As a host of macro concerns continue to weigh on the global economy, investors are increasingly reassessing their risk tolerances and looking to contain volatility as much as maximizing returns. With this in mind, 7investing lead advisor Matthew Cochrane welcomed back Value Stock Geek to see how his self-proclaimed Weird Portfolio held up in 2022 amid a worrying economic backdrop.

The Weird Portfolio consists of six low-cost ETFs representing five different asset classes and geographic diversity. While each of the asset classes are highly volatile on their own, when combined in a portfolio they have an overall smoothing effect, as each asset class delivers different returns during different environments.

In this episode of our 7investing podcast, Value Stock Geek walks Cochrane through the asset classes of the Weird Portfolio and the role each one plays, including U.S. small cap value stocks (20%), small cap international stocks (20%), real estate (10% domestic, 10% international), long-term treasuries (20%), and gold (20%).

The Weird Portfolio is just part of Value Stock Geek’s overall portfolio, however, with the rest dedicated to individual stocks that he believes are wonderful companies at wonderful prices. Cochrane and VSG discuss their mutually shared positions in Meta Platforms (NASDAQ:FB) and PayPal Holdings (NASDAQ:PYPL), and why VSG believes both have durable economic moats and trade at attractive valuations. VSG also walks Cochrane through his investment cases for Taiwan Semiconductor Manufacturing Co (NYSE:TSM) and General Dynamics (NYSE:GD).

VSG and Cochrane also discuss value traps and how they have each fallen for companies that looked cheap, but which were really declining businesses masked by cheap valuation multiples.

Transcript

Matt Cochrane  00:06

Greetings, fellow investors. I’m Matthew Cochrane, a lead advisor at seven investing where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone listeners to today, I am very excited to welcome back value stock geek by day value stocks he toils in corporate America but by night, he is a do it yourself retail investor pursuing financial independence while chronicling his investments on his on his substack. And on his blog, we had him on our podcast, just about a year ago, when he talked about his quote, unquote, weird portfolio. And after a crazy year in the markets, I thought it would be a perfect time to check back in with value stock geek to see how his weird portfolio performed and missed all this macro economic uncertainty. And outside of the weird portfolio, he thinks wonderful companies at wonderful prices with an emphasis on economic Moats. And you know, I like that, and we’re going to discuss some of the companies he’s found that I’ve earned a place in his portfolio, as well as some companies that he’s looked at, but passed on owning by you, stock geek, welcome to the show.

Value Stock Geek  01:58

Thank you for having me.

Matt Cochrane  01:59

Oh, thanks for coming back. So let’s just start here. 2022 was a crazy year, many macro economic factors were at play, including inflation, rapidly rising interest rates, a supply chain crunch, you know, people saying like a recession is coming, or maybe a soft landing is coming. There’s geopolitical tensions that are flaring up around the world. We have a war involving Russia, and missed all this. How did the weird portfolio do

Value Stock Geek  02:31

odd weird portfolios down 17%. In 2022, total stock market was down 19.51%. I would say normally, in a year where the stock market would be down, the weird portfolio should have held up better. But we had an unusual situation where the bonds were crushed due to rising interest rates. Gold should have also done a little bit better, but but it was at least flat for the year that was constrained a little bit by the US dollar. But overall not too bad. I’d probably preface this by saying I don’t think last year was that bad for US stocks. That might surprise some people. But I think a 20% Fall in the market is kind of par for the course something people should expect every few years. And I think the weird portfolio is more there for protecting against the really, really nasty like 50 60% draw downs, at which point I would expect long term treasuries and gold to do better than they did in the last year. I would say that Harry Brown would call this who designed the permanent portfolio, which is what the weird portfolio is based on he would call the last year a hard money recession where the Fed is raising interest rates in an attempt to deal with inflation. And I mean that has two outcomes that’s either going to work in which case inflation will come down. And probably stocks will do well after that, or it’ll work too well. And it’ll drive the economy into a nasty deflationary crisis where the Fed will have to really cut interest rates to get out of it. And they’ll go back this year interest rate policy. And we’ll see what happens.

Matt Cochrane  04:22

So I encourage listeners to go back in listen to our year ago episode if they want, like a really detailed breakdown in the weird portfolio. But why don’t you just like maybe give us a brief overview of like the portfolio allocation of the weird portfolio?

Value Stock Geek  04:40

Sure. So the weird portfolio is a I would say it’s a risk parity style portfolio where it’s designed to have uncorrelated assets that should do well in different environments. When something is up a lot. There’s something that should be down a lot and it’s designed to kind of smooth out your returns. For all these portfolios, there’s a lot of different versions of them You could go for Harry Browns permanent portfolio that’s the original Ray Dalio has a version of it the All Seasons portfolio, they all basically have three assets. So you’ve got stocks, treasuries, gold, those are the big ones that are in there. And gold is designed to deal with inflation Treasuries are there to deal with crisis, declining interest rates, and stocks are there for prosperity. In terms of my specific allocations, mine is geared towards global small cap value, which is 40% of the portfolio, real estate 20% of the portfolio, long term treasuries, 20% of the portfolio and gold, which is another 20% of the portfolio.

