How to Invest in Small-Town America | 7investing
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How to Invest in Small-Town America

June 4, 2021

The pandemic has changed some Americans’ minds about where they want to live. That has sent more people from big cities to smaller towns. Will this mean a resurgence for small-town Americans — and what might that mean for investors. Dan Kine and Matt Cochrane will cover what’s happening and give you three companies poised to benefit from this population shift.

Transcript

Sam Bailey  0:15

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  0:25

Good afternoon 7investors and welcome to the Friday edition of 7Investing Now. My name, of course is Daniel Brooks Klein. I’m the host of the program. And I’m being joined today by Matt Cochrane. Matt, you came up with the idea for this show, we’re going to talk about how to invest in small town America. And you came up with that, because you just got back from some of the smaller towns in America, where were you?

Matt Cochrane  0:48

Oh, that’s right. Yeah, we were, we were visiting my sister’s family and my niece was getting married in the northwest corner of Alabama. So if you’re from Alabama, shout out like we want to kill in Alabama. And then we spent a few days like semi camping here in Lake Guntersville, which is in the northern area of Alabama, that we had to drive back 13 hours, and most of that was on small country roads.

Dan Kline  1:10

That sounds awful. And for those of you who don’t know, Matt has four kids. He hasn’t even named all of them. Some of them just have numbers or symbols. And so that that is a long are we there yet, ride for people? We of course would like your questions and comments, you can talk about your small town investment ideas, you can ask us questions about just about anything. We’re also going to talk later on about lessons learned during the pandemic.

Matt, before we get to some specific companies, we are going to give you three companies that we think are good investing plays in small town America, we’re not saying these are pics, these are just companies we follow that we’re fond of, of course, to get access to our picks, you need to be a 7Investing subscriber. But before we get into it, why don’t you give us a little bit of overview about what’s happening in the in the company in the country? We’re having a bit of a small town resurgence?

Matt Cochrane  2:02

Yeah, absolutely. So you know, the funny thing is, I mean, for the last year, and a few months, we’ve been talking about remote work, and a lot of the obvious plays have been beaten to death by analysts and investors. And you know, like, the Zooms, the Microsoft’s, the Slacks, like those companies in the world, I have obviously done very, very well during the pandemic. But you know, something that we haven’t talked as much as much about is how the pandemic has caused, like a population shift, where more people are moving from cities and suburbs to more small towns. And, you know, the first, like, obvious thing is like the housing market, we’ve seen, you know, like, I was reading some recent wall street journal articles that kind of, like, sparked my interest in this as, right before I made my trip. And, you know, it talks about how prices are skyrocketing, and places that you know, until recently offered affordable entry for the middle class to buy houses.

Dan Kline  3:00

But yeah, it has gotten very strange. So we’re seeing some of the smaller cities, some of the beaten down cities of the country, have these massive price increases, because people are looking in there say, okay, you know, I can move. So where can I live, that would be affordable, and even the worst towns tend to have, you know, neighborhoods that are livable, or neighborhoods that are on the cusp. Let me give you a few examples here. We’ve seen prices surge since January in Allentown, Pennsylvania. No offense to people in Allentown. But when you’ve been commemorated in a Billy Joel song about how your whole town is shutting down, that’s not great. So, you know, so their prices have jumped by 24%. Martin, Tennessee, that’s a small city about 150 miles from Nashville. The median asking price went up 159%. You’re seeing local bidders get priced out of the markets. You’re seeing sight unseen people buying houses. Matt, is this getting a little bit nuts?

Matt Cochrane  3:57

Yeah, I mean, it’s it seems like it is right I mean, you have local buyers bidding against each other, you know, as well as have investors like investors now comprise about a fifth of annual home sales nationally. And you know, the low inventory means you you know, buyers have to make quick decisions. Many are making no look offers, which means they actually haven’t seen the house they’re bidding on in person.

Dan Kline  4:18

Yeah, and that’s actually something I did. So I’m doing this show today from our about to be put on the market rental property in Davenport, Florida. And as you know, as everyone who watches the show regularly knows we recently bought a condo a few miles down the street at a resort and I was there today. And I’m not doing the show from there because checkout is 10am and we have guests coming in. But we literally were tracking when new listings went up. And if a listing went up unless it was obviously something wrong with it.

We were putting in offers not having seen it. Now we knew the property. We knew sort of the ranges of what they look like. So maybe if you got one at the high end of the price range, that needed flooring, maybe we wouldn’t come in over asking price. But the one we actually bought, everything was done. And we came in well over asking price, and we’re lucky enough to get it. Since that point, I’ve been tracking properties that are selling in the same city. And Davenport is a very small city he has sort of outside of Orlando which while physically It is a very large city, population wise, it is a very small place. And you’re seeing prices skyrocket.

Dylan, we appreciate the comments. But that’s actually on you. We have a number of people who are monitoring our connection and saying it’s not an issue. So apologies that this is not coming through well for you, but it is absolutely coming through okay for us.

So what we’re going to do is we’re going to look at how this population shift, and it’s not a massive population shift, but it is a meaningful population jump how this affects three different companies. We are both big fans of or at least two of the three. I’m a big fan of the third one I don’t know as well. The first one up. To be fair, before we get to that. Let’s talk about trends a little bit, Matt, you shared a graphic with me that we don’t own, so we can’t share it. Does this look like a long term trend?

