Welcome back, everyone. Today on the Joseph, Carlson
show the inflation report came in for September and it was
worse than expected. Despite that the market
continues to trade up words. We also have the news that
PepsiCo reported their earnings. It's better than expected.
They beat on both the revenue and the EPs and they raised
their full-year guidance. So there's no earnings recession
for Pepsi Co but despite this there's a lot of people upset at
Pepsi, they're upset at the company.
So we're going to discuss why people are upset at Pepsi.
Microsoft is launching a new Product called designer.
It's the answer to the highly valued at startup canva.
This is Microsoft doing what they do.
Best the Microsoft bundle, a juggernaut that crushes.
Any company in its wake, I'll explain why Microsoft continues
to win with inferior products. And then finally, we have the
big question that's being tossed around is value investing
officially dead. Well, David Einhorn, a once
legendary successful value. Investor is saying yes it is.
Relating to Value investing. I don't I don't know that it
ever comes back. He's not only saying that it's
dead but he's saying that he doesn't think it's ever going to
return and will decide whether or not value investing is dead
and if it is dead, if it's going to come back.
So we have a lot of news to jump into before we get to that.
We have to do the portfolio update.
As you know we're transparent are actually show what I'm doing
with my portfolio, which is something I've done since the
beginning in an effort to change the financial industry for the
better to have more transparency across the Bored in this
channel. I show you what I'm doing with
my money. I don't tell you what to do with
yours now. I focus on investing in high
quality dividend-paying companies that they also have
strong compounding characteristics.
So these are companies that I think are all whether companies
they can stand up in any environment, they can grow their
earnings in almost any environment.
That's the major Focus here now, and I looked through my
portfolio. There's a lot of companies that
I've been buying into, but there's one that I put the most
money into recently, and it's actually a smaller company.
Texas Roadhouse. This restaurant company is the
one that I've poured, the most cash into.
Right now, I'm in the green by forty five hundred dollars on it
and that's after recently buying into it really heavily this year
and I just want to highlight a couple things about this
company. Texas Roadhouse is a company
that has fresh cut steaks. They have a butcher and every
single restaurant which is different than a company, like
Applebee's or Chili's and Texas Roadhouse, you have a butcher
cutting the steak every single day before you eat it, and they
have a Sure, that hand makes their roles every single day.
Most of the food is fresh at the restaurant with a strong focus
on quality, which is different than a lot of other competing
restaurants. And while doing that they try to
keep costs low as possible while having extremely extremely good
cost structure. So this company qualitatively is
one that I like they focus on the experience, they focus on
the quality of their food and they really try to pay attention
to Consumer feedback to any type of trend going on so that
they're on top of it. But while focusing on, Qualities
in the experience at the restaurant.
I've also outlined this company is one that I consider to be a
very good. Compounder, it has strong
franchise durability. They have brand value, the
company as I purchased it had over four percent free cash flow
yield with growing free cash flows.
They have no outstanding long-term debt currently.
They have more cash than debt which is very unique in the
restaurant industry, they return Capital to the shareholder, both
by a growing dividend, that's compounding over 17 percent on
an annualized basis, and they return Capital to the
shareholder by doing BuyBacks, which they've accelerated in
recent years buying back three percent of their market cap just
over the past year. And most importantly, this is a
restaurant company that actually earns consistently High Returns
on Capital employed in the range of 16 to 19 percent and while
they're able to accomplish all of this, the compounding and
their earnings per share has also been incredibly fast at a
15% rate over the past 10 years and in just the past two years,
annualized 20% per year. So they also are showing
predictably strong Growth and this company in this market that
we're in right now where everybody's selling out a
different companies has actually sold down to at one point a 17
forward P/E ratio which I think is incredibly cheap for it.
Now, it's recently started to trade back up.
In fact. Year-to-date Texas Roadhouse is
up 5%. So I'm no longer buying the
company even though I want to because it's just going up too
high and there's too many other options to buy right now.
So this company is one of my bigger bets, I put thirty five
thousand dollars into a six. Billion-dollar company.
But overall, this is an example of the type of company.
I'm looking for now, another one of my portfolio in the consumer
category that recently reported earnings is PepsiCo.
This is the reason it's nice to own a company like PepsiCo
during a very uncertain Market cycle the earnings per share of
PepsiCo were better than expected.
So they beat on their EPs and they also beat on their revenue
expectations. And they also raised their
full-year guidance from 10% to 12%.
So they beat on They beat on revenue and they raised guidance
overall. A very strong earnings report
that caused the stock to bump up 4% and then the next day it's up
to percent right now. PepsiCo is only down two
percent, year-to-date not counting dividends it's
basically flat year-to-date when you count in the dividend even
though the broader markets down 20 plus percent.
