Welcome back everyone. Today on the Joseph Carlson
Show. The market continues to go up.
The passive income portfolio is doing well.
It's growing at a brisk pace. Just today we're up 1.72%.
We've gained nearly $15,000 and we're just getting started.
The Story Fund, my secondary portfolio, is also doing great.
It now has an all time gain of $141,000.
On the day, it's up 1.59%. And of course, with both of
these portfolios, we have extremely strong companies.
I call them compounding machines or high quality companies or
they're just simply really good companies.
These high quality companies are how we're getting these type of
gains. Companies like S&P Global,
MasterCard, Intuit, Moody's, Equifax are elite tear
companies. We have companies like Costco,
the best retailer on planet earth, booking holdings, high
margin platform companies with dominant moats.
And we even have a few sleeper picks, ones that are less
mainstream but are very dominant in their category, Texas
Roadhouse being one of them. I invest in these companies that
attract evaluations like we did with Apple years ago, making
$34,000 in gains on that company.
My original buys are up 3 to 4X from Apple alone.
We bought Microsoft heavily at $220 per share.
Now it's trading at 460. I take buying high quality
companies seriously. It's not just something that I
say is nice to do or good. Theoretically, I have extremely
high standards of the type of company that ends up in My
Portfolio now. The market has been up over the
past month or so as Trump has relinquished many of his tariff
demands and we're seeing more of that today.
Just a few days ago, Trump threatened the EU with 50%
tariffs out of frustration from them being very slow to make a
deal. Representatives from the EU said
that they will speed up the deal making, but they need until at
least July 9th. So the tariff deadline is once
again delayed only a few days after making it.
This is the same thing we've seen a few Times Now with these
tariff deals. Now, as the market raises up
today, investors may believe that you missed the train, that
stocks are now a bit too expensive to deploy your cash.
And I personally believe that's the wrong take away.
There are stocks that are still attractively valued in this
market, and I'm going to highlight five of them in this
video today. Five companies that are both
extremely high quality. They are compounding machines,
and they are buys today based on their risk adjusted returns.
We'll be going over all five of these quality companies and
discussing why they're buys today.
And we start this off by highlighting company #1 which is
FICO currently going down another staggering 9% cent or
$155. Just today.
The stock price is now approaching $1500 per share,
which is notable because the stock entered this year at $2000
per share, and then it got as high as $2200 per share.
Then within just a matter of days, the stock price is
plummeted. Roughly 1/3 of the value has
been chopped away just on recent news.
And what is causing all of this concern with FICO shareholders?
Well, it's still this guy, Bill Pulte, the new Federal Housing
director. He was just recently sworn into
this position. And in many cases, like a new
CEO, he wants to make a dramatic impact right out of the gates.
One of the first things he turned his attention to was the
closing costs on homes, specifically credit scoring from
Housing Wire. Bill Poulte turns up the heat on
FICO now. Now, all of this is new.
Some of this stuff was plans they had before he took this
position. But he's certainly putting gas
on the pedal. For example, with FICO
specifically, one of the things they mentioned here was turning
the system from a try merge to buy merge system.
He says we're actively looking at getting this done.
He secifically calls out FICO time and time again saying they
should make sure they're being as economic as possible.
And he says that I don't like some of the things I've heard in
terms of cost. He's wagging his finger at FICO
for raising prices too aggressively.
Now we know the consequences of this.
If this system moves from Trimerge to buy merge,
mathematically that would erase 1/3 of Fico's revenue,
specifically with their scoring business.
If we look at Fico's revenue overall, it's broken up into
these three different categories.
There's software, professional services and scoring.
Now, the professional services is a small amount.
If we take that away, roughly half of FICO is the scores, the
origination scoring is what's under pressure here.
Now again, theoretically, if you were to move to a biomerge
system, that would theoretically remove around 1/3 of this half
of revenue. And this half of revenue is much
higher margin than the other half.
So this is a very lucrative portion of revenue.
So you may say, hey, Joseph, it makes sense that the stock is
down around 30% when you're proposing something that may
impact 30% of Fico's highly lucrative revenue.
All of these arguments make sense theoretically, but in
practicality, it's probably going to be a lot less impactful
and FICO will likely end up a lot better than expected.
