Big Stories From the Past Week, Plus Your Questions!
May 21, 2021
It was a really busy week and the market was more volatile than usual. We’ll have much of the 7investing team on talking about what we make of the rough market for most of the week, the crypto crash, AT&T’s spinoff of WarnerMedia to combine it with Discovery, Target’s big earnings number, and much more. We’re also taking your questions and answering them live.
Sam Bailey 0:13
Welcome to 7investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.
Dan Kline 0:23
Good afternoon 7investors and welcome to the Friday the special 12:30pm edition of 7investing Now. My name of course is Daniel Brooks Klein. I’m the host of the program but I am very lucky. I’m spending my day with the 7investing team. Sam if you want to change the graphic, I’ve good Steve Symington. I’ve got Matt Cochrane. I’ve got Maxx Chatsko, I have Simon Erickson, Dana Abramovitz is gonna join us, hey, if Anirban wakes up, he could join us as well, that’s not that likely, it’s very, very late there.
So just to give some of you who are just tuning in a little idea of what our day is on the third Friday of every month at 10am we do a call just for new members. This is to orient them to the service to get them comfortable with the idea of buying stocks to talk about our philosophies. Then from 11:00am to 12:30pm. We do a call with our members, we had our highest turnout ever. What we do during that is we take questions about our picks about our recommendations about what’s going on in the market. It was a really exciting call. Today on 7investing Now we’re going to look at some of the big stories of the past week we’re going to talk about the rough week for stocks, the crypto crash, the Discovery (NASDAQ: DISCA) and Warner Media mashup, Target (NYSE: TGT) results.
We’re also going to take your questions but before we do that, I’m gonna go around the room I’ve got a bit of a little bit of a silly start to the show. I want to know what’s your guilty pleasure food or beverage? For me, it’s definitely cold brew coffee with salted cream cold foam I would drink five of them a day if it was good for me, it is not, so I don’t. Steve Symington you can go first
Steve Symington 1:56
Oh, biscuits and gravy, hands down like I judge breakfast restaurants like by their biscuits and gravy and if that’s acceptable I feel like the rest is but I will order that without shame or hesitation anytime I sit down at a table.
Dan Kline 2:09
Steve you got to come visit there is an amazing biscuit place in Celebration, Florida about 10 minutes from the home that I’m actively buying during this show. I’ve literally been DocuSigning. For those of you who are DocuSign fans (NASDAQ: DOCU). I have been DocuSigning all day cause we’re closing on a condo. Matt Cochrane What is your guilty food or beverage pleasure?
Matt Cochrane 2:29
Oh, it’s not even close. Domino’s Pizza.
Dan Kline 2:31
Oh come on. I’ve sat with you and had better pizza the Domino’s like
Matt Cochrane 2:38
Yeah, well that’s like guilty though.
Dan Kline 2:43
Maxx Chatsko. You’re in Pittsburgh. There’s some delicacies there. What do you have as a guilty pleasure?
Maxx Chatsko 2:50
Sour Patch Kids.
Dan Kline 2:52
Hard to argue with Sour Patch Kids a favorite candy of mine as well. Though there is an exact point where you’ve had too many Sour Patch Kids. Simon Erickson your thoughts here?
Simon Erickson 3:02
Oh Blue Bell milk chocolate ice cream Dan, I would have that all the time. I saw Daniel Delgado checking in from Sugarland, Texas. He knows what I’m talking about here in Texas. Best ice cream there is out there in my opinion.
Dan Kline 3:12
And Daniel also chimes in, beer and wings. Hard to argue with beer and wings. When I was a freshman in college. I took a class with Professor Doug Brinkley. He’s NBC’s White House historian he is a, I believe he taught at Rice for a while where Simon went, a very famous professor and I was the only freshman in the class and we met on Friday at an all you can drink beer all you could eat wings place. I don’t think you could do that anymore. And he took me aside he just said you’re a freshman. Don’t be stupid. So you know, I would sip a beer and eat a bunch of wings. I don’t think that’s allowed at college anymore.
We would love your questions and comments. We’re gonna get right to it. I’m gonna let Simon kick this off first. It was a rough week for stocks. But Simon that can be scary to see. But as long term investors, it doesn’t really matter, right?
Simon Erickson 3:57
Yeah, Dan, actually, we we took advantage of the volatility in the market. Right on our subscriber call we just had we actually we were talking about several companies we bought into because we see this as an opportunity. If you’re going from point A to B over a five year time horizon, does it really matter to you have the squiggles look in between? Or does it matter where you end up? And so we as long term investors, I almost feel like sell offs are an opportunity. And they’re your friend because you’re getting to buy your favorite companies at more attractive entry points. So as long as you’re a long term investor, don’t worry about the volatility. Look at look at the long term and see how these companies are actually performing.
Dan Kline 4:32
And Maxx Chatsko we saw a lot of growth stocks, really take it on the chin and a lot of them. It’s this idea that the pandemic is over. So now we should only invest in travel stocks. And I’ve seen a lot of money going into some really dumb places like the airlines are trading for more in general than they were pre-pandemic. I don’t like airlines any more than I did previously. But Maxx, do you think there’s a little bit of an overreaction to the so called end of the pandemic?
Maxx Chatsko 4:57
Yeah, I mean, we’ve talked about this before, but you know, I think pandemic accelerated the digital transformation of a lot of different industries, you know, that doesn’t go away because people can go outside and eat beer and wings when they’re freshmen in college, you know. So a lot of those trends are here to stay and that growth is real. That’s not going anywhere, the premiums we pay for that growth might decline a little bit, but three, five years out, that’s not gonna matter.