Matt Cochrane  6:08

Yeah, it does, Dan. So like there was a poll, and 2018 that Gallup conducted, which suggested that like, more people want to live in rural areas than anywhere else in the US. So 27% of this Gallup poll responded that if they could pick where they wanted to live, 27% said rural area, and that was over choices like big city, small city, suburb of a big city, suburb of a small city. More people suggested a rural area than anywhere else. And not only that, but the rural areas where the biggest gap where Americans would like to live, and where Americans actually live existed. So like 27% wanted to live in a rural area, but only 15% actually did.

And not only that, Dan, like last year, in late 2020, Upstart conducted a survey that found indeed that remote workers really are on the move. So it founded that anywhere between 14 million and 23 million Americans were planning to move as a result of remote work. And when you combine that with those moving regardless of remote work Upstart predicted that the near term migration rates maybe three to four times what they normally are. It also found that 20% of those who wanted to move were currently based in big cities, and they wanted to get out. And the biggest reason people want to move is to find more affordable housing. 52.5% said they were planning to move to a house that was significantly more affordable than their current residence. And all those things just make sense. I mean, right down, I mean, what we’re talking about, if you can make the same or almost the same amount of money working remotely, you know, a lot of people want to like bow out of there’s really high mortgage rates are, you know, high housing prices they have in the city, it can move somewhere else for like a fraction of the price.

Dan Kline  7:53

Yeah, that’s actually what we did. When we first moved to Florida, like we were living in Connecticut. Connecticut is a very expensive place to live. And admittedly, we opted, we wanted to live downtown in the city, so we didn’t go as cheaply as you could go. But we bought out a small three bedroom condo. And for the same amount of money, we were spending in Connecticut, we had access to a beautiful pool and a gym and all the downtown amenities. So the problem is now someone who wanted to do that might not be able to do it. We sold our condo for about 50% more than we paid for it. And I don’t know that the housing market in Connecticut is 50% up.So you’re seeing some real trends, you’re also gonna see, I think, people moving into places that maybe weren’t doing so well. But if you see a big influx of people, you know, that can turn communities around. So this is going to be interesting, and it’s going to be a big trend to watch going forward.

Matt, let’s uh, let’s not say all three companies we’re going to talk about here, let’s do them one by one. And I’ll let you go first here because I know you’ve got some graphics as well. But the first company we’re going to talk about is Dollar General (NYSE: DG). I am about three miles down the road from Dollar General in one direction. And then there’s another one about seven miles down the road in the other direction. This is a company that really, really understands its market. And I’ll point out while Davenport, Florida has a big mix of wealthy homes, it’s largely I think the median income isn’t like the 40 thousand and is not a wealthy place. So it fits directly in to the Dollar General model. Matt, your thoughts on Dollar General?

Matt Cochrane  9:28

Well, yeah, before we get into the specific numbers, just anecdotally, like we were in when we were in Alabama we were like visiting like we’re doing a lot of hikes and boating and things like that. And one of these parks there’s a nature trail, and I forget the name of it, but it was the guy who had first explored that park and it was called that guy’s name Boulevard. And we had a right a park ranger leading the tour. And he jokes he made a joke and he goes, you know the only what, what what is different about this Boulevard than any other Boulevard in Alabama. And he goes on this boulevard you won’t find at least 2 Dollar Generals.

Because like when you go in small town America, you I mean, you can’t go anywhere without running into a Dollar General. And I mean, you know, if you live in a big city, I understand I are, I understand why you wouldn’t really be familiar with this door. Like before my parents moved to rural South Carolina, like a few years ago, like, I don’t think I’ve ever been to a Dollar General and I know we have some around, but like, there’s really no reason for me to. But like when they moved, the nearest Walmart was probably 10 miles away. But there’s Dollar General about a half mile away. And so you know, when you need to run to the store to get some milk or like, you know, whatever else, you might need a snack or anything, you’re going to the Dollar General, there was nowhere else to go that was even remotely close.

Dan Kline  10:48

Let me jump in. Dollar General serves areas that are underserved by supermarkets. They also sell in quantities that are definitely aimed at people for whom money is tight. You probably cannot go into your Publix or your stop and shop your Kroger or whatever it is, and buy a half a roll of toilet paper. And I make that joke. I’ve said it before in the show. But it’s actually true, you can go in and buy that type of quantity at a Dollar General. And the reason for that is some of the people shopping there. That’s kind of what they can afford at the moment, they can buy one can of soda, not necessarily a 12 pack at a time. And I recognize that there’s other places you can buy a can of soda. But Dollar General isn’t doing the markup.

This is a company that is incredibly focused on serving an underserved audience, and really knowing what they need. So the merchandise varies. I’m in sort of a tourist area. So the Dollar General stocks, things like pool noodles that it wouldn’t necessarily stock at the one that was next to the college campus where I lived in Connecticut, which was the only one around there. And that made sense. A lot of college students don’t have a car, they’re limited as to where they can go.

So this is a company that they’re not catered to me. I walk into the store and I actually find the stores disheveled. I don’t like sort of how crowded they are. But if I needed some dog food, a USB cable, a beach towel, a coffee can you know who knows what else, you can buy all of these things on this one stop. So does it speak to people that need to just like shop on a day to day basis? Yes, it does. Does it speak to the tourists in the area? Absolutely. This is a company that’s adding about 1000 stores a year. And it’s worth noting, this is not a company you judge by same store sales will probably throw those numbers out at some point. But basically a Dollar General knows where to put a store. It gets up to speed very quickly. And then its sales variance is not going to be that high. Matt why don’t you jump in with some of the specifics.