And the big thing that led to this outstanding performance by
PepsiCo is one main factor. One big thing.
It's the top of the list of the compounder checklist the The
brand value. This is the reason why franchise
durability, the brand value is number one on that compounder
checklist. In fact, it's funny to listen to
the CFO of PepsiCo, come on to CNBC and explain.
Yeah. Basically, we sold the same
amount of stuff but because we have such good brand value, we
can just price things whatever we want.
People can't give up our products.
Now the CFO the executive there doesn't explain it quite like
that, but listen to what he actually says.
He basically says Of such good products.
We can charge whatever the heck we want.
We saw Revenue growth of about 16 percent that includes the
higher prices volumes, or units that we sell were up just a bit
on on the quarter. So passed along a bit of
inflation. Obviously, our commodity costs
are up even more and as a result gross margins were down a bit,
but then we manage the balance of the cost structure.
Pretty tightly. So operating margins were
actually up about 30 basis points so it's a combination of
Of look, we're we invested in Our Brands where we're actually
seeing good consumer response, despite the fact that we've had
to increase prices and we've got our cost structure and under
control very well. So, we delivered a superior
result. He says, yeah, you know, we sold
a little bit more items but basically, we just increase
prices and consumers, Love Our Brands and they'll pay whatever
we charge them, that's brand value.
Now, I know from an economic standpoint when you're reading
headline news of high inflation and then you're seeing companies
like Pepsi No, charge, basically, whatever they want to
offset the effects of inflation that can be upsetting, and
there's many people that are upset by this, they're saying
pepsico's, the problem there, the their big meanie charging
more for these items. But look, I don't control
inflation. I'm not controlling these
factors. What I'm doing is outlining
Investments That might do well during times of inflation.
Specifically Investments have good brand value, that leads to
immense pricing power. PepsiCo is one of those
companies whether you like it or not, they are a company.
That can raise prices and the consumers will continue to buy
their products. When consumers go to the grocery
stores and they're looking for Quaker Oatmeal, they're going to
buy Quaker Oatmeal. They're not going to switch it
to some different brand. That usually is not what happens
when consumers go and they want to get their Ruffles, they're
going to buy Ruffles when they go on, they want to get their
Pepsi, they're going to buy. Pepsi it takes more than a 17
percent price hike to sway consumers from their favorite
Brands to some off brand that they don't really trust and the
truth of the matter is, most, Companies most companies in the
market right now do not have pricing power like PepsiCo.
Most of them cannot pull off what Pepsi's doing if they raise
their prices, too much consumers, do I end up going to
different products. So this stands out as a unique
company that uniquely thrives in this type of environment and a
huge part of that is their brand value.
Now, as we go through this earnings season, we're going to
see how a lot of these companies do.
And I really don't expect all of them in my portfolio to do, as
well as Pepsi did this company. Is very unique.
In fact, Church & Dwight. As one of these consumer, staple
companies is struggling a lot more than Pepsi.
They don't have quite the same brand value as Pepsi.
A lot of their products are more commoditized products.
And this one has lowered guidance around three times this
year. So not every company, can pull
off what this one's doing. It's a pretty incredible thing
they're able to do. Now, moving on from my
portfolio. We also have predictions from
Big All-Star investors, like David Einhorn.
This guy used to be a legend Now, run into trouble for the
past decade, in fact, he hasn't done so well, during this growth
bull market in 2018, there were headlines of him losing 34% in
his fund. There's similar headlines in
2019 and so on, and so forth, he has many times where he's been
struggling, over the past decade and now he's gone on the record
saying, value investing is dead. So we have this interview of him
saying value. Investing is dead and just a
mention, just something I'll throw in before we get into this
interview, is that we also had A recent tweet soon after this
interview came out from none. Other than Michael burry and
Michael burry said I get the sense that in 2002.
There were more value hedge funds than there are value
investors today just to repeat that burry says 20 years ago,
there were more value investing hedge funds than there are
individual value investors alive today.
So Barry is basically saying the same thing.
He thinks that value investing is dead.
So let's go ahead and look at this interview from Einhorn and
see the City made because not only does he say that value
investing stead, he actually goes through and defines.
What value investing even is, you know, there have been
serious changes to the market structure and pretty much.
Most of the value investors have been put out of business.
Now, right off the bat he says most value investors have gone
out of business. Basically the the art of value
investing is going extinct and David Einhorn is one of these
dinosaurs that survived the Ice Age so far.
But the big problem I have with David einhorn's.
