A Deep Dive Into the Growth Stock Selloff | 7investing
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A Deep Dive Into the Growth Stock Selloff

May 14, 2021

When you see your portfolio fill with red, it’s disconcerting even when you have a long-term investor’s mentality. That’s simply human nature. Nobody likes to lose money even if it’s just on paper and you still believe the stocks you own will recover if given enough time.

Maxx Chatsko and Simon Erickson joined Dan Kline on the May 12 “7investing Now” to break down what’s happening with growth stocks. The trio explains why they’re still confident in their investments while also talking about why many formerly high-flying stocks have fallen in recent days.

A full transcript follows the video.

 

Dan Kline: Here’s what we’re gonna talk about today. The market has been selling off, we’re gonna call them growth stocks. We originally call them tech stocks. But we’re going to talk about biotech as well. So it really is a lot of growth stocks that are not doing well. We know there’s a lot of concern in the market. We know there’s a lot of investors that are heavily invested in these stocks. So we’ve got a bunch of your questions to take, and we’re happy to take whatever questions we can live. Simon is gonna try to fight his way through the show.

But just in case he doesn’t make it, Simon, why don’t you give us your 10,000-foot overview of what’s happening in the market right now.

Simon Erickson: So Dan, this is textbook sector rotation what’s going on right now, right? You’ve got institutional managers that have for years been risk on with low interest rates, go for the gold, put your money in tech stocks that are rotating this to counterbalance that and put into some names are going to recover from the cyclical economy. Just to kind of clarify what that means we’ve seen last year unemployment was at 15%. Now it’s down about 6%. GDP in the U.S. last year was -2% because of COVID.

Now we’re up to 6% GDP, so the economy is recovering. And so what fund managers with 10s of billions of dollars at their disposal want to do what they say let’s take some risk off the table. Let’s take a lot of this out of those higher growth higher flyer names, who have a lot of their cash flows in the future that have benefited from really low-interest rates. And let’s put into it more cyclical recovery names. The companies like Lowe’s or Home Depot’s are kind of things that you’d see in the Dow Jones, we’re starting to see a second sector rotation, this is completely normal for the cycles of the market that follows the economy.

Dan Kline: And Simon and I’ll come to you Maxx in a second. Some of this is also – there was sort of like a fervor over certain stocks, like Zoom and Teladoc are two great examples. We’ve talked about these a lot. But these were stocks that pulled growth forward from the pandemic. I think it’s fair to say that with the pandemic, you know, sort of ending – it’s largely normal here in Florida. I mean, most things are – everything’s open, most things you can go to, even without a mask, in some cases, if it’s outside, you’re not going to see the hyper-growth and that’s spooking some investors, is that a reasonable take on it?

Simon Erickson: Well, I think that the tech sector experiences the hype cycle a lot more than a lot of other sectors of the stock market, right? We get so excited sometimes about things and we put unrealistic price tags on them. We saw this with marijuana companies a couple of years ago, we saw this with virtual reality companies a couple of years ago, Maxx, I would even say we’re seeing this with a lot of electric vehicle companies right now, right? Companies that are exposed to things that make a lot of headlines, sometimes you get really far ahead of ourselves in terms of the valuations for those.

But I also don’t want to discount the fact that a lot of these tech names, even the ones that are selling off today, are actually still in the early stages of long term developing trends that are just now kind of at the tip of the iceberg of what the value that is created for investors are likely to achieve. We hear a lot about the digital transformation, that’s kind of a buzzword of people moving their workflows and their data from on premise data centers to the cloud. And the companies that are taking advantage of the software as a service.

Infrastructure as a service. Platform as a service. Anything as a service now that you’re getting from Cloud-based providers, that is still less than 10% of global IT workloads have moved there. And so when we’re talking about these companies that are selling, Oh it’s 25 times sales is 30 times price to sales multiples. Those are selling off because a lot of tech names are selling off, I would take the other side of that coin and say it’s justifiable for a premium because you’re still at the denominator of a lot of those voltage. Those valuation multiples are still at the very, very early innings.

Dan Kline: And I’ll argue and I’ll throw it to Maxx in a second, that those high-flying tech stocks are performing a lot like Netflix has during the pandemic, where Netflix got this huge rush of subscribers. And then last quarter had a “bad” quarter. But if you zoom out and look at their five quarter growth total, the numbers are astounding. So I think that’s what you’re going to have to do with the Fastly’s and the Zooms and Teladoc, Okta, Crowdstrike, and some of these companies is don’t look at a quarter by quarter basis, because if they have three times the growth they expected in Q3, it’s actually okay if they have much lower growth in Q4. It’s really about adding the customers but Maxx, you’re looking at this a little bit differently from your perch in the biotech world.

Maxx Chatsko: Yeah, so I guess just at the top, I mean, on the whole we have seen the rotation that Simon was talking about, but in the last week, that’s not been true. I mean, the Dow Jones is at some of its worst days, just this week. So I think all stocks are down. It’s not just people running into Home Depot and all that all those types of stocks, I think we’re seeing across the board, people are trying to like figure out what does inflation mean.