The first thing to consider is even if this is actually passed,
it's unlikely that every mortgage broker will switch from
Trimerge to by Merge. This is something that would
make it optional, but not mandatory, and there are reasons
to argue that a lot of lenders wouldn't want to switch to Buy
Merge. The credit Bureau TransUnion
makes this exact point in an analysis that examines the
potential repercussions from switching from Trimerge to Buy
Merge. Transunion's analysis found that
moving to a Buy Merge process could result in 2,000,000
consumers becoming ineligible for government sponsored
enterprise mortgages. Their ineligibility would be due
to gaps that can exist among lenders when it comes to
reporting. Using only two credit scores
will often result in an incomplete or inaccurate picture
being painted of a potential borrower, particularly if the
consumers most valuable set of credit data is in the one that's
getting excluded. So the big point here is that
it's a bit like playing Russian roulette.
Some of your credit information may be uniquely accounted for on
one of the three credit bureaus. If you just pull two of the
three, you may get incomplete credit data.
And in some cases this could mean a more expensive interest
rate on your loan, making it so it's significantly more
expensive than had you just pulled all three credit ratings.
They say. Additionally, 600,000 new
mortgage borrowers per year could end up paying more in
interest under the Buy merge than they would have otherwise.
With the Tri merge information being used, this could cost
consumers around $6600 in additional interest over the
life of the mortgages. Now that's a particular note
here because pulling that third credit report probably costs
around $10. They go on to say that under the
Buy merge, the first time homebuyers who have thin files,
are new to credit could become unscorable, or if they are
scored at all, could be charged a higher interest rate than they
would otherwise. Just one missing trade line that
may result from using one less credit report could dramatically
impact eligibility and monthly payments.
Now he's not exaggerating with this.
If you have a credit card that's only matched in one of the
credit reports that gets excluded.
That credit card where you've paid off your credit debt may
make the difference of you being able to get into a home or not
having one. Long term credit card being paid
off continually and reported in one of the credit bureaus
dramatically lowered our interest rate.
He says ultimately, the decision to only use two credit reports
could make all the difference in whether an interested home buyer
is able to buy a home or not. So we have the case where many
customers may actually pay more by excluding that third credit
rating if that third credit rating is containing any credit
history that's beneficial to you.
So again, this is like playing a bit of Russian roulette.
You don't know if you're getting the best score because you don't
have a complete credit history. In addition to holding credit
worthy borrowers out of the market, a by merge could have
the reverse effect on otherwise ineligible borrowers,
potentially increasing default risk.
Incomplete information could also lead to consumers paying
less interest than their true risk merits.
The goal of scoring people's credit is to see the ability
they have to pay back on that loan.
If you do not get an accurate picture, the customers either
paying them more than they should or less than they should.
The bank is either taking on too little of risk and overcharging
people or they're taking on too much risk and undercharging.
Either way, it's a less functional and less efficiently
priced system. So right now the stock is down
30% on roughly 1/3 of half of the revenue.
And even that third of half of Fico's revenue is still up for
debate and likely not going to go down by a complete 1/3.
There are going to be many lenders that require the Tri
merge system that they still want all three credit reports,
many individuals that'll also want all three credit reports if
they're excluded from a home. So the damage here may not be as
extreme as it first seems. Now you may also mention that
this report is from one of the credit bureaus that benefits
from having the Tri merge system, which is correct.
They're trying to protect their business.
But the people launching these attacks specifically against
FICO are also people trying to protect their business.
There are large lobbyist groups specifically from brokerages.
Bill Pulte's on X reposting different posts from actual
lobbyist. In fact, this one right here
that he retweeted is from the Broker Action Collation, which
is a large lobbyist group for brokerages.
Now this document goes over how FICO specifically with its
credit closing costs have gone up tremendously over time, and
they point out promptly how much FICO has raised prices.
They say the average cost was $14.50 in 2023.
In 2024 and 2025, it's $80.00 with the unregulated cost from a
single credit report, which has up to two persons.
So this is basically like a two person report.
And that's a price increase of up to 700%.