Dan Kline 5:21
That class, by the way, was the Music of Vietnam. I actually think we went to see some of the members of The Band perform as a as a homework assignment, I had a pretty cool college experience, as you might imagine. I’m Matt Cochrane do you want to weigh in on this one? It’s obviously probably been the week I’ve gotten the most messages about, what about this stock? are we worried? And I know, I see it as a purchase opportunity. How has your week gone? When it comes to the stock market?
Matt Cochrane 5:44
Well, I mean, look, it’s it’s a, it’s a weird time, right? No doubt. I mean, we’re coming through an like an almost unprecedented pandemic, the economy is kind of reopening. But it’s not like there’s an official like bell to ring to have it fully reopened. So there’s a lot of like, fits and starts to it, it’s like three steps forward, two steps back, as far as that goes. During the pandemic, a lot of stocks fell way too much, a lot of stocks probably ran up a little too much. So you got all this going on, it’s going to probably take a while to figure for the market to really figure it out. So you’re gonna see volatility, I mean, that’s normal, though. This happens all the time, as everyone’s pointing out, and, you know, look, the trick is to keep the, keep your eyes on the big picture, the longer term. And that’s what we do here.
Dan Kline 6:28
The 7investing philosophy is to buy good companies and hold them forever. And we say forever, we mean, a long time until your life event, until your thesis changes. People ask us all the time, will we tell you when to sell. And here’s the reality, if something fundamentally changes about a stock, so, you know, let’s pretend we own you know, the we own McDonald’s, and McDonald’s (NYSE: MCD) comes out and says, we’re going to go all plant based, we’re gonna get rid of all of our meat. And we might go, oooh, that is a fundamental change to our thesis. We don’t necessarily recommend McDonald’s, I’m just picking a random company out there. That’s when we’ll tell you to sell if something fundamentally changes, maybe the the CEO switches positions, and the new CEO has radically different ideas, and we don’t agree with them, even then we might let it play out a quarter or two, because that’s what we’ve been wrong on in the past.
But a topic number two here is we’re going to talk the crypto crash. And that sounds more daunting than it is, but Steve Symington I’ll throw it to you what happened this week in crypto and give us some insight as to why
Steve Symington 7:29
Oh, goodness. What happened this week in crypto is something we could dedicate a couple of podcasts to. And actually, Simon and I did we spent some time talking with the folks at CryptoEQ, our partners CryptoEQ.io, about that. But man, we’ve seen some extraordinary volatility in cryptocurrencies in general, and crashes and rebounds. I think at one point Bitcoin was down more than 30% in a single day earlier this week. And everybody’s panicking and then Elon Musk tweets that Tesla (NASDAQ: TSLA) has diamond hands with the emoji since basically indicating, nope, we haven’t sold the despite everybody’s kind of assertions otherwise. So I think even now, you look at the price of Bitcoin it went from, where was it? Where did it peak? Simon was it $52,000, $60,000
Simon Erickson 8:20
I think it was over $60,000 for a second
Steve Symington 8:22
Ya, it was over $60,000 for a little bit. And I think now it’s at like $37,000 and but it’s it’s it’s wildly volatile. And that’s sort of punching some holes in people’s assertions that this is a stable coin of value, you know, sort of sort of measure of value and people are kind of figuring out which alt coins they want to invest in your Dogecoin and, and little things like that. But, wow, what a week, crazy volatility. There’s also speculation that you might have sort of a pullback in crypto that might coincide with sort of building a base and rebounding and growth stocks as some of that money funnels out and people think maybe crypto trade is over. But man, this volatily’s pretty nuts and it’s it’s not terribly unexpected, but it’s creating a lot of stress. And, and, and I think it was kind of necessary anyway.
All right, I’ll throw to Simon in a second here. But I just want to point out two things. First of all, our partners at CryptoEQ saw this coming, they hit this number pretty directly on the head. And if you’re a member, you have access to Simon and Steve doing a monthly podcast on crypto, we don’t make crypto picks, but we certainly do provide some information and I don’t remember what my second point was gonna be. So Simon Erickson, your thoughts on crypto and volatility?
Simon Erickson 9:42
Yeah, absolutely Dan. You know, I think that the first thing we have to keep in mind here is who’s the investor base in cryptocurrencies right now? It’s individuals. Its retail investors. We do not have a very established institutional base of people who are buying Bitcoin we’ve seen Elon, but put $1.5 billion on Tesla’s balance sheet. We’ve seen other corporate corporations think about putting on their treasuries. But for the most part, it’s people like us who are buying into cryptocurrencies all over the world. And of course, when that happens, you get these wild volatile swings, you’re not going to see as much of a volatility swing if you start seeing companies take billion dollar stakes all at once and sit on it and park it on their balance sheet.
But the thing that we have to keep in mind right now, and again, I’m not the cryptocurrency expert. That’s why we hired CryptoEQ to chat with us about these podcasts. But I think that the real important thing is that this is an unregulated market right now. You’ve got Elon Musk out there saying that Dogecoin is going to speak with their developers and Dogecoin’s price goes up 40%. And then he goes on SNL and he says Dogecoin might be a hustle and Dogecoin drops 40%. This is extreme volatility in a way that’s completely unregulated. When Elon said he was going to take Tesla private for $420 a share that cost him the chairmanship of Tesla, the SEC brought the hammer down says you can’t do that. cryptocurrencies are still kind of a wild west, you can see these vast fluctuations just on popular opinion, because the investors in this are individuals.
