ASX Market Darlings – What their valuations tell us

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How you going? 

Alec: [00:00:29] I'm very good. Bryce. Great to be back for another episode. It's pretty cold in Sydney at the moment. 

Bryce: [00:00:35] Yes, it's probably not the coldest place in Australia. It's more rather mild. 

Alec: [00:00:40] Luckily, my dumpster fire of a portfolio is keeping me warm. 

Bryce: [00:00:43] Sounds like you've been waiting to say that for a while. Actually, I just go. Well, that's heavy for you. And that your portfolio is going not so well. Yes. Well, I don't know. I don't look. I don't check shows today. Ren. We've got an episode that's a lot to cover. We're going to be chatting about what we're doing with our portfolios, having a bit of a chat about what's been going on in markets. Apple Pay later. And then towards the second half of this episode, it's not just the American stocks that have been tumbling. Some of Australia's market darlings have also been taking a hit. So we're going to be going through them and taking a bit of a look at valuations and discounted cash flows. 

Alec: [00:01:25] Explaining discounted cash flows and reverse discounted cash flows. But before we get there, you may have seen that we have some billboards up around the place and also some of what we call the little, little things in offices, many billboards. 

Bryce: [00:01:41] Little things. Offices. 

Alec: [00:01:43] So if you have seen one of these ads and this is your first time listening, welcome. Great to have you here here at Equity Mates. We want to make markets as accessible as possible. We think investing is for everyone. But if you find that this episode has a little bit too much jargon, we do have a companion podcast. It's called Get Started Investing. We're very creative with our management here, and that is a back to basics. Everything we've learnt on the journey of doing Equity Mates. So please keep listening, head over, listening, listen to get started investing as well. We've got eight podcasts in the network so there's plenty to listen to, whatever you're interested in, whatever you want to learn. But Bryce in terms of exciting news, billboards is only the second most exciting thing we have to talk about this week because Fin first ticket's alive. 

Bryce: [00:02:34] That's it. Fantastic. It's alive. And they are running out the door Saturday, the 15th of October, right here in Sydney. We're throwing Australia's largest finance event over 25 sessions on the day. Many experts coming in from around the country to share their wisdom on all things investing entrepreneurship in business. So it's not just a day of investing chart. There's going to be entertainment, bucking bulls, rainbow rooms. If you have no idea what all of that means, then get excited because it's going to be an awesome day. Head to Equity Mates dot com slash fin fest to grab your tickets. They're only $47 and it's going to be a priceless event. 

Alec: [00:03:11] Yes, shout out. We said to the team would shout out the first person that bought a ticket. And so shout out to Sarah, who was up the crack of dawn on Thursday and was the first person to buy a ticket. But look, we're really excited. It's going to be a great day. Forget everything you thought you knew about finance events. You're going to want to be there. 

Bryce: [00:03:31] That's a massive shout out to stake as well. Who are powering fan fest head to head Questacon to find out more information about them. But Ren let's get cracking. Plenty going on in markets. You mentioned at the top that your portfolio is on fire. So let's start with a bit of a chat about our portfolios. 

Alec: [00:03:48] Yeah, well, I think we get to June and everyone starts to think in the financial year we actually had someone pitch us a concept of a week of end of financial year episodes. And the fact of the matter is, as investors, there's not a lot that we need to do at the end of the financial year. We obviously we have to submit our taxes, but we couldn't really think of a week of content that we could do about end of finance tax week. We wouldn't do it to you guys listening as well. There's only so many times you can talk about the 50% capital gains discount before it's just boring. Yeah, but I think it did get me thinking about what I'm going to do before the end of the year. And one thing I am going to do is take the opportunity to look at my portfolio, see those that are contributing most to the dumpster fire and sell them. Because if you if you make a loss on an investment and you claim that loss, you tell the tax office, hey, I lost money on this investment. You can offset that against a gain in future years or a gain in this current year. So our minds are on tax come June. And so I'm going to take the opportunity to sell sell some losers, the. 

Bryce: [00:05:03] Losers that you have no no longer have conviction in or losers just because they're down. 