And they are lobbying a call to action for Congress, the FTC,
the FHFA, the CFPB, any entity that can to take these costs
down to make it so that the FICO score is cheaper.
Bill Poulte has stepped in saying thanks for the input.
Still not happy with FICO. We should be making some
decisions on all related items in the next one to three weeks.
So he's directly responding to these lobbyist groups saying
that he's going to do exactly what they want and try to take
down FICO. And since FICO is getting such
focus from Bill Polte, I thought I would reply and just ask him a
few questions now. He posted this about an hour
ago. I just replied to it saying, Hey
Mr. Polte, do you mind explaining how Fico's pricing is
a bigger and more pressing concern to homebuyers than the
mortgage broker fees or realtor commissions?
For reference, you would need approximately 180 FICO pull
requests to equal the fees of one mortgage broker transaction.
You'd need to pull your FICO score 600 times to equal a
single realtor Commission on a sale.
Other than the significant amount of lobbying that brokers
and Realtors do, what reason do you have to focus on FICO more
than these other costs? And I gave him a nice table of
the relative expense of these different parties.
We have FICO here, which the average pulls around $40.
So you pay $40 to get your credit from all three credit
bureaus. The Trimerge system.
Now, if we assume we're buying a $400,000 home, $40 compared to
that $400,000 home is about 0.01% of the total sale.
So you're paying 0.01. The mortgage broker group, which
is largely the group responsible for putting all this pressure on
FICO, saying that Fico's raised prices, that it's out of
control, that consumers are paying too much.
They make an estimated $3600 to $7200 per home sale.
Now that is .9 to 1.8%. Again, that's around 180 times
what FICO charges. So you have the relative groups
here. Then of course, you have the
realtor commissions, so you have that 6% or $24,000 compared to
the $40.00 of the FICO score. Then you have additional closing
costs of eight to $15,000, that's 2 to 4%.
Again, you compare that to the FICO score.
But out of all the things that he's focusing on that are
difficult for people to afford when buying a new home, it's not
the mortgage broker fees, it's not the Commission fees, it's
not the closing cost that are all based on a percentage of the
home sale. So they scale indefinitely with
the price of the home. It's the $40 FICO score,
something that no borrower has ever concerned themselves with
or ever worried about. And if you even want to go into
more detail, this actually is better for FICO than it appears
here because the estimated dollar amount here, that $40 is
including the cost from the credit bureaus and FICO.
So Fico's only a portion of that $40.
They're not the entire cost. So FICO probably makes up more
around 5:00 to $10 per pole, not $40.00.
So the reason that this is laid out is because anybody looking
over the total cost of buying a home and anybody that's been
through this process, the least of your concerns is the $10 FICO
score. Nobody even cares about that.
Nobody even notices it. But you do notice paying the
mortgage brokers $7000. You do notice the closing costs
and the realtor commissions. Those are real expenses that are
big chunks of the overall transaction.
Now, again, I replied to his post with this question.
We'll see whether or not he acknowledges it, but I'm not
going to hold my breath. In reality, he doesn't have to
respond to my post, he doesn't have to make any type of
justification whatsoever. Most politicians and people in
public office do what's best and most popular what their lobbyist
and peers want them to do. Having a logical standpoint
comes secondary. And there's also the fact that
FICO has brought some of this upon itself.
You can't lay the blame on everyone else when FICO has
exercised extreme pricing power over just a few short years.
This is one of the concerns I expressed about this company
years ago, that if you become in a dominant position and you
exercise no restraint with your pricing power, if you push
prices up too aggressively, too fast without any care to
different businesses or consumers, it will raise
regulatory scrutiny. And that's exactly what FICO did
back in March of 2024. I was looking over all these
different companies and I said that I think my next buy is
going to be Moody's. I'm thinking of buying it in
$10,000 increments more of ADCA into the position.
I've reviewed FICO. I think the East is too high and
I don't really love how much they depend on insane pricing
power to lift the stock further. Moody's PE is high, but only
because the stock has a huge slowdown in credit which should
pick up over the next five years a lot, specifically if interest
rates go back down. The analytics business is
awesome. Super high retention,
subscription income, and a ton of proprietary credit data that
they own now. As of this comment that I left,
FICO has gone up more than Moody's stock, so I would have
had better returns if I bought FICO instead of Moody's.
