A Continued Conversation with The Science of Hitting | 7investing
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A Continued Conversation with The Science of Hitting

April 6, 2021 – By Samantha Bailey

7investing Lead Advisor Matthew Cochrane was happy to welcome back The Science of Hitting to the podcast for another conversation covering a wide gamut of companies and financial news.

After writing more than 800 articles on GuruFocus over the last nine years, The Science of Hitting is moving to Substack, where he will post new research ideas, personal portfolio updates, and higher-level thoughts on investment philosophy. He says, “I essentially view this as an opportunity to take the work I’ve done on Gurufocus over the past decade a step further, to really open up everything about my thoughts and actions as an investor with subscribers.”

When discussing whether he uses complex discount cash flow analyses when valuing stocks, Science of Hitting says he hopes he has found a happy medium between using back of envelope math or financial modeling that employs dozens of unknowable variables. While he uses models to see what earnings and free cash flow might be five years down the road, the bigger rationale for doing it is discovering the business’s most significant drivers. For instance, it can help when studying retailers to determine if store expansion or same-store sales growth is more critical to the company’s future.

The two look at the market, discussing whether re-opening economy plays are already getting ahead of themselves. Matthew notes that the U.S. Global Jets ETF (NYSE:JETS) is only slightly off its pre-pandemic highs and the Invesco Dynamic Leisure and Entertainment ETF (NYSE:PEJ) is slightly above its pre-pandemic price. Science of Hitting shares that he sold longtime position Booking Holdings (NASDAQ:BKNG) based on valuation concerns. He noted Booking’s stock price was about $2,000 heading into the pandemic before getting cut in half, but that it had now recovered to about $2,400. That’s 20% above where it traded pre-pandemic despite management cautioning it might take years before its business fully recovers from COVID’s impact. 

While discussing economic re-opening plays, the discussion turns to Vail Resorts (NYSE:MTN), the owner-operator of the majority of the most popular ski resorts in the U.S. and around the world. Vail recently cut its season pass prices by 20%. With the number of active skiers seemingly in secular decline, many wonder if this is a desperate attempt to lure new skiers to its resorts or leverage its scale and competitive positioning to kick its competitors while down.

Science of Hitting also gave his take on Spotify‘s (NYSE:SPOT) recent acquisition of Locker Room, a live audio app used for fans and insiders to talk about sports. Overall, it was a relatively small sum Spotify spent to secure the deal while it has the potential to now participate in a massive step of audio’s evolution.

Timestamps

00:00 – TSOH’s Move to Substack

06:30 – TSOH’s Views on a Volatile Market

21:44 – Investing in Discount Retailers

32:05 – Spotify’s Acquisition of Locker Room

Transcript

Matt Cochrane

Greetings, fellow investors. I’m Matthew Cochrane, a lead advisor at 7investing where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone. Listeners, today I am very excited to welcome back Alex, perhaps better known by his pseudonym, The Science of Hitting, this is his second time on the show. He was an investment columnist for Gurufocus for most of the past nine years, where he wrote more than 800 articles. He’s one of the most informative follows on FinTwit. And he hosts The Science of Hitting podcast on major podcast players everywhere. And I said “was” because Alex, you’re not writing for Gurufocus anymore, you’re starting a new Substack. So why don’t you tell everyone what you’re planning? And what inspired the change?

The Science of Hitting

Yeah, well, thanks for having me again, we had a great discussion last time. So I look forward to this one.

Matt Cochrane

Absolutely.

The Science of Hitting

In a nutshell, I decided to move to Substack because I thought it was a good chance to kind of go direct and get closer with the audience. And, you know, make sure the incentives were properly aligned in a lot of ways. So I could focus on kind of the quality of the work as opposed to the quantity of the work, which I think got a little bit out of balance in some, in some ways, not anybody’s fault. But that’s just kind of how it evolves. So I thought this was a great opportunity to focus on the quality of the work. And I also thought it was a chance for me to really go deeper and open up my process more. So the idea of the services, I’m essentially offering complete access to my research process and decision making. So that goes all the way from when I look at new ideas, I’ll present them to subscribers, when I have updates on names that I currently own, or thoughts on things that are happening in their business, I’ll obviously talk about that with subscribers. And then anytime I place trades, I’ll have an explanation for the buy decision, the sell decision. And I’ll tell people about that before I do it. So most likely day-of obviously. So just really opening everything up. And, you know, I think in some ways, obviously, being open will invite feedback. And my goal would be to become a better investor myself, obviously, but also to help people along their own journey to becoming a better investor. So I think it’s a really good chance for me to just be more direct with an audience that views my work as high quality. So, hopefully I can find those people and I am looking forward to it.

Matt Cochrane

That’s great. That’s great. So listeners, if you didn’t hear the first episode, we kind of tackled Alex’s like thought process and investment philosophy in that episode. But Alex, why don’t you just tell us, like, as part of your investment process, like, how do you build out financial models? Like, how do you entail that into your process at all?

The Science of Hitting  

Yeah, so the the first big paid post of the service is a complete portfolio review. And I go through everything that I currently own, and obviously talk about the business, I talk about valuation. And for a fair number of the names, I have models, for some of them, I don’t, but for a large number I do. And one of the early articles in the service is going to be about financial modeling, basically, you know, there’s some people in the camp that the most they would ever do is a kind of a back of the envelope calculation. And for other people, they have an Excel spreadsheet with 12 tabs and 1000 interconnecting cells. And you know, it can get very precise and very intense. So, you know, I’m somewhere in the middle of the road, I think about modeling in the sense of trying to get to a rough estimate of where earnings power free cash flow can be, you know, call it five years down the road. And that output’s important, but I don’t think it’s the the sole purpose. I think the bigger rationale for doing it is to get a good understanding of the drivers of that outcome. And to think about things like if it’s a retailer, well, what is unit growth mean, for example. What kind of capital requirements come with unit growth? What about comps growth? What kind of capital requirements come with comps growth? How much of this story is tied to, you know, repurchases or dividends? So capital returns to shareholders. So it’s thinking about those things and trying to really get an understanding for where the thesis will be made or broken, essentially.