Matt Cochrane  12:42

Yeah, absolutely. Sam, if we have that graphic, and we just throw it up. It’s from a recent Investor Relations page. Yeah. So they have 17,000 stores in the US, which is an incredible number. It would almost make you think like how much more can they grow. But actually this year, the company plans to execute 2900 Real Estate projects, that includes 1050 new store openings, 1750 store remodel, store remodels and 100. Store relocations. And so like, and that’s what they do. I mean, you almost have to think of it as a glorified convenience store. At least that’s how I think of it Dan, you know, it’s really it doesn’t fit neatly into any other retail category. And but it’s, it’s more like a convenience store on steroids. And, and they’re so like the locations that they could pick are almost endless.

Dan Kline  13:31

So it’s a convenience store of the old school. When I was a kid growing up in Swampscott, Massachusetts, there used to be a little market on my way to school. It was called Paul’s market. And you could buy like ground beef and bacon and pancake mix and also the stuff you get at a 711. Now not that 711 doesn’t have some of that Dollar General is that to the exponential degree. I mentioned things like USB cables and towels. And you know, they’ll sell housewares and you know, you need some cheap paper plates, they’re going to have that. It’s a very densely packed store. The shelves are absolutely crowded. And as I said they’re not particularly well organized. But there is a lot going on in those stores. We’re going to talk next about tractor Oh, go ahead, Matt.

Matt Cochrane  14:14

I just gonna say I was actually looking for the book on my shelf but like I actually here so I actually read the the founders autobiography of Dollar General. And it’s really interesting, they get this whole town store. I mean, they get that small town, a market because that’s where they’re that’s where the roots are from, like they they started in like this podunk town in Kentucky, where they operated for years and they would just go to like neighboring towns like and like buy stores that were in trouble or things like that, and then grew from there. And like when they moved to like Nashville, Tennessee, I think like that was like moving to the big city like when they moved their corporate headquarters there. I mean, they get the small town market because that’s where they from. That’s where they’re from, like one of their first promotions they ever did. Dan was like they handed out all these left hand clubs. to farmers and the market, and they said you can get the other right hand glove for free when you came to a store. So like they, they’re, you know, they get that market very well.

Dan Kline  15:12

The guy who lost his arm in the thresher accident did not have to go in to get the other glove. We would like your questions and comments. Sneha we see your comment. We’ll take it at the end of the segment. But if you want to ask us questions about Dollar General about our next company Tractor Supply, about anything in the housing shift, we are happy to talk about that. We also know that it’s Friday and many of you are going to be watching this show passively, perhaps checked out a little bit. We appreciate that as well.

So Tractor Supply (NASDAQ: TSCO) is a company that our mutual friend Emily Flippin put on my radar. It’s not a company I’d ever really thought about. And then I realized I driven by a Tractor Supply for two years on the way to work. There’s one in Manchester, Connecticut, where I used to run the toy store and what is Tractor Supply? It’s the largest rural lifestyle retailer in the United States. What does that mean? They serve people who have farms and gardens and who live in places where you have to take care of the outside of your home.

Matt, this is a little bit foreign to me. I am I feel like plants curl up when I walk by like they sell baby chicks at Tractor Supply. Only seasonally, you can only buy chicks at certain times a year, they will actually mail them to you, which seems dangerous. I feel like the baby chicks will just keel over if I come in. So I am not the target audience here. But this is a company that knows its audience incredibly well. And they have no competitors. These might, Tractor Supplies are in places where the nearest Walmart might be a 20 minute ride away, where the supermarket isn’t selling the things that Tractor Supply sells. So this is a company that’s located incredibly well. They’re incredibly in touch with their audience. And they really just understand what they’re doing.

And they had a blowout quarter. Now mind you, some of this is fueled by what we talked about earlier. All these people who lived in the big city that are moving to rural areas are and I think they might many of them will become disenchanted with this. But they’re like churning their own butter and building chicken coops and planting crops and all sorts of things like that. So in the most recent quarter, net sales increased 42 and a half percent. Comparable store sales were up 38.6%. Diluted earnings per share were up 118%. Ecommerce sales grew by triple digits and the company has raised its EPS range to $7.05 to $7.40 for the full year, up from $6.50 to $6.90.

So I actually think this is sustainable now. Are they going to be putting up double digit growth and even triple digit growth? Every quarter? No. But as we see this population shift, I don’t think you’re going to see Targets opening up in these markets. I don’t think you’re going to see Walmart put in stores to serve now, will there be some things on the fringes? Yeah, absolutely. Some of those bigger small cities, we talked about that that are big and spread out, like where I am in Davenport, Florida, where there’s absolutely dense population in certain places, but there’s also rural communities, areas and people with farms and people with land. So yeah, you might see some growth of the other chains. But for the most part, you’re seeing more people move to where Tractor Supply is. And that’s going to be very, very good for this company. Matt, you want a graphic for this one as well?

Matt Cochrane  18:28

Yeah, Sam, why don’t you go ahead and throw up the Tractor Supply business. But yeah, the you know, the, like, Dan, all the all the numbers you talked about, like, you know, customer traffic was up 21%, the average price ticket for visitors was up 17.6%. But Dan the number that really stand out is to triple digit ecommerce growth for the fourth consecutive quarter that that’s incredible numbers right there.