And it’s not just because of pricing, you know, that when interest rates went from, you know, before the pandemic, they were two and a half percent range, right down to near zero overnight, you know, that shifted a lot of pools of money in the economy around, right, nobody’s really in bonds anymore, not nearly as much money anymore. That all flowed into equities. Some of that’s now flowing into cryptocurrencies, of course, it will fall back in equities eventually. So the pools of money are moving a little bit more than they have in the past. So I think that’s important to point out too when it comes to like, concerns over inflation. Simon, were you gonna weigh in there? Saw you unmute, or no?

Simon Erickson: Yeah, no, that’s perfect. Max, I just wanted to add a point about how do institutions think about valuation? Right? Like let’s think about where the money is moving hands right now and how they think about why do this? Why move money around? So much of it is very quantitative. You know, if you’ve seen institutional DCF, valuation, multiples things like this, they’re heavily weighted towards discount rates and movement of the economy. How is the economy doing and what’s the discount rate? And so last year, when we were stuck at home, because of COVID, tech companies were shooting off the charts because everyone’s glued to their desktop computers and their mobile phones, you saw that the results from tech were amazing.

I mean, revenue growth and earnings growth was off the charts because there was no other place for people to do things. And then coupled with very, very low discount rates, it’s kind of made all the inputs, the perfect storm for a lot of those shorter term price target valuation models we’ve gotten used to now it’s a step back and say, Okay, yeah, the valuations went up, do you believe the growth story of these companies? Or is this going to be something that fades away because that growth is not sustainable? So you’ve definitely got to pick the wheat from the chaff on those tech companies.

Dan Kline: Let me jump in here, Maxx, we’re going to talk a little bit about the different way we look at biotech and value compared to technology. But I want to jump in and answer Max’s comment on the overall market being down. I think we’re in a damned if you do damned if you don’t sentiment, because there are some retailers and I cover the retail space that have put up tremendous numbers.

And they’re getting the market saying Yeah, but you’re not going to have growth like that a year from now. And it’s like, Well, okay, but I had a really good quarter, and I added new customers and you’re right, you know, you might not add 15% in same-store sales or grow your customer base by 20%, or whatever it is quarter after quarter. But just if you had that bonus, that gives you more money to invest, it tells your story, it moves it forward.

So I do think there’s going to be a catch up, I think there’s a lot of companies that have done very, very well during the pandemic, and their stocks have actually taken a beating. And at some point, the market will just go: these are really good companies Maxx, sorry to step onto there.

Maxx Chatsko: No, that’s all right. And yeah, that actually leads right into my other point I was gonna make here before we get into biotech, I have personally bought – I’m all tapped out now, dang it, so I have used this as a buying opportunity, because, you know, we’re oriented in long term mindset, right? We’re looking at three years, five years from now or longer, but just because stocks pullback recently doesn’t mean necessarily they’re going to shoot right back up to where they were in February or March, right for growth stocks.

I think the recent pullback says a lot more about where valuations were in February and March then it being necessarily like this epic buying opportunity. I think like what Dan was saying, expectations are very high and they were and I think even current valuations even with a sell off, there’s still a lot of high expectations baked in to current valuations. Simon, what do you think?

Simon Erickson: Yeah, there absolutely is Maxx. But you know, when we I think zoom out, like I said, is is kind of the key here. I’m going to be providing an advisor update here on the 15th. And I won’t go too into the details of it, but it’s based on a study done by Boston Consulting Group. It’s what I love every year about how value is created over the long term for investors. So if you think about this in terms of a couple of months or a couple of years, you say, Oh, yeah, okay, well, there’s money coming off the table here, there’s a sector rotation here, price to sales was at 30. Now, it’s only a 20, I lost a lot of money. But if you zoom out, and you look at how companies, the best-performing companies create value for you, as a shareholder, the stock prices go up over long periods of time of five years or more, it is based really on two fundamental things. One is profitable revenue growth, and two is how companies deploy the cash flows that they’re creating.

Right, and I’ll get more into those. But at the long term, if you’re thinking five years out, you don’t care about the interim steps of where the markets doing with its money, or what kind of sector rotation or valuation wants to give, you’ve got to find best in class companies that are putting their money where their mouth is, and visionary leaders that are capturing those opportunities. So the best three performing companies the last five years, if you look at total shareholder returns, that was Shopify was number one, AMD was number two, and Square was number three. And all of those are growth companies. Right? Those are companies that you can call tech companies that are out of favor right now. But Shopify has had an average annual compound annual growth rate of 113% per year. And we’ve been calling it overvalued the entire way up. So it just kind of shows you how value gets created over the long term is out of touch with a lot of the headlines, I think that we’re seeing right now.

Maxx Chatsko: Absolutely. And that’s the point. I mean, don’t don’t buy today and expect in two months, you’re gonna be up 50% or something, right? You’d have realistic expectations and orient yourself towards the long haul.

Dan Kline: Yeah. And that’s why what we do at 7investing is so important. We’re actually putting the homework in and understanding the companies and it isn’t where a company is now. It’s what roadmap they set out and did they tick off those points. So Maxx is going to talk about this a little bit when it comes to valuing biotech stocks, but I wanted to take the comment from Springer10, if you can bring that up, Sam.

