1 00:00:00,080 --> 00:00:01,800 Welcome back everyone. Thanks for joining. 2 00:00:01,800 --> 00:00:04,400 In this episode, we're going to be looking at five companies 3 00:00:04,680 --> 00:00:07,480 that are on a dip. Five companies that are on sale. 4 00:00:07,880 --> 00:00:09,200 Now. If you're anything like me, 5 00:00:09,280 --> 00:00:12,280 you're a value investor and you're wanting to find very good 6 00:00:12,280 --> 00:00:16,040 companies at attractive prices. It's the Terry Smith motto. 7 00:00:16,320 --> 00:00:19,120 We want to buy good companies but we don't want to overpay. 8 00:00:19,560 --> 00:00:22,440 The problem is, as you can see right here, we're looking at the 9 00:00:22,440 --> 00:00:26,040 S&P 500 chart. Year to date, the S&P 500 is up 10 00:00:26,280 --> 00:00:31,930 15.86 percent, 15% year to date. And then the QQQ, these tech 11 00:00:31,930 --> 00:00:35,970 companies, they're up even more, 38% year to date. 12 00:00:36,770 --> 00:00:39,010 Now if you're like me and you're looking at this, you're 13 00:00:39,010 --> 00:00:42,730 thinking, wow, a lot of these companies have ran up in price 14 00:00:42,730 --> 00:00:45,250 just this year. And it seems like yesterday they 15 00:00:45,250 --> 00:00:48,210 were so much cheaper. So you're trying to find deals 16 00:00:48,210 --> 00:00:50,690 in the market. What can we buy today that is on 17 00:00:50,690 --> 00:00:52,290 a dip? Well, that's what we're going to 18 00:00:52,290 --> 00:00:54,570 be talking about. I filtered for five companies 19 00:00:54,570 --> 00:00:57,370 that are trading at a substantial dip, and I've ranked 20 00:00:57,370 --> 00:01:01,250 them in order of the dip. Now, the way that we do this is 21 00:01:01,250 --> 00:01:04,650 not just by my opinion, it's not just by me saying they're in a 22 00:01:04,650 --> 00:01:06,450 dip. This is by a mathematical 23 00:01:06,450 --> 00:01:09,330 equation called the 200 Day Simple Moving Average on 24 00:01:09,330 --> 00:01:10,650 Qualtram. I've developed something called 25 00:01:10,650 --> 00:01:13,010 the Dip Finder, and the dip Finder is a simple tool. 26 00:01:13,250 --> 00:01:15,810 You enter in a watch list and then it takes your list of 27 00:01:15,810 --> 00:01:18,850 companies and it builds a chart that gives you a visual 28 00:01:18,850 --> 00:01:22,130 illustration of which companies are in a dip and which companies 29 00:01:22,130 --> 00:01:24,810 are in a price surge. If they're in a price surge, 30 00:01:24,810 --> 00:01:27,450 they'll be green above the X axis. 31 00:01:27,770 --> 00:01:30,610 If they're in a dip, they'll be in the red below the X axis. 32 00:01:30,970 --> 00:01:33,490 And then the percentage that it shows, whether positive or 33 00:01:33,490 --> 00:01:37,570 negative, is based on the Simple moving average of 200 days 34 00:01:37,810 --> 00:01:39,690 versus the current price of the company. 35 00:01:40,130 --> 00:01:43,330 Now the 200 days simple moving average is a technical analysis 36 00:01:43,330 --> 00:01:48,250 term to describe the momentum in a stock, whether it's negative 37 00:01:48,330 --> 00:01:51,330 or positive. So if a company has a -200 day 38 00:01:51,330 --> 00:01:54,270 moving average, that means Simply put that the price is 39 00:01:54,270 --> 00:01:57,350 going down, the stock is becoming in a bigger and bigger 40 00:01:57,350 --> 00:01:59,710 dip. If the momentum is positive, 41 00:01:59,710 --> 00:02:02,430 then the stock is going up. So you have companies like 42 00:02:02,630 --> 00:02:05,910 NVIDIA where this one has heavily positive momentum. 43 00:02:05,910 --> 00:02:07,910 The stock has gone up like crazy this year. 44 00:02:08,310 --> 00:02:10,150 Then we have other stocks that are in a dip. 45 00:02:10,229 --> 00:02:12,590 So as I've been looking at my different watch lists and 46 00:02:12,590 --> 00:02:14,870 looking at the different trading, I've been noticing the 47 00:02:14,870 --> 00:02:17,270 companies that are in a price surge and the ones that are in a 48 00:02:17,270 --> 00:02:20,630 price dip and these ones are in a substantial dip. 49 00:02:21,070 --> 00:02:24,630 So I have 5 here and I've benchmarked them against the S&P 50 00:02:24,630 --> 00:02:27,670 500 and the QQQ. So those last two ones that are 51 00:02:27,670 --> 00:02:29,310 in the green, that's the benchmark. 52 00:02:29,310 --> 00:02:31,350 That's where normal companies should be. 53 00:02:31,590 --> 00:02:33,990 These companies are obviously in the red. 54 00:02:33,990 --> 00:02:36,630 So let's go ahead and start off with company #1. 55 00:02:36,630 --> 00:02:39,030 And you may have guessed it, #1 is Disney. 56 00:02:39,070 --> 00:02:42,310 And keep in mind this is the smallest tip of the five, not 57 00:02:42,310 --> 00:02:44,310 the biggest. So this is just number one. 58 00:02:44,350 --> 00:02:47,350 It's going to get worse from here, but Disney's not looking 59 00:02:47,350 --> 00:02:49,780 good. Disney has been trending down 60 00:02:49,820 --> 00:02:52,620 ever so slightly since the beginning of the year. 61 00:02:52,740 --> 00:02:56,620 It's down 5% overall. So technically this isn't really 62 00:02:56,620 --> 00:02:59,140 that big of a dip. It's just down slightly. 63 00:02:59,540 --> 00:03:01,860 Normally this wouldn't cause any alarm. 64 00:03:01,860 --> 00:03:04,820 It wouldn't cause any concern. The problem with Disney is the 65 00:03:04,820 --> 00:03:07,340 more that you zoom out, the worse the picture looks. 66 00:03:07,540 --> 00:03:10,780 We zoom out to one year and it's down 25%. 67 00:03:11,140 --> 00:03:14,300 Then we zoom out to five years, still down 25%. 68 00:03:14,380 --> 00:03:16,820 That's really bad when you're still down that much in five 69 00:03:16,820 --> 00:03:19,850 years. Then we zoom out to 10 years and 70 00:03:19,850 --> 00:03:24,250 we have a 38% gain. A lot of companies had made that 71 00:03:24,250 --> 00:03:27,850 gain just this year, so an entire decade lost. 72 00:03:28,010 --> 00:03:30,610 Disney, in my opinion, is one of the most tragic companies to 73 00:03:30,610 --> 00:03:34,210 have performed this poorly. I think it's especially sad 74 00:03:34,450 --> 00:03:37,330 because so many retail investors, so many average 75 00:03:37,330 --> 00:03:41,370 people, just normal people going about their day have invested in 76 00:03:41,370 --> 00:03:43,570 Disney. We have families that have 77 00:03:43,570 --> 00:03:46,090 invested in Disney because they they know the products. 78 00:03:46,090 --> 00:03:48,730 We visited the parks, we've seen the movies, we've seen how 79 00:03:48,730 --> 00:03:51,650 powerful the economics can be in this company. 80 00:03:52,010 --> 00:03:54,570 We have lots of people that are parents that buy Disney stock 81 00:03:54,570 --> 00:03:57,090 for their kids is kind of a starter stock, right? 82 00:03:57,410 --> 00:04:00,490 We have lots of people that have exposure to Disney and the 83 00:04:00,490 --> 00:04:02,810 performance has just been terrible. 84 00:04:03,170 --> 00:04:08,490 Now the company is sitting at a 10 year low back to prices in 85 00:04:08,490 --> 00:04:13,060 2013, Bob Iger has come back to save the company from something 86 00:04:13,060 --> 00:04:16,459 that he largely started himself. He handed the company off to Bob 87 00:04:16,459 --> 00:04:18,779 Chapek. It was a total disaster. 88 00:04:19,019 --> 00:04:21,420 He took back over and he's trying to repair things. 