Dan Kline  18:52

It is. It’s also worth noting and, you can take the graphic down Sam, that’s that growth is coming kind of from nothing. This is really an in person company. It’s mostly things you want to do. So the pandemic brought in more audience. That’s obvious by the 21% increase in traffic. But it’s also a wealthier audience if you downsized but kept your job maybe upsize but move to a cheaper home and you’re still making the money you were making in the big city, you have much more money to spend. You might also be seeing an audience moving into these places that simply more comfortable with ecommerce if if you were an in person Tractor Supply customer, it’s very likely that during the pandemic once things subsided and became safe to go out you probably like that routine. I know anyplace I shop in person I’ve largely gone back to shopping in person. This is a steadily growing company. It’s not one people talk about very often. And I think it’s just a steady retail winner and competing with them would really involve another company making a really significant investment. And I don’t see that happening.

Matt Cochrane  19:55

You know, yeah, Home Depot tried a few years ago, Dan, to like I forget what they called it, but they tried to make a store that competed with it. And it didn’t work out. I mean, they fail. I mean, they get kind of gave up like within a year or two of starting that project that goes back like a decade. But it shows you like Tractor Supply, really understands that market. And like you said, I mean, it’s a mixture of like, feed for animals and seeds and planting things. You know, it also has like some lawn decorations and like knives and Leatherman tools. So that’s like part, you know, it has some tools with like, part Home Depot and part like, you know, all garden supplies and all these other things. But yeah, like you said, it’s really for people living out of the country who wants to, you want to build that chicken coop and who needs chicken feed, and you know, all the other things that goes with raising chickens or, or you know, like pigs, like you know, it has pig feed and things like that. And you know, it understand this market, because it’s done phenomenally well over the last decade.

Dan Kline  20:54

The only thing I don’t like about this company is its name, because I’m sure they do sell some level of supplies for tractors. But that is, that is not their core product. This isn’t a john deere where you walk in and buy like those big wheels, or you can see what I know about tractors, it’s not very much met the third one on this list. And remember, seven investors, you can get your questions and comments. And it doesn’t have to be about what we’re talking about right now. We’re going to get to talking about investing lessons we learned during the pandemic. Those are all things that came from you on social media. But Matt, you’re going to talk about Casey’s general store. This is one I actually don’t know that well.

Matt Cochrane  21:29

Yeah, Dan. So in Casey’s (NASDAQ: CASY) is a convenience store, it operates almost 2200 stores in 16 states, mostly in the Midwest. And it’s, it’s like a gas station too. So if you’re on the East Coast, you’re not familiar with cases, similar to a WaWa or QT or Sheetz, like one of those operations. It found success, though, by opening stores in small towns across Iowa, and still does that today. So I want to say like, nine are over 50% of Casey’s locations are in population areas that are that have a population of less than 5000. So it’s the fourth largest convenience store in the US. It’s the fifth largest pizza chain in the US because they make this pizza that I’ve never been to a Casey’s because the Midwest is outside of my range of road trips. But one day, I hope to do that. But like, apparently they sell a pretty good pizza, they make it from scratch, or you know how they advertise it. And you know, it’s pretty popular.

Its rewards program has 3.3 million members, which is pretty good. I think for a gas station, and convenience store. Its digital sales were up 95% year over year in its latest quarter. So like more people are ordering on their app and online. Its EPS was up 14% its revenue was down about 12%. But that’s not the best way to judge Casey’s because of gas prices can fluctuate so much. So depending on how gas prices are like their revenue might be up or down, but has no bearing on their profit. So like don’t look at revenue grow so much as their earnings growth. In case, I’m sorry, saying we also have a graphic for Casey’s that we can show.

So you can see over the last over the last decade plus I mean, their revenue has grown to 7.1%. Their inside sales. So this is like the high margin foods they sell inside. So this is really important. Their inside sales have increased by almost 10% since 2009. Its fuel gallons have risen too and it’s it keeps growing unit. So like you know, it’s currently two units by about 4% compound annual growth rate over the last decade. So it’s expanding and opening up new distribution centers. But like the thing you really want to watch is your earnings growth and the inside store sales because those are the much higher margin project products that they sell on the inside of the store, then like the gasoline sales.

Dan Kline  23:56

One of the things that’s important to bring up about all of these stores is they’re really really good at picking locations. And if you pick locations, right, it becomes very, very hard to compete because Dollar General is established, Tractor Supply, Casey’s they’re established in their markets. If you go in next to a Casey’s and open a WaWa, of course WaWa has some of its own fans, and there might be some excitement, but the people who go to Casey’s are probably still going to go to Casey so you know it’s very much like how difficult it is to compete with say Dunkin Donuts in in parts of New England where the small town at the core of the town is the Dunkin Donuts. That’s true in the town I grew up in there are other coffee chains there. But definitely sort of like the Town Hall is the Dunkin Donuts.

Matt Cochrane  24:41

One more thing, Dan, I actually just pulled up those numbers. So 57% of Casey’s stores are still found in areas with populations of 5000 or less. Only 17% of cases locations are in pop are in areas where populations of 20,000 or more and a lot of times they built that out but the area just grows up around it. So like get like, to your point, they they’re excellent at picking out these underserved areas. We that’s like the thing that just keeps coming up right Dan like these underserved areas that like Dollar General and Tractor Supply, and Casey’s to have found a way to exploit and turn a nice profit doing it.