And so I think, Dan, what we’re gonna see with crypto, there’s a lot of interest from institutions, you might be able to buy this in retirement funds in the near future as crazy as that sounds. But to get to that, there’s gonna have to be a lot more regulations and a lot more stability. And that’s going to mean less volatility for the price like we’re seeing right now.
Dan Kline 11:25
I remembered my second point and it’s tune out Elon Musk. Elon Musk is trolling you, or manipulating the market. We don’t know what he’s doing. He might just be having fun with how much power he has. I think if I had that much Twitter power, it would be tempting as well. But I would I don’t put a lot of stock in what he’s saying. I also think of Elon Musk says he’s holding that might mean he’s selling, like you need to be really, really careful. Maxx Chatsko. You want to add in a little bit on crypto here?
Maxx Chatsko 11:52
Yeah, I think we’re giving a little too much credit to Elon Musk. In the last week, a lot of the volatility in Bitcoin’s been from, all the crypto markets, has been from regulatory decisions from China. You know, they made some restrictions on what financial institutions can do with crypto. Just today, they said they are interested in limiting your ability to mine some of these tokens. So that’s had an effect too, maybe a larger effect than anything Elon Musk is tweeting.
Another thing to keep in mind, like Simon was saying, you know, with institutional ownership is just not there. We’re kind of building that base. I think that’s made some really big strides in the last year for sure. But still early in the technology is still very early as well look at like the theory of network, right, it’s still proof of work just like Bitcoin, which means mining, but they’re eventually moving and transitioning to proof of stake. So you’ll be able to stake tokens into pools, and you’ll earn income based on the amount you stake. So it looks more like an income stream, more like a dividend stock. And you you know, you make the whole network work more efficiently. I mean, that’s kind of more of the idea of the technology with blockchain, and enabling all of these things with like, open decentralized system. So we’re still not even there yet with Ether, which is the token for Ethereum. There’s other ones as well. So you know, Bitcoin doesn’t even have any plans to move to that. So this is still gonna be volatile, and the technology is still evolving and maturing.
Dan Kline 13:07
We’re gonna take a question from Alfredo Reyes. Soon about crypto. But before we do that, I want to welcome Dana Abramovitz to the program. Dana, I know it has been a busy, busy day, but we opened the show by talking about our guilty pleasure food or beverage. I’m not gonna hit you with it right now. I’ll hit it after the promo. But why don’t you think about it? I answered cold brew coffee because I am a coffee addict. We had lots of great answers there. So I’m gonna come back to you soon. But I just wanted to welcome you. And Simon before we take Alfredo’s question, you had something you wanted to say a little bit of a congratulations there.
Simon Erickson 13:41
Well, yeah, I really love this comment that Alfredo put up that says that we’ve inspired him to work towards his Certified Financial Planner degree that that is, that’s fantastic Alfredo, go get ’em, man. That’s, I love, please, anyone let us know. And when we’re empowering you out. That’s exactly what makes our job so rewarding is to see people say hey, I want to be even more involved as an investor. Hey, I want to go out there and get, you know, my certification for CFP or something like that. Way to go Alfredo. I’m very proud of you. I’m very excited for your future. Thank you for posting that.
Dan Kline 14:12
Alfredo also asked us, “Will crypto get regulated in 2021”. Steve Symington, you can take this, I have no idea.
Steve Symington 14:19
I won’t speculate too much on this. I’m not sure it’s gonna happen before the end of 2021. But I will say that in our CryptoEQ podcast that we recorded and published recently to the 7investing site if you’re a member you have access to that we did talk at length about the potential for regulation in cryptocurrency so that was actually published on May 15th. So about a week ago, if you’re 7investing member, check it out. You can find it on our homepage or find the latest CryptoEQ podcast if you’re not a member, you can check us out at www.7investing.com/subscribe, you can join us, and yeah, so but we did talk quite a bit about regulation in that podcast
Dan Kline 15:00
We’re gonna talk about AT&T (NYSE: T) spinning off Warner media and combining it with Discovery+, you already got my thoughts. I am not a big fan of this deal, to put it lightly. I thought Discovery had a wonderful $4.99 product in Discovery+, and I’m not sure what this addition does other than maybe free up some back-office jobs?
Matt Cochrane, you did not get a chance to weigh in here. And I know streaming is a space you cover as well. How did you feel about this deal from a streaming media point of view?
Matt Cochrane 15:28
So I actually I think I liked the deal more than you. Now granted, a lot of that it’s just because AT&T was unwinding, like a big mistake when it acquired Time Warner a few years ago. Um, look that and that was always problematic. I think, like, you know, the problem with AT&T acquiring Time Warner is that, like, I just felt like their core businesses were not strategically aligned. You know, AT&T competes for customers, like it’s a zero sum game, right? Like with Verizon (NYSE: VZ) or T-Mobile (NASDAQ: TMUS), if you’re an AT&T mobile subscriber, you’re not a Verizon mobile subscriber. But when they bought Time Warner, you know, like, the best idea for that content is to get into as like, as many hands as possible. And but, what would have been best for AT&T though, would be to, like, make it exclusive to AT&T as a way to gain customers. And so like, there’s the strategies, just never, I just never felt like they lined up with each other.
Um, so I think it’s good for AT&T, um, that, you know, they can they got rid of some of there I mean, they had, like, close to $200 billion in debt, and I think they’re sending over $40 billion of that debt with a, you know, into the new entity. So it’s, I think it’s good for AT&T. As far as Discovery and the new, the new entity, I think it’ll give them more bargaining power with like, with, with the cable networks or with the cable carriers, um, you know, and we’ll see, but I think, I think like Disney (NYSE: DIS) has shown like, like, I think the what we’re seeing were is like a consolidation, a lot of these entertainment and content companies. And the more content you have, I think, the better your chances are of either making it as your own streaming bundle or with the cable companies.