89 00:04:21,940 --> 00:04:24,020 So there's a couple things that's happening with Disney 90 00:04:24,140 --> 00:04:27,060 that I think could possibly turn this company around and I want 91 00:04:27,060 --> 00:04:29,660 to go through some of them Now. The first bit of news here, if 92 00:04:29,660 --> 00:04:33,740 we go to the news section is there's reports that Disney is 93 00:04:33,740 --> 00:04:38,900 in talks to spin off ESPN or at least make deals with ESPN. 94 00:04:39,420 --> 00:04:42,140 And I think that this is going to be a creative to the bottom 95 00:04:42,140 --> 00:04:44,700 line of Disney. The truth is, when I look at 96 00:04:44,700 --> 00:04:48,140 this right now, the big problem with Disney is that most people 97 00:04:48,140 --> 00:04:51,620 look at the company as being the parks and the movies, when in 98 00:04:51,620 --> 00:04:55,860 reality a lot of Disney's ESPN and cable TV, So a lot of it is 99 00:04:55,860 --> 00:05:00,780 ESPN, but the problem is ESPN is being beaten up by big tech. 100 00:05:01,140 --> 00:05:03,660 Apple's coming in buying Leono Messi. 101 00:05:04,010 --> 00:05:07,210 We have Amazon diving in and buying all these all these 102 00:05:07,210 --> 00:05:09,010 sports rights to football and everything. 103 00:05:09,050 --> 00:05:12,210 But we have ESPN right now facing bigger competition than 104 00:05:12,210 --> 00:05:15,770 they ever have in their history. So a big portion of Disney is 105 00:05:15,770 --> 00:05:19,570 facing ever growing competition. And what Bob Iger is trying to 106 00:05:19,570 --> 00:05:23,850 do in this situation is find any way to monetize ESPN as 107 00:05:23,850 --> 00:05:26,690 possible. He considers ESPN not core to 108 00:05:26,690 --> 00:05:28,810 Disney. It's it's just not part of the 109 00:05:28,810 --> 00:05:32,130 magic flywheel of Disney. And I agree with Bob Iger. 110 00:05:32,500 --> 00:05:34,300 I don't think ESPN's core to Disney. 111 00:05:34,540 --> 00:05:38,060 If you look at the two products, I think that the parks and I 112 00:05:38,060 --> 00:05:41,100 think the merchandise and the cruises and the Broadways and 113 00:05:41,100 --> 00:05:44,620 the movies and the music, all of that is core to Disney. 114 00:05:45,100 --> 00:05:48,340 But ESPN, that's kind of a side thing that seems like something 115 00:05:48,340 --> 00:05:51,340 a big telecom company would own. Now if we actually go to the 116 00:05:51,340 --> 00:05:53,060 source of this rumor, it's from a website called The 117 00:05:53,060 --> 00:05:55,500 Information. They say that Amazon has had 118 00:05:55,580 --> 00:05:58,780 early talks with Disney about working on streaming versions of 119 00:05:58,780 --> 00:06:01,520 ESPN. It is developing, said people 120 00:06:01,520 --> 00:06:04,680 familiar with the matter. The tech giant could offer the 121 00:06:04,680 --> 00:06:07,240 service through one of its streaming offerings, helping to 122 00:06:07,240 --> 00:06:10,560 expand its distribution while possibly also taking minority 123 00:06:10,560 --> 00:06:15,200 stake in ESPN. So Amazon might invest directly 124 00:06:15,200 --> 00:06:17,880 in ESPN. Such an arrangement could shore 125 00:06:17,880 --> 00:06:20,720 up ESPN status as the biggest force in sports media. 126 00:06:20,800 --> 00:06:23,000 This could also reposition the tech behemoth. 127 00:06:23,000 --> 00:06:25,920 They're talking about Amazon hair, which has been trying to 128 00:06:25,920 --> 00:06:30,160 make a dent in sports streaming as more friend than foe to ESPN 129 00:06:30,580 --> 00:06:33,020 and it could weaken the sports league bargaining power. 130 00:06:33,140 --> 00:06:35,980 So I really do like this deal. I like the ESPN is being 131 00:06:35,980 --> 00:06:37,900 adaptive. I like that they're making deals 132 00:06:37,900 --> 00:06:40,620 with big tech. I think that overall changes 133 00:06:40,620 --> 00:06:42,820 need to be made because they are bleeding customers. 134 00:06:42,820 --> 00:06:45,740 Profitability is going down and big tech are the ones that have 135 00:06:45,740 --> 00:06:48,260 deep pockets. So I think this is a positive 136 00:06:48,260 --> 00:06:50,540 move for Disney. I think it will help offset some 137 00:06:50,540 --> 00:06:53,460 of the subscriber losses. This could be a catalyst to a 138 00:06:53,460 --> 00:06:55,940 stock that's really beaten up right now. 139 00:06:56,420 --> 00:06:59,380 Now if we look at some of the fundamentals of Disney, the top 140 00:06:59,380 --> 00:07:01,960 line growth really shows no problems. 141 00:07:02,200 --> 00:07:05,640 If I was to look at this in just isolation, it shows a high 142 00:07:05,640 --> 00:07:08,360 amount of linearity. It's just going up in a straight 143 00:07:08,360 --> 00:07:10,200 line virtually. Some of this has been 144 00:07:10,200 --> 00:07:13,160 acquisition driven. So this hasn't been all organic, 145 00:07:13,520 --> 00:07:16,320 but the revenue growth is there. Disney's seeing its revenue 146 00:07:16,320 --> 00:07:18,840 growing. It's all the other metrics that 147 00:07:18,840 --> 00:07:22,080 look really bad. We have the EBITDA that stalled 148 00:07:22,080 --> 00:07:24,880 out back in 2018. It's starting to go back up a 149 00:07:24,880 --> 00:07:27,640 little bit, but it's still not, not even close to there. 150 00:07:27,880 --> 00:07:30,550 We have the free cash flow. You can see the same thing. 151 00:07:30,550 --> 00:07:35,430 It's stalled out right here, 2017 through 2019, and then it's 152 00:07:35,430 --> 00:07:38,630 still trying to be repaired. Here's the bottom line for 153 00:07:38,630 --> 00:07:41,070 Disney. The cash flows are not where 154 00:07:41,070 --> 00:07:44,430 they used to be, not even close. We can see this more visually 155 00:07:44,430 --> 00:07:46,350 illustrated when we look at the full timeline. 156 00:07:46,670 --> 00:07:50,350 Disney's cash flows are about where they were ten years ago. 157 00:07:50,590 --> 00:07:53,150 So the stock price is where it was 10 years ago. 158 00:07:53,550 --> 00:07:56,670 Over the fullness of time, companies really aren't going to 159 00:07:56,670 --> 00:07:58,830 grow if their cash flows don't grow. 160 00:07:59,310 --> 00:08:02,830 So we need cash flows to start accelerating and showing a line 161 00:08:02,830 --> 00:08:05,350 of growth. Now if I zoom in over the past 162 00:08:05,350 --> 00:08:07,710 10 years, this shows it even clearer. 163 00:08:08,310 --> 00:08:11,510 We have right here from 2013 to 2022. 164 00:08:11,510 --> 00:08:14,550 But in 2023, they're starting to move to profitability in a 165 00:08:14,550 --> 00:08:16,750 bigger way. The streaming is getting closer 166 00:08:16,750 --> 00:08:19,310 to profitability. They're pushing for more change 167 00:08:19,310 --> 00:08:21,990 to instantly cut costs and raise profitability. 168 00:08:22,270 --> 00:08:24,670 They've had a couple movies do OK, which has been helping out 169 00:08:24,670 --> 00:08:26,910 Disney. So if I was to give it my best 170 00:08:26,910 --> 00:08:30,910 guess of what the cash flows will look like in 2023, I think 171 00:08:30,910 --> 00:08:34,830 it's going to be right around here, I think just under $4 172 00:08:34,830 --> 00:08:38,429 billion. So I think we see about 3.63 173 00:08:38,429 --> 00:08:41,870 point, $8 billion in free cash flow and then hopefully Disney 174 00:08:41,870 --> 00:08:46,350 can raise that year over year up to five billion, 7 billion and 8 175 00:08:46,350 --> 00:08:48,110 billion. I think it's going to be very 176 00:08:48,110 --> 00:08:50,790 tough for them to get back to this $10 billion mark. 177 00:08:51,070 --> 00:08:54,110 They are so far off from it and they face so much competition, 178 00:08:54,600 --> 00:08:58,400 but they could get back up to 3.6 to 4 and then up to 6 and up 179 00:08:58,400 --> 00:08:59,880 to seven. I really think that's 180 00:08:59,880 --> 00:09:02,960 attainable. If they do that, the stock price 181 00:09:02,960 --> 00:09:05,440 should start to head back into positive territory. 