Dan Kline  25:19

So before we segue into our next topic, I wanted to take the one comment from Sneha. We promised we would So Sam if you want to bring that up. Uh, hi, Dan and Matt on the topic of housing, how do you compare Redfin, Zillow and Opendoor. And I’m going to take a cop out here, Matt, you’re welcome to weigh in. I will start with the caveat that I am probably out voted by members of the team that are fans of these companies. And I am not I don’t own any of these. And here’s why. They’re operating in a space where the margins are already low. A real estate commission is 6% at the max. Now when they’re doing something like ibuying, that gives them some leeway, where you already would have been paying that commission that so they can, you know, they’re paying you less, but well, you don’t have to pay your realtor, but it’s really, really tight.

And to me, I don’t see that real estate is something that needs to be disrupted. I like working with a realtor who is a person who knows the market. When we were looking for our condo I did approach through Zillow and Zillow assigned me to someone who wasn’t any good and didn’t keep in touch and didn’t send me what I was looking for. I wanted someone who wasn’t going to send me every three bedroom, I only wanted to see three bedrooms in resorts or two bedrooms and resorts. And I found it a pretty bad experience. Whereas the real estate experience with a realtor is actually really, really good if you pick the right person. And I understand some people think 6% is high. But compared to what they’re trying to do with ibuying, it is not high in terms of trying to sell it yourself. Yeah, in some markets, you can do that. But that’s also difficult as well. Matt, I think you disagree with me on this one.

Matt Cochrane  26:58

Yeah, so what I’ll say is this, um, out of those three companies, I like Redfin (NASDAQ: RDFN) the best, I think there’s a way to make the whole process of getting a mortgage and buying a house and selling a house like more simpler and cheaper for the for the end buyer and seller, and I think Redfin, it has the best chance of doing that. Opendoor (NASDAQ: OPEN) is making that process very simple, but it’s also charging more, and I’m not sure if there’s too much of an appetite for that. So Opendoor, actually the one I like the least, Zillow (NASDAQ: Z), I’ll take a cop out, I don’t know as well as those two. But I do have a small position in Redfin.

Dan Kline  27:35

Before we hit the homestretch here, Matt, let’s talk a little bit about the past couple days. So we’re only a few days past the first of the month. And the first of the month is where our new rec is when our new recommendations come out. So as a member, you get access to our recommendations, you get access to the videos of our recommendations, these are 25 minutes, 35 minute really long pieces, where we lay out a case with a whole PowerPoint presentation, and everyone in the team gets to ask us questions. So not only do you get our take on the stock were picking, you also get our answers to the questions and objections of the other members of the team. On the third Friday of the month, we are going to do our new member call. That is where new members to the service, get to log in and learn. We talked about how the service works, even basic things like how to open a brokerage account. And then of course, we do our subscriber call. That’s a 90 minute call, where people can ask us about our ongoing picks.

And I think the new member call this month, Matt is going to be especially busy, because we announced something a few days ago, we announced that our prices are going to increase. So right now, our prices are $17 a month, or $170 a year. And if you join through July 7, you get those prices not just for the year, not just for the month, but forever. So if you become a founding member, someone who joined in our early days, we’re never gonna raise your price. So you still have about four weeks, a little more than four weeks to lock in that pricing. After that, if you don’t join, you’re gonna pay $49 a month or $399 a year, Matt, it’s a value even at that. And I know I work here and I’m biased, but we’re raising prices, largely because people told us we were crazy to charge so little. I’ll let you weigh in before we hit the homestretch here.

Matt Cochrane  29:22

Yeah, absolutely. I mean, please, please take advantage of this. You have a little over a month left to lock in these prices, which is just, again, biased. Of course, I’m biased, but I just think it’s a phenomenal value for what you get. Absolutely.

Dan Kline  29:36

So I asked the question on Twitter, what investing lessons did you learn from the pandemic? And when I ask a question like that, I usually am the first one to throw out an answer. So Sam, if you want to throw up my answer, that would be fabulous. Assuming Sam has these answers if she just not, there we go. All say it’s my the lesson I learned is that the best companies are two steps ahead, which helps a lot when the annex spected happens. So I’ve talked about McDonald’s a lot before you can talk about Domino’s, it’s, it’s not limited to food companies, but company, you know, Target and Walmart would also be great examples. Target (NYSE: TGT) and Walmart (NYSE: WMT) didn’t pioneer curbside pickup or work on same day delivery because they thought we were going to have a pandemic any more than they stocked up on, you know, axes because the zombie apocalypse is coming like they were engineering for a future and that work they did paid off. So that’s the type of thing we are talking about here.

We’re gonna start with one from Ken McInerney. I was actually chatting with earlier today. He says, I don’t know where I heard it. But it would be thinking long term investing over wanting to be a quick shrewd player got burned enough times dumping a stock too early. Can’t think a trade the other way that was just in time. Whew. Matt, your thoughts here?