Matt Cochrane  05:43

And I believe, like, is this the is this this is still the current makeup of the weird portfolio right here?

Value Stock Geek  05:50

That’s it? Yeah. I mean, you can do this with different ETFs. There’s different versions of small cap US small cap value that are available, there’s different versions of international small caps that are around. But yeah, this is these are the ETFs that I use.

Matt Cochrane  06:06

So now, like why don’t you walk in again, we did this a lot more in detail last year, but like, why, why 40%? Two or 20% to small value, and then another 20% to international small value? Like what? What how do you see that uncorrelated to the rest of the portfolio.

Value Stock Geek  06:26

So small cap values absolutely is is correlated with the overall stock market. But small cap value has a nice little quirk to it, where it tends to at least avoid the big bubbles. So I was very concerned about for instance, investing in 100%, s&p 500, and then the s&p 500 goes into some Japan like bubble, and then I lose money for 30 years. Meanwhile, small cap value is a place where you can hang out and it it’ll go down with the market, it’s definitely not immune to big bear markets. But you have an asset class that does fairly well when there’s a bubble that’s going on. And this year, actually small value held up pretty well. Small cap value is down about 10%, while the overall market was down about 20%. So it delivered some solid performance this year. And it’s split up between the US and international just because I wanted to avoid home country bias I wanted to I’m a US investor. And I didn’t want to have all of my eggs in the United States. As much as I love the country as much as I love the companies here. I thought it was smart to split it up internationally. And I settled on 5050.

Matt Cochrane  07:42

And then what about 20% of real estate, you have 10% to us real estate 10% to international real estate. Why? Why why dedicate a fifth of your portfolio to real estate?

Value Stock Geek  07:53

Sure, so real estate is another one of those assets, that tends to avoid the big large cap growth bubbles, it performed a lot like small cap value in the early 2000s doesn’t mean that real estate can’t get into a bubble as we saw in the late 2000s. But it does tend to avoid those big large cap growth style bubbles, it also adds an element of inflation protection. So in the 1970s REITs did very well, in comparison to the overall US market because your replacement costs with real estate are gonna go up with the inflation rate, rents are going to go up with the inflation rate. So you get some protection there. And then on top of that, you get some yield, which is a bit more reliable than you’d get from some other asset classes. If you were to do like a correlation back test, you would see basically performs the same as small cap value, but I thought it had some of those special characteristics where it was worth giving a special place to in the portfolio. And

Matt Cochrane  08:58

in what about gold, so now you have gold in your portfolio. I think this is probably an area where because of like gold’s like recent track record, I guess. It’s recent performance. And when I say recent, I really mean like the last couple of decades, like I think this is probably an area like most US investors probably ignore or neglect too much, but you have 20% of the weird portfolio to gold. So So why does gold have such a high place in this portfolio?

Value Stock Geek  09:29

So the most important aspect of gold is that it’s uncorrelated with bonds and stocks. So you have an uncorrelated asset that is going to do different things than your stocks and your bonds will which helps smooth out returns. So gold, what happens is it tends to hold up very well when there’s a big deflationary crisis. So if there’s something like the early 1930s or 2008, gold will at least be flat or it’ll go up. Then if you have a situation where there’s some Extreme inflation or currency problem, gold should do very well in those environments. It’s not necessarily there for a Mad Max style apocalypse. It’s kind of just there for it’s an uncorrelated asset. It can have strong decades when stocks are having off decades. And it does help smooth out the volatility in the portfolio. This year, gold did pretty well gold was basically flat while US stock market was down. So that definitely helped the portfolio.

Matt Cochrane  10:33

And then finally, long term treasuries, so you have 20% of the weird portfolio to long term treasuries. Why so much in long term treasuries, even when the yields were low? You have 20% to long term treasuries.

Value Stock Geek  10:48

Yeah, I stick to the formula. I’m sure. I don’t want to speculate about where interest rates are going to necessarily go. So you know, right. Now, with hindsight, it seems like oh, well, interest rates were below 1%, it was obvious that they were going to go up. For me, I kind of am macro agnostic, I want to ignore, I don’t want to try to predict interest rates or inflation. So but why they’re in the portfolio. So long term treasuries tend to do very well when we’re in a really serious bear market like down 50% Or more kind of bear market, because the Fed is ultimately going to have to go in there and cut interest rates. And the longer you go out in duration, the bigger the effect will be in terms of the price movement in the asset. So in a year, like 2008, your long term treasuries were up 20%. In the early 1930s, your long term treasuries were up significantly, even in 7374. Long term treasuries did pretty well and offered some protection. So that’s why that’s there in the portfolio. And it also is highly uncorrelated with stock market. This year, it did terrible, long term treasuries had a pretty at a pretty rough year, they were down about 30%. So But hey, that’s, that’s what happens. The point of this portfolio is you’re just not trying to predict anything. I stuck to it, even when it was at a low interest rate, because rates could always go lower, we could have had another COVID lockdown situation. And we could have entered a kind of deflationary mess where the Fed had to take us maybe to negative interest rates are, and that should have offered protection while stocks were getting clobbered. That’s not what happened, then inflation got higher. And we had, you know, we had a bit of a boom and unemployment got lower. And yeah, long term treasuries were crushed. But I think the situation now is much better. You have it’s positive yielding, you’re around, I think 4%. With treasuries, so it should now take some room to fall again, if we do enter into a more serious bear market. And if that doesn’t happen, if we don’t enter a bigger fall, well, now you have some income.