But the concern here that I listed is still relevant.
I don't really love how they depend on insane pricing or to
lift the stock further. In a comment even before that
one, I said, you know, I was listening to Warren Buffett and
Charlie argue against Valiant and it reminded me a bit of
FICO. Buffett basically said that
buying exclusive rights over a drug and jacking up price is not
a good business strategy and will lead to regulatory and
public backlash. Now, I'm not saying that Fico's
exactly like Valiant, and obviously there's a big
difference between buying exclusive drugs that are life
savings and running mortgage credit ratings.
But the fact remains that they rely high on this insane pricing
power, which does attract regulatory and public backlash.
And we're seeing that regulatory backlash now.
So there's two ways to look at FICO.
One of them is that it's an exceptional company in an elite
category of high margin, 0 cost of replication of its scores.
It is deeply embedded in our financial systems, and the
product is very difficult to replace and avoid making it so
that it has substantial pricing power.
The other side of this is that this is a company that's simply
too good for its own good. It's a company that's pushed on
the pricing pedal so hard that now it's getting laser focus
from regulators. So the story of FICO has become
less clear, less predictable. If I have to pick a side today,
my guess is that FICO will still be an exceptional investment,
especially after this 30% trade down.
This doubt gives you an opportunity to enter into a
position on an exceptional company when one regulator's
targeting the company. And in most similar cases with
companies of this quality, now is a good time to buy now as we
look through more high quality companies to buy today.
Another one that I'm going to continue to mention because I
still believe this stock is high quality, undervalued and less
appreciated than most other high quality companies.
It's Salesforce. This is a company that I have
$62,000 invested in. I'm currently basically flat on
it, only up $500. Salesforce trades at 277 today,
and it's come down from around 3:30 just a few months ago.
Now, Salesforce is actually in the green today, but this
morning the stock was in the red because they announced another
acquisition. And if you're Salesforce
investor, you know that acquisitions aren't the thing
that investors want Salesforce to do.
After all, Salesforce has spent some of the most money on
acquisitions, buying companies like Tableau and Slack for 10s
of billions of dollars, massive amounts of money spent.
In many cases, investors believe they dramatically overpaid for
these companies, hampering their future returns.
So as soon as investors heard that Salesforce was acquiring
another company, they sold, and that was the morning sale of the
company. But then investors dug into the
deal and now it's moved back into the green.
Because once you actually dig into this deal, it's a lot
better than previous deals that Salesforce has done.
First of all, we can look at the company that Salesforce is
buying. They announced here that they're
buying Informatica. When we bring up Informatica and
look at what they actually do, it makes a lot more sense of why
Salesforce is buying the company.
Its core offerings include data integration, data quality,
master data management, metadata management, and data governance,
primarily delivered through a subscription based revenue.
Salesforce advertises this, saying that the planned
acquisition will enhance Salesforce's Trusted Data
foundation, critical for deploying powerful and
responsible agentic AI. They highlight three different
categories that this company will improve.
Data transparency. Informatica's Advanced
Integration Catalog and Lineage tools show where data comes
from, how it has changed, and how it's used.
Crucial for audibility and regulatory compliance data.
Understanding Informatica's rich metadata combined with Sales
Forces Unified data model will empower AI agents to interpret,
connect and act on enterprise data with meaningful context.
And then data governance built in MDM, data quality controls
and policy management ensure that all data driving AI is
standardized, accurate, consistent and secure.
Marc Benioff says that together Salesforce and Informatica will
create the most complete agent ready data platform in the
industry. Salesforce has need for this
product. This has been a weak point of
the company and it solves that weak point and they compare it
with their new agentic technology.
So this isn't a simple bolt on acquisition.
It's one that can be integrated into what Salesforce is already
doing. But more to the point, when we
look at the type of transactions that Salesforce has done
historically, they've been some of the most overpriced,
expensive acquisitions in the history of any company.
So it does raise some eyebrows of scrutiny when they're back to
doing acquisitions. But the point that I'd like to
raise is that in this case, it looks like Salesforce is being
far more disciplined with what they're paying for these
companies. Salesforce agreed to pay $8
billion for the company based on the $8 billion in their last
quarterly free cash flow over the trailing 12 months.