Matt Cochrane  

Sure, no, I actually, like I agree with you. Like that’s what I use models for too is to just try to find like, what’s moving the business and what can move returns there. Just trying to find like, the biggest factors into it. You know, I tried modeling for a little bit,  where I would try to be real detailed and I just basically  gave up in exasperation because I never knew what to put in for the terminal value, I never knew like, you know, there’s just so many things, how do you get that from this? You know, you can play with a few things and, and basically get whatever output you want. So, but yeah, I do agree with you that like, for finding just what moves a business like it can be a really useful tool.

The Science of Hitting

That’s one of the great modeling quotes which I stumbled across when I was writing the article. I ended up taking it out, but I can’t remember who said it now, I’m forgetting, sorry to whoever said it, but they say – the joke is DCF is like the Hubble telescope, you move it a fraction of an inch and you’re in a different universe. So there’s definitely a truth to that. You can’t become too obsessed with the outputs. I think it’s thinking reasonably and intelligently about the inputs and the outputs and what it all means.

Matt Cochrane

Sure, sure. So, um, you know, obviously, the markets been volatile. I mean, the last year, but also the last month, um, you know, right now, I think we’re having this like tug of war between, reopening plays, and these high flying tech names, and you know, it almost like oscillates, like what day it is, like, what’s in favor and what’s out of favor. What’s your view of the market right now? Do you think that the tech stocks overvalued? Are the reopening plays like the airlines and hotels and travel? Like argue that they’re overvalued? Like, so what’s your take on the market right now?

The Science of Hitting

Yeah, I’ll start with a typical disclaimer that day to day, week to week, month to month or even year to year, I don’t really have any thoughts on, you know, what the markets gonna do in the short term. And it’s something I really don’t even focus on. I’m trying to find high quality businesses that I can own for the long term that will deliver reasonable returns. But to your point. I think it’s been kind of a mixed bag. I mean, I can see, I can see both sides of the argument that both are, I don’t know if overvalued is the right word, but that certainly optimism has returned. You know, on the high flying tech stocks, I posted a chart a day or two ago that showed the price-to-sales multiple for SaaS companies as a whole. And the multiple had peaked at, I think it was 13 times, and it pulled back 10 times. And the point of the chart was simply that, sure, it’s pulled back pretty good. But you know, they peaked at 8 or 9 times, early on during COVID. And the response I got from some people was, well, these are better businesses. Now they’re more established, digitization is kind of accelerated and I get all that. My kind of response is well, even to the extent your true, you got another turn or two on the sales multiples. So you did get some benefit in terms of valuation, the market apparently agrees with you somewhat. At the same time, I look at data from Goldman as an example they say for this group as a whole, FY ’21 sales estimates are basically unchanged. So it’s not showing up in the very near term sales data, which, you know, in some ways makes me question if that thesis is supported by the data. So I’m a bit torn on the high flying tech names, at least as a group. But the same can be said for a lot of the reopening plays. I mean, I’ve seen people and I’m sure you’ve seen it as well, point to stuff like airlines on price to sales and it’s kind of a similar idea. Looking at my own portfolio, I owned Booking Holdings up until a week or two ago or a couple weeks ago. You know, it’s a name that at the start of 2020 traded out like $2,000 a share. 2020 their business was down well over 50%. If you listen to management, they say recovery is going to take years. If the Street agrees with that, you’re looking at two to three years before you most likely get back to 2019 type numbers at least on a normalized basis. And the stocks at 2400 today. I mean, it’s up 20% from where it traded pre-COVID. And, you know, they’re a big player in Europe, which my sense is, they’re having somewhat more of a difficult time than the United States. And they have things they’re investing in, but it’s also unproven, on a lot of those efforts, as well. So I just don’t think the story’s changed that much. I think the timeframe for things happening is maybe been pushed out a bit, which to me would suggest it’s probably worth a little bit less than it was pre-COVID. I don’t think there’s some big sustain- I don’t think the normalized run rate of the business is higher as a result of COVID, which is kind of what you would need to believe. So, and a similar name is Yelp, which, you know, went from 35 bucks to I think it bottomed around 15. And their business got hit very significantly. And today, it’s, you know, I think it’s north of $40 a share now. So they’re doing a lot of things behind the scenes that I think could ultimately justify that price. It’s not like it’s completely outlandish, but the bar has just been raised. We’ve gone from, you know, pessimism to unbridled optimism very quickly it seems at least in terms of valuation. So I’m a little bit confused, but that’s been generally true. It’s been generally true for much of the past one, two, five years. So I don’t know, I’ll continue to be confused.

Matt Cochrane

Yeah. I know, I mean, I think as far as tech goes, like, I mean, I think there’s definitely some overvalued names. And then at the same time, like I think some big tech is, it’s fairly reasonable. Like the reopening plays, I struggle to understand – like I was just looking right before we came on – like the JETS ETF, which is just basically global airliners, you know, it’s from pre-COVID, like from January 1, 2020 – so like, you know, a couple months before COVID hit to now today, it’s down 15%, which I mean, granted, they’re going to survive, but 1) they took on a lot of high interest debt during the pandemic, and 2) it’s going to be a while before customers really come back to those levels. And then another one I was looking at was the Invesco Dynamic Leisure and Entertainment ETF, and that one’s up 3%. And that’s like, you know, that has restaurants and like some of those travel names like Booking or Airbnb, you know, and things like that. And it’s up 3%, from January 2020, which I don’t know. I don’t know.