Matt Cochrane  13:01

Now, this isn’t your entire portfolio, you know, how do you determine? Because I know at different times, this kind of fluctuates, like as a percentage of your portfolio. So how do you determine like, one, I guess, maybe start, like, how much about how much of your portfolio is the weird portfolio now? And like, how do you how does that fluctuate with time? How do you determine that?

Value Stock Geek  13:26

So for me, the money that I save, and my paycheck every two weeks goes into the weird portfolio. So every time I go and I get a paycheck, I buy whatever asset class is light in my overall portfolio. And that’s basically my vehicle for saving all of my money. Then I set aside a slice of my net worth. And I said, this is going to be my active portfolio where I’m actually going to pick stocks. Now I use the weird portfolio in there, where if I can’t find enough stocks to buy, I’ll hold the asset allocation. So in that portfolio in that active portfolio, or I am picking stocks, I started the year in 2020, to about 80%, that weird portfolio, I only owned a handful of stocks. And then this year as the market declined, I use that as an opportunity to pick up a lot of businesses that I thought were on sale.

Matt Cochrane  14:23

And so like how much like So you started the year at 80% of your portfolio. And we obviously saw the stock market come down quite a bit, and especially some names come down quite a bit in 2022. About how much does it make of your portfolio now.

Value Stock Geek  14:41

So now that’s down to 20%. So I went from 80% Weird portfolio to 20% of your portfolio and last year, I bought a lot of stocks as the market declined. So this is a

Matt Cochrane  14:53

perfect segue. So when you so you obviously saw a lot you liked this year In the stock market, or at least a lot more than you liked, at the beginning of 2022. What do you look for when you look for stocks? Like what’s your basic investment philosophy when you’re looking for individual names.

Value Stock Geek  15:15

So I am looking for wonderful businesses at wonderful prices. So I run a sub stack, where basically what I do is I look into a company every single week, and I try to determine is this a wonderful company, usually, they’re a wonderful company. And I add them to a lot, but they’re too expensive. And I add them to my watch list. And I wait for them to go down. So a lot of the companies that I previously analyzed, fell a lot in 20, to 2022 to my baizen. So what’s a wonderful company, so I’m looking for a company with a moat. So I wanted to have something that will insulated from competition, I want it to have high returns on equity, high returns on invested capital, I want to do it without a lot of leverage, I want it to generate free cash flow, I want there to be competent management that can deal with it. That can make sure that the company is managed well. And I want it to be of basically like a high financial quality, like I want to see good metrics in terms of debt to equity in terms of the Altman Z score, which is a measure of bankruptcy risk, I want to see a good end score, which measures earnings, potential earnings manipulation. And then just logically, from like a qualitative side, I want to be able to think through the business, understand how they make money, and feel confident that this is a stock, I can hold up for five to 10 years, and it’s not going to follow businesses, I’m gonna fall apart.

Matt Cochrane  16:41

And so you said a lot of times you find wonderful companies, but they’re not at a valuation you like so what are you looking for? As far as like a valuation? What what makes it attractive enough to earn a place in your portfolio?

Value Stock Geek  16:55

Sure. So valuation, I think it’s more art than science. But from like a quantitative point of view, I want to see a good yield. So I want to see a basically an EV bid multiple, ideally, less than 15, I don’t think I’d pay more than 20 on a stock. Then what I look at are the I look at trending in multiples, I look at trending and price to sales, I look at trending and enterprise multiples. And I want to see where does it normally trade. So if it’s at a discount to those multiples of where it typically is, I’ll be interested in it. So I know that I’m I can at least approximate that I’m getting in there with some margin of safety. And I also like to see shareholder yield, I’d like to see a company that’s buying back stock or issuing dividends at an attractive rate. Well,

Matt Cochrane  17:50

so let’s get to the fun part. Let’s talk about some of the individual names you found. And like we discussed, like some of the companies we could, we can talk about. And first up is General Dynamics. So General Dynamics is if listeners aren’t familiar with them, they’re a defense contractor. They make business jets, you know, their aerospace segment makes the Gulf Stream business jets. They’re like they have a segment that produces like the M one Abrams tank, their marine sub segment manufactures and creates nuclear powered submarines, among other things, what do you like? And I think you’ve held this in your portfolio for quite a bit. This is just if you’re watching on YouTube, this is just a look at their most recent results. What’s attractive about General Dynamics?