182 00:09:05,800 --> 00:09:08,880 We should see it trending upwards back to 100 back to 183 00:09:08,880 --> 00:09:11,080 1:15. So it's difficult to say if this 184 00:09:11,080 --> 00:09:13,840 is the dip to buy. I think the biggest risk you run 185 00:09:13,840 --> 00:09:17,680 with Disney buying it here is you have kind of the case of 186 00:09:17,840 --> 00:09:21,920 AT&T and Verizon, a big bloated company that really doesn't go 187 00:09:21,920 --> 00:09:23,680 anywhere for a long period of time. 188 00:09:24,150 --> 00:09:27,110 You buy basically a value trap. That's the risk you run with 189 00:09:27,110 --> 00:09:29,230 Disney. But I think that the chances of 190 00:09:29,230 --> 00:09:32,910 that are a minority. I think it's 2030% chance that 191 00:09:32,910 --> 00:09:34,190 it's going to be a big value trap. 192 00:09:34,510 --> 00:09:37,710 I think more than likely over the next couple of years, I 193 00:09:37,710 --> 00:09:39,550 could see Disney trading higher than it is today. 194 00:09:39,630 --> 00:09:42,870 So Disney's dip #1 being 12% below the 200 day moving 195 00:09:42,870 --> 00:09:46,190 average. We move on to dip #2, which is 196 00:09:46,510 --> 00:09:50,550 14% below the 200 day moving average, which is technically a 197 00:09:50,550 --> 00:09:53,350 significant dip. This is Nike. 198 00:09:53,680 --> 00:09:55,560 Yes, Nike. And as you can tell, I'm someone 199 00:09:55,560 --> 00:09:57,400 that I love Nike. I wear Nike clothes. 200 00:09:57,840 --> 00:10:00,440 I like Nike products a lot. I think they're high quality. 201 00:10:00,440 --> 00:10:03,560 I love the logo and the branding and the history of the company. 202 00:10:03,760 --> 00:10:06,560 I even like how it was founded, how they competed with Adidas. 203 00:10:07,040 --> 00:10:09,800 I just like the company overall and I continue to support it. 204 00:10:10,120 --> 00:10:12,760 No, I'm not sponsored by them. Never have been sponsored by 205 00:10:12,760 --> 00:10:14,600 them. I'd love to be, but 206 00:10:14,600 --> 00:10:16,440 unfortunately I'm not that much of an athlete. 207 00:10:16,440 --> 00:10:20,480 So let's go ahead and dive into Nike and see why this company, 208 00:10:20,960 --> 00:10:25,280 this legendary company with immense brand power is on such a 209 00:10:25,280 --> 00:10:28,200 technical dip right now let's go ahead and take a look at what 210 00:10:28,200 --> 00:10:30,160 this dip actually looks like year to date. 211 00:10:30,160 --> 00:10:35,360 Nikes down 16.34%. Now let me remind you, the S&P 212 00:10:35,360 --> 00:10:40,000 500 is up 16%. So we have 33% underperformance 213 00:10:40,000 --> 00:10:42,480 relative to SPY this year, greater relative 214 00:10:42,480 --> 00:10:44,240 underperformance against the QQQ. 215 00:10:44,560 --> 00:10:47,560 This is massive underperformance by one of the world's best 216 00:10:47,560 --> 00:10:51,030 companies and we can really see this right here, the peak in 217 00:10:51,030 --> 00:10:55,030 2021 like so many companies and now it's back down to prices 218 00:10:55,030 --> 00:10:57,950 that are so much lower. And remember in these type of 219 00:10:57,950 --> 00:11:00,990 cases when the magic has gone away from these great stocks, 220 00:11:01,150 --> 00:11:03,630 when the price is really flattened down to five year 221 00:11:03,630 --> 00:11:07,430 lows, that's a usually a great time to start accumulating a 222 00:11:07,430 --> 00:11:09,710 position in a world class company. 223 00:11:10,110 --> 00:11:12,230 So let's go ahead and see what's happening to Nike. 224 00:11:12,350 --> 00:11:14,510 The first thing that I want to mention that Nike's facing. 225 00:11:14,510 --> 00:11:18,370 Like many other companies, I did an entire episode on how your 226 00:11:18,370 --> 00:11:21,650 returns are being stolen, literally by thieves. 227 00:11:21,650 --> 00:11:23,010 They're stealing away your returns. 228 00:11:23,250 --> 00:11:26,650 Nike merchandise is being stolen at every step of the way, from 229 00:11:26,650 --> 00:11:30,650 the freight that ships it over, from the ocean to the warehouses 230 00:11:30,650 --> 00:11:33,930 to fulfillment centers to logistics centers to the retail 231 00:11:33,930 --> 00:11:36,330 outlets. Every step of the way, organized 232 00:11:36,330 --> 00:11:39,170 crime is stealing from Nike. So they're having to invest a 233 00:11:39,170 --> 00:11:42,670 lot into preventing theft. And those investments weigh on 234 00:11:42,670 --> 00:11:44,630 the margins and profitability of the company. 235 00:11:44,670 --> 00:11:47,990 With both a Nike and Disney, it's not the revenue that's 236 00:11:47,990 --> 00:11:49,950 being hit. The companies are growing 237 00:11:49,950 --> 00:11:54,190 revenue with tremendous levels of linearity, meaning it's 238 00:11:54,190 --> 00:11:55,910 literally going up in a straight line. 239 00:11:56,430 --> 00:11:59,030 Look at how linear that is. It's almost like a perfect 240 00:11:59,030 --> 00:12:01,310 straight line. We can zoom in over the past 241 00:12:01,390 --> 00:12:03,470 decade. This is what it looks like. 242 00:12:03,470 --> 00:12:07,030 Do you see any problems with this revenue at all? 243 00:12:07,430 --> 00:12:10,300 Nothing. For 1/4 it went slightly lower 244 00:12:10,300 --> 00:12:13,860 during a literal pandemic. A single quarter was it. 245 00:12:14,140 --> 00:12:16,260 Nike recovered much faster than most companies. 246 00:12:16,660 --> 00:12:19,780 So there is nothing, absolutely nothing wrong with their 247 00:12:19,780 --> 00:12:22,380 revenue. The problem comes in with the 248 00:12:22,380 --> 00:12:25,180 margins, with the actual profitability metrics. 249 00:12:25,420 --> 00:12:28,060 Their margins are being squeezed, one of them being 250 00:12:28,060 --> 00:12:30,500 theft, and their investments into security eats away at their 251 00:12:30,500 --> 00:12:32,980 bottom line. Another thing that's a problem 252 00:12:32,980 --> 00:12:36,950 for them is extra inventory. See, these companies have to 253 00:12:36,950 --> 00:12:39,270 order a lot of goods and then they have to get rid of them. 254 00:12:39,550 --> 00:12:42,910 If they have extra inventory, they have to mark it down to get 255 00:12:42,910 --> 00:12:44,950 rid of it. And this is a big problem for 256 00:12:44,950 --> 00:12:46,910 Nike. So Nike had to do a lot of 257 00:12:46,910 --> 00:12:49,790 markdowns in their products. They had to sell a lot of their 258 00:12:49,790 --> 00:12:53,390 products in places they don't normally sell, like Costco's and 259 00:12:53,390 --> 00:12:56,790 Costco's have very low margins. So to get rid of all of this 260 00:12:56,790 --> 00:12:59,150 inventory, it hurt their profitability. 261 00:12:59,710 --> 00:13:02,070 But if we look at this now, we look at the free cash flow here, 262 00:13:02,390 --> 00:13:05,510 this is over the past 10 years, we can see that it's still not 263 00:13:05,510 --> 00:13:07,910 that bad. We're having some decent cash 264 00:13:07,910 --> 00:13:10,470 flow. So it doesn't look terrible. 265 00:13:10,710 --> 00:13:14,430 We flip this to annual and look at it, it looks like it's 266 00:13:14,430 --> 00:13:16,710 basically on track. We can look in the past ten 267 00:13:16,710 --> 00:13:19,790 years, we can look all time. That doesn't look too bad, 268 00:13:19,790 --> 00:13:22,270 doesn't it looks like Nike's growing their free cash flow 269 00:13:22,270 --> 00:13:23,950 over time. And then if we look at the free 270 00:13:23,950 --> 00:13:26,630 cash flow yield of the company, I think it looks pretty good. 271 00:13:26,670 --> 00:13:29,070 The free cash flow yield is 3.19%. 272 00:13:29,560 --> 00:13:32,800 The stock based comp adjusted free cash flow yield is 2.7, so 273 00:13:32,800 --> 00:13:34,040 a little bit more expensive there. 