So all that being said, should we be buying? So I believe this is a buying opportunity for many stocks, there are stocks out there that you look at, specifically in my space in retail that have put up very, very good numbers and have gone down and I’ve gone down significantly. There’s also some stocks in tech, you know, where you can look at the growth chart and say, okay, the market is punishing them because they only grew 47% last quarter, and the analyst expected 52%? Well, some of those are really nitpicky kind of stupid things. But in tech, we look at growth, we look at revenue, but that’s not really what you’re valuing biotech companies based on Maxx.

Maxx Chatsko: Yeah, that’s right. So you know, when you value tech, and you look at price to sales ratios, you know those look pretty expensive. You’re basically valuing revenue projections. When you’re valuing a biotech company or drug developer, you’re pricing in certain de-risking events, like clinical trial results, or the ability to scale a new drug product in the market. And that gets into like, a little bit more crystal ball territory, Dan, because clinical trials all the time, they have mixed results, there’s multiple endpoints, there’s safety, there’s efficacy, sometimes the drugs, very effective, but then there’s some weird thing, nobody saw coming with a safety signal, and  maybe that program gets canned, maybe the FDA has some more questions or delays it or makes you monitor patients for five more years.

So all of these things aren’t really – I guess the amount of risk isn’t priced in, in my opinion, biotech, even with some of the sell offs. I mean, a lot of these elevations in certain areas as well. seem to be a little elevated still, in my opinion. Certainly, I don’t know. I think coming out of the pandemic, I think people are kind of like chest thumping, you know, yeah, we crushed the pandemic, we made vaccines in a year, we figured out biology. And it’s still very complicated, right?

I think expectations for some of these newer therapeutic modalities are still a little too high. They’re going to be humbled a little bit, but they’re still like going to be with us. It’s just, you know, you can overpay, so you have to be realistic, kind of what Simon was saying earlier, you know, we kind of get on the hype train a little bit too often in tech and biotech. And you know, that can lead to unrealistic expectations and maybe bad results in your portfolio. If you’re not that thinking with a long term mindset.

We’re gonna get back to unrealistic expectations in a second. But before we do that, Simon, we don’t promote what we do all that much on this show, but we actually have something pretty special coming up a week from Friday. I was kind of hoping it was a team dinner, but it’s not. What exactly are we doing a week from Friday?

Simon Erickson: Yeah, Dan, it’s our subscriber call we do we do every month on the third Friday of the month, we actually interact directly with any of our subscribers that can join us. It’s a live Zoom call on the spot. You can ask our advisors any questions you want. You can talk in the chat on the sidebar, too. It’s kind of a lot of fun. We also make it available for anybody who’s not able to make it. It is next Friday starts at 11 o’clock eastern time, which I’m told is the standard timezone of the United States for those on the east coast.

Dan Kline: That’s the correct time.

Simon Erickson: The fun part about this one, Dan is I think that it goes back to Springer’s question which I loved that Springer’s is asking this which is, you know, should we be buying? Right? With all the analysis that seven investing goes with all the different markets? You guys are looking at?  What should I do? Should I be buying through this? And we encourage everybody to think of investing as a personal thing, right? Everyone’s Maxx’s answer isn’t the right answer for Dan, which isn’t the right answer for me.

But we’re gonna do something a little different on next Friday’s call. Just because it’s been such an interesting month, we’ve seen so much volatility, and we’re going to invite any of our advisors who wants to, speak up about one or two specific companies that they personally been buying into. And I think that hopefully this doesn’t confuse that investing still is personal. And that’s not always the right answer to just follow what someone else is doing. But to show that when we say hey, think long-term buy and hold, this is an opportunity. We personally live that too. And we feel it when there’s red ink in our portfolios, but we see this that if you’re a long-term investor, you gotta take advantage of opportunities like this. So we’re gonna make a little bit more real Dan, on next Friday’s subscriber call.

Dan Kline: I actually think that’s one of the joys of being a 7investor member, not just that call, but you know you talk about well Maxx’s pick might not be for everybody, but as a member as someone who watches 7investing Now – you get to know us. You know, for example that I’m married for a long time I have a 17-year-old kid, I like to travel a ton, I’m buying a resort condo. You know a lot about me, so you can apply how that is like – you know that Maxx is single and he’s chosen to live in Pittsburgh and has made some other questionable life choices. I’m just kidding. But you get to know us and as members you get even more of that because you know, we’ll tell you what stocks we’re buying and selling sometimes or give you more insight into our portfolios than we necessarily would here on 7investing Now.

So I won’t belabor it but if you’d like to be at that call it 7investing.com/subscribe. Tell him Dan sent you. There’s no actual place to do that. But a 7investing.com/subscribe.$49 a month or the best deal out there -$399 a year. We do not take Bitcoin yet or any cryptocurrency. We did have a really fun conversation about creating a cryptocurrency. We’re not actually going to do that. But the fact that scamcoin is already taken really upset me. So we will move on Simon with tech stocks, we’re going to get to some of your questions and comments is probably all we’re going to talk about this show, I don’t think we’re going to do any other segments. Because there there’s really a lot of concern in the market. But Simon what tech stocks? is some of this just investors having unrealistic expectations? I mean, you don’t have to grow 130% every year to still be a growth company.