Dan Kline 17:17
I’d argue it’s a little bit like the Long Island diner, where the menu is just too extensive when you get there and you’re like, I don’t know, like, I just want some pancakes. I don’t need lobster thermidor like.
Matt Cochrane 17:27
Well, so like, so but look at it like with like the Disney bundle they’re trying to sell right with like Disney+, and Hulu and ESPN+, like that’s a lot of content. And, you know, to bundle it all together. If you can, like if your wife likes Diners, Drive-Ins and Dive, or one of those, like home improvement shows that they have. And you know you like an HBO series or something like I can see, like, I can see like more households buying into that kind of bundle, but I don’t know, we’ll see. But I think it’s good for AT&T. So I’m, like, you know, I don’t know how many. I don’t I don’t think I ever ran into too many Discovery shareholders before this. So but like a lot of people owned AT&T for the dividend and I think it’s good for AT&T, they can focus more on their, their knitting now, you know,
Dan Kline 18:15
We’re just sweeping under the rug, the $20 billion mistake they made not counting the giant DirecTV mistake like
Matt Cochrane 18:23
Oh, they made so many mistakes. Oh, no doubt. And it sounds like to me unwinding those mistakes is is a good thing, though. So you know, I mean, it better to admit those mistakes and try to move on then like to keep doubling down. So, you know, like, yeah, they made a lot of mistakes. I think it was a mistake, like I said, for AT&T to ever acquire Time Warner just like it was a horrible deal. They put them in like, I mean, these kinds of companies already have so much debt because building out like, like their their mobile networks and everything. It’s very capital intensive. So AT&T already had a lot of debt that just put them in more debt. But unwinding these mistakes, I think is better than holding on to them.
Dan Kline 18:59
Yeah, AT&T is not a business I like I have to admit, I’m going to throw the Dana for her guilty food pleasure in a second. But one of my guilty pleasures, is watching shows where someone runs a restaurant poorly and then either Gordon Ramsay or Robert Irvine shows up and yells at them for an hour. But the part of me that was always amazed by it is they’ve never even like bought a book on like how to run a restaurant like Dana, you run a business. I’m assuming there was some prep work like you went out and like looked at how like point of sale systems work or, or you know, how you pay rent or whatever it is. And there are these people in the restaurant business that I don’t think Google like how to price your food. Like it amazes me. Do you think of this as a business owner?
Dana Abramovitz 19:42
Yes. Yes, all the time. Yeah, no. And you know, but you say that right. And so, you know, like, I make mistakes all the time. Right. And, you know, it’s just a lot of times I have to fly by the seat of my pants and you know, it’s kind of like In a restaurant, you know, and you know, the pandemic didn’t help. So there’s a lot of change. And so even, you know, like, I have a business plan. I haven’t seen you know, I haven’t been able to stick to that business plan and you have to be able to kind of evolve. As you know, things go just because you have expectations and sometimes they aren’t met.
Dan Kline 20:25
I feel like “the pandemic didn’t help” could be a T-shirt. Dana before we talk about Target (NYSE: TGT) results, and I’m gonna let whoever wants to weigh in on that weigh in. Dana, what is your guilty food or beverage pleasure?
Dana Abramovitz 20:37
I love ice cream. I do. I love ice cream. I can eat ice cream at any time. Like if I’m not even hungry. I can eat ice cream.
Dan Kline 20:48
The lack the lack of good ice cream available here in Florida, being from New England, is one of my complaints. We we have all the ingredients for ice cream, yet we don’t seem to put it together well. Dana, feel free to comment there.
Dana Abramovitz 21:01
So you know, I moved to Texas. Hey, I moved to Texas from California and the ice cream there is just incredible. And I just haven’t found ice cream that I love here in Texas. So
Simon Erickson 21:15
Blue Bell Dana, we got to send them some Blue Bell we’ll ship some out to Florida if it doesn’t melt by the time it reaches you Dan.
Dan Kline 21:20
For the record. Avocado is not an ice cream flavor. I don’t care what Tom Brady has to say. Target had a massive jump in same store sales were up 27% these are pretty similar to Walmart‘s (NYSE: WMT) numbers. Matt, I’m going to ask you, are these pandemic driven? Or are these partly driven by all the work Target’s done at building out their owned and operated brands and improving their stores over the past year? And I’m sorry to throw this to you, but I don’t know who else might be able to comment here?
Matt Cochrane 21:49
Oh, no, no problem. Um, I it’s both right. Like, I think we’ve seen like, in the pandemic, all the companies that were that had been investing for the future, we’re we’re much better positioned than companies that weren’t, and I you know, I think Target’s results are, are a result of that they, you know, they’re their deals with, like to improve like delivery. And like all kinds of things like the investments they’ve made over the last year or two, like positioned them well, for the pandemic. So I think it’s like a good mixture of both.
Dan Kline 22:19
Matt, I tend to agree with you, but I think we’re gonna see something. And, Steve, I want you to weigh in here, because some of the tech companies are going to deal with this. You have a lot of stocks that reported really good numbers, and analysts short term analysts came out and said, Hey, I don’t think they’re gonna be able to equal these numbers. And maybe they’re not, I don’t think they’re gonna have 27% year over year growth. Is this a case where we really have to start pulling out like 2019 comparisons?