274 00:13:34,400 --> 00:13:37,360 The big problem with the company in terms of the valuation is the 275 00:13:37,360 --> 00:13:40,960 Ford P/E because they are taking on losses from marking down 276 00:13:40,960 --> 00:13:42,760 products. So we look at the earnings per 277 00:13:42,760 --> 00:13:44,720 share chart. This is where things get a 278 00:13:44,720 --> 00:13:48,400 little dicey with Nike and we see a bit of a concerning trend 279 00:13:48,400 --> 00:13:50,520 here. So we can see it over time and 280 00:13:50,520 --> 00:13:53,640 we can see the long term growth path of Nike. 281 00:13:54,040 --> 00:13:56,720 A lot of good linearity there. Looks like it's just going up 282 00:13:56,720 --> 00:13:58,660 over time. Then we see what's happening 283 00:13:58,660 --> 00:14:00,780 more recently. Let's zoom into the past 10 284 00:14:00,780 --> 00:14:04,100 years. We see it growing over the past 285 00:14:04,540 --> 00:14:06,980 nine years. And then for some reason this 286 00:14:06,980 --> 00:14:09,380 year, every single quarter is going lower. 287 00:14:09,460 --> 00:14:11,980 We have the four most recent quarters in earnings per share, 288 00:14:12,300 --> 00:14:16,900 93 cents, 85 cents, 79 cents, 66 cents. 289 00:14:17,300 --> 00:14:20,340 That is the problem right there. The most recent trend is that 290 00:14:20,340 --> 00:14:24,140 it's going negative. Now in my opinion, I think 291 00:14:24,140 --> 00:14:25,540 they're going to turn this around. 292 00:14:26,090 --> 00:14:29,290 If you're looking at the company right now on a future earnings 293 00:14:29,290 --> 00:14:32,290 per share basis based on the next 12 months, it's going to 294 00:14:32,290 --> 00:14:34,970 look really expensive because it's going to take more than a 295 00:14:34,970 --> 00:14:37,090 year for Nike to turn this around. 296 00:14:37,370 --> 00:14:40,570 So based on next year, the company looks pretty expensive. 297 00:14:41,050 --> 00:14:44,770 But I think the longer term, outside of one year, I can see 298 00:14:44,770 --> 00:14:47,530 Nike returning to its normal growth path in earnings. 299 00:14:47,810 --> 00:14:50,210 When that happens, I think the stock is going to get a really 300 00:14:50,210 --> 00:14:52,350 good bump. So we had Disney and number one 301 00:14:52,350 --> 00:14:56,310 with a 12% dip, we have Nike and #2 with a 14% dip. 302 00:14:56,710 --> 00:15:00,190 Then we move on to #3, a 15 1/2 percent dip. 303 00:15:00,510 --> 00:15:02,790 And the company this time is PayPal. 304 00:15:02,910 --> 00:15:05,790 Now the first thing I'll mention with PayPal is I already did a 305 00:15:05,790 --> 00:15:09,510 pretty indepth valuation on this company and if you haven't seen 306 00:15:09,510 --> 00:15:11,030 it, I would recommend watching that first. 307 00:15:11,030 --> 00:15:12,470 It's on my other YouTube channel. 308 00:15:12,750 --> 00:15:14,990 It's the video that literally says PayPal right on the 309 00:15:14,990 --> 00:15:16,830 thumbnail. And I walked through three 310 00:15:16,830 --> 00:15:19,230 different scenarios of projecting out the next five 311 00:15:19,230 --> 00:15:21,910 years of cash flows. I give a return distribution 312 00:15:21,910 --> 00:15:25,590 chart and what it shows. The basic conclusion for this 313 00:15:25,590 --> 00:15:30,350 company is that even in the kind of worst case scenarios, the 314 00:15:30,350 --> 00:15:33,430 worst realistic case, it's not too bad. 315 00:15:33,630 --> 00:15:37,230 You just get subpar returns. So the downside with PayPal, by 316 00:15:37,230 --> 00:15:39,750 my estimate is, is not too terrible. 317 00:15:39,750 --> 00:15:42,350 I don't think that investors are going to have a lot of downside 318 00:15:42,350 --> 00:15:45,630 buying at this price because if we look at the dip here, it's on 319 00:15:45,630 --> 00:15:49,710 a technical dip with its 200 day moving average, it's down 18% 320 00:15:49,870 --> 00:15:53,230 year to date, so it's down big, while the S&P 5 hundreds up big. 321 00:15:53,630 --> 00:15:57,910 Then we have the past year it's down 39% or 33% rather the past 322 00:15:57,910 --> 00:16:02,590 five years it's down 34% and it went all the way from $300.00 323 00:16:02,590 --> 00:16:06,510 per share now all the way down to $61.00 per share. 324 00:16:06,990 --> 00:16:09,790 The trouble with this type of company is it's tricky. 325 00:16:10,150 --> 00:16:13,230 A lot of people were saying that PayPal is the cheapest it's ever 326 00:16:13,230 --> 00:16:14,230 been. It's on a dip. 327 00:16:14,550 --> 00:16:19,110 When the company was $90.00 per share, they're saying that it's 328 00:16:19,190 --> 00:16:22,910 it's the easiest dip ever by the company now and now and from 329 00:16:22,910 --> 00:16:27,310 $90.00 to $61.00 and it's even gone down as low as $50.00. 330 00:16:27,670 --> 00:16:29,790 So you want to be careful with these type of companies. 331 00:16:29,990 --> 00:16:32,870 Just because the company's gone down in price does not mean it 332 00:16:32,870 --> 00:16:36,110 won't go down lower and in many cases momentum carries these 333 00:16:36,110 --> 00:16:38,830 stocks lower and lower. But if we look at the absolute 334 00:16:38,830 --> 00:16:44,070 valuation of the company, it is trading at a 15 Ford P/E ratio. 335 00:16:44,390 --> 00:16:49,380 Right now the market multiple of just your average company is 336 00:16:49,380 --> 00:16:52,780 around 19 Ford P/E and the S&P 500. 337 00:16:52,860 --> 00:16:55,300 So it's actually trading below the S&P 500. 338 00:16:55,380 --> 00:16:57,820 This company is cheaper than the rest of the market. 339 00:16:58,340 --> 00:17:01,820 So a lot of the analysis here is, do you think the S&P 500 is 340 00:17:01,820 --> 00:17:03,980 going to grow faster than PayPal? 341 00:17:04,380 --> 00:17:07,940 If you do, this company deserves to trade at a cheaper multiple. 342 00:17:08,220 --> 00:17:11,420 But if you think PayPal is a better company, higher quality 343 00:17:11,460 --> 00:17:14,819 and it will grow faster, then buying it at a price cheaper 344 00:17:14,819 --> 00:17:17,579 than the S&P 500 makes a really good relative bet. 345 00:17:18,020 --> 00:17:19,780 We have another valuation metric here. 346 00:17:20,020 --> 00:17:22,819 The free cash flow yield of the company is 5%. 347 00:17:23,060 --> 00:17:26,300 Now a lot of investors focus in on this, but remember this is 348 00:17:26,300 --> 00:17:29,780 not a true indicator of the valuation of the company because 349 00:17:29,780 --> 00:17:34,820 the traditional, the traditional definition of free cash flow is 350 00:17:34,820 --> 00:17:38,180 just looking at the cash from operations minus the CapEx. 351 00:17:38,340 --> 00:17:41,060 It does not factor in the expense of stock based comp. 352 00:17:41,500 --> 00:17:44,260 When we look at that, we can see that stock based comp eats up 353 00:17:44,300 --> 00:17:48,460 around 1/3 of the cash flows and that is a real cost to the 354 00:17:48,460 --> 00:17:51,020 investors. So you want to factor in this 355 00:17:51,020 --> 00:17:53,380 stock based comp. When we factor in the stock 356 00:17:53,380 --> 00:17:56,300 based comp, the company's trading at a three percent, 357 00:17:56,500 --> 00:18:00,260 3.22% free cash flow yield, which I think is a true 358 00:18:00,260 --> 00:18:02,300 reflection of their valuation right now. 359 00:18:02,660 --> 00:18:06,740 So we have a company trading below the S&P 500 at a 15 Ford 360 00:18:06,740 --> 00:18:10,350 P/E and it's trading at a really decent free cash flow yield of 361 00:18:10,350 --> 00:18:14,310 3.22%. But the big question with PayPal 362 00:18:14,830 --> 00:18:18,910 is growth, economic growth in the company and this is what I 363 00:18:18,910 --> 00:18:20,630 struggle with, with this company. 