Simon Erickson: Yeah, I mean, this is one of the limitations of quarterly numbers coming out, right? It’s just much context of where were we a year ago at this exact moment versus where are we today? Obviously, it’s really hard for a lot of software companies to close large enterprise deals, because their sales reps are traveling. I mean, when you look at large companies, a lot of the reasons they want to work with direct sales reps is because they’re the guy that they get on the phone, and they say, hey, I need to do this, can you help me make this happen?

I mean, when you’re limited to Zoom calls for that, it’s a lot harder to have those direct relationships. And so we’ve seen a blip with that. On the other hand, I think that this is kind of given a lot of companies a chance to reevaluate their digital presence, you know, how are we doing our website? Now’s the time to double down on things like that. And so the expectations? Yeah, to your question, I think it’s kind of a combination of a bunch of things, Dan, I do think that I’m still seeing in the companies that I followed strong top-line growth for most, at least enterprise software companies.

Dan Kline: And a lot of this is interpretation, because, you know, I just mentioned it, strong top line growth is open to interpretation. So you know, in the retail space, one company might be 30% down. You know, there was a point where Starbucks was 30% down in sales, but I think pretty universally, was looked at as like, wow, they’ve handled this really well. There have been other companies that have been up in sales that people have gone like, well, and I’m guilty of this because I’ve talked about Kroger a lot. I think Kroger has had tremendous sales, because you had to go to Kroger, I don’t think in a post-pandemic world, Kroger is going to compete all that well with Walmart and Amazon.

And I’ll throw Target in there as well, simply because those companies don’t need to make money on groceries. And it’s really hard to fight competitors. But I might be wrong there. But I do think, if you have a quarter where Netflix adds 10 million subscribers and the market goes ho hum, like no, like 10 million subscribers is, I don’t know 18 Fubo’s? And Fubo was up what 20% after hours last night because it posted an inconsequential gain in subscribers and I’m not going to spend more time picking on fubo. But I just want to use it as an example of companies that people really like they’ll find any reason to be positive about and companies that have had long-term success.

Sometimes we look at it and go like, Oh sure McDonald’s sales are exceeding pre-pandemic levels. But yeah, people aren’t going to want Big Macs after the pandemic, it can be very, very strange. Let’s take the comment from Connor Murphy, before we get into some of the comments from Twitter, I’m really excited about the companies I own, which makes it easier to brace through a sell-off Maxx Chatzco. Your thoughts here.

Maxx Chatsko: We talk about this all the time. That’s a great point, Connor. And that is, you know, when you buy into a company, it’s a business you want to own and you develop a thesis. And you know, this is gets to like signal versus noise. You know, what happens today, before the market closed or three Tuesdays from now it doesn’t really matter, right? Like what’s going on in the next two years, or three years or five years? And if your thesis remains intact, and doesn’t really matter if it’s up 30% or down 30% for a different points in the year, the next two years? Isn’t that great long term trajectory and has good sound operating metrics or, you know, at least a path to get there, then that’s great.

Dan Kline: And Maxx, thanks to you, I own a bunch of biotech stocks. And to say they’re not doing great is probably putting it mildly. But a lot of the reason these stocks move is vapor, because you’ve shown me Okay, with company x, here’s the milestone we’re looking for, does it get this approval? Or are they able to sell 500 units in the field or whatever it might be? And when these milestones aren’t impacted one way or the other, it doesn’t matter if the stock goes up 300% or down? 80%. Right? Like it’s really just responding to nothing.

Maxx Chatsko: Yeah, my January pick, right, it was a small cap. And at the beginning of this year, just all small caps really kind of like had a great run. And people like right after I made the pic, I think it was up like 60 70% at one point. And people were like, you know, holding parades for me and everything, you know, just trying to make me kiss their babies and things. And I was like, hey, slow down, like this could be down 60 or 70%. Equally, there’s no reason for it to be up. And now it’s since corrected a little bit. And it doesn’t really matter. Right? I’ve talked about this, I’ll say it again, I think the nearest term milestone for any pick I’ve ever made is still like mid-2021.

So none of my picks have even crossed their first milestone yet. So it doesn’t really matter if we’re up or down or anything in between. And hopefully they reach those milestones and de risk themselves, they’ll earn a higher valuation. And that will be more durable because there’s less risk involved.

Dan Kline: We talked about this earlier in the show, a company sets up a roadmap and your job, our job as analysts is to see if it’s fulfilling that roadmap. And one of the most important things to me, is if something falters. If a company, you know comes out, I’ll use Starbucks as an example, because I talk about them a lot. If Starbucks comes out and says we expect 2% growth in cold beverage sales, and cold beverage is more profitable, and it leads to 4% higher food sales, and they only deliver a 1% growth. I want them to address what went wrong. If they do now they might come out and say yeah, we had unseasonably cold temperatures in 60% of our sales territory. And we actually had a 12% spike in hot beverage sales that we just think is an anomaly.

If their reason makes sense. I’m still gonna see them getting there. Now, if what happens is they come out and say like, no, like we focused group and people hate our cold beverages. Well, that’s a bigger problem. And that’s sort of how it goes in biotech. But to a much more intense degree, it’s really relatively easy for Starbucks to tweak a recipe, it’s not as easy to redo your cure for cancer, or wherever it might be. Simon, you’re smiling. I know you want to weigh in here.