Value Stock Geek  18:44

Yeah, I bought General Dynamics in October 2020. The stock was beaten up after COVID and everything else. And it was one of the it was when I was transitioning to looking for these really quality, high quality companies. It has as great a mode as any you could find where their main customers, the United States government who can print their own currency. So and it’s in an industry where we’re likely not going to see any major budget cuts. And at the time, it was available at a very attractive price. I think it was down to a P of about well, I bought it because I thought first of all the price was attractive that had a moat. But I also thought that tensions would be rising with China and a naval capacity. So General Dynamics big business is a big segment of their businesses marine and that’s manufacturing ships for the Navy. Critically submarines. So you know, they have a, they have a contract for for the Columbia class submarine, which is the newest nuclear powered submarine that the United States government has created. That’s that’s a contract. worth $100 million. And they’re going to build multiple submarines over the next couple of decades. And what I was looking at when I bought that was I looked at the Naval capacity of China. And I saw that China had actually had more ships than the United States did. So I thought I looked at that and said, Well, it’s probably likely that the United States is going to catch up, they’re not going to allow the Chinese to overrun their defense capabilities. So I bought stock under that thesis, that tensions would be rising throughout the world. And this would be a natural beneficiary of it, and it’s at a solid price.

Matt Cochrane  20:41

I, I want I wanted to talk about this because the defense industry is an industry that I had not really looked at too hard up until like, a couple of years ago. And I remember talking to Lourdes Hansel, and he kind of sold me on just like some of the unique merits of the defense industry and had me started looking at it in, in the last year, year and a half. Like my, the companies I own in the defense industry are like some of the only things I’ve owned that have worked at all. So you know, but like, there’s also like, you know, when you have a defense company, whether it’s General Dynamics, I own Lockheed Martin and L three Harris, you know, but there’s some others Northrop Grumman, you could easily put in there are Raytheon, you know, you also have like, like, like, as far as, like economic moats go, like, you have like some very unique moats in that arena, like you have, like, contracts that are like, very long time, like Lockheed Martin with the F 35. I mean, that’s like that, that platform, like, well, well, that’s for decades more. And it’s, you know, it’s already been in effect for decades, do you have to have like a really highly skilled workforce that’s willing to work on these platforms that are designed at the end of the day, you really like to kill other people, which a lot of, you know, like, in recent years, like when Microsoft gotten involved with the Department of Defense or alphabet, like they’ve had a lot of employees and their employee base, like, right, open letters to management, protesting that they don’t want to be working on anything that might have to do with that stuff. They also have the highly skilled workforce that’s willing to work on this stuff also has to be able to pass a security clearance. You know, so the US government has a very vested interest in making sure these companies like maybe not thrive, but at least not like suffer. Like they don’t want mass layoffs going on. They don’t want these factories being shuttered. Because it’s not like you can turn these things back on with a switch. It just the defense industry, has just a few unique moats like that. That makes it like really interesting.

Value Stock Geek  22:58

Yeah, absolutely. They’re great moats, and they’re very immune to competition. So I can’t, I can’t start up a company tomorrow and manufacture nuclear submarines. So it’s, it’s a great, great business to be in because you don’t face the constant disruption that’s assaulting other industries. They’re pretty safe, where they are.

Matt Cochrane  23:20

You absolutely so another company that you own that I’ve owned for quite a while, is is PayPal now, I won’t PayPal, almost as it got spun off from eBay. And up until until about a year ago, like it was doing fantastic. And it has been beaten down. And at some point along that way, you also have own shares. But like this is still a company that when you look at its historical growth rates, and again, if you’re watching on YouTube, I just put up like a recent slide from its recent earnings presentation. But it has 435 million active users that includes 35 million merchant accounts, engagement with these accounts keeps going up. They now average the inactive account. Now average is almost 52 transactions per year. That’s up from that’s up significantly in the last few years. And while account growth has slowed, it is still growing. free cash flow is growing, earnings per share is growing. And it’s it’s this is still a growing company and its valuation is much more attractive than it used to be. What do you like about PayPal? Sure.

Value Stock Geek  24:33

So I looked at PayPal a while back and I thought it was an excellent business growing quickly. I mean, when you think about it logically. Just phrase it this way our electronic payments going to grow. And I think the answer to that as a unanimous Yes. So if you think electronic payments are going to grow, PayPal will be a unique beneficiary of that not just because of PayPal, but also because of Venmo which they also however, it always traded No very extreme valuation. And in 2021, it really reached a pretty absurd level, it got up to I think, at times earnings. So the growth rate fell a little bit and people freaked out and the stock fell. And at one point, it got down to 20 times. So I thought, if that’s the best opportunity, I’m going to get to own a business like this. I was a little bit early on that the stock has dropped more since I bought it. But I’m sticking with it. And I think they’ll continue to grow that user base continue to grow their fundamentals, and the stock should do well, especially from the current valuation. I’m not too concerned about it falling to say 10 times earnings or something like that, I think 20 times is a pretty reasonable price for it.