Alec: [00:05:08] Losers that I no longer have conviction in. No names. 

Bryce: [00:05:12] Why not? 

Alec: [00:05:13] Well, because, you know, the companies are filled with people and people have feelings. 

Bryce: [00:05:17] So I think the important thing here is because some people might be sitting there going, you guys are hypocrites saying, you know, you never sell. Blah, blah, blah. And here we are saying it's tax time where we're going to get rid of some of the losers. I think it's important to caveat that it is couched, I guess, in the fact that you have lost conviction or thesis is a broke. And it's not just you saying, oh, we've we've hit we've had some market turmoil, some stocks are down. I'm going to be selling to just offset some gains. 

Alec: [00:05:49] Yeah. We should also be clear that if you sell something to get a tax benefit and then buy it straight back, that's called a wash sale. And the ATO do not look kindly upon that. 

Bryce: [00:06:00] Yeah, yeah, yeah. Yeah, they don't. If you want more information, we did a big Q&A with Charlie Viola this time last year on Equity Mates Investing podcast, so just search for that episode. We took plenty of questions from the Equity Mates community about tax and investing, so we're not going to cover it all today, but there's plenty of information in that episode that still remains very relevant. 

Alec: [00:06:23] Yeah. So for me, it's take the opportunity to sell some companies. I don't have a lot of conviction in some that I the thesis is broken or I've lost some money on. I had some cash just saved up that most of that has gone to work. I've put that in the market the last couple of months. I've been pretty excited. The there's been some real opportunities. So I'm not, I don't want it to sound like I'm getting out and going to cash. It's it's been a good couple of months for the old brokerage account. 

Bryce: [00:06:53] Nice. 

Alec: [00:06:55] What about you? 

Bryce: [00:06:56] I've sold a couple. I'm going to name set. I got rid of. 

Alec: [00:07:01] I did. I had top of my list for naming names. 

Bryce: [00:07:05] Got rid. Of them just because I have lost conviction in them and. 

Alec: [00:07:12] And a lot.

Bryce: [00:07:12] Of money. I lost a lot of money on them as well. So I'm going to take that as I get rid of that before tax time.

Alec: [00:07:18] You get to hang on to your zip holdings.

Bryce: [00:07:20] I'm out of it. I don't have zip ran and I never I didn't I haven't had zip for a very, very long time. I'm not in any as we know, I'm not in any Afterpay buy now, pay later at all. But similarly to you I. 

Alec: [00:07:33] Have you say like as we know, as if that's like something that is just should be known by everyone. 

Bryce: [00:07:39] Well, I think we spoke about it a while ago that I'd finally did so in my to. Please speak a lot. But I've been taking the chance. Of course, I've just got my usual drip feed into some of the ETFs. I'm definitely loading up on some of the loved ones, but have been taking the chance to buy some of those just rock solid companies that I've been in for a while and or ones that I haven't had exposure to and now taking the chance, still loving my carbon ETF as well. But yeah, I'm not going to name names just. Because. 

Alec: [00:08:13] I was going to say we might need to get a sort of a beep you out just for licencing. 

Bryce: [00:08:19] Yeah, but I'm not going to name names but yeah. Look I similarly to similar to you, I haven't deployed all my cash. I still want to remain a little patient in cash in case this is some sort of a dead cat bounce or, you know, things occur over the next 6 to 12 months. 

Alec: [00:08:34] You just said something there that people would be like talking about dead cats because the mainly talking about US market here because the Australian stock market, the UK stock market, they've actually held up pretty well. But the US has been brutal. To start the year it was down about 20%. The tech stocks were down even more, about 27% I think. And then what we've seen since sort of mid-May, I think the 11th of May, something changed. For some reason, markets are actually up a fair bit. From that, it's up about 7%. So overall, the S&P 500 index of the 500 biggest US stocks was down about 20% and now it's down I think about 13% for the year.

Bryce: [00:09:16] Yeah, it's down 14%. 