Simon Erickson: Oh, yeah, those are great points. And by the way, Maxx, and we did get video footage of the parade that I threw for you here in Houston. So I’ll put that up on YouTube at some point. Great point, great point about the operational execution, right? Hold management accountable for what they say they’re going to do. No management team is going out there and saying, Hey, I’m going to get our stock to have a price to sales multiple of 30 to 30x this year. They’re going to focus on the things that they can actually control. And I think that’s important for us to remember, as investors,

Dan Kline: Stocks tend to catch up to operational execution. When you look at some of the best performing stocks long term, they tend to have really, really good management, that’s not always true in technology, you do sometimes get some just brilliant visionaries that don’t execute as well. But usually below them, you have that your Sheryl Sandberg of the world, you have your people that are just making sure that everything gets done that the i’s get dotted and the t’s get crossed. That’s very, very important, especially in restaurants and retail, where the margins tend to be micro thin.

With that Sam Bailey, if we could take the Twitter comment from Greg, it is the first one in the doc we’re going to get to some more of your questions. Simon, thank you for the great perspective. Can you shed some light with your following Simon, you have a following as to why fear of inflation negatively impacts high growth/tech stocks. So drastically? This isn’t new news. So it’s fascinating now if it all works, how it all works, Simon, if you do have followers, could you not make us wear the matching robes? And those like cheap Nikes with the red stripes? Can we be like a much cooler cult if that’s where we’re going?

Simon Erickson: Dually noted. Thanks very much, Dan. This is a great question. I think it goes back you know, to the example Greg, we’re talking about kind of the valuations for tech companies and how they’re so dependent on future cash flows, right? This year, companies that don’t have a whole lot of assets in the ground, they’re not chemical plants, they’re not, you know, railroads things that you can kind of count on those assets providing a return on assets today. You’re looking to the future, you’re saying we’re building a software platform that’s based upon subscriptions, and we’re going to go out, and we’re going to capture this many customers, and we’re going to keep this kind of retention rate for them, or we charge this much money per year.

And so because so many of those cash flows are in the future, and you’re discounting those back to the present. The people that are true value, investors would say, well, the current value of those future free cash flows of the business is what the equity value is today, the intrinsic value of a stock is based upon the future. And so a lot of tech companies that are high fliers, again, they’ve got in the future, when you discount those back at a higher rate, a higher weighted average cost of capital for the company, if you will, they’re worth less today than they were when interest when money was free, and interest rates were very, very low. And so I think a lot of the volatility in the tech names, especially when you start going through rising rate environments like we’re going through right now, is because of that dynamic, there’s just kind of an understanding that future cash flows are worth less when inflation is on the table.

Dan Kline: We’re going to take the comment from Deborah Hata next, I apologize if I’m pronouncing that correctly. It’s a little far away from the screen for me to see if you want to throw that one up Sam. Please share your hedging strategy to members. So I’m going to go first, my hedging strategy is I have a deep emergency fund, I try to keep 12 months of operating expenses in cash. And I’d say my other hedge is real estate. I’ve talked a lot about that we’re buying a condo and when we buy our rental condo, we will own that free and clear.

So if everything – and the house I’m sitting in now I own free and clear. This is a very modest manufactured home, we’re gonna sell this, but I looked at it as when we bought it. If everything went to hell, the world went crazy. Nobody wanted financial analysis or journalism or whatever the things are, I could do and I had to go work at Wawa. I could afford to comfortably live here. So that was my hedge against disaster. I don’t hedge with gold or silver. Maxx, do you have like a pirate’s chest somewhere hidden in your in your house full of doubloons or something like that? How do you hedge?

Maxx Chatsko: Yeah, I left the map to Simon in my will. So Simon’s gonna be really rich one day. You know, actually, when it comes to stocks, I don’t hedge I my hedge is a long term mindset. You know, volatility does really spook me anymore, especially in biotech. Right? I was joking internally with the team like, Oh, your stocks are down 5%? Yeah, welcome to the club. So you know, but as you were saying in terms of like, zoom out and financial picture overall, live below your means, have an emergency fund all those things. That helps you sleep better at night when there is, you know, a pandemic or something that nobody saw coming.

Dan Kline: A viable hedge for Maxx also is that I have a guest room. Simon, how do you hedge?

Simon Erickson: Yeah, I would just warn anybody, I mean, hedge funds, use a lot of options strategies, because they’re managing large diversified portfolios. A lot of the hedge funds that you’ve seen blow up in the last decade or so have been the long-tail risks, you know, the things that they couldn’t control the Jurassic Park, you know, the Raptors got through the fences. And nobody counted on that, because they didn’t design it that way.

Hedge funds are the same way. You know, we’ve seen that kind of throughout financial history, things like that happening. As individuals too. It’s tempting to get some extra income from the premiums of a covered call or from writing puts out there, or doing things that seemed really smart at the time. But again, those are priced the way that they are for a reason. I don’t encourage investors who are new to options to think too hard about hedging strategies, there’s a lot of risks that are that are kind of beneath the original line of sight with this.

Dan Kline: I would argue that owning really good companies is a hedge, there’s always going to be value in a really good company. Now, that doesn’t mean the stock price won’t go down. But if there’s inherent value there, you’re gonna have much more long term protection. I want to take a comment from Choch that’s in the documents. Simon this is one you didn’t really well, my answer is different from yours.