Matt Cochrane  30:49

Absolutely. Ah, look, if you had asked me in March 19th, or March 20 2020, I think that’s when the market bottomed. I’m like, you know what, the next weeks or months we’re going to hold for the market, I would have easily predicted just more pain. Like I you know, that was the time like, nobody knew how serious the pandemic was going to be. Nobody knew when the economy would reopen. Things were looking to bleakest. And I thought, like, I thought for sure the market wasn’t going anywhere for a long, long time. And how wrong was I? You know, if you were trying to get in and out of these companies that we invest in? Like, there’s no way you would have, you would have missed so much of that move up over the last year? And like, and who would have predicted that back in March? I mean, like, you know, I certainly wasn’t like, you know, it was it was about like, but thinking about the long term and thinking about what we’re, eventually the pandemic would end, and thinking about coming out of it allowed me to, like, just hold on to the position to my portfolio. And without that long term perspective, you’re just trying to trade in and out of companies, tiny movements, right? There’s no way you’d have gotten that.

Dan Kline  31:56

Matt throwing out a Clubber Lang and predicting pain, Rocky three, call back for those of you who are watching at home. So I think it’s really important here to realize that in the short term, we don’t know what’s going to happen, who knew that a pandemic was gonna hit, and everyone was gonna want a Big Mac? That did not seem all that logical.  I probably would have predicted pizza sales up, I didn’t necessarily predict that some of the companies that would do well, or some of the companies that had to close their physical locations, like say, Best Buy, how well they would recover, and how unseen demand like who knew that every kid was gonna have to work at home for six or nine months, or whatever it is.And we would need desks and laptops and tablets and headphones and webcams. You couldn’t buy a webcam for quite a while. I mean, the pandemic was probably also good for, say, like Staples and Office Depot, which are not great investments or great companies in the first place.

So nobody knows in the short term, and let’s throw one up next, from our very own Anirban Mahanti, who hopefully is sleeping right now. Time is the friend of the wonderful business an enemy of the mediocre. So as so many two, tier two, three and four businesses dilute their shareholders to debt just to survive. And one way to assess quality, just peek into the balance sheet. Cash is slash was king, your thoughts on this Matt?

Matt Cochrane  33:15

Well, one, the balance sheet. Definitely, like if you have cash, you have some optionality. You don’t have to worry about immediately surviving any crisis. You know, you have a little bit of leeway there. So 100% like balance sheet strength is something to always look at. And the other thing too about just the difference between mediocre companies or higher quality companies, look the ability to innovate and think on your feet and to roll with the punches, so to speak, sticking with the Clubber Lang, like even with the Clubber Lang theme here, like the ability to roll with the punches for companies is so so underrated.

Like Best Buy (NYSE: BBY), being able to, like quickly develop and like, sell things curbside and have customers just pull up in the parking lot. What do you need go out and get it or order on the app. So they can pick it up curbside, you know, companies like  Square (NASDAQ: SQ), like how quickly they rolled out things for their customers, saying, hey, look, we collected all these email addresses and phone numbers on your behalf. So let’s start a marketing campaign that you’re open for business and we already have partnerships with with these third party delivery companies so you can deliver and instead of curbside like that. So companies that were able to innovate quickly were the ones that did the best in the pandemic.

Dan Kline  34:30

I thought you were going with the Van Halen reference with roll with the punches. So we’re we’re going old school 80s here on 7Investing Now. Stock Investor says chaos can catalyze a quality company. Yeah. You learn about people when things go wrong. A lot of people seem steady, a lot of leaders seem great. And then something goes wrong and they’re crying in the corner or abandoning their post. I’m exaggerating a little bit, but we’ve seen it here.

Some companies that you didn’t know how great their CEO was. I don’t think we knew how good a CEO Brian Cornell was, or for most of the pandemic over at Best Buy was Hubert Joly, it’s, I’m forgetting the woman’s name. There’s a new CEO there, her first name was Corey, I apologize for forgetting her name. But that being said, we saw how people took this terrible, terrible blow, and then they came back from it.

We’re going to share a couple that we don’t necessarily agree with right in a row. And when I say this, it is with all respect, these are friends of the family. These are people that are active with us on Twitter. So I pushed back a little on Twitter, you’re allowed to not agree with me. But if you want to share to just comment, Sam, and then we can go right into Giovanni’s. When a stock explodes four times in just three months, take profits, don’t ride it all the way back down. Because you’re thinking long term. I don’t agree with that. I’ll explain in a second, if you want to move on to Giovanni’s Oh Yep, bring that up. Thank you. When your stocks go parabolic up, you better start selling by dollar cost averaging on the way up, example, selling 35% of position, then re enter after the unavoidable correction.

Corrections are not unavoidable. There are plenty of stocks that if you did that you would never be able to get back in. So let me give a very broad statement. I have a long conversation with Simon Erickson, after our show on Wednesday, Simon is of course, our CEO, our fellow lead advisor. And we talked about how historically if you look through the various portfolios and places we’ve worked our personal portfolios, that it actually almost never make sense to sell. The only caveat, I’ll say it’s in line, I’ll let Matt weigh in in a second here, it’s in line with with a little bit of what you said, If I own something, and it literally goes up 400%. And all of a sudden, it’s 60% of my portfolio, and I feel it’s a risk stock, not a foundational stock, then I might sell a little but that’s a personal peace of mind sleep at night thing. The reality is history has shown us that selling just because the stock has gone up is actually not a good idea. Matt, your thoughts here?