364 00:18:20,670 --> 00:18:23,030 Now the interesting thing is all three of these companies have 365 00:18:23,030 --> 00:18:26,190 something in common. All three of them have resilient 366 00:18:26,270 --> 00:18:28,350 revenue growth. They're all growing their top 367 00:18:28,350 --> 00:18:31,110 line, but it's the profitability, the margins of 368 00:18:31,110 --> 00:18:32,990 the company that are coming under stress. 369 00:18:33,280 --> 00:18:35,480 That was the case with Disney. They were growing revenue. 370 00:18:35,640 --> 00:18:37,840 That was the case with Nike. They were growing revenue. 371 00:18:38,080 --> 00:18:40,280 And that's the same thing with PayPal. 372 00:18:40,520 --> 00:18:44,000 We look at PayPal all time since 2014. 373 00:18:44,600 --> 00:18:47,040 Does this have any glaring issues right here? 374 00:18:47,280 --> 00:18:48,800 Can you really highlight a problem? 375 00:18:49,200 --> 00:18:50,720 Sure. It's had times where it's ebbed 376 00:18:50,720 --> 00:18:53,440 and flowed a little bit. I guess it's slowing down a bit 377 00:18:53,440 --> 00:18:56,640 to 7%. That's still decent, That's 378 00:18:56,640 --> 00:18:59,720 above, that's above GDP revenue growth. 379 00:19:00,040 --> 00:19:02,000 So this isn't where the problem is. 380 00:19:02,420 --> 00:19:04,460 The problem with all of these companies that are really 381 00:19:04,460 --> 00:19:07,100 struggling is the profitability of the company. 382 00:19:07,580 --> 00:19:10,540 If we look at the free cash flow, while the revenues going 383 00:19:10,540 --> 00:19:13,300 up over time, the free cash flows are not going up. 384 00:19:13,620 --> 00:19:16,540 And this is I think the biggest red flag for me with PayPal. 385 00:19:16,860 --> 00:19:18,940 If I look at the past 10 years, this is what it looks like. 386 00:19:19,220 --> 00:19:21,300 We can zoom into the past five years. 387 00:19:21,780 --> 00:19:24,260 So this is quarterly, the past five years. 388 00:19:24,660 --> 00:19:27,940 Now if we take out this one outlier here, we have an outlier 389 00:19:27,940 --> 00:19:30,780 for whatever reason, but we remove that out of the picture, 390 00:19:31,190 --> 00:19:34,310 we get a clean picture of what the cash flows look like on a 391 00:19:34,310 --> 00:19:37,350 quarterly basis. It's almost literally flat for 392 00:19:37,350 --> 00:19:39,950 the past five years straight. So why is the revenue going up 393 00:19:39,950 --> 00:19:42,630 for PayPal, but the profitability remaining flat? 394 00:19:42,910 --> 00:19:45,350 Typically when you have companies where their economics 395 00:19:45,350 --> 00:19:49,070 get worse over time, that is a result of increased competition. 396 00:19:49,430 --> 00:19:52,390 So if we look at PayPal, they offer Venmo and then their 397 00:19:52,390 --> 00:19:55,710 PayPal transfer services. You can buy products online 398 00:19:55,710 --> 00:19:58,950 using PayPal Checkout. Now, I don't know if you're like 399 00:19:58,950 --> 00:20:03,190 me, but when I go online and I'm shopping, if I'm on my phone, I 400 00:20:03,190 --> 00:20:06,670 use Apple Pay. It is so incredibly easy to use. 401 00:20:06,830 --> 00:20:09,990 I don't have to type anything into the website and I use Apple 402 00:20:09,990 --> 00:20:11,990 Pay already. I trust Apple with that 403 00:20:11,990 --> 00:20:14,350 information. They have brand value and trust. 404 00:20:14,710 --> 00:20:18,550 Apple Pay has been an increasing competitor to PayPal with online 405 00:20:18,550 --> 00:20:21,630 transactions. PayPal seven years ago existed 406 00:20:21,630 --> 00:20:24,950 at a time where they were one of the only options to pay for 407 00:20:24,950 --> 00:20:27,360 things online. And now there's more ways than 408 00:20:27,360 --> 00:20:30,480 ever to pay for things online. So what I see is maybe the 409 00:20:30,480 --> 00:20:33,880 primary reason why this company struggling is an increase in 410 00:20:33,880 --> 00:20:36,200 competition. I think that that fact is 411 00:20:36,200 --> 00:20:39,240 undeniable and it will be interesting to see how this one 412 00:20:39,240 --> 00:20:42,160 does. So that is dip #3, PayPal. 413 00:20:42,280 --> 00:20:45,200 So we have Disney in a 12% dip under their 200 day moving 414 00:20:45,200 --> 00:20:50,640 average, Nike at 14%, We have PayPal at 15.5%, and then we 415 00:20:50,640 --> 00:20:56,470 have the next one, Ulta Beauty at -15.75% below the 200 day 416 00:20:56,470 --> 00:20:59,150 moving average. This is a pretty significant dip 417 00:20:59,310 --> 00:21:02,350 for such a great company. Ulta Beauty does not get enough 418 00:21:02,350 --> 00:21:04,830 credit. This stock is incredible. 419 00:21:04,830 --> 00:21:08,350 It really is an incredible stock and it's one of those sleeper 420 00:21:08,350 --> 00:21:10,670 stocks where it's one of the biggest winners over the past 421 00:21:10,670 --> 00:21:12,790 decade. But most people really have no 422 00:21:12,790 --> 00:21:13,990 clue. They've never heard of it 423 00:21:13,990 --> 00:21:16,630 before. Aside from just being some 424 00:21:16,630 --> 00:21:18,990 retailer. In the past decade, Ulta has 425 00:21:18,990 --> 00:21:23,330 given 302% returns. This company is an absolute 426 00:21:23,330 --> 00:21:25,050 beast. It's a great growth story. 427 00:21:25,050 --> 00:21:26,930 It's a economically sound company. 428 00:21:27,250 --> 00:21:30,490 But if we look year to date, we can see that we're we're running 429 00:21:30,490 --> 00:21:32,530 into some trouble. It's selling off a bit. 430 00:21:32,530 --> 00:21:37,250 It used to be at 5, about 550 up here and now the company's 431 00:21:37,250 --> 00:21:39,810 trading at what it's trading at 4:07. 432 00:21:40,010 --> 00:21:43,130 So from 5:50 to 4:07 there, we get our dip. 433 00:21:43,130 --> 00:21:45,330 Let's go ahead and take a look at what's causing this dip for 434 00:21:45,330 --> 00:21:47,410 Ulta and what we see in the future of this company. 435 00:21:48,130 --> 00:21:50,870 First of all, when I look at what's causing this dip, it can 436 00:21:50,870 --> 00:21:54,270 be a number of factors, but I think the biggest reason why is 437 00:21:54,270 --> 00:21:57,910 overall market uncertainty, interest rates going up, people 438 00:21:57,910 --> 00:22:01,230 being fearful of a recession and them not wanting to own 439 00:22:01,350 --> 00:22:03,710 retailers. Ulta Beauty is a retailer that 440 00:22:03,710 --> 00:22:06,470 sells a lot of beauty products, makeup and hair products, all 441 00:22:06,470 --> 00:22:10,030 that type of good stuff. Now, if there's market 442 00:22:10,030 --> 00:22:12,830 hesitancy, if people don't want to own these type of companies, 443 00:22:13,070 --> 00:22:15,750 that might be an opportune time to jump in. 444 00:22:16,210 --> 00:22:18,250 If you don't agree with the market that we're going to go 445 00:22:18,250 --> 00:22:21,090 through a huge recession, another thing I'd like to point 446 00:22:21,090 --> 00:22:25,650 out is this is a beauty company. Can you spot the recession on 447 00:22:25,650 --> 00:22:27,730 the chart? A little game I like to play, 448 00:22:28,210 --> 00:22:31,730 Where's the recession In this chart, we did have one of the 449 00:22:31,730 --> 00:22:35,370 worst financial crisis is ever in the history of this country, 450 00:22:35,770 --> 00:22:40,170 but yet back in 2009, right here, 2007 to 2009, I can't see 451 00:22:40,170 --> 00:22:41,930 it. If you were just reliant on this 452 00:22:41,930 --> 00:22:44,650 chart to see trouble, you would not be able to identify it. 453 00:22:45,010 --> 00:22:47,490 Ulta continually grew throughout the recession. 454 00:22:47,770 --> 00:22:50,410 They open up more locations. They remained profitable. 455 00:22:50,610 --> 00:22:53,610 That's a very good track record. We actually ran into more 456 00:22:53,610 --> 00:22:56,090 trouble with Ulta during the store closures. 