I read the question a little bit differently, Sam, if you want to bring that up. All your 7investing picks for May are down. Yeah, we don’t really worry about that. Understandably, as you were committing to starting those positions on May 1 in the middle of a huge market correction. Would you ever consider postponing your picks and telling members, it’s just not the right time to buy now?

So here’s my answer to this. When we all make our pick, we do factor valuation. That’s one of the things in our report. So let’s say I was gonna pick company x, and I don’t know Jim Cramer went on TV, it was like company x is great and go buy it and it’s up 300%. I might go with my second pick, because that might make it not my highest conviction pick this month. It doesn’t mean it’s not a stock I like but maybe something out of the ordinary happened, or maybe I really like a stock. But there is a little bit of a question as to whether its CEO was, I don’t know, friends with Jeffrey Epstein. And like it’s a little too close to Bernie Madoff, like, who knows, like some terrible thing. You might go, okay, that is more risk there. This is a CEO-driven company. And if the CEO gets involved in a scandal, that could be a problem. So we do make adjustments into what we’re picking.

But I’m not concerned if a company I picked in May, is down 20%. In May, that doesn’t matter to me at all, you know, what I’m concerned about, if it was down 10 years from May, that’s, you know, three to five years. That’s how I think about it. So yes, we factor in price we factor in, you know, all sorts of outstanding things. But the reality is, sometimes things happen that you don’t know. Right now we have an abnormal gas crisis that we’re going to talk about extensively on Friday’s show. Well, gas prices affect the travel industry, they affect, you know, pretty much everything they affect food prices.

So right now, there are gas lines in South Carolina, there are shortages. Are these real shortages? No, they’re not. They’re shortages, like we had toilet paper shortages, where instead of buying a two week supply, people are buying a 10 week supply. Everyone’s running out and feeling every gas can because there might be a disruption in supply. So that’s sort of what we look at, like if something happens in the short term that that makes my company not perform as well. That doesn’t concern me all that much. Let’s take the comment from Clint next. And we will keep working through your live comments. Maxx, jump in, feel free.

Maxx Chatsko: Simon and I think we wanted to jump in on the dynamics of the scorecard, if you will, but um, yeah, first of all, just for the record, there is one pick from somebody not bragging that is beating the market since May.

So it’s important. Oh, go ahead Dan

Dan Kline: I was gonna say I believe it’s up.003%.

Maxx Chatsko: It’s still green baby alright. So look, we make our picks on the 1st. So we’re not going to change that. Because we are again, oriented towards where’s this gonna be in three years or five years, we’re thinking long term. And you know, in May 2025, it’s not gonna matter if we chose our picks on May 1 2021, or May 7 2021. None of that’s going to matter. That’s all going to fade away.

And it’s also different from when you are investing, right, compared to the scorecard. I mean, you can accumulate and buy into positions over time. So you smooth out your average prices, right? Maybe you do that over many months or years. On the scorecard. It’s there, it’s once you see it. So, you know, we can’t like actively manage the prices. And again, we’re not really worried about that, Simon? Anything?

Simon Erickson: Yeah, I mean, that’s great. And kudos to that to that advisor that has a winning pick in May, we won’t say any names, but it might rhyme with Chaxx Matzco. I don’t know. The scorecard dynamics, I mean I love your questions, when you ask these. This is another good one, I think that we are always very confident with the pics that we’re putting in front of subscribers on the first of the month.

And you know, we’d like to have a little bit of a window that if things happen, or we see something out there that we really don’t like, we can always pull those back and say, Hey, you know, we’re gonna go with this pick, instead, we got a really strong team process allows us to do that. But in terms of like what Maxx just said, you know, we don’t want to start adjusting, ahh the price we recommend on the first, we’re gonna recommend it on the third or the fourth or the fifth. We want to keep it a steady process. But I am very confident that our picks are the right picks at the beginning of every single month.

Dan Kline: Yeah, and it’s happened to all of us where your pick is locked in. And then like some piece of good news that like you expected to come in the next five years comes like an hour before your pick, it goes final like like that’s happened to me. In fact, it happened to me with this month’s pick, which obviously I can’t talk about what the pick is. So we don’t worry about the short term all that much. We are going to take the comment from Clint, Simon I’ll let you read this one as it’s, it sort of speaks to you a little bit there. Sam, if you want to bring that back up. Well, you may not be able to bring that back up.

Simon Erickson: Which one do you want to pull up?

Dan Kline: The one from Clint?

Simon Erickson: Clint says I’m hanging in there with you all, like my dad always says never say whoa, in the middle of a mud hole. Man. That sounds like a Texas saying right there if I’ve ever heard one click come down here and have a couple of beers with me in Houston sometime.

Dan Kline: Yeah, I don’t even know what a mud hole is, though. I could imagine. Sam Bailey, our director, our producer behind the glass here if you want to bring up Robbie Shaw’s comment, the Twitter comment in the doc. I think this is an interesting one for Maxx. What’s the lowest market cap stock you’ve bought historically or recently? And he’s asking about Ark ETFs. But Simon if you want to talk about ETFs in general Max, the lowest cap stock I own is whatever pick you made. That’s the lowest cap stock so I’ll let you answer here.