Matt Cochrane  37:02

Well, I hate that like kind of cop out. But like, it kind of depends to like, what it depends on your thesis, like, what is your thesis. You know, and on each situation, like, I will say, I have trimmed companies because of extreme valuation, you know, like, sometimes I get into a company, I think, you know, this could definitely go up three or four times over the next five years. And I like the optionality is I make it a small position, even though I see there’s a lot of risk. And a lot of times at risk I see as valuation risk. And then if it explodes upward three to four times in six months, like where my almost my five year thesis is played out. Like, yeah, I’ll take some off the table. I think I you know, that’s, that’s how I do that. That’s what I do.

Now, and other times too, again, though, always, depending on the situation or your thesis, like, you know, when it’s a company like Amazon or Shopify that like these great companies, their valuations are almost always going to be ahead of themselves. And companies like that, where their total addressable market is larger than the optionality. And again, also, why is the stock updated four times in six months? Are they entering a new market are they like our sales, like, way up more than people thought? So there’s just so many variables here, it’s hard, it’s hard to say like, it’s hard to paint with too much of a broad stroke here. So it really kind of depends on a lot of things here, but a 100%, like I’m always wanting to buy and hold, I never exit a position just because of valuation. But sometimes, sometimes I do true.

Dan Kline  38:31

And we’ve done many shows on why we sell a stock. Again, I’ve talked about this, if something that I thought was going to go up 1400% goes up 1400%, you know, then maybe I’ve reached the end of my thesis. And I’ve mentioned that a bunch of times. And here’s the reality. That’s much more true in say, retail, where there can be a finite number of stores for many brands. So you might get to a point where you go, okay, that brand is has kind of spread out, you know, 10 years from now maybe Dollar General is open to every Dollar General. And the other things they’ve tried to spin out, they do have another concept they’re working on. Maybe it didn’t work and you go Okay, that’s probably not true in tech. That’s probably not true in biotech. So I’ve said this many times on air, but the reality is, I’ve never actually had it play out in my my real life investing story. I’ve never seen a company that I believed in, not find some new avenue for growth and sort of actually hit the end of the investing thesis.

We’re going to get to a couple more here. I just want to say I appreciate how many of you we’re not even gonna be able to use half of the ones I have on my list here. Because we’re bumping up against time and the fact that I have to drive home in what’s going to be a very, very rainy day and want to take it very slow. I don’t know Matt if you’ve driven the Florida Turnpike, it’s absolutely terrifying when it’s rainy, it basically becomes a river on both sides of you and it’s a two lane road and you can’t see so we’re not going to go quite as long as we normally do.

But I want to take one from our from our very own Brock Briggs as our next last one here. If you’re kept up at night worrying about your potfolio something is wrong. Allocation, selection or some combination. I feel really confident in that one. There were points during the pandemic, where I looked at my portfolio, you know, and it was a sea of red, it was ugly, it, it did not look great. And none of it, I went my head, I said, did anything change about these companies? And I went, No, we’re in a pandemic, like these companies may suffer for a year or two years. Who knows what it is? Do I believe they’ll turn it around? Yes. Now, those of you who are 7Investing members, and if you’re not, that is, of course, 7investing.com/subscribe, you will know that my pick last month, not this month, last month, was a company that I didn’t buy for much of the pandemic because I was worried about long term survivability, or at least a chapter 11 wiping up shareholder equity. And once a quarter was turned with that was no longer a concern. It became one of my favorite investments. And I think one of the investments that has the most upside. Matt, you sleep well at night, right? You don’t worry about your portfolio.

Matt Cochrane  41:03

Well yeah. And so like, it’s like, like Rocky Balboa, sometimes your company has to take a punch and get back up. So sticking with the Rocky theme, they’re like, Yeah, absolutely. Like, you have to know, you have to know why you you hold the companies in your portfolio. You have to know why you believe those companies will do well over the long term. And you have to understand also that the name of the game is that there will be volatility along the way, and that they will go down 20%. And if you don’t know why you own those companies, like your faith will be severely challenged during those times and you will, you will lose sleep, you will be thinking about it, you know, your portfolio when you should be thinking about, but about other things.

So definitely, like, you know, again, like, like you said, Dan, like not to toot our own horn here at 7Investing. But one of the advantages is like, you know, when you when we suggest companies, you know, it’s not just a ticker, like in a tweet, or you know, the bull thesis, find in a couple of tweets on Twitter or something like that. You’re getting a 2000 to 3000 word report explaining why, like the thesis of this company and getting regular company updates on it, you know, you but you have to know, you have to know why you hold the companies in your portfolio and why you think they’ll succeed.

Dan Kline  42:14

And we don’t even own a horn, Sam Bailey, we should put that on the marketing acquisition list, we should get a horn so occasionally, we can toot our own horn. Right now we’d be tuning a borrowed horn, and that is not nearly as good. I’m gonna say it’s not.

We’re going to take the last one here from Buddhist Investor. Again, I apologize to the many I didn’t get to there were a lot of them on the list here. But I thought this one in line with it being a Buddhist investor, I have no idea of Buddhist investors actually a Buddhist. Patience is very boring. But the results are exciting. We can’t emphasize this enough. We talk about get rich slowly, and I get it. It’s really fun to like, be like my friend who bought some some Dogecoin and forgot about it, and went into the account and realized he had $70,000. Like, that’s great. But that’s like when someone gives you a scratch off lottery ticket for your birthday and you scratch it, you win $10,000. That wasn’t planning that wasn’t strategy. There’s, you’re not in the know, that’s like if I go to the casino, and I’m playing three card blackjack, you know and get a four of a kind that never happened to me that happened to our our friend and colleague, Matt Frankel. And that is so rare that they actually had to watch the tape to make sure he wasn’t cheating. And the payout on you know what was like a 60, 70 dollar bet when all is in because you don’t pull any of your bets back. It was like a $4500 payout. That’s not because he’s brilliant. That’s because the cards felt that way. And he knew the basic way to play. So yeah, most of your riches are going to be about being patient. Matt I’ll give you the last word.