The Science of Hitting

Yeah, it’s hard to see. I think Tobias Carlisle had a segment on Value After Hours where he dug into some of the valuations on the airlines. And to me, I think about it a lot from the perspective of, I hear Microsoft talking about Teams and the success it’s having and I hear obviously, Slack talking about similar ideas. And individual companies, it was I don’t think it was the most recent quarter, maybe it was the one before it was to see change in my mind, in terms of how companies talked about remote work, it was basically complete buy-in that a large percentage of companies are okay with this idea. And I, it’s maybe not one for one, but I think you’ll see something similar in terms of corporate/business travel, which is a significant part of the market. So something like airlines is just very difficult for me to get my hands around, which was probably true pre-pandemic as well. So I guess I’m okay, I’ll just keep avoiding them.

Matt Cochrane

For sure. So do you think, I mean, how do you see business travel in the years ahead? I mean, do you think it’s coming back? Do you think conferences and things like that are are going to still happen? Or is it going to be moving online? Or a mix? Like, how do you see that playing out?

The Science of Hitting

It’s kind of like my thoughts on Booking, which is, I’m not entirely sure but if part of what I need to believe is that it returns to the run rate it was at previously or even higher, then that becomes a really tough sell for me. And obviously, there’s a need for some amount of business travel to sit with clients, and conferences have a purpose and stuff like that. But we’ve all become very comfortable with Zoom calls. And as we can see, right here, the technology is very good. You know, we’ll see what happens with stuff like AR/VR, we’ll see what happens with things like driverless cars over a longer period of time. But those are the kinds of things that can take away from a relatively short flight that used to take, you know, it’s – I just think there’s a lot of ways for the volumes to take a hit, which may or may not impact the business’s profitability. I’m not too sure about how the airlines would respond. But it could be it could have an impact on volumes, I would bet more likely than not that the volumes do not return to the trend that existed prior to pandemic.

Matt Cochrane  

Yeah, I think a lot of it will eventually come back, but I think it’s going to be a while. But you know, in my experience, a lot of business conferences are more for the networking, let’s say, or the socializing after the conferences, you know, into the night and things like that. So I, you know, as long as there’s a sales organization, or a company hosting it for, you know, if it’s being sponsored. So, you know, it’s not always on the people going to it, like, at least not the whole thing is on their dime. I don’t know, I do think a lot of those things will come back, But to your point, I mean, it’s so easy and cheap now to host something, like a lot of training and stuff like that maybe. I do think a lot of that’s going to be you know, it’s just gonna be virtual now. Like it’s so cheap. Like why host a huge conference?

The Science of Hitting

There was a Wall Street Journal article about this has suggested that stuff like training is a fairly significant portion of the market. And again, my idea in all this would be, and I can’t speak on airlines specifically, just because I don’t have the knowledge. But the idea in my mind would be if volumes go down, even 5-10% let’s say, it’s the supply and demand dynamics of that industry, you know 5% of the planes didn’t necessarily go away, you know. That concept, it could have changes in competitive dynamics that just change the industry landscape. So it’s those type of things that really worry me more than just some small decline in demand. I think you’re seeing it again, an example might be Vail Resorts which just announced, you know, it could be an offensive move. So I’m not saying it’s defensive, but they announced a 20% cut in the price of, basically across the board their Epic passes. And surely some of that is a reflection of the fact that people who previously would have just shelled out the money for the season pass. If you live in somewhere like New York or Boston, where you’ve been locked inside for a year, you’re surely thinking about whether or not you’re actually going to get value from that purchase. So these things matter, and competitors will have a response and what you do may ultimately lead to things that are ultimately not in your best interest as a company.

Matt Cochrane

Sure, sure. So let’s talk about Vail Resorts for a little bit, if you don’t mind. So like if you don’t know, Vail Resorts, they own multiple ski resorts around the country and around the world. But some of the best locations, and like what Alex just said they just recently cut their season passes, which is their main their big moneymaker right, by 20%? Do you think that’s offense or defense? Is that a move to really hurt the competitors while they’re down? Or is this like a reactionary move to consumer demand?

The Science of Hitting

Let me give you an unsatisfying answer, which is, I don’t know because I’ve just started looking. But I think I think it’s a very interesting industry. There’s a good book called Ski Inc. 2020, which my friend Ernest recommended to me, I just started it, but it’s already I know a book’s good if in the introduction, I take notes when I read everything, or else I’ll forget, I just got through the introduction. And I already have three quarters of a page worth of notes. I know this is gonna be a good book. Sure. But my read on the situation was that for many as you alluded to, they have, they have 6 of the top 10 Mountains in North America based on annual attendance. And my read, I go skiing about once a year with friends. And we go to Breckenridge and it’s one of the premier places to ride. And my sense as someone who has gone for a couple years was that they consistently increased prices by a pretty fair amount. That was just anecdotal. But now you can go back and look on the Epic passes, they’ve increased prices roughly 5% a year since 2012 or so. So for a long time, they took larger than inflation sized increases in the cost of the past and it was still a fantastic value because it had mountains the whole way. But yeah, so now they’ve decided to take a 20% price cut. And people speak very well of CEO, he’s seems to be a very smart guy. He’s been there for a while, he has a long term time horizon. So I won’t question their conclusion until I know better. At the same time, I posted a quote from Pat Dorsey, an investor when he spoke at Google who said, you know, when a company increases their prices 2, 3, 4% a year for a long time, and then they suddenly cut them and say, you know, we’re being good to our customers, this is a tough time in the economy. His response was, that’s always bullshit. And I think there’s some truth to that as well. They have a competitor with Ikon pass, and you know, they’re gonna have to, they’re almost certainly gonna have to respond as well. So I don’t know. From my not-too-knowledgeable position right now. I’d say it’s somewhere in the gray. It’s not black or white.