That puts the deal out of 5% free cash flow yield, which is
pretty good, but they also run a lot of stock based comp.
When you adjust out the stock based comp, that puts the deal
still at a 2% free cash flow yield.
Not quite as attractive, but it looks better, especially noting
that the free cash flow is growing while the stock based
comp is declining. On an earnings basis, this
company is not even trading at a 24 PE.
So this company doesn't look that expensive either by the
free cash flow yield or the PE ratio or the price to sales.
And that's likely why investors are reacting positively today.
Typically when you see a large company like Salesforce buying a
much smaller company, the smaller company will be in the
green and the larger one will be in the red.
But in this case both are in the green.
So I believe overall this is. Is a well disciplined
transaction by Salesforce showing that they're still
focusing on profits? Now the last thing I'll mention
with Salesforce is this company's reporting earnings
tomorrow. We're going to see some
fireworks tomorrow as the stock trades up or down.
If the stock goes down, that's not a concern for me.
Salesforce is a very volatile company.
It trades up and down after earnings in many cases.
Right now, Salesforce still trades at a cheap price and I
expect this company to work its way back to 3:30 now.
Next up, we have ASML, which is up $22.00 today, 3, 1%.
It's always discouraging to want to buy a company when it's
already gone up and you feel like you may have missed the
best timing on it. That's not the way to look at
stocks. Companies are not fixed
entities. They're organic.
They grow, they evolve over time.
Even though ASML is up 3% today, the company continues to make
substantial progress in technological innovation and in
the massive lead they have in EUV technology.
It's nearly impossible for a human to actually comprehend the
technology that goes behind these machines.
ASML is doing some where nobody else so far can even figure out
what they're doing. They are the sole producer of
extreme ultraviolet lithography machines or the EUV machines.
Their latest device, this new EUV model is called the High NA
or high Numerical Aperture machine, and it costs $400
million. Now this new model, the high NA
machines, they have larger lens openings.
In the previous EUV machines. The EUV light is created by
firing lasers at molten tin droplets in a vacuum.
The EUV light has a wavelength of 13.5 nanometers.
Now specialized mirrors from Zeiss.
This is a German company that makes mirrors so flat you could
spread them over the entire country of Germany.
And the biggest imperfection will be less than a millimeter.
That shows how precise these mirrors are.
They are used to direct the EUV light.
This nearly perfect mirror is a key ingredient to this.
So SML already has a monopoly on the EUV machines, but now
they're upping the ante, furthering the technology with
these high aperture or open lens technology that can produce
things even smaller. That's the whole point is making
it as small as possible. It's also significantly reduced
the energy needed per wafer exposure for the machines since
2018. So they're not only doing the
same thing, but they're doing it in an energy efficient way.
And as they're releasing this new technology, ASML is off to
the races, working on the next generation machines, Hyper NA,
going another step past the high NA.
Even when they beat their best and there's no second place,
they decide to run even faster and they need to do that.
If you talk to employees from FML, they'll tell you that they
have 10 or 20 year plans. That's how they can forecast
their operating income and revenue so far out.
They already know what they're going to be working on five to
10 years from now to keep the lead from any competitor, to
make it so that any competitor is literally a decade behind.
So when we're looking at FML, we're looking at a stock 30%
below its all time highs, trading at a historically low
valuation in terms of free cash flow and the Ford PE ratio.
It's a company that has an unparalleled technological mode.
They're the only ones doing these devices and they continue
to iterate. They continue to press on the
gas pedal and move the technology further in the
future. I expect this stock over the
next couple of years to be well above $1000.
Now Next up, we have another key in My Portfolio, a stock that is
still undervalued today, incredibly high quality.
And even though it's getting further recognized by the
market, this one still has a ways to go.
The company's Amazon, if we look at the story fund, Amazon is a
significant holding. The total size is $124,000,
thirty, 1600 of that being gains.
Now if we look at this, Netflix is a bigger position, but that
is because Netflix grew into a bigger position.
Netflix has been an incredible investment.