In his interview hair is his definition of what value
investing is. Listen to how he defines.
What value investing actually is.
So if value investing is trying to do security analysis, think
about what companies are worth, think about why they might be
Miss valued or misunderstood and then do valuation analysis.
That tells you, that, that in fact is true.
There's just very few of us left, that's David einhorn's,
definition value, investing doing analysis, finding
companies that are under Eyelid and waiting for other investors
to re-rate, the multiple of those companies.
And he goes on to explain how big of a factor, the re-rating
of multiples are to his investing thesis, it used to be,
we could buy something at a reasonably low multiple,
whatever. We thought that was think that
the company would do somewhat better benefit from it being
somewhat better and realize the other investors would see what
we saw. Six months later a year later
and and would rewrite the shares to so you could buy something 11
times earnings and maybe they would earn 10% Want more.
But you get another three points on the multiple and you make 50
percent over two or three years that isn't happening anymore
because there's nobody to notice what actually happens at these
companies. So we have to be the other side
of that is is nobody knows what anything is worth.
So there's an enormous number of companies that are dramatically
Miss valued in ways that we haven't seen before.
So, as well, as before, we might pay eight times or nine times,
or 12 times would seem like, well multiples, but now we can
buy a lot of those same companies that three times
earnings. Four times earnings and if
they're buying back 10 or 15 or 20 or 40 percent of their stock
in some cases eventually we're going to have to get paid by the
company as opposed to having other investors figure out what
we thought we figured out before this value, investing to him was
going in and sifting through very low multiple companies that
were trading under the multiple that they truly deserved and
then you buy in them and you wait for other investors to buy
the same companies, raising the multiple higher and higher what
he's doing here. There is a no true Scotsman
argument. He's acting as though his
version of value investing is the only version in existence
and everyone doing something else.
It's all algorithmic based and nobody else really knows what
anything is worth. They all don't know what they're
doing, but that's not correct. There are incredible value
investors that have done well over the past 10 years.
They just didn't do what you did David.
They did a different version of it.
Here's an interview with someone that I consider an incredible
value. Investor named Harry Smith, this
interview was in, 2014. So we're looking back, nearly a
decade ago and Carrie Smith is a specifically about the specific
type of value. Investing that David Einhorn
considers, the only true value investing listen to Terry
Smith's reaction to this. By one of the things that some
value fund managers, say is the way, they're, they're able to
make returns for you as by buying significantly cheaper
stocks. And waiting for that re-rating,
that is exactly the type of value.
Investing that David Einhorn is talking about, Buying cheap
stocks waiting around for re-rating.
Is there a risk? Then with your strategy that
you're paying over the odds, at the, these stocks are expensive.
Yeah, you're right. That's how some value for
managers seek to do it. I have to say, looking at the
average results. So you just read, not very many
of them seem to manage to achieve our performance with
that. And one of the problems with
that strategy is this. If you buy your poor company
apart from the fact that it does destroy value wash you.
Wait, if you get the timing roughly right, yeah, it'll make
some value for you, it'll create it will create some performance
for you. The problem is And you have to
go find another one. Whereas with our companies if we
select them right, we never have to go and find a new company.
We can sit there not deal and as a result cut down the costs of
running the portfolio, so it's Terry Smith.
They're not a true value investor is he not wanting to
buy a dollar for less than a dollar?
Of course not. His goal is to buy companies
that actually generate value. They create value every day they
get high returns and make value for the investor.
I think that's a very reasonable definition of value.
Investing buying into companies. He's that generate consistent
value for the investors. And again, this interview was in
2014 Carrie Smith. Unlike David Einhorn since this
interview is actually beat the market.
He's actually out performed which has been difficult to do.
Most value investing hedge funds have not accomplished that and
Terry Smith goes on to explain that doing the game, that David
einhorn's doing trying to buy cheap companies, that will
eventually get re rated by other.
Investors is relying on other investors and not relying on the
Penny, you're putting the fate of your fund and the hands of
other investors. One of the things that we really
bad as investors is judging the outcome of differential rates of
compounding. If you have 1,000 pounds that
you invest for 30 years. So an investment lifetime, I
would say roughly and you invested at 10% you'd have
17,000 pounds at the end. If you invested at just two and
a half percent more, 12-mile percent you have 34,000 pounds
and twice as much. If you invested at 50% only 5%,
more have sixty, eight thousand pounds, four times.
As much the secret to, the companies we own.
If there is a secret is that they actually compound in value
more consistently in the market as a whole over long periods of
time. Not because they grow faster
because they don't really have a downturn.