Matt Cochrane

Sure, sure. No, it’s an interesting move. And I just, I don’t know what to make of it either. I guess like, you know, the number of skiers in the US at least, I don’t know if it’s global. But, you know, it’s slowly but steadily declined over the past several years, like you know, the last two winters, I’ve taken my family skiing, and we don’t go to Vail resorts because we just tried out, like, you know, we live in South Florida, so my kids are just excited to see snow. So if they see a hill with snow on it, they think it’s great. So they don’t know the difference, right? We just go to like, we just try to find like an off like, you know, like an off resort. We don’t need to go to the best one. Again, they don’t know. So I’m like, if they don’t know, you know, we don’t need to go there. So we just try to find the cheaper option to wherever we’re traveling. But yeah, it’s, it’s interesting. Like, are they trying to get young people interested in skiing? Like is it a dying leisure activity? Is it a way to kick competitors while they’re down? Or is it like, you know, are they really hurting to get people back? It’s just a it’s an interesting question.

The Science of Hitting

An important note on it too, which is confusing for me. The Epic pass covers everything from their all-you-can-eat pass at the top, which is for all their mountains and basically unlimited riding at those mountains. Then they also have Epic passes which are local for a certain set of mountains all-you-can-ride. But Epic pass also includes people like myself, or like you would be, who are just prepaying for 1, 2, 3, 4, 7 days on the mountain. So it covers everything that’s not purchased at the time you’re riding, and they cut prices for all of that stuff by 20%. So I don’t know how someone can really argue that this is just an attempt to put, not saying that you were, but someone couldn’t really argue that this is an attempt to push people to the all-you-can-eat pass. And at the same time, if you’re saying, well, you were on the local pass, now you’ll consider the all-you-can-eat pass. I just don’t know how many people’s use cases for this product is dependent on the pricing of one bucket versus the other. If you live in Colorado, and all you want to do is ride at Brech and Beaver Creek or wherever else, I don’t really know if there’s an incentive there to pay up anyways, even if it is, you know, basically the same price as you used to pay. And same for if you were going to go for three days. Maybe this convinces you to go for I don’t know, but we’ll have to see what the results are. And but yeah, I’ve talked to a number of people who like the stock who thought it was a smart move. I don’t know if I had told them a month ago that that Vail is going to cut the prices 20% that they’d be as optimistic but again, we’ll see what happens there.

Matt Cochrane

Yeah, yeah. No, for sure. The next time we talk let’s follow up on that. All right. Let’s move on to some retailers. And actually a group of retailers I think we both generally like. I actually don’t own any of them but I don’t have anything bad to say about them either. And it’s the discount retailers like Five Below or Ollie’s or Dollar Tree or even Dollar General? Um, what are your thoughts?

The Science of Hitting

Well, like you, I don’t know any of them. So I’m glad we’ve wasted our time together equally. I’ve been close a few times, it probably would have – Ollie’s is the one that hurt me the most, I got really close to buy when it got down to about 35 or 40. And then it had a really big run. But that’s water under the bridge now.

Matt Cochrane

That was my biggest regret, as far as investing in the pandemic was that I somehow missed Ollie’s because I had been following it for a while. I was waiting – in none of my wildest dreams did I think it would get as far as low as it did. I was hoping for like the 50s. You know, maybe low 60s even. And I totally just missed it. I guess there was just too much going on? I don’t know, it just flew under my radar and it just didn’t register.

The Science of Hitting

Yeah, I think there was – I don’t even know if I looked at it at that time there was just so much going on. But yeah, this is a concept for people who live in the US that if there’s one 20 miles out of your way, and you’re on a road trip or something you have to go see it. It’s a retail experience unlike any others. And I say that in a good and a bad way.

Matt Cochrane

Both of that is true.

The Science of Hitting

Yeah. But generally speaking, I just I think the space is interesting for a number of reasons. And Dollar General is probably the best example. It’s store footprint is unique, it doesn’t have a ton of, I guess you’d call, you know, large competitors. You know, the trips are frequent ,tend to be low ticket. So it’s something that’s really hard to compete with e-commerce, it’s a lot of convenience purchases. It’s something that someone’s buying, you know, they might be stopping home on the way from work to buy frozen pizza and some chips or something, some laundry detergent, but they need it that night. This is stuff that in my mind, even if you could be price competitive, it’s just not really stuff that’s going to be competed away by e-commerce. So I really like the category generally. The problem is always is thinking about valuations. And for something like Dollar General as well, I kind of struggle with the long term opportunity on store count, because they have added a ton of stores in the past 10 years. And they’re trying new concepts and trying to find ways to to get into new or newer markets. But it’s tough when you’re putting up you know, 1000 boxes a year. So something like Costco, I still like a lot. I feel like the e-commerce risks there is a little bit higher, but they’re so early on the international strategy, and they’ve had success. And they’ve always taken a slower pace to unit grow. So I think you could legitimately make the case there that if the model continues to work, which I think it will, you’re looking at a decade’s long runway of unit growth. So there’s some really interesting concepts in the space and I don’t think prices in general are that crazy, I probably need to update some numbers. But as of right now, I don’t own anything in that space.

Matt Cochrane

Right like so I actually divide those discount retailers into two separate categories. So I would have like Dollar General, maybe like Walmart, you know, like to me like Dollar General. I think just if you live in the suburbs, or the city like I would understand why you you think like, well, I don’t understand what’s so special about this store. But like when you go into the country – so like my parents used to live in the sticks in South Carolina, and when we go visit them to go to a Walmart or any major grocery store would be a 20 minute drive easy. And the Dollar General was like maybe at tops two minutes away, you know, so if they needed any basic item, you know – they’re going to Dollar General. They’re not driving 20 minutes to buy some milk or some eggs or whatever, you know, like, if they’re having people over like, you know, some soda or beer or you know, just basic items like that, you’re not going 20 minutes to pick up a couple items, you’re just going to drive two minutes, and you’ll pay a little more than you might have at a major grocery store. But it’s not enough to even come close to justifying driving all that extra way. And then, you know, and they’re all over, like when you’re when you’re in small town America, like Dollar Generals are where it’s at, you know, sometimes there’s, there’s two in each small town, like one on each side. I mean, they just, you know, and in the country, like everything just spread out so much.