457 00:22:56,370 --> 00:22:57,970 They sent all their employees home. 458 00:22:57,970 --> 00:23:00,290 They still paid them while they weren't working. 459 00:23:00,490 --> 00:23:02,770 The company treated their employees excellently. 460 00:23:03,090 --> 00:23:06,210 That hit their revenue a little bit, but Ulta was in such a good 461 00:23:06,210 --> 00:23:10,170 situation, they still made it through the 2020 COVID pandemic 462 00:23:10,450 --> 00:23:13,040 without much trouble. Now again, we look at these 463 00:23:13,040 --> 00:23:14,960 other metrics here. I just want to study the history 464 00:23:14,960 --> 00:23:17,640 of this company for a minute, look at the free cash flows of 465 00:23:17,640 --> 00:23:21,720 Volta since around 2003. We're a little shaky, but this 466 00:23:21,720 --> 00:23:23,400 wasn't a problem with the company. 467 00:23:23,400 --> 00:23:26,280 If you look back what they were doing, they were reinvesting 468 00:23:26,280 --> 00:23:28,600 this cash flow at very high rates of return. 469 00:23:28,880 --> 00:23:31,800 So all the extra cash they had, they put in the CapEx. 470 00:23:32,080 --> 00:23:35,560 The CapEx at that time was opening up new locations, 471 00:23:35,960 --> 00:23:38,480 decorating the stores, building the buildings, opening up the 472 00:23:38,480 --> 00:23:40,280 new locations required a lot of cash. 473 00:23:40,280 --> 00:23:43,160 So that whole time period wasn't a lack of profitability. 474 00:23:43,200 --> 00:23:45,560 They weren't struggling there. They were just using all of 475 00:23:45,560 --> 00:23:49,320 their cash flows to open up new locations and scale and scale 476 00:23:49,560 --> 00:23:51,520 and that was wise choice by them. 477 00:23:52,000 --> 00:23:55,520 Then we see when they start to get the bigger scale and we see 478 00:23:55,520 --> 00:24:00,320 those economies of scale start to work in from 2016, the free 479 00:24:00,320 --> 00:24:03,600 cash flow has steadily gone up. Free cash flow is a little bit 480 00:24:03,600 --> 00:24:06,320 more volatile than earnings, but not that much. 481 00:24:06,320 --> 00:24:10,560 So this is great free cash flow. Since the company doesn't have a 482 00:24:10,560 --> 00:24:12,240 lot of developers or programmers. 483 00:24:12,240 --> 00:24:14,360 You don't need PHD's to run an Ulta store. 484 00:24:14,800 --> 00:24:16,240 They don't have a lot of stock based comp. 485 00:24:16,640 --> 00:24:19,760 They can pay these employees hourly, they pay them well, but 486 00:24:19,760 --> 00:24:22,480 as a result we have a very minimal amount of dilution. 487 00:24:22,960 --> 00:24:25,200 Look at this amount of stock based comp compared to the free 488 00:24:25,200 --> 00:24:30,400 cash flow, 43,000,000 versus 1.17 billion, 47,000,000 versus 489 00:24:30,440 --> 00:24:34,150 887,000,000. So the company's becoming more 490 00:24:34,270 --> 00:24:37,710 efficient overtime, less dilution proportionate to their 491 00:24:37,710 --> 00:24:39,590 cash flow. Now we look at the earnings per 492 00:24:39,590 --> 00:24:41,750 share of the company and I'm going to swap over to quarterly 493 00:24:41,750 --> 00:24:45,230 hair so we can see this on a more granular basis all time. 494 00:24:45,390 --> 00:24:48,550 This is what it looks like. Again, I can't even see the 495 00:24:48,550 --> 00:24:52,070 recession on the chart. It really is impossible to tell. 496 00:24:52,070 --> 00:24:53,710 They're really having any trouble at all. 497 00:24:53,950 --> 00:24:58,830 They grew earnings substantially from 2007, seven cents per share 498 00:24:58,830 --> 00:25:04,490 up to $0.37 per share in 2011. So big EPS growth throughout a 499 00:25:04,490 --> 00:25:07,690 recession and I think that's because they're in the beauty 500 00:25:07,690 --> 00:25:10,010 category. We look at this one and it 501 00:25:10,010 --> 00:25:12,970 continues to grow with great linearity. 502 00:25:13,130 --> 00:25:15,250 It's actually accelerating growth over time. 503 00:25:15,610 --> 00:25:18,890 The only thing that's a blemish on their record is something 504 00:25:18,890 --> 00:25:21,450 that's a once in a lifetime, hopefully once in a lifetime 505 00:25:21,450 --> 00:25:25,170 thing, which was complete closures of stores nationwide. 506 00:25:25,490 --> 00:25:26,690 We're not going to do that again. 507 00:25:26,690 --> 00:25:30,470 We can't afford to do that. So when we look at this, if we 508 00:25:30,510 --> 00:25:33,510 fill in the gap here, which I think is fair for Ulta, this is 509 00:25:33,510 --> 00:25:36,030 an unlikely one in a lifetime occurrence. 510 00:25:36,350 --> 00:25:38,670 It looks like purely linear growth. 511 00:25:38,950 --> 00:25:42,150 And even to this day, the last couple of quarters have not been 512 00:25:42,150 --> 00:25:44,110 bad. Maybe their guidance isn't quite 513 00:25:44,110 --> 00:25:47,070 what investors want, but this still looks great. 514 00:25:47,070 --> 00:25:49,950 I don't see any problems fundamentally with this company, 515 00:25:50,070 --> 00:25:53,150 even on a quarterly basis. The returns on capital employed, 516 00:25:53,470 --> 00:25:56,030 which is basically the returns they're getting for reinvesting 517 00:25:56,030 --> 00:26:00,270 back in their business, continue to increase, going from 6% per 518 00:26:00,270 --> 00:26:04,430 quarter, so about 25% per year. Now it's gone all the way up to 519 00:26:04,430 --> 00:26:08,710 around 11% per quarter. So now they're up to 44% per 520 00:26:08,710 --> 00:26:12,470 year on their ROCE. This is a really good growth 521 00:26:12,470 --> 00:26:14,790 over time. We look at the gross margins of 522 00:26:14,790 --> 00:26:16,430 the company, they're very flattish. 523 00:26:16,430 --> 00:26:18,750 They're not increasing a whole lot, but they are going up a 524 00:26:18,750 --> 00:26:21,990 little bit over time, 1% gain over the past decade. 525 00:26:22,150 --> 00:26:25,480 We look at the operating margins, again, very flattish, 526 00:26:25,480 --> 00:26:30,160 not substantial growth, but we're going from 1011% to around 527 00:26:30,160 --> 00:26:32,120 15%. It's headed in the right 528 00:26:32,120 --> 00:26:34,200 direction. We look at the profit margin, 529 00:26:34,600 --> 00:26:37,600 the same thing, slightly higher profit margins because of 530 00:26:37,600 --> 00:26:40,160 scalability. So we see this company actually 531 00:26:40,160 --> 00:26:42,760 scaling in many cases better than some tech companies. 532 00:26:42,920 --> 00:26:45,240 Now another thing I was looking at when I was looking at why 533 00:26:45,280 --> 00:26:47,640 Ulta was selling off, I was actually diving into this 534 00:26:47,640 --> 00:26:50,240 company and doing some renewed research on it and I was 535 00:26:50,240 --> 00:26:53,250 interested to see are they losing market share against 536 00:26:53,250 --> 00:26:57,370 Amazon or Walmart or other places to shop for beauty 537 00:26:57,410 --> 00:26:59,850 products. So what I did was I I brought up 538 00:26:59,850 --> 00:27:02,450 the teen survey from Piper Sandler. 539 00:27:02,490 --> 00:27:05,530 This is a well done survey. It's a respected one, which just 540 00:27:05,530 --> 00:27:07,450 means they use a lot of survey science, right? 541 00:27:07,450 --> 00:27:09,770 They don't just do this haphazard, they do proven 542 00:27:09,770 --> 00:27:13,330 techniques to prove what teens are doing, what their shopping 543 00:27:13,330 --> 00:27:16,850 habits are like. And this is from fall of 2019, 544 00:27:17,290 --> 00:27:20,530 so 2019. This is what the survey shows 545 00:27:20,910 --> 00:27:23,430 when we look at top beauty destinations. 