Matt Cochrane  25:49

And what do you say about like that, you know, while digital payments is certainly growing, maybe now there’s just so much competition that is gonna get lost in the, in the crowd, so to speak, because you have Apple Pay, you have Amazon pay, you have, you know, Cash App, you have Klarna, you know, like on Twitter, which were which were both active on like, a lot of times, you’ll see like, people just put up like all the buttons, all the payment buttons now that come up at the end of a website, when you want to check out, it is a very crowded field, what do you think PayPal can withstand that competition?

Value Stock Geek  26:26

I do think that they can withstand it, it’s definitely a threat. But I’m not seeing anything in the financial results to suggest that, that their competitive position is becoming eroded. And I think that they have enough of an established position where pretty much everybody has a PayPal account, pretty much everybody has a Venmo account. I know just going out with friends. When people want to split a bill on a restaurant, it’s going to everybody uses a Venmo account. So I haven’t seen that really getting disrupted. So I’m not too concerned about that. And I think because they were in such an early mover there, I mean, they were the first mover in digital payments, that really gives them an advantage over everybody else. And yeah, it’s becoming a crowded field. But I think that just because so many users are on it. It creates network effects, where it’s unlikely that it’s really difficult for competitors to get in there and really eat into that business. So I feel pretty secure in it. And judging like I said earlier, judging by the financial results, I think that it’s that it’s in good shape, and there’s not a lot of evidence that that mode is eroding.

Matt Cochrane  27:38

Yeah, absolutely. You know, it’s, like I said, I’ve been around a long time. I’ve written a long way up and along way deck down. But yeah, I agree with you, like when you when you look at the results, like I just don’t see anything yet that’s especially definitively says that this is a company in decline. I don’t think you can conclude anything like that when you when you look at the company’s results.

Value Stock Geek  28:03

Yeah, absolutely. I completely agree. And, yeah, that’s great that you bought it so early. I mean, even even though you’ve had a rough year, you’re still significantly from saying

Matt Cochrane  28:13

I’m still doing fine in it. I’m still doing fine. And yes. There’s part of me that wishes maybe I had taken an opportunity to at least trim it about a year ago or a year and a half ago. But yes, like, that’s a that’s a company that I was I was in early on for sure. Alright, the next company is Taiwan semiconductor manufacturing company. That’s the world’s largest dedicated chip foundry. It has more than like, like 50% of the global market share. It was founded in 1987. It’s in Taiwan. Its scale and like high quality technology allow the firm you know, it generates solid operating margins, even in like the highly competitive foundry business. And the shift to the fabulous business model, which basically means that companies like Apple, AMD and Nvidia, they design chips, but they don’t actually make their chips has really been a great tailwind for TSMC. What do you like about Taiwan semi?

Value Stock Geek  29:20

So I think again, like high level long term trends to think about are semiconductor semiconductor demand going to be higher 10 years from now than it is today? I think without question, it’s going to be higher. We’re going to need more chips TSM they’re the leader in the industry, but they’re also really at the technological forefront. I mean, Intel, a stock which actually recently sold, I think they were proposing plants for 10 nanometre chips, and then TSM is down to five nanometers. So they’re already massively ahead of the competition. They manufacture chips for Apple, for instance. And those are big I mean pretty entrenched relationships, almost like the kind of relationships that Intel used to have a PC manufacturers back in the 80s, and 90s. And now TSM is establishing those same relationships. I never, this was one of those companies I looked at a couple years ago. And it was, I think, 40 times earnings. And I never imagined I would ever have an opportunity to get that at like a value price. But this December, it fell down to 10 times. So I figured this is my opportunity to buy this really incredible company.

Matt Cochrane  30:36

I think this is one of the most wonderful businesses in the world. The only question I think that I have about it, and probably I think why it was you were able to get at such a valuation is the geopolitical risk that Taiwan has with China? How do you weigh that type of risk with owning a company like this?

Value Stock Geek  30:59

Yeah, so I think China’s a big part of it. But the way I kind of look at that as well, if we go to war with China, I have bigger problems than what’s in my portfolio. We’re problem we’re dealing with a nuclear power, who will probably also engage in cyber attacks and attacks on our infrastructure. So hopefully, that never happens. And yeah, I don’t think I don’t I don’t think I don’t care much about my shares in Taiwan Semiconductor if the United States is getting nuked?

Matt Cochrane  31:31

Yes, that’s, that’s a fair point. That’s their point.