The Science of Hitting

Yeah, I love some you know, every once in a while a Bloomberg or Wall Street Journal will have these great like company profile type articles. I think of the one, there’s a Bloomberg article about Chipotle, it’s like the definitive history where they interview a bunch of people from Ells, who is the founder, to people at McDonald’s who were involved when they bought them. So anyways, it’s just a great article, but there’s one from the Wall Street Journal that’s about Dollar General. And my favorite quote from the article was the former CEO from I think it was like 2003 to 2008 or something. And his quote was “we go where they ain’t”, and he was referring to Walmart, they would literally just look where Walmart’s were and throw stores, as you said, like, if we can put a store near a town of 5,000-10,000 people, and have the closest Walmart be 20 miles away, we know that’s a winning strategy. And it’s one they’ve, they’ve played very, very well over the last decade.

Matt Cochrane

The story is fascinating. So I actually read the book by the, I guess, the son of the founder, so his dad was just as great entrepreneur, but he was great at like, selling things and like reading – just having a great intuition about what people wanted, and especially his audience, you know, they knew, I mean, it started, I think, in Kentucky, Tennessee, or Kentucky, but like, you know, small towns, like where, you know, people, you know, are not making much. And like one of their, like, first promotional strategies was to, like, give out free farmer gloves, they would go around to all the farms and they would send out a flyer, and like, it would have one free glove, like I left hand to right hand I forget it said, to get the other glove come in, it’s free, nothing new. Like if they come into the store, they buy things, you know.

The Science of Hitting

It’s a great idea.

Matt Cochrane

Yeah, yeah, it was great. But like, he had no organization. So like, they eventually they would just grow and then like, they got to this point, like, you know, where the father would come in and he would estimate how much is in the warehouse. And say, like, you know, and put it down for their numbers, you know, and it was just like, it was just funny. So when they went public, they had to learn everything they had no idea how to do like, you know, real calculations. Like analysts would ask them questions and he said, like, I would just be like a deer in the headlights, I had no idea so we’ve had to go back and  find out how to do everything but it was it’s a good story, it’s a good story. Interesting.

The Science of Hitting

While we’re on the topic I should add this real quick because Dollar Tree is a name I’ve talked about a lot and you know the story there is kind of been the Dollar Tree banner has been a fantastically successful retail concept. But they got in a bidding war for Family Dollar with Dollar General probably five years ago now. I think it was 2015. Dollar Tree was the winner. Acquirers curse there, right? Right? It has it has not done well. Family Dollar was a beneficiary from the pandemic, because when people went to places like Walmart, or you know, local grocery store and couldn’t find cleaning supplies and paper towels, they finally went the Family Dollar because of that. So we’re still going to see whether or not this turnaround actually takes hold. But the reason why I brought this up is because Dollar Tree, I spent a lot of time talking about the synergies of having these two banners under one corporate umbrella. Well, they finally unveiled one of their big synergies, which is a store that essentially split down the middle from the outside. One side is a Family Dollar banner, and one side is Dollar Tree banner, and people will have to see this to believe it, you can pull it up and see the picture. It’s the most god awful, ugly looking store you’ve ever seen in your life. Man, the idea that this wasn’t a joke is simply unbelievable. But yeah, so I’m still following Dollar Tree. But that picture alone was enough for me to consider never owning it going forward so let’s see what happens.

Matt Cochrane

But you know, you can’t put too much in a store. So like we were talking about Ollie’s, you know, and they’re just famous for I mean, their founder, Mark Butler, before he died, you know, he was just like, I mean to say they do not put much effort into the stores appearance is I think is very accurate.

The Science of Hitting

Yes, you step in there and you’ll know what Matt means means very quickly.

Matt Cochrane

And at the same time, though, like people love it.

The Science of Hitting

I mean the prices are fantastic.

Matt Cochrane

You don’t know what you’re going to get. So there’s that element of like, mystery or I guess they would say like a treasure, you know, like treasure hunting expedition like treasure shopping.

The Science of Hitting

But yeah, when I was researching it, people there was these articles going around about them having wedding dresses. I don’t know if you ever heard about that? I don’t know if it was 100 bucks, or 20 bucks. It was one of the other. Well, they had some The last time I went and boy, those dresses still looked overpriced. They did not look good.

Matt Cochrane

I can’t imagine getting a wedding dress from Ollie’s

The Science of Hitting

They weren’t. They were not very good looking. Sad to say.

Matt Cochrane

My brother in law worked at Walmart for a spell. And when my niece – his daughter – was like very young. And like at some point, it came up like, she was asking my sister,  her mom like how getting married works and wedding rings and things like that. And she’s like, oh, when you fall in love with someone when you’re older, you can marry them. And she’s like, maybe he’ll get my wedding ring at Walmart. Like, and her like four or five year old is that was like the pinnacle of shopping.

The Science of Hitting

That’s funny.

Matt Cochrane

Um, so Okay, so like another thing in the news? You know, like Spotify? Like, I know, you follow them, and they bought Locker Room? Like, you know, like, I guess it’s a competitor  to Clubhouse? Like, what’s the rationale here?