Maxx Chatsko: So there is a lot of risk, right if you’re if you’re picking these like very small cap companies. I have taken very small, very, very, very important to say very small positions in companies with a market cap of around $150 million, which is very low. That’s like, by far the lowest I’ve ever gone. And you know, but it’s a little stake. And I think in the long run, if my early proto thesis pans out, that’ll be a good early position to have. And I can add to it over time as it gets de-risked, but it’s definitely very risky. And those companies are usually trading at a $100 million market cap or something like that for a reason. You know, it’s like the penny stock ideas, right? People say it’s at a penny now, or a 10th of a penny, what happens if it goes to $10? It’s not gonna go to $10, right, so you have to be realistic.

Dan Kline: Generally, stocks, the lower the price – it’s like wine, the lower the price, the lower the value, and it doesn’t mean you can’t find a good $5 wine. But if you just go randomly buy 20 of them, you’re probably going to be disappointed 20 times like you probably have to buy 100 to find a good one that used to be a game I played when I had no money and lived in New York and I found one Chilean wine that was usually around $5 that I liked quite a bit and was worth it. And I tried a lot of really bad wine to get there. We’re going to take the comment from Mike V. Maxx, you can see a little better than I can. So I’m gonna let you read this one. The big one, Sam. Yep, there we go.

Maxx Chatsko: Alright, Mike says it’s nearly impossible to “find the bottom so don’t even try”. If you own a stock with good fundamentals and is down a lot. Add more if you have conviction, add funds and funds available and don’t lose sleep over it. You don’t quote make or lose money. Similar to people that check the appreciation of their home’s value, it’s unlikely you would sell on a whim. Anybody want to take that one?

Dan Kline: Sorry no, that one’s all you.

Simon Erickson: That fantastic. That’s so insightful. Mike, that’s a great comment. That’s kind of like the foundation of long-term investing, right? We’re not trying to get it in and out. We’re trying not trying to make money in a week or a couple of months. We’re trying to compound wealth over long periods of time, it takes time to enact strategies for management teams to stick to their word and actually do what they’re trying to do out there. Doesn’t take just a short period of time. So that’s fantastic. Mike, you’re hired for future segments.

Maxx Chatsko: Yeah, and think about it. Like if you own a bakery, would you measure your bakery’s performance in like weeks or months? Probably not, right? So think of the businesses you own the same way.

Dan Kline: So Maxx, this happens in South Florida, where I live, I’m in Orlando at the moment, or Davenport, but I live in West Palm Beach, and you get out of market money. So a New York restaurant chain or a national chain will move into west palm, and they’ll open in October. And then November, December, January, February, and maybe even March will be blockbuster. Because we have snowbirds. We have a seasonal population. And they don’t do anything for the locals. There’s no specials.

Why would they have to have specials for locals because they’re busy? When the snowbird crowd goes away, the locals go, well I’m not going to that place. They didn’t treat me right during the season. And they invariably go out of business, the amount of national chains I’ve seen fail, when local places have courted a relationship with the people who actually live there. And those people go, Okay, now it’s not crowded, I’m going to go out to eat twice a week and eat at these places. So, you know, this is very much how you have to look at some of these things in the stock market.

We appreciate so many of you playing along. This is the only interactive show in the entire investing world. And it’s probably not true, but it sounds good to say it’s like it’s like every show that’s on now that’s live says they’re award-winning. And I’m like, I don’t really remember what award they gave to the to the WWE Thunderdome, but apparently, it’s award-winning. So we’re just gonna start handing out awards. We’re going to take a couple more comments here. But I wanted to get to one from David Strauss that’s in the doc, because I really think this speaks to mindset. And it’s a really, really important one. And I am sorry, Sam, that I keep putting you on the spot with these by going a little bit out of order. But if if that’s a tough one to bring it up, I can read it on my phone here.

I’ve been so conditioned to hold long term that now when I need to sell a few pieces to fund a kitchen remodel, I feel guilty about selling them off to do it. How do you get past that guilt, even though it adds value to a home and makes your wife happy. That’s why you’re investing. you’re investing so you can afford to do the things you need to do so if they home remodel is going to make your life better. We’ve talked about this with homes before it’s going to make your life better and you know what you do every day you live in your home like that is a good reason to sell a stock that you’re not investing just to win some magical scorecard. This isn’t a game. Simon you’ve had to do that, you know set sell stocks in order to pay for things that are important to you. which is which is

Simon Erickson: Dan and Maxx right? I gotta pay you guys right? It was actually something that came up this last year in a funding 7investing. I had to take some money off the table said all right, which stocks you know are going to come off of the portfolio. But again, because I knew that was money that needed to be out of the market that was funding something in my life that was very important.

Right now, I haven’t been stressed out this past week, Dan, I say that honestly that when there’s so much red in the portfolio, and everyone’s going, Oh, my gosh, tech stocks are selling off, this is terrible. I say, hey, the money I’ve got in there, I’m keeping in there for three-plus years. I don’t worry about that. Because I know that I’ve got funded for the things that I need to take care of. So hey, man, buy the kitchen remodel, make sure that your life is happy and let the stock market work for you rather than the other way around.