Alec: [00:09:18] So it's come back a bit and everyone's like, oh, what's going on here? Are we are we out of the woods? Maybe a strong maybe is is the point. But you mentioned dead cat bounce, which is a terrible name for an important concept. So explain that to us. 

Bryce: [00:09:36] Okay. Well, I'll just explain what it means in an investing point of view. 

Alec: [00:09:39] I mean, I can't explain it. 

Bryce: [00:09:41] It's from an investing point of view. It's just what we're experiencing right now. It's it's a a small recovery, I guess. So where it feels like the market has recovered from the bottom and is on its way back up, but then it turns again and goes even further. Yeah, I guess. Is that what a dead cat does?

Alec: [00:10:00] The idea, the reason that is called a dead cat bounce. And I did not come up with this term. 

Bryce: [00:10:05] Of course. 

Alec: [00:10:06] The idea is even a dead cat will bounce if it falls from a great. 

Bryce: [00:10:11] Okay. Right. So this. Yeah. So that's what they're explaining here with the market.

Alec: [00:10:17] Do you remember a couple of years ago, Peter came out with how all these terms needed to change and it was like killed two birds with one stone needed to change. Would like feed two birds with one bread roll or something. And there was a bunch of, I guess like animals, political, animal. 

Bryce: [00:10:34] Cruelty.

Alec: [00:10:35] Cruelty terms that had to change. I'm surprised that cat bounced. Didn't make it on the list. So true. That's probably going to be on the version 2.0 of the list. But every major market downturn has seen dead cat bounces. We did an Instagram post on this a little while ago, but Great Depression, there were, you know, stock market fell 80% from 1929 to 1932. But within that 80% fall, there were a number of times when it actually went up 20% and then it kept falling. The 1973, 1974 crash, same thing overall big fall, but a like a I think like a mid-teens percent run up and then it kept falling again. 2000 there were a number of mid-teens run ups and then it fell again. And same with 2008. In the global financial crisis, there was a moment where the stock market, I think, was up about 20% and people were like, is the worst of it over? And then it kept falling. So that's not to say that we're this is definitely just going to be a dead cat bounce, because there have also been market falls where there have been like a 20% fall and then it's just recovered. 

Bryce: [00:11:46] Yeah. 

Alec: [00:11:46] So basically whatever narrative you want to have in this moment, you could find historical analogies where it fits. It's a dead cat bounce, it's a recovery. The point is, we don't know. And anyone who says they do know don't take the word as gospel. 

Bryce: [00:12:00] There's enough going on out in the world that I'd be surprised if this is just my opinion as well. And that's kind of how I've been thinking about the probabilities of this being the return to a bull run again on the lower side. Then I guess if that makes sense. Okay. Yeah, that's how that's what I think. Like the conditions required for it to return I think to a to what the bull run that we saw over the last couple of years. My, my feeling anyway, this is just I'm a gut, I'm a gut investor. Right. 

Alec: [00:12:30] You're very driven by headlines. I may disagree with you. I actually don't think economic conditions are that bad. And I know people are going to be like, have you seen inflation? And I get that. But outside of inflation, the everything actually feels pretty good. 

Bryce: [00:12:47] Does it? Yeah. 

Alec: [00:12:48] Like turn the stock market off, put that to a side. Unemployment, like everything is looking good. Like we're not we're not saying like mass waves of business banks.

Bryce: [00:12:57] Yeah, but if it. 

Alec: [00:12:58] Looks like it could get worse, we've heard a few whispers just in circles that we're in, that businesses are struggling to raise money and that laying people off and stuff like that. So maybe it's just. 

Bryce: [00:13:09] Bad economic activity is starting to slow. That's that's the interesting part. And then it's kind of like what's going to be the case in six months? Not right now. And if economic activity slows, interest rates are high, no wage growth or stagflation vibes, then you start going, we're in a bit of trouble here.

Alec: [00:13:26] Yeah, yeah, yeah. We definitely are seeing wage growth. 

Bryce: [00:13:29] Not not globally. Yeah, globally, no. 

Alec: [00:13:31] Well in the US the US is basically not here. Yeah. Here. 