The Science of Hitting

Yeah, I would assume it is. I think, you know, Ben Thompson wrote about this. I think it was yesterday. And that’s who I turned to, to understand a lot of the strategy/tech of all this stuff. And I think what he wrote makes a lot of sense. I think it’s, you know, it was it was a relatively cheap deal in the grand scheme of things, they paid 15 million, according to The Wall Street Journal payouts could be 80 million if they hit certain targets, obviously. I think it’s an interesting, you know, it’s an interesting new form of audio. And, as Ben Thompson kind of alluded to, from Spotify’s perspective, it’s important that creators are on their platforms, whatever that means, whether it’s Anchor, or now Locker Room, it’s important to have creators and importantly, I think Spotify is in a very good position given the the real estate they own on people’s phones. And it’s a place where people naturally go to listen to audio. So if they have a compelling, you know, Joe Rogan live, I don’t even know what we call it, live audio, live podcast, if they have somebody like that, or if The Ringer does for sporting events, which would seem like a natural fit here. You know, it’s one of the things they can do to try to really complete that vision he had, I think he said, this is kind of the ESPN of the future is one of the comments he made when they bought Ringer, could be as successful. And I think that’s kind of an interesting idea to think about what they can do in sports and something like the audio space. So I think it’s you know, in the scheme of Spotify balance sheet, income statement market cap, it’s, it’s a small bet. If the whole space never goes anywhere you throw away $50 million, but you you took care of a kind of, potentially an existential risk, who knows. So I don’t think there’s any way it can really be a huge miss. On the other hand, if it becomes a hugely popular space, I think it’s important for him to have a presence. So I think generally speaking, I’m pretty impressed with a lot of the moves they’ve made. I’m reading the Spotify book right now, which was written by these two Swedish guys, and they got it translated it to English. It’s fantastic read, it’s called Spotify Play, people should read it. But yeah, I’ve I’ve been impressed by what Spotify has been doing. And growing subs is one thing. You know, I think relatively big news that happened recently that didn’t get a ton of press coverage was Spotify launched a product in South Korea. And one of the major record labels in South Korea also owns something called Melon, which is basically a Spotify competitor in South Korea. So as Spotify was launching in that market, they had a disagreement about keeping that record label’s music on Spotify, and the reporting from, I think it was Variety or The Wall Street Journal here in the last two or three weeks was that there was a ton of backlash from artists and fans, and most of the backlash was actually on the label. It wasn’t on Spotify, from what I saw. And the article specifically said that they came to the table and settled up the terms that were initially being discussed. Spotify didn’t, didn’t give up anything incremental. So I think, I think my view on this space and what’s going on is changing slightly, and I think Spotify is probably in a good position to to take chances but also to continue to try to you know, really, really win in audio.

Matt Cochrane

I mean, you can see the potential for something like this right? Like going back to the Locker Room just how like, right after a playoff game ends and you have a sports podcast, I mean, like one thing sports podcasts can’t really do is like, just start airing as soon as the game ends, you know, with your after game take or like, you know, for like in the financial world like after Apple reports earnings or something like that, you know, if there’s big news like how, you know, instead of like waiting for your next podcast to drop or whenever that is you could go live right away and people can listen. So I see the potential, um, you’re talking about like Spotify a little I mean, they’re up to 345 million active users. 155 million subscribers, the revenue growth, I think was like 17%. In the last quarter, they’re starting to show some free cash flow is this like, um, like is the ship finally turning here for them to like, make real profits or? Like are the economics of the industry changing?

The Science of Hitting

My answer at this point is I don’t know. One of the things that would probably be part of the service, I presume, depending on if I work with other people and how how they feel about that. But one of the things I really want to work on, which I’ve struggled to find, this book gives some crumbs in terms of how the deals were originally structured, I’d really like to go back and look at how this has all evolved over the past 10 years and try to put numbers on it directly as possible. I don’t know if it’s actually possible, given the disclosures that have been made, either in filings or you know, in press releases and the like. But I’d really like to go back and get a sense for that. Because it seems logical that as we keep going down this road, Spotify is going to be in a very strong position in individual markets globally, on a couple different dimensions where when they go and sit down in a room with someone, it’s one thing to write them off when they have 20 million subs or 100 million subs. But now you’re up at 350 million monthly actives. And it seems like it’s a lot of listeners, a lot of people. Yeah, as someone, my route to this kind of investment. And even as a user, I signed up for YouTube Music one time, because they gave me three months for free. And I used it for a while, I thought it was a decent product. Then I switched to Spotify, and switching over and getting all my music on there. And you know, the artists that I liked and things like that. It wasn’t, it took a little bit of work. It wasn’t like days of work, but it took work to get that music over there. And now on Spotify, I have playlists and the artists I like and the podcasts I like etc. So I do think there’s some reality to the fact that they’ve built a differentiated product. And it shows in the user numbers and it shows in the engagement data. So again, this this South Korean example. Spotify has a real negotiating position. And I think one of the interesting takeaways from the book is when they were negotiating early on to get into the US, they had a really hard time getting the labels to even come to the table really, because Apple was such a big source of revenue from digital, you know, sales of songs for 99 cents. When they eventually got two of the major labels to agree. They essentially sent an email to one of the other big labels and said, listen, we’d love to have you on the service. But we’re launching next week, or whenever it is, and if you guys aren’t on there it is what it is. And I thought it was interesting reading that, you know at that time they had, I don’t know 10 million users or something like that. And they were already in a position where they were confident enough to launch a product that wasn’t you know really complete in a lot of ways. Now you fast forward and they’re on their way to 400 million subs and people think about you know, would they be okay with losing one of the major labels for a period of time? And the more I think about it, the more I am of the position that they probably have the upper hand in a lot of these discussions.

Matt Cochrane

Kind of related to Spotify buying Locker Room was that, at the same time there’s rumors going around that Microsoft might buy Discord for $10 billion dollars. We talked about Microsoft in our last conversation. You have any thoughts about a possible acquisition there?

The Science of Hitting

This is one of the positions where it’s really nice to be invested in a company where you really trust management and their long term vision because I gotta tell you I’m honestly still confused exactly what Discord is, like I don’t, you know when you play and this is just my personal experience but when I play on Xbox Live I had a mic I talked to people on there right? So gamers gamers today must be doing something different that I don’t even know about, but apparently Discord is extremely popular. But so long answer short, I certainly trust management to make an intelligent long term decision. I like a lot of the things you’re doing in gaming so it would probably fit in well but I don’t really know what the product is.