Steve Symington 22:48
No, um. Yes and no, I guess I wouldn’t necessarily blame it. Maybe some of it was the analysts who were just kind of like mehhh, like amazing results. And they’re like, this is all right. Like, it seems like the whole the market as a whole wanted a lot more in order to kind of merit any sort of sort of pops. And we saw a lot of sort of underwhelming or even negative responses to otherwise perfectly great quarterly results. And part of that, I think, was also the the broader pullback in high growth names, and some of these these big high fliers that that kind of outperformed last year, and into sort of more cyclical names and economic reopening plays. And, and I, I’m not really that concerned, you know, I stayed invested along the way, it’s not like I tried to trade the tops and sell the tops and bottoms as we went, because that’s so extraordinarily difficult to do consistently. But I just sort of take those those short term analysts views and in short term market views in general with a grain of salt.
Dan Kline 23:56
So over the next year, you’re going to need to cover earnings with nuance. And that is not something your mass earnings places do. Right. Reuters is not applying a lot of nuance to it. And I liken it to when I was in the family ladder and scaffolding business. And we might make a seven figure sale to, we would sell scaffolding that we didn’t make and pass it on to the US government. And they would do nuclear sub cleanings. And at the end of it, the scaffolding got thrown away, and we would only make like 7% to 10% on it. But all we did with that sale is facilitate the delivery, we never touched the scaffolding, we never actually handled the material, we just collected a check for being the middleman and we would put that on our results was sort of an asterisk because it wasn’t repeatable the next year. We might have five of those sales in one year, and none the next.
And I think you’re gonna have to really look carefully at all these results because we’re also going to be lapping the cost of COVID-19 mitigation, there was a lot of expense, there was extra worker pay. We’re also seeing a worker shortage. So salaries and hourly rates are rising. There’s gonna be a lot of nuance and a lot you have to look at and I’ve talked about this before, you’re going to hear a lot about inflation and there will be some inflation. There’s also going to be some supply chain driven price increases where Yep, we all want this. It’s out and we saw it last summer with with pools. You know, the the above ground pools you couldn’t buy one they were selling on eBay for $1000’s of dollars. You couldn’t buy a hot tub. They were all over eBay for $300 to $500 for old used ones, those went up to the $1000’s. You couldn’t buy an RV. That’s not inflation. That’s a change in demand patterns.
We are going to take your questions and your comments in the next segment. Sam, we’re going to share some of the Twitter ones from the dock. But first Daniel Delgado says “try night food ice cream, the ice cream is really good. It’s sleep technology ice cream”, I have no idea if that’s a true thing. I would love to have ice cream that put me to sleep. That sounds like a much better choice for how to go to sleep at night. I’ll have to look into that one Maxx, maybe.
Steve Symington 25:57
I thought that was ice cream, like Denver’s got that right, like Colorado general or Oregon, you know.
Dan Kline 26:04
Is that what’s involved in the ice cream? That would make a lot more sense. Those are, of course, legal cannabis states, but Gross Margin asked us and Sam, if you can share this, that would be great. “Topic might be too broad, but given the recent turmoil in the growth segment of the stock market, I think it would be a good time to revise some basic growth stock valuation principles. I think a lot of your listeners would appreciate your guys taking that matter”, Maxx, I’m gonna throw to you first. And then let Simon weigh in.
Maxx Chatsko 26:31
Yeah, I mean, we’ve I’ve talked about this, I have a different take, I think on some of it, like the recent pullback, or even with, you know, a company releases good earnings, and the stock kind of just doesn’t do anything doesn’t move. I think you have to realize a lot of expectations already baked into a lot of valuations. So that what can we possibly learn for the rest of the year? that’s going to change the direction of that. And, you know, valuations have been at a historic a very high premium in recent, in the last year. And I think as there’s concerns with inflation, or what the Federal Reserve policy is, that is going to eventually kind of start to make those the premiums we pay for valuation decline over time. You know, I think it really is kind of that simple. Like, the reason we had this great stock run up in the last year was 85%, because of what the Federal Reserve did. And that’s probably going to be true for the next 24 months. It really, I think, is that simple to me.
Dan Kline 27:26
Simon, I think we’ve obviously seen a lot of companies sort of jump five years ahead in valuation, and they’re giving some of that back. What are your thoughts here?
Simon Erickson 27:34
It’s an interesting question, because it’s kind of is a short term nature of this. And then there’s a long term angle to it as well, right? So everybody likes to talk about price to sales multiple, as a preferred multiple for tech stocks. I don’t know how I feel about that. I understand that it’s common, but there’s so many nuances to cloud computing companies, and how they recognize revenue and all these other things, whether they’re doing it rateably, rather they’re doing it upfront through a license, I mean, this, there’s a lot of nuance to the numbers.
So first of all, I think that there’s kind of a recalibration in the market of tech stocks. You’re not just you know, selling something upfront and recognizing the license, you’re spreading it over a month to month basis for a lot of these cloud companies that have sold off lately. But then on the other end, that’s a short term consideration, Dan, I think there were kind of re-understanding how we should be valuing these companies. And to be fair, institutional investors are doing the same thing and their price targets.
The second piece. And I’ll be talking with Paul Teich, here very soon, who is who’s kind of an expert in semiconductors and and kind of everything going on the tech world. But I think that, and Ben Book just chatted with me to from GigaOm, there is a digital transformation underway. That is in the second and third inning right now. It is very, very early and how companies are moving to the cloud and starting to adopt new technologies. And so for us to say that price to sales or price to billings or price to cash flows, or whatever metric you want to use, as the denominator is is overvalued right now. And we need to re correct our expectations, I think is missing the bigger picture being only in the second and third inning, when a lot of this hasn’t even taken shape yet. I mean, if you grow revenues 10x in the next 10 years, is it okay to sell at a price to sales multiple of 40 times today? Or a price to billings of 30 times today?