Dan Kline: And I am taking a little extra money and investing it but just a little because there are some opportunities. And I tell you, when I close on my new condo, you know, hopefully a little over a week from now, that’s the largest sum of money that will ever have sat in my bank account, and it will be there for roughly 12 hours. Do I feel bad about it?

No, when I’m sitting on the beach with perhaps an adult beverage in my hand, and you know, maybe some nachos nearby, I am not for a second gonna think, oh, if this money was invested in Tesla, like it would be making me this much money and like, sure it would. But the point of money is to enjoy. Is to do the things you want to do. So like, you know, do I take money out of my normal investing to fund a vacation? No. Do I set aside money to go on vacation? Absolutely. You know, part of the reason I’m investing is so I can make some lifestyle choices later in life? Absolutely.

We’re going to take one more comment from Stock Investor, and then we’re going to move into our finisher. Simon has been a trooper getting through this, and I’m gonna answer this first so you guys can can think about it. “Hey, guys, what’s your favorite earnings report released in the past couple of weeks”? I don’t remember the timing on it. But my favorite couple of earnings reports, the last two Apple earning reports have been like a greatest hits of success, like when you see a company and I have heavy Apple exposure in my 401k, not in my personal portfolio.

But when when you see a company say this is what we’re going to do. And they do it and it works across all channels, like usually you get a company going, here are the 10 priorities. We have an eight of them work and you’re excited. Apple was up double digits, I think more than 20% in every single category. Why is that important? Because one of their major goals was being less reliant on the iPhone. And you could argue they’ve achieved that Simon, is there an earnings report you particularly enjoyed.

Simon Erickson: There’s a lot of them going on out there, I was actually kind of impressed with American Tower. American Tower is doing exactly what it should be doing, which is consolidating assets across the world. So it just bought up a whole bunch of cellular towers in Europe and in Latin America. This is an oligopoly, there’s only a couple of players in that field that are able to do that and get even more attractive interest rates. So when people are saying, oh, interest rates are going up, you know, are you worried about a company like that? I’m not. I mean, this is one of the best capital allocators in the stock market. I like to see them taking advantage of their advantage out there and then putting some more money to work this year.

Dan Kline: Maxx Chatzco, I’ll let you weigh in here as well.

Maxx Chatsko: Yeah, I tend to follow stocks that are off the beaten path. So I don’t want to telegraph too much of what’s going on. But I did publicly mentioned on Twitter I bought, I started a position in Invitae, a genetic testing company. The market kind of went the other way on that. But I think you know, long term, I think this company is on the right path. They think they can grow revenue 60% per year for the next few years. They’ve a lot of irons in the fire different parts of the genetic testing markets, right. We think of it as one thing, it’s not. So you know, long term. I mean, I’m not going to bet against Sean George, you know, is it going to be volatile? Yeah, people love to hate it. People love the love it. It’s going to be volatile for the next few years. But I kind of like where it’s going. So I started positioned right after the earnings report.

Dan Kline: I own some Invitae as well. And that attests to the power of this team. Because it’s not a company I understand. It is one that I believe I heard about from you and Manisha Sammy, our former colleague and good friend. And it’s one where the argument that you made you know, in our personal Slack channel is just so compelling. You know that it’s absolutely, it’s absolutely just something I want to own and do I have big exposure? No, I don’t. But I regularly buy stocks that we talk about in our personal Slack channel. Because I trust this team. Yep. Mike Fee, you are welcome to join me for a drink on our faux beach. That is a weird thing in Central Florida where they just built like a sandy beach over like a lake that’s full of alligators that you can’t actually go into.

But I want to take one more comment before we close out here. Nick Steiger had a good had a good question, a good comment but I think was worth How do you condition your mind to not be emotionally affected by the numbers on a screen. I’ll give my thoughts quickly and then go to assignment and then go to max. For me. It’s remembering this isn’t a basketball game. It doesn’t really matter. There’s no timetable on it like I’m a big Celtics fan and the Celtics have been down by more than 20 some staggering amount like 22 times this year, and they won some of those games. Stocks don’t work that way. Like if I fundamentally believe in the company, and nothing has changed. I don’t care where its stock price sits on any given day, Simon.

Simon Erickson: Yeah that’s the perfect way to say it is, the numbers on the screen are just gonna go up and down on a daily weekly basis, more interesting is that that’s kind of the exhaust of how the car is being driven. Right, let’s find the right companies out there and get into the nitty gritty of some of the softer, things that aren’t so quantitative. About strategies and leadership and R&D projects and markets. And all of that is kind of neat. There’s a lot more to investing in my opinion than just kind of what the stock price tells you on a daily basis.

Dan Kline: Maxx, your thoughts here?

Maxx Chatsko: I guess the simple answer is turn off the screen. We’re surrounded by technology 24/7, you got notifications going off. I am militant about controlling my notifications. Nobody except for people on this team. And maybe some family members can get to me between the hours of 930 and 930. It’s like my quiet time. I don’t have social media on my phone, I don’t have investing apps on my phone, I just kind of disconnect, I unplug. And I allow myself to do that. So you know, again, if you’re oriented to the long term, it doesn’t matter what’s going on today or tomorrow or whatever.