546 00:27:24,030 --> 00:27:31,030 Ulta's number one with 38% Okay, 38% market share from teens with 547 00:27:31,030 --> 00:27:32,870 Ulta. Then what I did was I Fast 548 00:27:32,870 --> 00:27:36,230 forward to modern day. This is the 2023 Piper Sandler 549 00:27:36,230 --> 00:27:39,270 survey and I wanted to see how things changed over time. 550 00:27:39,790 --> 00:27:42,950 Well, wouldn't you know, we have Ulta Beauty at the very top like 551 00:27:42,950 --> 00:27:46,270 it was before, but in this case it's 41%. 552 00:27:46,640 --> 00:27:49,760 So what's going on here? Ulta Beauty has a bigger market 553 00:27:49,760 --> 00:27:52,880 share of teens today than they did back in 2019. 554 00:27:53,000 --> 00:27:55,200 So when I look at this, I'm trying to come up with a bear 555 00:27:55,200 --> 00:27:57,240 case for Ulta. I'm trying to come up with a 556 00:27:57,240 --> 00:28:00,040 downside. The downside is recession, but I 557 00:28:00,040 --> 00:28:02,360 can't see a recession on the charts throughout history. 558 00:28:02,560 --> 00:28:06,120 I can't see a recession in 2009 in the earnings per share. 559 00:28:06,400 --> 00:28:08,560 I can't see it in the free cash flows of the company. 560 00:28:09,040 --> 00:28:11,560 So recession doesn't seem like it's that big of a concern. 561 00:28:11,960 --> 00:28:14,810 We have market share and competition forces, but they've 562 00:28:14,810 --> 00:28:17,050 gained market share. They've gained substantial 563 00:28:17,050 --> 00:28:20,170 momentum over competitors over the past four years. 564 00:28:20,650 --> 00:28:23,970 So competition, recession concerns, I don't know what's 565 00:28:23,970 --> 00:28:26,010 wrong with Ulta. I don't know why this company 566 00:28:26,010 --> 00:28:28,290 selling off. So with Ulta being on a dip 567 00:28:28,370 --> 00:28:32,970 where it's 16% below the 200 day moving average, while the S&P 568 00:28:32,970 --> 00:28:38,090 500 is 6% above and the QQQ is 13% above, I think that it's 569 00:28:38,090 --> 00:28:40,370 time that investors could start looking at Ulta. 570 00:28:40,800 --> 00:28:43,000 I think potentially right now it's a pretty good deal. 571 00:28:43,200 --> 00:28:46,120 Now moving on to the final dip. This one's the biggest. 572 00:28:46,120 --> 00:28:47,840 This one surpasses all the other ones. 573 00:28:48,120 --> 00:28:53,560 Dip #5 is Paramount, which is down 21% below their 200 day 574 00:28:53,560 --> 00:28:57,040 moving average. This company has been a disaster 575 00:28:57,040 --> 00:28:59,480 of a stock. This is one of the ones that 576 00:28:59,800 --> 00:29:03,280 Berkshire Hathaway, under Warren Buffett's control, bought a 577 00:29:03,280 --> 00:29:06,280 portion into this company and Warren Buffett was asked why did 578 00:29:06,280 --> 00:29:08,280 you buy Paramount? And then Warren Buffett 579 00:29:08,280 --> 00:29:12,250 proceeded to respond with 5 minutes of why Paramount and 580 00:29:12,250 --> 00:29:15,530 especially streaming is a bad business going on about how the 581 00:29:15,530 --> 00:29:18,650 actors and the producers make all the money, the shareholders 582 00:29:18,650 --> 00:29:21,730 get robbed in the situation. And then the interviewer was 583 00:29:21,730 --> 00:29:24,130 like, okay Buffett, but why did you buy the stock? 584 00:29:24,410 --> 00:29:26,570 And he goes, well, we'll see what happens. 585 00:29:26,770 --> 00:29:30,140 He did not give an answer. Now, you can try to fill in the 586 00:29:30,140 --> 00:29:33,100 blank there, but I think it was just a simple mistake. 587 00:29:33,100 --> 00:29:35,380 I think that Buffett bought into the company thinking it was a 588 00:29:35,380 --> 00:29:38,020 little bit of value. Sometimes he buys value traps. 589 00:29:38,020 --> 00:29:40,500 Buffett is not immune to making bad investments. 590 00:29:40,500 --> 00:29:43,100 He's done so before. Luckily, this was a smaller 591 00:29:43,100 --> 00:29:45,820 position in Berkshire, so it's not really going to damage them 592 00:29:45,820 --> 00:29:47,900 long term. But if we look at Paramount 593 00:29:47,900 --> 00:29:51,700 right here, here's the dip. We had this right here, which is 594 00:29:51,700 --> 00:29:54,700 not a glitch. This isn't incorrect data. 595 00:29:54,940 --> 00:30:00,080 The price went from $23 to $15 or $17.00 in a single day 596 00:30:00,360 --> 00:30:02,160 because of a bad earnings report. 597 00:30:02,160 --> 00:30:06,480 Subscribers slow down, they have huge losses and basically all of 598 00:30:06,480 --> 00:30:09,240 their divisions, even their movie division, they're saying 599 00:30:09,240 --> 00:30:12,400 that next year they're going to be profitable, but so far it's 600 00:30:12,400 --> 00:30:16,280 just been tough for Paramount. They can attract subscribers. 601 00:30:16,520 --> 00:30:20,800 They can gain subscribers at an incredibly unattractive price. 602 00:30:21,000 --> 00:30:23,690 For Paramount, they're not making enough money per 603 00:30:23,690 --> 00:30:26,250 subscriber. So they're gaining subscribers 604 00:30:26,250 --> 00:30:29,250 and numbers, but they're not profitable because this content 605 00:30:29,250 --> 00:30:31,370 costs a lot to make. Now, when I look at the 606 00:30:31,370 --> 00:30:34,170 streaming world and I try to assess which companies I think 607 00:30:34,170 --> 00:30:37,490 will do really well and which ones will do poorly, when I look 608 00:30:37,490 --> 00:30:42,010 at Paramount, I see this one as an afterthought in streaming. 609 00:30:42,410 --> 00:30:45,570 So think about sitting down on your couch on a Sunday evening 610 00:30:45,570 --> 00:30:47,810 and you want to turn on a good series to watch. 611 00:30:48,170 --> 00:30:50,920 You might open up Netflix. That's a lot of people's first 612 00:30:50,920 --> 00:30:54,120 go to, I believe Another one is Max, which is HBO's new 613 00:30:54,120 --> 00:30:57,720 streaming service. So we have Netflix, we have Max, 614 00:30:57,920 --> 00:31:00,560 which I think are two of the anchor streaming services. 615 00:31:00,560 --> 00:31:02,240 They're what people check most frequently. 616 00:31:02,600 --> 00:31:06,680 Then we have Amazon Prime Video. Most people have that already 617 00:31:06,680 --> 00:31:09,880 because they're paying for Prime for shipping and other benefits. 618 00:31:10,360 --> 00:31:14,150 So we have 3 anchor services there, but then you get out to 619 00:31:14,150 --> 00:31:17,510 the other ones, there's some Peacock, you have that as well. 620 00:31:17,710 --> 00:31:20,110 That's another streaming service from NBC. 621 00:31:20,670 --> 00:31:24,190 And then you have Paramount. Paramount is fighting in place 622 00:31:24,190 --> 00:31:28,910 of like Hulu and Disney Plus and kind of the 4th and 5th tear 623 00:31:28,950 --> 00:31:31,590 ones on the list. So when you look at Paramount, 624 00:31:32,350 --> 00:31:34,550 in my opinion, this streaming service is a bit of an 625 00:31:34,550 --> 00:31:36,270 afterthought. So I believe that they're in an 626 00:31:36,270 --> 00:31:39,790 undesirable position, being the 4th or 5th tear in the streaming 627 00:31:39,790 --> 00:31:42,860 ranking, and that makes it very difficult to have substantial 628 00:31:42,860 --> 00:31:45,340 pricing power. They have a couple good series, 629 00:31:45,660 --> 00:31:47,740 they have Yellowstone and they have these other ones that 630 00:31:47,740 --> 00:31:50,340 they've tried to leverage. But even the creators of 631 00:31:50,340 --> 00:31:53,940 Yellowstone have realized that they have all the control and 632 00:31:53,940 --> 00:31:56,820 they're forcing them to pay them huge amounts of money for their 633 00:31:56,820 --> 00:31:59,340 show. So the economics are under 634 00:31:59,340 --> 00:32:02,420 pressure as well. All of this has culminated to a 635 00:32:02,420 --> 00:32:04,660 