I mean, things like this, we kind of take for granted that we haven’t even gotten started on these trends. And so I really am more interested in things like, you know, cash conversion, how are they actually capturing cash flows out of these contracts, that they’re signing dollar based retention rates, you know, how much are they growing at existing customers that they have? billings growth just at the top line, I mean, things like this, we’re talking about tech companies. I think it’s worth the premiums that we’ve been paying, even if there’s some short term corrections, because as a five year plus investor who’s very interested in this space I don’t worry about if it moves around a little bit in the short term. I’m looking 5-10 years out and there’s still plenty of opportunity in my mind.
Dan Kline 29:59
It is very hard to maintain a long term mindset when you see things going down 20%, 30%, 40%, or 50%. That is why we are here for you. I want to take a comment from Stock Investor not not necessarily going to take it in the direction he wanted to go. But he says, “Would you rather own Waste Management (NYSE: WM) with a PE of 38, or Etsy (NASDAQ: ETSY) with a PE of 47. So I actually think in a really strange way, these are really similar businesses. Waste Management is literally a waste management company, and it’s not something you’re likely to change. So they have a pretty big moat against competition. Etsy has a very large base of creators, and it will be very hard to disrupt that. So I think both of those companies, and I haven’t dug into the financials on either one. But I think both of those from an attractive point of view, are very, very hard to compete with.
Matt, if we started, you know, “Mattsy” tomorrow, and it was, you know, your goal was to build that base of creators, I don’t think you’d be able to do it. I’m not sure there’s enough people out there. If anyone else wants to weigh in, wave their head, I just, I just felt the need to make a comparison to two companies Waste Management at Etsy that have never been compared before. Steve Symington your thoughts here.
Steve Symington 31:06
I would venture to say that for a company still relatively early in its growth stages that arguably enjoys more opportunities for operating leverage. PE ratio might not be you know, sort of, we might be talking about apples and watermelons, right? When you’re comparing the two. So I think there’s maybe better ways to evaluate that. But if you’re saying would you rather own Waste Management with the P 38 or Etsy with P 47. I’d say maybe look at some different valuation metrics, but Etsy at 47 makes a lot more a lot more sense to me when we’re talking about financials so.
Matt Cochrane 31:43
Yeah, and a lot of it depends on your investing goals. Right. So like, I think these two kinds of companies might appeal to very different investors, if you’re an older investor, and you’re looking for a very stable, mature business with income, like Waste Management could be a great way to go. Yeah, like, I mean, like they have long term contracts with municipalities to cover areas, you know, a little very little competition in a lot of areas. So that’s a great company. If you’re looking for income or more stable business in your portfolio, and Etsy, probably a great company, if you’re looking for a growth, a growth stock, you know, like, like great growth numbers out of Etsy, you know, they’ve really captured a niche, and a fantastic business, but it like could appeal to very different investors, depending on your goals, you know, or if you’re looking for a diversified portfolio could easily fit into the same portfolio, but it depends on your goals,
Simon Erickson 32:34
Yeah totally agree Matt. Steve, isn’t he the one doing a lot of machine learning on the platform? They were looking at all the signals and kind of connecting the dots.
Steve Symington 32:41
Yeah, Etsy’s got some really interesting, interesting AI experimentation in there. They’re kind of they’re able to dig into a lot of the data they have with with cloud and big data. So I’m very intrigued to see how they kind of leverage that in order to improve their business. But yeah, Etsy’s artificial intelligence efforts are kind of impressive, so
But yeah, great point, Matt, about different goals for different investors. I think last I checked, Waste Management’s got it. It’s like a 1.7% dividend. You know, so for income seeking investors, who want a steady-eddy stock, Waste Management’s quite remarkable. But yeah, Etsy’s much more exciting for me, but that’s because I’m an artificial intelligence specialist to make small cap growth stocks, and I’m relatively young. So that’s how they work.
Matt Cochrane 33:30
Waste Management from my hometown, Fort Lauderdale started with one garbage truck. Wayne Huizenga back in the 60’s.
Dan Kline 33:37
Good. Good to see that Wayne Huizenga did something right. He was not a great NFL owner. He owned the Dolphins for a while and I I don’t think they ever won that when he was the with the owner. We’re gonna take a couple more questions. Matt, you can weigh in a lifelong suffering Dolphins fan.
Matt Cochrane 33:53
I would just saying about Wayne Huizenga like he took three companies public and like Waste Management, Blockbuster, and Auto Nation, a great entrepreneur. used the same acquisitive roll up strategy took a fragmented market and a great businessman. Maybe not a great football owner, though.
Dan Kline 34:13
You bring up Blockbuster. I wanted to talk about this. This is not related to the show. But did anyone notice that Redbox went public? This to me is the dangers of how easy it is to go public through some of these alternative methods to an IPO. Redbox is the company where you go rent a DVD like in front of CVS. This seems to me like cashing out on a legacy business and and basically, duping investors. And I don’t want to use that word, because there’s obviously an underlying business there as well. But this is not a growth business and probably not where you should be infatuated.
I kind of wanted to mention that because during our members call, we had a lot of people asking about SPACs. And I think it’s very important to not invest in a SPAC just because it’s a SPAC, like that. That I think is something we see how quite a bit, we’re going to take another question from our Twitter fans. I’m going to apologize first to Andrew Holder, Andrew, we’re going to push your question to Monday I only copied half of it into the dock. I don’t think it works as well without the graphic illustration you provided. So we’re only going to we’ll take it on Monday’s show.