Matt Cochrane

It’s the best of my knowledge and I actually have a Discord like we use it for some things at 7investing and I’m not on there much but like it’s kind of like Slack except there’s also audio stuff too and even video too so I almost  like if you imagine like Slack or Zoom or like a Slack Zoom combo, like almost something like that. But that is probably a horribly wrong take. And I’m missing things there. But like my, my very loose impression of it is it’s something like that.

The Science of Hitting

Okay, well, I’ll do more research on it, especially if they buy it. So next time we talk, I’m going to have a better answer.

Matt Cochrane

We did a lot of research for this show.

The Science of Hitting

Yeah, well, I almost had to download TikTok and start using it when they were talking about buying that. So I’m really glad that didn’t go through. And I’m sure a lot of other users are happy about

Matt Cochrane

You know, we could have seen some of your dance moves.

The Science of Hitting

Exactly.

Matt Cochrane

One thing we talked about every time we talked is about banking, and FinTech and like, is FinTech, is legacy banking, a melting ice cube, like is FinTech eating market share from them. Um, and, you know, since our last discussion, to your credit, Bank of America and Wells Fargo, I mean, they’re up like, what about 50%? And that was like, what, maybe five months ago?

The Science of Hitting

Yeah, they’ve had a good run, which, you know, they also had a terrible run before that.  Bank of America has worked out well in terms of timing, I got lucky in terms of when I started buying it, but Wells , there’s been a lot of pain in front of that train. So it’s what I said.

Matt Cochrane  

Yeah, that’s a hard one right there.

The Science of Hitting

It’s nice that it’s done well, recently, but it was a couple years of pain before that. So  but yeah, so they’ve done well lately, which obviously changes the, you know, the thinking in terms of whether or not it’s worth being a position at all, whether it’s worth being a certain size, etc. So that’s worth saying, I think the other big change in the industry has been, you know, the yield curve, the 210 spread, the 210 US Treasury spread bottomed out at like 50 basis points, or maybe a little bit below that back in August, I want to say. Since then, it’s increased quite a bit to I think it was around 160 bips today. So, you know, depending who you ask, because obviously, there’s assumptions as assets and liabilities. repriced how much will be given to depositors and like. But the estimates I’ve seen suggests that a move of that kind, you know, call it 100 basis points in the long end is probably worth 10% plus in terms of net interest income for Wells Fargo and Bank of America, which is looming, hugely important. Wells Fargo in particular has gotten crushed on net interest margin and net interest income over the past 10 years. So they, they would really, really, really like to see some benefit on them, and NII over the next, you know, couple of years, if possible. So that’s a bit encouraging. You know, outside of that, I think much of what I’ve said in the past probably still rings true, these companies are investing a ton of money on tech, you know, both consumer facing and back end, they still have branch networks and ATM networks that even if they’re used less often, they do have value from time to time potentially. At the same time, there are a large number of competitors, a large number of tech startups coming at different parts of the business. So you know, I talked about both these names in depth in my portfolio review so people can read more there. But I’m, I’m still undecided on where I stand in terms of the quality of these businesses, are they high quality enough to be in my portfolio? If they’re the kinds of things I’m going to own for the next 5, 10, 20 years and forgetting about stock price for a minute. Are the businesses high quality enough? And I think there’s a reasonable argument both ways. So nothing’s ever black or white in this game, but it’s something I continue to think about.

Matt Cochrane

Sure, sure. Like, do you have any like thoughts or opinions like on like Square and PayPal? Like they’re gonna offer where people can fund their purchases soon with like cryptocurrency, like any of their merchants? Or like yesterday, I mean, I retweeted this but like, you know, like Square’s CashApp  was doing a giveaway with Miley Cyrus on Twitter who has like, approximately like 50 gazillion followers where she was giving away a million dollars worth of stocks, I think, divided and $50 segments to like a whole bunch of people um, you know, to try to get people like on CashApp to buy and sell stocks, you know, use that function more on the app. Like I mean, are these kinds of things are they going to continue to drive engagement for like CashApp or PayPal and Venmo um, you know, like I just like I know I think we come at like different sides on this one but like, I just like that kind of marketing. You know like, you know, for a million dollars like you know, they get like how many people starting to buy and sell stocks on their platform, you know, with this like promotional tie in with Miley Cyrus or if like buying your, you know, buying your groceries in Bitcoin or whatever going out your restaurant and buying it in Bitcoin is that what like, makes people use the apps more, I just think that’s like such a low customer acquisition cost. So hard to match by I mean, even Chase or Wells Fargo,

The Science of Hitting  

I would even extend that to something like, you know, think about Robinoood relative to the Fidelity’s and the Schwab’s of the world. They have found a way both organically but they just had better customer, I don’t know better is the right word. They’ve had effective customer acquisition tools. So far. They’re still very young, or at least Robinhood’s very young, I’ll be curious to see how, obviously these things tend to reach a younger audience on average, I’ll be curious to see how they evolve over time, and whether or not as people you know, air quotes get serious about their finances and things like that, whether or not they’re comfortable having all of their savings in a Robinhood account, as opposed to $1,000 that they’re kinda, you know, just trading around or, you know, throwing up meme stocks or whatever. So I’m certainly not saying that’s all people are doing on there. Of course, yeah, I got it. But yeah, but stuff like crypto trading and things like that in the CashApp, I don’t know how much of this is really…

Matt Cochrane

Yeah you get your first real job. And, you know, you think about retiring, you know, opening a retirement account, because you’re starting a family or something. And, you know, you’re starting to take your finances more seriously for whatever reason, and like, yeah, are you starting to put your monthly savings into Robinhood? Are you know, which, to your point, they don’t even offer IRAs, you know, accounts like that, which like, to me is like, that’s one of my biggest criticisms of like, especially Robinhood, I mean, , basically, essentially just a brokerage, like how, you know, like, it almost is just a trading platform for me, you know, not really a true investment brokerage. But like, yeah, to your point, like, they don’t offer some of the more robust options like that.