stock that has not been doing well. 636 00:32:05,060 --> 00:32:07,060 Now if we look at the revenue and we zoom in let's say over 637 00:32:07,060 --> 00:32:10,990 the past three years to get a more granular look at this, it 638 00:32:10,990 --> 00:32:14,190 looks like it's growing slightly, not a lot of growth, 639 00:32:14,190 --> 00:32:16,550 but we are seeing growth. The problem comes in with the 640 00:32:16,550 --> 00:32:20,750 profitability, much like Nike, much like Disney, much like 641 00:32:20,750 --> 00:32:24,390 PayPal, we're seeing top line growth, but the profitability 642 00:32:24,390 --> 00:32:27,510 leaves a lot to be desired. Over the past five years, the 643 00:32:27,550 --> 00:32:31,190 EBITDA has gone from 1.5 billion, one billion per quarter 644 00:32:31,470 --> 00:32:37,030 down to the negative -1 billion flat $93,000,000 in EBITDA lost 645 00:32:37,030 --> 00:32:39,950 last quarter, 630 million three quarters ago. 646 00:32:40,430 --> 00:32:42,990 Now the thought here is that they're going to be profitable 647 00:32:42,990 --> 00:32:46,310 in 2024 and they're screaming and the EBIT is going to swoop 648 00:32:46,310 --> 00:32:48,910 back upwards. But right now it doesn't paint a 649 00:32:48,910 --> 00:32:51,270 pretty picture. We look at the free cash flows, 650 00:32:51,510 --> 00:32:54,670 this looks even worse. We can erase a little bit of the 651 00:32:54,670 --> 00:32:56,510 history and just go to the past five years. 652 00:32:57,230 --> 00:33:00,550 This is a horrible free cash flow view. 653 00:33:00,550 --> 00:33:03,630 It just looks awful. PayPal looks better than this. 654 00:33:03,870 --> 00:33:06,390 At least PayPal is consistently in the positive. 655 00:33:06,800 --> 00:33:09,640 But what we're getting with Paramount is negative free cash 656 00:33:09,640 --> 00:33:12,360 flow after negative free cash flow quarter after quarter. 657 00:33:12,520 --> 00:33:14,640 So I look at all of these profitability metrics, we can 658 00:33:14,640 --> 00:33:16,960 throw a net income. Looking over the past five 659 00:33:16,960 --> 00:33:19,960 years, this looks no different. It's going in the negative and 660 00:33:19,960 --> 00:33:23,240 the earnings per share, maybe the most important one, also 661 00:33:23,240 --> 00:33:25,360 looks really bad going in the negative. 662 00:33:25,800 --> 00:33:29,360 Again, they have said that it's going to swing back positive in 663 00:33:29,360 --> 00:33:32,600 2024. So they have guidance long term 664 00:33:33,090 --> 00:33:35,570 that looks positive. But remember, the executives can 665 00:33:35,570 --> 00:33:38,170 say whatever they want. Of course they believe they're 666 00:33:38,170 --> 00:33:41,930 going to earn money in 2024, but they're facing competition that 667 00:33:41,930 --> 00:33:43,650 does not care about their projections. 668 00:33:43,730 --> 00:33:46,170 Netflix and Max do not care about the profitability of 669 00:33:46,170 --> 00:33:48,450 Paramount and they're going to compete fiercely with them. 670 00:33:48,650 --> 00:33:51,770 Now if we look at the valuation of it, the cash flows look a lot 671 00:33:51,770 --> 00:33:53,730 different than the P/E ratio of the company. 672 00:33:54,010 --> 00:33:56,770 The cash flows look horrible. They're negative right now, 673 00:33:56,850 --> 00:33:59,180 negative free cash flow yield because the cash flows are 674 00:33:59,180 --> 00:34:00,700 negative. So of course that makes sense 675 00:34:00,700 --> 00:34:02,380 there. We can't really value the 676 00:34:02,380 --> 00:34:04,100 company based on cash flows right now. 677 00:34:04,100 --> 00:34:07,740 But when we look at the P/E ratio, because of their analyst 678 00:34:07,740 --> 00:34:10,300 projections of the next 12 months of earnings, it's trading 679 00:34:10,300 --> 00:34:15,020 at a 13 PE, which if that's accurate, the company is very 680 00:34:15,020 --> 00:34:17,659 cheap. The commodity multiple meaning 681 00:34:18,020 --> 00:34:20,420 the price of company trades at if you think there's going to be 682 00:34:20,420 --> 00:34:23,540 no value creation whatsoever is around 13. 683 00:34:23,820 --> 00:34:26,940 So this company's trading at a commodity multiple. 684 00:34:27,139 --> 00:34:30,940 Investors are pricing it right now as though it's basically a 685 00:34:30,940 --> 00:34:34,820 static company that's not really going to create value or destroy 686 00:34:34,820 --> 00:34:36,820 value. That's what it's priced as. 687 00:34:37,179 --> 00:34:40,699 So if your thesis is that Paramount will create a lot of 688 00:34:40,699 --> 00:34:44,300 value over the next five years, it is dramatically undervalued. 689 00:34:44,620 --> 00:34:47,500 In that case, it is a buy. But if you think the Paramount 690 00:34:47,500 --> 00:34:50,900 is going to continue to struggle to create any real value and 691 00:34:50,900 --> 00:34:53,639 it's not really going to destroy value either than it's priced 692 00:34:53,639 --> 00:34:56,040 appropriately today. When I look at this and I 693 00:34:56,040 --> 00:34:59,240 compare this against the other companies, I still don't like 694 00:34:59,240 --> 00:35:02,040 Paramount. I still rather own Netflix and I 695 00:35:02,040 --> 00:35:04,720 do own Netflix today. So I'm coming at this from a 696 00:35:04,720 --> 00:35:07,240 bias perspective. I really think that Netflix is 697 00:35:07,240 --> 00:35:09,040 in such a more enviable position. 698 00:35:09,400 --> 00:35:12,840 Netflix is projected to, they're just gushing cash flows at this 699 00:35:12,840 --> 00:35:14,760 point. It's literally just a cash flow 700 00:35:14,760 --> 00:35:17,240 beast. Paramount is not at that point. 701 00:35:17,740 --> 00:35:20,780 So while I think there is a case for Paramount, if you're a deep 702 00:35:20,820 --> 00:35:24,220 value investor trying to buy the cheapest companies and hope for 703 00:35:24,220 --> 00:35:26,980 a turnaround story, this might be a good play. 704 00:35:27,300 --> 00:35:29,020 And for whatever reason, Buffett owns it. 705 00:35:29,020 --> 00:35:32,020 So you have that as well. But I don't base my buys off of 706 00:35:32,020 --> 00:35:34,100 super investors. I won't buy it just because 707 00:35:34,100 --> 00:35:36,740 Buffett owns it. I think Netflix is far better. 708 00:35:36,860 --> 00:35:40,540 Netflix is the one I own now in terms of these five companies 709 00:35:40,580 --> 00:35:43,930 that are all on a dip, the one that I think is currently the 710 00:35:43,930 --> 00:35:47,170 best value and the one that I'm the most attracted to buying 711 00:35:47,170 --> 00:35:49,450 today is Ulta. I think the company's 712 00:35:49,450 --> 00:35:51,770 fundamentals look the best. I think it's in a very enviable 713 00:35:51,770 --> 00:35:54,450 position. I've not seen any weakness in 714 00:35:54,450 --> 00:35:57,170 their fundamentals whatsoever. And I think any predictions of 715 00:35:57,170 --> 00:35:59,930 doom and gloom because of economic turmoil in the future 716 00:36:00,210 --> 00:36:03,250 is likely to have minimal impact on Ulta compared to other 717 00:36:03,250 --> 00:36:06,250 companies. So in terms of what I may buy 718 00:36:06,250 --> 00:36:09,210 out of these five companies on a dip, I'm leaning more towards 719 00:36:09,290 --> 00:36:12,100 Ulta than any others. But I also think that there's a 720 00:36:12,100 --> 00:36:15,780 case to be made for Disney, for Nike, and for PayPal. 721 00:36:16,180 --> 00:36:18,580 The one that I would avoid personally is Paramount, but 722 00:36:18,580 --> 00:36:20,180 that's my thoughts. Let me know if you agree or 723 00:36:20,180 --> 00:36:22,140 disagree. I hope you enjoyed this overview 724 00:36:22,140 --> 00:36:24,580 of five companies on a dip and I'll see you in the next one.