But a Lucid JP asks, “competition between Mercado Libre (NASDAQ: MELI) and Sea Limited (NYSE: SE) in Latin America will Sea become a serious threat?” Boy, I have a hard time believing you’re gonna be able to unseat Mercado Libre, Simon Erickson, your thoughts here.
Simon Erickson 35:31
I agree. 100% agree, Dan. These are regional monopolies for e-commerce. There’s just too many regulations and too established of a user base. I mean, like this is kind of why you see Alibaba (NYSE: BABA), you know, and JD.com (NASDAQ: JD) the kings of e-commerce in China, you see Amazon (NASDAQ: AMZN), the king of of e-commerce in the United States. I mean, like, and then Mercado Libre down in South America, Latin America, too. I mean, it’s very difficult to displace the leaders, not only as the investment side of it, you got regulations, you’ve got different cultures, you’ve just got so many, it’s so challenging, and then you got to deal with the government too. And you know, they’ve got different expectations of foreign companies, I would always bet on the domestic company, for e-commerce. So I would think it’d be very difficult for Sea Limited, in my personal opinion, to displace Mercado Libre in South America.
Dan Kline 36:18
We are, we appreciate your questions, we appreciate your comments, there’s more in there that we are probably not going to take that’s never because we don’t love you. It’s because at some point, we have to stop the show, and we are recording, about half of our pitches. That’s when we pitch each other on what our stocks are for the next month. And these are 20-30 minutes with back and forth with questions with people pushing back. We then on the 8th of the month, make those public for members so you don’t just get our write up as a member, you also get sort of all of our thinking and what everyone else’s objection was. So if you’re not a member, you should join us at www.7investing.com/subscribe,
But for the homestretch, I’m going to go around the room and I’ll go first here, and it’s “what stock were you most wrong about?” This haunts me, but for a long time, not in the bankruptcy era, but pre bankruptcy I was very bullish on JC Penney, when Marvin Ellison was running JC Penney, and he was making all these great moves. I thought, like putting appliances in when Sears was leaving the market, we’re adding Home Services, we’re adding toys. What I didn’t really look at is the execution was pretty bad. And there wasn’t a strategy to actually get people into stores. And if they did get them into stores, they did not see a great setup. So it did not work. But I was a, I didn’t own it. I didn’t recommend it. But I personally advocated for it and I was startlingly wrong on it. Steve Symington, what stock did you get the most wrong?
Steve Symington 37:48
Oh, man, I feel like the jury could still be out on this, but I’ve owned Under Armour (NYSE: UA) for over a decade, and they’ve had some, they’ve just had a rough decade. Right. And it’s sort of been one of those stocks that outperformed pretty hard early on, and then it just had misstep after misstep. They just kind of resold some of the big mobile acquisitions they made, you know, they spent more than half a billion dollars on acquiring mobile apps and stuff and, and then less than savory sort of culture practices and and, you know, so I, I’m a heck of a lot less bullish, I still own a few shares of Under Armour, but nowhere near where I did, because I’ve kind of pared that back. But you know, there’s, there’s a potential for them to rival Nike over the long term still, but I feel like that’s one of those stocks that I’ve kind of like, pulled my hair out for several years now.
Dan Kline 38:46
I’ve owned several Under Armour shirts, but no stock. Matt Cochrane, your thoughts here?
Matt Cochrane 38:51
Where to begin? There’s a lot, 3D printing and FINRA, but I’ll talk about Kinder Morgan (NYSE: KMI), it was a pipeline company, you know, Kinder, the CEO, like promised like, he was gonna raise the dividend like by 10% over like several like every year for several years. And you know, it already had a good dividend yield. This was back in like, 2015 I bought into it, it was probably about $35 it went up to like about $45 like, almost right away, I felt like a genius. And I sold it at about $18 a couple years later, um, and like a lot of things like I did wrong like one I underestimated like, how much of its business was tied to the price of oil like, even though like I thought, well, it’s a pipeline and it just gets paid by volume. Like if if the oil companies can’t pay the pipeline if they’re not making money well, if your customers can’t pay you then you have a problem. You know that there was a lot of mistakes I made like its balance sheet was a mess, like it did a corporate restructuring. So a lot of things but like Kinder Morgan.
Dan Kline 39:53
Maxx Chatsko I know you make very few mistakes. You know you’re a millennial. Millennials don’t do much wrong. Which stock did you get wrong?
Maxx Chatsko 40:01
Make plenty of mistakes, I know it’s hard to believe, because I’m so perfect. I think one I’ve made a big mistake on was Fluidigm (NASDAQ: FLDM). Of course we all know Fluidigm. So it’s a niche laboratory hardware company. And it makes things for single cell analysis, very niche, but very important using an increasing amount of research. And what I didn’t quite understand was how difficult the lab hardware business can be, it’s very hard to scale very hard to generate consistent recurring revenue and profits. So you have to sell the machines, it’s a one time piece of revenue generation. And then the idea is that you’re going to generate revenue continuously from the machine, because you’re going to sell the scientists what they need to operate the machine. So that’s the recurring revenue that has to come in. But these these machines were just too niche. And it kind of got caught with different budget decisions and academia and companies and now there’s other things that maybe kind of do a better for cheaper, and it was just a big mess. So I think I recommend or any recommend it, but I was writing about it at the time. years ago at like, $12 a share. Right now. It’s at like $5-$6 a share. I think so didn’t really work out. I didn’t understand all the nuances of that business.