Bryce: [00:13:36] Anyway, there's an interesting article that Dalio he's obviously sat down with, they sat down with, they. 

Alec: [00:13:42] Sat. 

Bryce: [00:13:42] Down with now the AFR.

Alec: [00:13:45] He also did something with our favourite person of the year. 

Bryce: [00:13:48] Dalio reckons that rates will be back to significant lows and not significant, but they'll be cut in a couple of years time again. 

Alec: [00:13:55] So let me ask you to summarise, you think on the balance of probability, all things are going to get worse before they get better. Why aren't you going to cash?

Bryce: [00:14:02] Because I don't need I don't need the money. 

Alec: [00:14:05] Oh, must be nice. 

Bryce: [00:14:07] Well, I think because I just have a seriously fat capital gains tax now. I'm kidding. I just think it's against everything that I. I like, I believe, as an investor, like the whole like this. This is just part of being an investor. And and I understand why fund managers go to cash in these situations in some instances because they have a mandate. They have investors that they need to like service. But I'm not I guess this kind of sounds a bit silly, but I'm not trying to preserve my portfolio value as tightly as someone who has investors expecting them to do that. Yeah. Sitting in cash with high inflation rate and nothing like I think it's still probably better to have it in the stock market. 

Alec: [00:14:49] Oh, that was a podcast I was listening to and I made this point that as well as all of the reasons that you don't go to cash from, you know, you miss the upturn a lot of the time. From a psychological perspective, if you go to cash, you become the most favoured, intense market watcher because you're waiting for the when. 

Bryce: [00:15:09] Do you go.

Alec: [00:15:09] Back but can. And they made that point, which is pretty self-evident. But I just thought about my temperament and how much I would hate that being like, Is this the right time? Second guessing myself, not wanting to miss it, probably missing it.

Bryce: [00:15:23] And then choice paralysis as well. You have all this cash and then you'd be like, Oh, now I've got to actually figure out again what I want to buy.

Alec: [00:15:30] And they were talking about these stories from the GFC where some people picked up perfectly like they they got out at the right time and they got back in at the right time. But then it created these really jumpy investors that because then the first the year or two after the global financial crisis, like 29, 2010 weren't great years like everyone was super nervous until they were like there was a lot of chat about a double dip recession and they thought things were going to get bad again. And then a lot of investors who picked it right the first time got really jumpy when all this double dip recession stuff started and then went to cash again and then missed the incredible next few years bookies. So it's just like no one can pick the market now. No one can tell you what's going to happen in a day or a week. So why spend that mental energy?

Bryce: [00:16:16] Yeah, and I think I'm pretty happy with how I like how diverse my portfolio is as well. Like, of course, I've got exposure to some of these tech stocks, but you mentioned at the top, like the ASX and some of the European indexes as well haven't been hit anywhere near as bad. So. 

Alec: [00:16:31] Well, I mean, we always lament banks and miners. Yeah, but in 2022, there's been nothing better to be exposed to than banks as interest rates rise and miners as resource stocks. 

Bryce: [00:16:42] And this is just a classic example of diversification across countries and different economies. And if you if you have decent enough weightings, you know, your portfolio can withstand in some way these sorts of things when particular parts of the markets are getting hit 80, 80% plus. But anyway, speaking of let's keep moving through, we want to have a chat about some of the funds that are also getting hit around. 

Alec: [00:17:11] Yeah, well, we put a heading in our Google doc here who would want to be a fund manager, and it has been pretty brutal for a lot of them, I think. Platinum Magellan. So there was a story that I thought there's been many stories and if. 

Bryce: [00:17:27] That's their job. 

Alec: [00:17:32] Platinum, Magellan, GQ, J, Pinnacle and one other are all down about 20%, at least 20% year to date. Mm hmm. 

Bryce: [00:17:44] Nice one, I thought. Tell me something new. 

Alec: [00:17:48] Well, we were talking about that before and your before we got on, Mike, and your reaction was a lot stronger than that. So I guess. 

Bryce: [00:17:56] Well, I mean. 