Value Stock Geek  31:34

So that’s one aspect of it. The other aspect, I think it was cheap is because semiconductor demand was super strong. And in the last couple of years, and it looks like it’s waning right now. And there’s also concerns that we’re going into a recession. So the way I looked at it, yes, there might be a recession in the next year, but where are we going to be 10 years from now, without a doubt, semiconductor man, demand is going to be much higher than it is today. And meanwhile, you have a stock that’s getting beaten a wonderful company that’s getting geared up for macro reasons that have nothing to do with the actual execution of the business businesses still a phenomenal business. And yeah, there might be a recession in the next year, but what’s going to happen after that, and that’s assuming we’re going to have the kind of horrible, nasty recession that everybody is anticipating. So, to me, it was a perfect setup, it’s a wonderful company, that’s getting beaten up for reasons that have nothing to do with the actual performance of the company.

Matt Cochrane  32:36

Now, on your, on your substack, you look at many companies, and I would say like, I mean, I haven’t, I don’t know this definitively, but I would say you pass on more companies than you buy, you know, in like, you know, I subscribe, and you know, I enjoy reading your write ups, when, you know, so you look at a company, and a lot of times you might like the business model you’d like to business, and then you’re like, but it’s too expensive. So like maybe like, what’s an example, if you could give like one like, of a company that you like, there’s a lot of things to like about it, but it’s just, you just couldn’t get there with the valuation?

Value Stock Geek  33:18

Yeah, almost all of my write ups are in that bucket where it’s, this is a great company, but it’s way too expensive for me. So the thinking there is I want to basically build up a good watch list of companies I already know are great companies. And when the market tanks or when there’s some big macro problem. And there’s an opportunity to buy these at good prices. I’ve already done the work on them, and I can just go in and scoop them up. I never really imagined I’d get the opportunity to do it with a lot of the tech companies that I bought last year like TSM and I also own meta, but it happened and they sell and then immediately the narrative shifts, and you get the opportunity to buy some of these. So a recent one I looked at that I thought was a wonderful company was Brown Forman. They are a spirits manufacturer. They make Jack Daniels whiskey. It’s pretty solid moat. I’m pretty sure people will be drinking Jack Daniels whiskey in 50 years. I don’t think that’s ever going to go away. It’s currently around 27 times earnings. But that’s just a wonderful company. You know, they make spirits they earn high margins and the spirits demand isn’t really going away for them. And it’s an excellent company. And I’m hoping that at some point, I’ll get the opportunity to buy it.

Matt Cochrane  34:39

Yeah, this is a company I might be a little more familiar with as a consumer than an investor. But yeah, they make the not only do they make Jack Daniels, the ultimate Woodford Reserve old forester which are very well known bourbon brands. I know they have some tequilas as well, and their companies are sold around the world. They obviously have Some great brands, some great distribution moat. What? What, like, how far away? Can you look at a company like this? Like, are you? I guess I like, like when I look at a company like so let’s take Brown Forman, and again, I’m not familiar with Brown Forman, but like, if I really liked it, but if I’m even, not even maybe even that close, I’ll take like, just a really small, like, by make it really small by the company to help me keep an eye on it. Like, how do you keep track of a company like this, that you’re like, I’m really interested in this company? I really like a lot of things about it. But if not, at the valuation I want, you just have like a running watch list that you’re constantly checking, like, how do you monitor companies like that?

Value Stock Geek  35:48

Yeah, I keep a watch list. It’s basically a spreadsheet, a list of companies that I’ve looked at, and it seemed to be wonderful. And then every month or so I’ll go in and I’ll update those valuations, see what they’re currently trading at. And then if they really do fall to an attractive level, then I’ll do a deeper dive and try to figure out well, what’s why is this cheap? Is it just some macro nonsense? Or is there legitimately a problem with the company and a company like Brown Forman? Like, I think like you said, I think you could buy these companies at some stretched valuations. And if you hold them long enough, you’ll probably do fine. It’s not the end of the world to pay a little bit too much. But I really want to get them at very attractive valuations. So my concern about buying some of these companies is I don’t want to wind up in a situation, like, for instance, Coca Cola in 1998. So Coca Cola 98, reached about 40 times earnings, the company performed exceptionally well over the following 10 years, but investors pretty much lost money, and were flat, because the stock was too expensive. And there’s lots of examples that you could look at Microsoft, Microsoft from 2000 to 2010, I think they tripled their revenues. But stock was too expensive. So it didn’t really move, move the needle. So I’m trying to avoid those traps, and at the same time, acquire these companies at an attractive valuation. On the flip side of that, if you own coke for 20 years, or you own Microsoft for 20 years, you got to find a result. But I would like to have a good result within five to 10 years.

Matt Cochrane  37:23

Sure, sure. And now what about when you own a company? So we talked about like PayPal and Taiwan semi, but let’s say like, what would make you sell one of these companies?