Steve Symington 41:09
Maxx, I feel like that’s the first time “of course we all know Fluidigm” have ever been spoken like word were ever uttered.
Dan Kline 41:16
I was, I was, about to say can any one of the team verify that that’s not a company Maxx made up because I have never heard of it. If he told me it was Fluid Dine, and it was you know, eating pods for people who have the flu, I would have believed that.
So that is to point out that we don’t get everything right. But here at 7investing, we are open about our mistakes. You can look at our scorecard and see where we get it now. Look, we are making picks based on the long term. So it’s not that important where they sit at any moment. That being said, we provide our members with full transparency.
Mike Fee, we appreciate your comment on on Sea Limited and yeah, counterfeiting is a problem for any service. It’s actually been a pretty big problem on Amazon. It’s one that they’ve fought but maybe not fought as hard as they should. It’s a problem around the world. I talked earlier about going to the Bahamas, and in the Bahamas, you can walk in and buy a you know, a Molex or a Pucci or, you know, any of your you know, some Mikey sneakers, like whatever you want, at a lot of different stores. So I think counterfeiting is not unique to any one part of the world or any one platform
With that. It has been a long morning for us, it is time to hit our finisher. Sam Bailey, thank you for bringing it up. It’s been a long morning for you too. “Is Bitcoin a good investment?” 38% of you said yes. 33% no. 27.8% said I don’t understand it. That’s where I fall as well. Simon Erickson. Is Bitcoin a good investment?
Simon Erickson 42:44
Well, this is a skewed poll, because the actual answer Dan is see I don’t understand it. Even the experts in the field, you know, this is such a mystery of how it’s going to be used and the economics and what it’s worth. Mainly when you talk to experts, you know, there’s so many uncertainties about Bitcoin. I personally think yes, I think there is something to this, I think there’s a lot of headlines right now that are pointing out all Bitcoin’s price has fallen. And, you know, there’s a lot of reasons to hate it. I think that there’s a bigger picture for cryptocurrencies and their usage and their value and all of that it’s, it’s worth paying attention to it. No doubt in my mind,
Dan Kline 43:15
Just because something may go up or may go down doesn’t mean you have to invest in it. There are, you know, look, I if I’m in Vegas, I will occasionally place a wager on a sporting event, but I’m not betting on every sporting event, you don’t have to own every form of investment. Steve Symington. I’ll give you the last word on this because you are also part of our podcast with CryptoEQ, which is available only to members,
Steve Symington 43:39
Right. Maybe I’m skewed as well, but I’m right there with Simon, I would say yes, but at the right price. You know, I if I see Bitcoin rallying, you know, doubling in in a month, and it’s trading above $60,000 a coin, maybe not stepping into it, but when it’s down closer to $30,000? I might do that. And it’s very volatile. And you have to expect that but I think over the long term, you know, I think your your, some of your your big Bitcoin bulls end up being kind of proven correct. And I think it will prove to be a pretty decent investment over the long term.
Simon Erickson 44:13
And I might chime in to Dan just with one final comment is keep an eye on the institutions here. You know, we always have been talking about Bitcoin in terms of just unleashing it for the public markets. Pay attention to if you start seeing this approved for fun, right? The Fidelity Retirement funds, the Schwab Retirement fund, if institutions who have got built 10’s of billions of dollars in each of those funds, get approved to start putting Bitcoin in there as a replacement for cash as a store of value, then the answer is definitely yes. Yeah. Because then there’s no been there’s no floor on there, that is gonna be a lot higher than what it is today.
Dan Kline 44:46
We are not allowing Maxx to buy any Bitcoin because he will lose his credentials. My favorite Bitcoin story is the people who back then it was worth nothing like us like 10 Bitcoin’s to buy a pizza and now that would be worth you know, $300,000
Matt Cochrane 45:02
Saturday! Bitcoin pizza day is Saturday to mark that anniversary I think it’s been 11 years.
Simon Erickson 45:08
How many Bitcoin Matt? how many, how much was paid for that pizza?
Matt Cochrane 45:11
It’s like 1000 Bitcoin I think
Maxx Chatsko 45:13
It was a lot
The value of that pizza is now like $500 million.
Matt Cochrane 45:19
[Matt Cochrane Joke] Do you remember the story about the kid asked his dad for $10 worth of Bitcoin and the dad goes $9.67 what do you need $10.52 for? Volatility.
Steve Symington 45:34
That’s fantastic. I saw a Bitcoin ATM today. By the way. When I was driving, it was it was outside of a convenience store. It’s a Bitcoin ATM in Missoula, Montana. I’m like, Really? So yeah,
Dan Kline 45:45
I’ve seen a cupcake ATM, doesn’t mean I’m going to invest in it. That brings us to the end of the program here. If you’d like to get in touch with us, you can reach us at email@example.com. That’s for emails about your membership. Maybe you’re thinking of joining, maybe you want to know how something on the site works. Those go to Steve Symington usually, though any of us could answer. And if you want to interact with us on social media, we are @7investing on Twitter. We are very active. We appreciate you getting in touch someone got in touch with me during the show to ask if our member call, which we just recorded, was recorded and yes, if you’re a member that will go up. Steve, what, Monday, Tuesday? somewhere around there.
Steve Symington 46:27
Usually Monday morning. Yeah.
Dan Kline 46:28
Usually Monday morning. We are fast at it. We’ll be back Monday. For everybody except Anirban. Who is sleeping. We appreciate you being on this call. We appreciate you joining us. We’ll see you Monday.
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