Bryce: [00:17:57] What's the story? 

Alec: [00:17:58] Yeah, it's like the market was down 20%. Of course. 

Bryce: [00:18:01] The market's down, they're down. 

Alec: [00:18:02] They invest in stocks in the stock market. It's the stock market's down. Yeah, well, you just the the company. Yeah.

Bryce: [00:18:09] And and you could probably talk about outflows and that contributing more and that's probably why they're down more than the market. Yeah. It's just kind of like no people who are hiring about oh Hyperion. And of course the Hyperion is one of the biggest growth managers in Australia and their biggest positions is Tesla and Alibaba. I think. 

Alec: [00:18:29] Definitely Tesla. I don't know about I. 

Bryce: [00:18:31] Think it is elemental. Yeah. And what do you expect to happen? 

Alec: [00:18:34] Yeah. Yeah. So then the so that's the I guess the the headline that we thought was a little bit, you know, how you go on with all these fund managers down 20%. It was like, well, of course, that's not reason to panic. That is just the industry they're in. But then there are fund managers that are down a lot more. And so the three big ones, platinum, are down 37% year to date, down 80% since since February 2018. You know. 

Bryce: [00:19:04] There's more going on there than just market crashes. Yeah, yeah, yeah.

Alec: [00:19:09] Magellan down 34% year to date, down 81% since February 2020. And then Pinnacle down 53% year to date, down 60% since November 2021. So Pinnacle, the story is really about Hyperion, as you just said, the Hyperion A do we call them the Cathie Wood of Australia? Like is that the vibe going for. 

Bryce: [00:19:31] Maybe. 

Alec: [00:19:32] Like just a lot of overlap between those two portfolios. 

Bryce: [00:19:36] Tesla Road and. Anyone's portfolio really. Yeah. 

Alec: [00:19:41] Yeah, but Platinum and Magellan, the two big names, remember when we started investing there was all the value V growth debate and platinum. Who was co Neilson's? He's since retired, but he was a real value investor. And then Magellan was this upstart growth investor and Magellan's returns were outstripping platinum and everyone was like, you know, Hamish Douglass v Neilson value. Growth. I think it's safe to say Magellan definitely won that debate. 

Bryce: [00:20:14] Yes. 

Alec: [00:20:15] The the 20 tens was a good growth time. 

Bryce: [00:20:20] Yeah. Yeah.

Alec: [00:20:20] Um, I feel sorry for platinum because for so long, value investing was unloved. But this was meant to be value investing moment. You know, growth stocks sold off like Coinbase, Roku, Zoom, Peloton. All those unprofitable growth stocks get absolutely kicked to the kerb, but they're still down 37% year to date in a value investor moment. 

Bryce: [00:20:46] What's the return of their funds, though? Do you know what I mean versus the return of their stocks? That'd be probably interesting. Say, I haven't looked at platinum for a long time neither. All right. Let's keep moving through in a couple of just key headlines before we head to an ad break. But I started the show by saying that I'd sold all of my exposure to buy now pay later. But this week, Apple came out with an announcement. Not only do they have the new M2 chip and leaked new products, as always, you.

Alec: [00:21:15] Don't know what this M2 chip is like. 

Bryce: [00:21:17] Yeah, well, I went to buy a new laptop and it doesn't have the M2 chip in it. It's got the M1, but they are now entering the buy now pay later game. 

Alec: [00:21:26] Yeah, Apple Pay later. There was this tweet that I saw that said with every sentence at WWE, they say, which is the Apple's worldwide developer conference with every sentence at WWE, they say Apple ends the dreams of a dozen start ups. Yeah, like every product decision they make, every security change, all of that stuff, the ecosystem that everyone is so dependent on that ecosystem. And I think us in Australia we saw what that what Apple's sentence on Apple Pay later did that. 

Bryce: [00:21:58] Yeah well I think firstly the fascinating thing here is the timing around this for me anyway like we saw PayPal announced a couple of years ago that they were getting in the game. We're seeing a lot of the banks now getting in the game here in Australia. Apple has finally come to the party on buy now pay later with the amount of cash on their balance sheet. They could have easily bought someone. 