Value Stock Geek  37:35

Yeah, so I tell if the valuation reached an extreme solid, I’m not going to sell if the company just became like, fairly valued. But if the valuation really got off the charts crazy, I’ll sell it. The other reason would be that I was wrong, I realized I was wrong about the business, then the moat has deteriorated and it fell apart. So that would be another key reason. And the other reason would be if there was just better opportunities around so if we ever run into a situation like late 2008 2009, I would probably have a lot of turnover in my portfolio because there’s every business in the world is on sale, and you can probably pick up some truly wonderful things. And I might sell some physicians to take advantage of that.

Matt Cochrane  38:23

You You flew out Intel earlier about a company you recently sold. What? What made you sell Intel?

Value Stock Geek  38:32

Yeah, so I bought Intel in January 2021. So I held it for about two years. And we’re getting back into semis. And what I was looking at was a company that had a moat, it still has a moat. It has pretty deep relationships with all the major PC manufacturers. And they have that those nice contracts in place. But the problem is they’re being outpaced technologically by companies like TSM. So two years ago, I saw it fell to a nine times EBIT, enterprise multiple. And I figured, alright, this is probably a good time to pick up a pretty good company at a pretty attractive price. But it turns out the market was right, the market was anticipating that they were just going to continue to fall technologically behind the curve. I thought they might have an opportunity to flip that around because they were spending so much on r&d, but it’s just not happening. And when I looked at Taiwan semi more, more recently, and I saw what they were doing and then at the same time, Intel released a disastrous earnings report on January 27, which prompted me to think about the position and I sold the other day. I think at this point, Intel could be good value. You could probably if some good news comes along it’s I think trades around one point Five times book value at this point, it could be a situation where there’s some good news, maybe tensions rise with China, the stock pops along the way, while you wait for it, you can collect a pretty nice dividend. So the stock might offer value, but in terms of is it a wonderful business I want to hold for 10 years, I don’t think it falls into that bucket anymore. So I got rid of investing. It’s hard, right? Yeah.

Matt Cochrane  40:24

Like, you know, there’s like, you can pay too much for a great company. And then like, you know, when you think you have a good value on what used to be a great company, it turns out to be a value trap. You know, I’ve fallen for that kind of setup. Many, many times. I remember like, this goes back, but like Gilead science, like if you, if you remember, they basically they basically cured like hepatitis, right? And yeah, and, you know, the stock just took off, but then it like, it started coming down. And I was looking at, like, wow, this trade. And I forget what it was, like, you know, a P E ratio of like, eight or nine. And it was, you know, if you looked at the trailing earnings growth, it looks great, you know, it’s still growing like 2020 30% I thought this is crazy, you know, like, but, but what I was missing was that like, you know, generics were coming on online, like, and they were like curing a disease that meant like, well, less people had it. So that or the demand for their product was was, you know, slowly going away. They almost like solve the problem too. Well, and, and long story short, I mean, I sold it years ago, and I think it’s still basically at the price. I sold it five or six years ago, after taking a 30 40% loss on it.

Value Stock Geek  41:44

I am I did the exact same thing. I owned it. Here you go. It came up in Joel Greenblatt’s magic formula screen. Back when I was more into quantitative investing, and I saw it in there and I said, Oh, hi ROIC, low enterprise multiple, let’s do it. And

Matt Cochrane  42:03

well, right. Yeah, it turns out like investing is you can never just really get it down to a simple formula. That’s foolproof. One of the things one of the companies we talked about last year, when you came on was was meta platforms. Now, it’s had quite a year. But you know, if, if you’re a shareholder, you at least have it? Well, the last couple months were good. Do you still hold meta platforms? And what do you think of it now?

Value Stock Geek  42:34

Yeah, I’m strapped in for the wild ride. The I still hold it. I think when you look at the core family of apps, they’re all still doing well, they’re still growing users at a pretty steady pace. And you look at that core business. It’s, it’s doing great. There’s a perception out there that people are flocking from Facebook, but I think they’re still using it. I think it’s kind of like going to McDonald’s, like everybody does it, but no one admits to it. Oh, I think people still have their Facebook accounts will go on there and check out how things are going. They absolutely still use Instagram. That’s still a big thing. And they’re growing internationally. So even though Facebook might have some negative connotations in the United States, internationally, it’s still pretty popular. So that core business is doing great. There’s not really any problems with it. It’s still a great advertising platform. If you talk to anyone who advertises on Facebook, it’s one of the best advertising platforms known demand. They have still collected a lot of data on people even though they’ve recently faced some concerns with Apple where Apple is blocking their ability to do that to the extent that they did in the past. They still have tons of data, they can still target ads very effectively and that business is doing well. The concern over the stock is more of the money that Zuckerberg is spending on the metaverse that’s still a major concern. You’re not really seeing it bear any fruit yet. That’s eating into their their expenses and cutting into their profits. Zuckerberg has a long term vision for the metaverse. I think it might work on me crazy. I think I think it could pay off in the long run. But um, that is that is yet to be seen.