The Science of Hitting  1:02:01

Yeah, there’s something to be said for age. Definitely. And there’s, there’s, for any of these businesses, obviously, there’s bumps along the way and Robinhood has has dealt with their fair share of, I guess problems would be a fair word. As I think about the big banks, their deposit bases are, you know, for the really big banks are, you know, on the order of a trillion dollars in terms of kind of consumer Small Business Banking deposits. I will continue to look at things like Ally, which is a kind of an online bank that has been successful and taking share both of the kind of digital channel, but also of obviously, banking generally, because digital’s outgrown kind of the core deposit base. So, I think there’s definitely things here to watch. And I look at companies like CashApp and Square, and I just think they are well run, or they appear to be well run, and they’re very good at at least the customer acquisition part of the game. So to write them off would be the equivalent of sticking my head in the sand, which is not very smart. So yeah, I think there’s a lot of validity to what you say,

Matt Cochrane

Ally is an interesting one, um, you know, because they really went after like the car loan market and just attacked it. Like, it took a lot of market share. And they’re really trying to grow it out from there, you know, but like, it’s interesting how they just attacked, like a certain market segment, they have really robust digital offerings, you know, especially for a bank of their size, but, uh, it’s just it is, that’s actually like, you know, quote, unquote, like traditional banks, you know, but they’re one I’ve looked at hard, a few different times.

The Science of Hitting

Yeah I took a somewhat deep look at it, I think Enlightened Capital told me to look closer, and he had done good work on it and share it with me and just sucked my thumb. And it’s been a great stock to won. Get what I deserve on that one. Even though I missed it, I’m still very impressed with what they’ve done. They’ve taken a lot of deposit share, it’s harder for me to get as comfortable with some of the credit type stuff only because I’m not as familiar with the bank. But, I mean, that’s the reality of investing in financials in any sort of way. So yeah, I think we’ll see what happens with stuff like the yield curve, we’ll see what happens with deposit share over time, you know, it’ll be interesting to see, for example, how if we actually do get a steepened yield curve, you know, deposit betas, historically, even the most recent, you know, hiking cycle have held in a range of kind of 35 to 40%. So obviously, the banks have kept a pretty significant share of the hikes. That could move higher, it could become like we were talking about with airlines or other businesses like that, where volumes go down, this space could potentially get more competitive. And if the differentials are big enough, maybe you’ll see that a younger consumer is willing to be with the online-only bank or, you know what, we wouldn’t traditionally consider a bank because they’re getting 1.5% on their money versus 20 basis points. So we’ll see how this plays out. It could be interesting.

Matt Cochrane

Sure, absolutely. Um, one last question. So like in your in your Substack that you’re launching, um, you have a quote in there from one of your introductory posts, it says, To quote Charlie Munger, “my preferred approach is patience followed by pretty aggressive conduct. I don’t make portfolio changes very often, but when I do they are meaningful decisions”. So like, how do you, like can you give us any light, like how you do make portfolio allocation decisions?

The Science of Hitting

Yeah, so as your, as people have listened to the first, the first episode we did together, and now this one, will realize there’s certain industries that I kind of like a lot, or companies that I like a lot, where I’ll be kind of sniffing around for a long time. Something like Spotify or Dollar General or, you know, new names that I’m adding to the list and my kind of preferred approach, once they hit a level, or when I get comfortable enough with the business that I’m willing to invest, I would typically look to put, you know, somewhere on the order of 5%. And maybe more depending on on how attractive it appears into the business, I’ve really tried to make a concerted effort to get away from the, you know, 1, 2, 3% size positions, which it works for a lot of people, it’s just something that for me, it becomes it becomes too unwieldy. And it’s hard for me to really stay on top kind of what we were talking about in March, where we both, things kind of slipped past just when the world really got crazy. That’s how I feel when I look at a portfolio and see like, just 30 names or so I’ve never had that many. But just as an example, I have 25 positions that are a percent each, it’s just hard for me to stay on top of that, to the extent that I really want to So long story short, I take relatively meaningful positions out of the gate. And then as you as people who read a portfolio review will see I talk about, you know, kind of average cost and how long it’s been. It’s been in the book, most of the things have been in there for a long time, the two biggest positions have been in there since 2011. A lot of other positions have been in there since 2016 2017. I find these businesses like Microsoft, Disney, Berkshire, and I really want to hold them for as long as possible. So if that needs to be the outcome, the work before making the decision needs to be pretty, pretty stringent. So that’s really where I think I can make the good decision is at the first buy and then not really tinkering with it too much from there after.

Matt Cochrane

All right. All right. So let’s wrap up our conversation there. Alex, where can people find your Substack? If they’re interested?

The Science of Hitting

That’s a good question. I don’t have the URL or anything on me. But if you go to my Twitter page, I’ll make sure to pin it once we launched this thing, which I guess this is probably going out Tuesday, so it’ll be pinned by then.

Matt Cochrane

And he can be found on Twitter at TSOH this which stands for The Science of Hitting underscore investing. And he’s a he’s a great follow up. We’ll have a link to your Twitter profile and the article accompany this episode. But let’s wrap it up there. Science of Hitting Ladies and Gentlemen, thank you so much for coming on today and discussing investing topics with us

The Science of Hitting

Always have fun talking with you, Matt. Have a good one.

Matt Cochrane

Yeah, absolutely. I’m Matthew Cochrane, lead advisor with 7investing and we’re here to empower you to invest in your future. Have a great day, everyone.

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