The companies aren't the fastest growing, but the fact that they
never had a downturn really helps with the compounding and
one of the biggest Holdings and Terry Smith's fund is Pepsi
which surprise surprise, guess what?
Company is not going through a downturn right now?
Pepsi there is no bear market for Pepsi there's no recession
for Pepsi. So even though this Doesn't grow
so fast. The fact that it never has the
downturns really helps with a compounding.
So, when you look at portfolios like David Einhorn, I don't
think that this is the only definition of value investing.
I think there's other methods of doing it and investors that have
convinced themselves that the only method of value investing
is buying very low, P/E companies that don't have any
strong compounding characteristics and hopefully
the marquetry rates them. At a higher multiple, I think is
a losing strategy. I think they'll continue to
struggle, like they have for the past decade.
Now, moving on, we have some news from soft.
Just a disclaimer. Microsoft is one of my biggest
positions. I'm very bullish on this company
and I've recently been buying more and more of it as it's been
going through this market sell-off.
Now, the headline here is that Microsoft is launching designer,
its answer to the highly valued startup canva.
Now, if you're not familiar with canva, it's like figma where
it's one of these browser designed tools that you can
collaborate, and designers can get in and work together to
build different interfaces like you see, right here.
Now, the first thing that I'll say, I knew this before even
reading it. To the article, I knew right
away that Microsoft would make it free.
No doubt in my mind that they would make this free.
Because this is how Microsoft Works.
This Is How They will bully and crush, canva even with an
inferior product. And I think it's important for
investors to understand the mechanics of how Microsoft
dominates from the article. They say, Microsoft is launching
a simple Graphics designer app called designer that will be
available for free as part of the office, productivity
software subscription. The company said when Today,
that is the killing sentence there.
If you're an executive at camba, you should be concerned.
You should be frightened and very worried because Microsoft
has done this time and time again.
And it works every single time. Remember, the time when slack
took out a full-page ad in the New York Times to welcome, the
new competitor Microsoft and for slack to say, we're confident in
our product, we're ready for the challenge to go head-to-head
with Microsoft. Microsoft still is gaining
market share over slack every single day, even with the help.
From Salesforce slack. Can't compete with Microsoft
teams. Even though slack is a better
product than Microsoft teams and that is because of the bundle.
That's the tool that Microsoft wields is they have the bundle
other companies don't have the bundle.
See, here's a situation. Canva decided to make itself.
As a competitive threat to Microsoft, they're going after
core parts of the office suite, it introduced an alternative to
PowerPoint slide development in 2021 and it's September it
brought out. Out a tool to edit documents
challenging word. Now, if your Microsoft and you
see this little company canva starting to build out your core
office suite. That's going to raise some red
flags. That's going to mean that there
a problem that needs to be dealt with.
And luckily for Microsoft, they're usually good at
protecting their core office suite.
They say now that canva has 55,000 paid teams using its
software, including Amazon, FedEx, PepsiCo, Pfizer and
Salesforce. So this is a competitive threat.
Microsoft and Microsoft is now responding.
Now, the problem for canva is what Microsoft can do is build
out a copycat of canva. Include it in the Microsoft
bundle, make it for free and then CEOs of companies will have
a very difficult time saying yeah, I want to pay for canva on
top of having Microsoft designer included in a bundle that I'm
already paying for see that's the big tool that Microsoft
wields any time they build out a new product they include it as
part. Part of the bundle, they make it
for free and then over time they increase the price of the bundle
but it makes it difficult for any company to buy anything.
In addition to something they have for free in the bundle.
Satya Nadella says, no company is better positioned than
Microsoft to help organizations deliver on their digital
imperative. So that they can do more with
less. What Sachin Adele is really
doing is saying, no company has a strong of a bundle as
Microsoft. And so many companies and can
out value proposition other, He's by continually including
other free products in the bundle by throwing more and more
free products in the bundle. It just makes it impossible for
other companies to compete. So it'll be interesting to see
how this pans out. And my opinion, I think
Microsoft will do exactly what they've done for the past 20
years. The value proposition of the
massive bundle. They already have with
consumers, will make it very difficult for canva to gain any
serious market share against Microsoft.
So that's all the news for today.
And again, it's crazy to see the reaction of the market.
It's truly unpredictable. Giftable nobody going in today
would have predicted that inflation would be hotter than
expected. And the Market's reaction would
be to go in the green by two and a half percent.
Nobody can say that they were smart enough or they had great
enough insight to have this prediction.
And this is just another example of why it's so incredibly
difficult to predict the short-term.
That's all for now. Hope you enjoyed and I'll see
you in the next one.