Matt Cochrane  44:22

If it if it doesn’t work, what do you so let’s say like, and when I guess we should probably define work, but like, you know, I feel like the metaverse can be a thing. I feel like the Oculus, and or, you know, the quest and their, their their glass devices, their AR and VR glass devices can can be a real platform. I wonder if we can ever pay it off like for how much money they’re spending on it. Like if it doesn’t work if it doesn’t justify by the amount of money they’re putting on it, what do you think happens to the stock long term?

Value Stock Geek  45:05

Um, so there’s probably a few scenarios that the metaverse so and the question is where we are towards the evolution towards this metaverse. So let’s talk about like the internet, the internet itself. So if you read like cyberpunk novels in the 1980s, it was clear that the internet was eventually going to be a thing. People were talking already talking about networking computers, and what would happen, the question was like, how fast is that going to happen? And if you made a big bet on the internet in 1985, you would have struggled for a while. That might be where we’re at with the metaverse today. Alternatively, it could be like, it’s 1994. And it’s really about to take off in a huge way. And Zuckerberg will basically own the next iteration of the internet, where a bulk of activity on the internet is going to be these virtual reality segments. That said, it doesn’t look like the technology is really there yet. Like, I think for that to work, you need it to be classes that you can just pop it on, hop on, it can’t be a huge headset, I think. And that’s probably what will happen. Eventually, you need the graphics to be better. It can’t just be cartoony images, you need to feel like I’m actually in a real location when you put on the virtual reality goggles. So where are we in that cycle? I’m not sure if Zuckerberg seems to think it’s 1994. It could be 1985. We should, we shall see. But I think eventually virtual reality will be a big thing. The question is when it’s going to happen, now for the stock. So what I think Zuckerberg should do is focus more on gaming, focus more on creating like, those massive multiplayer online role playing games that they have out there. I think virtual reality is a perfect platform for that where you can go onto a video game with your friends, and you can go out there and actually feel like you’re in the field, you know, shooting things, or you’re slaying a dragon or something like that, like create some really cool games. And that would kind of be the gateway drug to the metaverse, which longer term could be this much bigger thing. But I think they need to focus more on that. Instead, they seem to be focusing more on like conferences and hanging out with your friends and talking to them like Well, I’d like to do that in real life. I wouldn’t necessarily, but if you have a really cool game, I think that sell some headsets. And if it is a complete dud, if it doesn’t work, well, you still have this excellent family of apps business that’s doing super well. And presumably they could turn off the spending, they could admit the feet and move on. And after all the all the money from from this family of apps business, and even with the money that they’re spending on the metaverse, it’s still a fantastic business, even though even if it’s even if all that money is just going up with smoke. Still a pretty good business even with that going on.

Matt Cochrane  48:07

Yeah, no, I mean, obviously, I agree. This is another stock I’ve been in for for a very, very long time. And unfortunately, I’ve dollar cost average into it enough room a little down on my overall position now, but I do agree like you know, I just feel like if this, this turned out to be a bad investment, and it doesn’t ever, like justify the expenses and research that Metis poured into it. Like my line has always been like if the if the family of apps stay strong, and that moat is able to withstand, you know, all the competitive threats. Like I think eventually like meta meta will be fine. Like that’s a high margin business with like a great advertising platform, as you mentioned, and like and so far, like you know, you can talk about like Snapchat a few years ago stories or Tik Tok? You know, I think it’s incredibly bullish, like how the feeling of apps have stood up to any kind of competition and withstood it and been able to at least at the very least copy a feature or medium such as stories or such as, you know, with Instagram reels like copying like the vertical short form videos, and like any cool incorporate them into their own platforms.

Value Stock Geek  49:34

Yeah, I completely agree. It’s amazing how they’re able to hold up against competition, like high level think about how hard it would be to duplicate Facebook now. And you could create a better Facebook say some software engineers created better Facebook well, your family’s not on it. You know, people you know aren’t on it. You’re on Facebook because other people are on Facebook. And unless you see a massive exit As from Facebook and Instagram, I don’t think that you’re going to really see the Moto road. And I think that’s the ultimate test for remote. How hard would it be for a competitor to come in and make an alternative to this? And at this point, I think the mode is so entrenched that it’s nearly impossible for someone to come along and do that. And as long as that’s the case, I will continue to hold it.

Matt Cochrane  50:24

Well, look, I know you have to run, but for people who are interested in following you, and want to find out more about your style of investing, and look at your some of your write ups that you do on companies that you’re looking at, where can they find you.

Value Stock Geek  50:40

So the best place is on my sub stack. So that’s value stock geek.substack.com. And then another great spot would be Twitter, where my handle is at value stock geek.

Matt Cochrane  50:53

Like I said, before I subscribed to your substack. I enjoy it. And I definitely follow you on Twitter, you’re always putting out a good, good content. So you should definitely we’ll have that in the podcast notes for those who are interested, but definitely check out value stock geek. Well, thanks for coming on today. listeners. Thank you for listening. Again. I’m Matthew Cochrane, elite advisor at seven investing where it is our mission to empower you to invest in your future. Have a great day, everyone. Thanks for having me.