struggles during the pandemic
Foot Locker's strong financial performance, competent management, and large cash reserves make it an intriguing investment opportunity despite the challenges faced by retail businesses during the pandemic. The company's top line remains steady, and its CEO, who has been with the company for a long time, is seen as effective in managing the business. The financials show a quick ratio close to 1 and over $1 billion in cash, ensuring the company's financial stability even during difficult times. While the long-term future is uncertain, the investors believe that the price could rebound due to its undervaluation. For those interested in finance, this stock presents an excellent opportunity to study the financial statements of a well-managed company.
Investing in companies with major headwinds and potential activist interest: Investing in cash-flowing companies facing challenges, like Foot Locker in Asia expansion, can be volatile but may yield gains with activist involvement. Debt-laden firms, like Reliance Industries, can attract tech giants for strategic partnerships, creating new growth opportunities, but success is uncertain.
Investing in cash-flowing companies with major headwinds can be volatile, but may present opportunities for gains if an activist investor takes an interest. For instance, Foot Locker, despite its growth initiatives, faces challenges in expanding its brand in Asia. On the other hand, companies like Reliance Industries, which are heavily in debt but have successful business arms like Jio, can attract significant investments from tech giants like Facebook and Google, transforming their business models and creating new opportunities for growth. The recent partnership between Reliance and Facebook through WhatsApp is an example of this trend. However, it's essential to note that the growth potential for such companies may not be substantial, and the success of their expansion strategies remains uncertain.
Reliance's Debt Cleared, Positioned to Compete with Alibaba in India's Growing Economy: Indian conglomerate Reliance cleared $20B debt, poised to expand beyond oil & gas, compared to Alibaba in China's digital economy, India's digital infrastructure improving, Reliance entering market with own offerings, potential for significant growth in $5T economy.
Reliance, an Indian conglomerate, has recently cleared its debt of over $20 billion and is well-positioned to become a major player in India's growing economy. With a track record of over 20% CAGR for the past 10 years and ambitious plans to transform from an oil and gas company to a high-tech one, Reliance is being compared to Alibaba in China. India's digital infrastructure is improving rapidly, with the widespread use of smartphones, QR codes, and e-commerce platforms like Amazon and Flipkart. Reliance is entering this market with its own offerings, leveraging its control over traffic and relationships. While there are risks involved, given the size of the Indian economy projected to reach $5 trillion, the potential for a company like Reliance to make significant moves similar to Alibaba is high. The company's ticker symbol on the US-based exchange is rlniy.
Confidence in International Markets and Valuing Companies: To invest in international markets, assess growth potential and valuation using internal rate of return and discount rate. Consider risk, individual assumptions, and company prospects. Find stocks with highest expected return in your competence, and use newsletters for insights.
When it comes to investing in international markets, there's a growing confidence based on personal experiences and anecdotal evidence that these markets are comparable to or even on par with the US. This belief is rooted in the belief that these markets' growth will accelerate in the next five years. When it comes to valuing companies, understanding the internal rate of return and discount rate are crucial. The discount rate and internal rate of return are interconnected, and the decision on the expected growth rate of a company's cash flows and the discount rate to use is not a straightforward one. It requires a qualitative evaluation of the risk involved and an assessment of whether the expected return is worth the risk. The decision on the expected growth rate also depends on individual assumptions and assessments of the company's future prospects. Ultimately, the goal is to identify the stock with the highest expected return within one's circle of competence, while considering the level of conservatism in assumptions. Additionally, subscribing to a newsletter that graphs and discounts free cash flows for interesting stock picks can provide valuable insights.
Evaluating a company's value: future cash flows, current price, and discount rate: To determine a company's value, assess future cash flows, current price, and the discount rate, which reflects the time value of money and investment risk.
When evaluating a company's value, there are three primary variables to consider: the estimation of future free cash flows, the current price of the company, and the discount rate. The first variable involves estimating the future cash flows, which requires understanding the company's historical growth rate and making projections based on qualitative analysis. The second variable is the current price, which is a known quantity for publicly traded companies. The third variable is the discount rate, which reflects the time value of money and the risk associated with the investment. By considering these three variables, investors can make informed decisions about the potential value of a company.
Understanding Discounted Cash Flows and IRR for Investment Analysis: Discounted cash flows estimate future cash flows, choose a discount rate, and calculate present value. A higher discount rate lowers present value. IRR is the discount rate making net present value zero, indicating potential value. TIP Finance tool simplifies the process.
When evaluating a company's potential investment value, understanding the concept of discounted cash flows and internal rate of return (IRR) is crucial. Discounted cash flows involve estimating future cash flows, choosing a discount rate, and calculating the present value of those future cash flows. A higher discount rate results in a lower present value, while a lower discount rate results in a higher present value. IRR, on the other hand, is the discount rate that makes the net present value of all cash flows (both incoming and outgoing) equal to zero. When the IRR is high, it indicates the potential for significant value to be captured if the estimated future cash flows are accurate. The TIP Finance tool simplifies this process by automating the calculations and allowing users to input their own estimates for future cash flows and growth rates. Overall, understanding the concepts of discounted cash flows and IRR can help investors make informed decisions about potential investments.