Matt Cochrane  43:42

Well, I mean, it goes back to the famous Warren Buffet line, right? Like when asked why. You know, he was told, like what he did was pretty simple. He bought great companies and great businesses and held on to them. And like, he was asked, like, why didn’t more people do it the way he did it? And he replied, because most people don’t want to get rich slowly. You know, like, but but patience pays pays many dividends, figuratively, and literally. That’s what you’ll be rewarded for as an investor like, yes, there’s a lot of FOMO out there because you see like some of these like cryptocurrency coins that don’t even have a purpose, you know, some more than others, I guess. But like, you know that they’ll explode in value and then get decimated over the next week or whatever. There’s a lot of FOMO out there. But if you buy great companies and you hold for the long term, you are you know, history has shown that you’re going to be rewarded for that.

Dan Kline  44:36

And I know this isn’t a universal rule. But but here’s where I am on some of these things. If I can’t explain why something is going to gain in value, then I probably don’t want to own it. And we talked about AMC on the Wednesday show. We’ve talked about GameStop many times. Obviously there’s people who understand the crypto market and make a thesis for why you should buy certain coins and I might listen to those people and adopt their thesis. But there is not a person on earth who can look at gamestop or AMC and make a case for their valuation. So to me at some point that’s a bubble that’s a balloon eventually it gets deflated. You know things can’t go up forever when there’s nothing actually backing that and can the internet support something for a while? Absolutely it can but probably not forever This brings us to our finisher this isn’t progressing you don’t have to hit like six finishes you know nobody gets up from you know three elbows off the rope or or two F5 here. We’re going to the finisher.

Matt Cochrane  45:34

Rocky three rocky get fight Hulk Hogan too. So you know there’s there’s wrestling thing here too.

Dan Kline  45:39

We are bringing up Thunderlips. There was a summer where I was at camp and I taught I don’t even remember what I taught I journalism maybe and someone else was teaching video. And the only movie we had in our little mocked up video studio was Rocky three. And we have the Simpsons episode where Homer plays softball. So I’ve seen that movie at least 45 times that summer. And that Simpsons episode probably almost as many so there’s very little about Rocky three. I do not know that is my favorite of the rocky movies.

Matt Cochrane  46:11

No lover for Rocky four? Rocco, common?

Dan Kline  46:16

You you went the other direction. I thought I thought you were gonna make the Rocky argument that that’s clearly the best movie. Rocky four when it went a little over the top for me.

Matt Cochrane  46:23

End of the Cold War. Come on, Dan.

Big Gorbachev and it’s the Russian fans inexplicably cheering for him at the end. We have gone way off the rails. I appreciate everyone indulging us here. Sam Bailey, let’s hit our finisher. Which company will have the largest market cap in 2040? More than half of you said Microsoft, 30% said Tesla, 5.6% said Walmart, 11.3% said Walt Disney. Matt, can I make a case for Walt Disney? That right now I don’t think Disney is getting pretty much any bump. I realized Disney stock is up, you know 50% of last year or something like that. I don’t feel like it’s getting anywhere near the tech bump it should be getting for Disney Plus. I also think there’s way more value in ESPN plus and and that whole market as the world starts to get smaller in terms of the cable universe. So I get it Walmart, excuse me, Walmart. Microsoft is very, very valuable, but not necessarily going to stay there.

Yeah, well, I love Disney. So I’m not gonna argue too much. However, I think I would say like micro – I’m answering that question. I think I’d go with Microsoft. And if you gave me odds based on those results, like I might even take a flyer on Walmart, like if things go a certain way I can see them, you know, doing very well over the next 20 years or so. But just answering the poll straight up. I love Disney. I love Walmart. No, no real opinion on Tesla. But like, I think I’d answer Microsoft.

Dan Kline  47:56

Walmart would need to acquire a tech company in order to have that that they are not going to hit that type of valuation just with stores. The other thing I love with Disney is we’re about to see I mean, maybe we’re a year away the ultra premium model with the Star Wars hotel. If that works if people are willing to pay, you know, essentially premium cruise prices for a two day experience. It’s not crazy to think we could get a Marvel hotel and a Frozen experience and who knows what else so Disney’s ability to go way upscale and then maybe even lower prices to make the parks more democratic and make more people get in.

I think there’s a ton they can do there but with that, we’re gonna close the Friday edition of 7Investing Now if you’d like to get in touch with us info@7investing.com if you’d like to interact with us on Twitter, it is @7Investing that is the number at the number seven oh they symbol at the number seven investing. We are very active on Twitter and of course, if you would like to subscribe remember, you have to subscribe by the end of the day on July 7 to lock in the current pricing or else it goes way up. That is 7investing.com slash Subscribe for Sam Bailey. Matt Cochrane. I am Dan Kline. I’ll see you Monday with Maxx Chatsko.

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