It's gone up so much, but I've actually put more money into
Amazon. I've invested heavily into this
one because I continue to believe that we're going to see
substantial gains in the future. The opportunities that Jassy
highlights for Amazon are immense.
This company's not just one that's a retail company or one
where you get your packages in a couple days.
It is a digital technology company with a huge amount of
advertising, a huge amount of subscription services.
AWS makes up a gigantic portion of the overall revenue.
Then you have the other bets like Project Kuiper and Zoox.
They're going to have robo taxi soon.
It's another company that's in every important vertical but
doesn't get much credit for it because right now investors are
seeing the cash flows go down. Meanwhile, the earnings per
share of the company, which are accounted for differently but
still represent earnings power of the company, continue to
grow. The company's underlying
earnings power have grown significantly.
I believe that Amazon could easily earn $80 billion of free
cash flow in a year if they chose to, but they just consider
the opportunities today too big. So Amazon is a company that's
powerful, dominant, continually growing.
It's defeated every bear thesis over the past couple of years,
it trades at a lower PE ratio compared to its earnings growth,
and the underlying power of its cash flows have increased
significantly. Right now, the stock is easily
worth 260. Now the 5th and final one we'll
mention here is Google. You guessed it, it's a company
that I can't leave out because it is both very high quality and
the stock is trading at a discount.
For all the concerns facing this company now, I've gone over many
times and discussed the LLM threat, the AI threat, how
Google's responding to it. I'm sure we'll discuss set in
the future, but I want to focus on a different point in this
analysis. When we look at Google, I just
want to take a quick look at some of the fundamentals and
compare them with a company trading at a much higher
valuation. I want to compare Google with
Apple. The Ford PE of Google is 19, The
Ford PE of Apple is 27 1/2. So Apple trades at a valuation
on an earnings basis that's roughly 35% more expensive than
Google today. Apple investors are pricing the
company's earnings either more predictable or faster growing or
a combination of the both. When we look at cash flows,
Google's cash flows are priced at 3 1/2%.
That's 2.5% when you're just for stock based comp.
We have Apple today. That's again 3.3 percent, 2.8%
when you're just for stock based comp, very similarly be priced
and free cash flow. When we look at what's going on
with Google just over the past couple of years, we'll zoom into
just the past five years. So they've over doubled their
revenue in the past five years since 2020.
And not only that, in the past year alone they've grown their
revenue by 13%. We can go to Apple and look at
the exact same data. We can zoom into the past five
years and you'll notice that the revenue has not doubled over the
past five years. In the past one year, it grew
4.91%. Now the reason that Google's
being priced the way it is with the Super low PE ratio below the
market, way below companies like Apple is on the premise that the
company may potentially be disrupted in the future.
That the company will have a difficult time dealing with
artificial intelligence, LLMS and the new way that people are
consuming information and the overall that could cause
Google's growth to slow down. Now, another way of looking at
that is that if Google's growth actually slowed down, it would
look like Apple's. Apple's a company where their
growth has slowed down. In fact, I would argue that if
Google's revenue looked like Apple's today, people would say
that Google's already disrupted, the company's already gone
through challenges. And look, it's showing up in the
numbers. They're not growing anymore.
That's what investors would be saying.
But Apple's already at that point, and the company's still
trading at a much higher valuation.
And this isn't just with revenue.
In the past year, Google has grown its free cash flow by 8%.
Apple's free cash flow went down by 3%.
Google grew its earnings per share at a staggering 37% in the
past year. Apple's earnings per share
declined by a fraction of a percent last year.
Google's EBITDA went up 39% last year.
And Apple's EBITDA went up 6% last year.
In every way possible. Google's growing much faster
than Apple. And if Google matched Apple's
growth rate, people would be saying that the stock is
disrupted. It's already price for failure
when the company's succeeding, the company is being discounted
for perceived risks that other companies don't have.
And if the narrative changes at all, as the company continues to
prove that they're adapting, they're growing, they're making
new tools and implementing AI into everything they're doing,
as that narrative changes and the fundamentals continue to
grow, this one could be dramatically undervalued.
I could still see Google moving up to $220, making investors
today a lot of money. Now.
That's going to be it for this episode.
Hope you enjoyed. See you in the next one.