Alec: [00:22:18] Zip's worth about half a billion dollars at the moment. Yeah. And Apple what have 200 or something. 

Bryce: [00:22:24] Yeah. So they could easily be. 

Alec: [00:22:26] Exchange rate and. 

Bryce: [00:22:27] Well I don't think that thinking about that. Yeah. Yeah but they, they've decided to do it themselves which makes total sense. They've got the infrastructure, they've got the Apple pay. Like it's just, it just makes so much sense. And yeah, ending the dreams of many of these buy now, pay later start ups and zip, which we all know has been hurting over the last 12 months or so. And there's plenty of people in the community out there who probably still shareholders and. 

Alec: [00:22:53] Nothing gets more engagement on Equity Mates Instagram than a zip. 

Bryce: [00:22:57] And stuff. Yeah, but look, it took a battering, I think, over the two days following the announcement, down 15% or so, if not a little bit more. So tough, tough times over there for zip. 

Alec: [00:23:07] Now last thing, before we get into some of these valuation stuff, you've just put a note in Google, doc. Inflation is everywhere, including business class flights, which makes me think I need to check how you spending out credit, what's going on there? 

Bryce: [00:23:22] So the levels of air traffic, international air traffic post COVID is still only at 68% pre-COVID. Breakover However, business class flights are just selling through the roof and tickets are now on average from like X Australia to London, New York, you know, wherever those I think mainly those two flights are now on average 20 grand. 

Alec: [00:23:50] What was it before?

Bryce: [00:23:51] Up from 13 to 15 grand is how. 

Alec: [00:23:53] Much a business flight is. And then what is first class? 

Bryce: [00:23:56] I don't know. I didn't even look at that. But I imagine 30 plus, I have no idea. So I never click on it. 

Alec: [00:24:02] And Sydney, New York. What you one way you probably talking like two grand. Yes. And then 20 grand for business class.

Bryce: [00:24:10] Yeah, yeah, yeah. So, are. 

Alec: [00:24:12] You getting ten bucks value that? 

Bryce: [00:24:14] Uh, I don't know. I've never this like a better meal, just constant service. A bed. It's. I don't know. I don't know. I've never done it. Yeah. It's one of those things I'd love to experience sometime in life. Yeah, but. But you get. What do you get? You get a bed, a big a TV, a constant service, good champagne, good food, nicer toilets. I don't know. Is that ten x? 

Alec: [00:24:38] Oh, it's just like, what can you do? It was save 18 grand and spend it on your holiday or your business trip. 

Bryce: [00:24:44] Yeah, well, if the business is paying you. 

Alec: [00:24:46] Let's put it this way. I'd much rather stay in the Hilton rather than a hostel than go business class rather than economy class. 

Bryce: [00:24:54] You know what I mean? Really, I don't mind hostels. They pretty fun anyway. So anyway, inflation's everywhere is what I'm taught is what I'm saying. If you look if you're buying business class flights there.

Alec: [00:25:06] That was just a very expensive. I know. I know we shouldn't be criticising each other's contributions to this episode, but what did that have to do with investing? 

Bryce: [00:25:14] Nothing. 

Bryce: [00:25:15] Nothing. I don't spend. What it means is 20,000 compound over ten years at 8% per year could be the difference between retirement.

Alec: [00:25:23] People didn't need you to tell them about business class flights to know that inflation is here. 

Bryce: [00:25:28] Lettuce. Iceberg lettuce is $12. I know. 

Alec: [00:25:31] We saw we saw green beans selling for $40 a kilo. 

Bryce: [00:25:36] I know. It's ridiculous. And now. Business class and. Now business class flights. It's it's unbelievable. Anyway, after the break, green, we're going to turn our attention to some of Australia's market darlings that are also taking a hit. We've got ARIA group. Sake, Xero just to name a few. So stay tuned as we talk through the valuations of some of those companies and we'll just hear from our sponsors. All right, Ren. We've spoken a fair bit about some of the big tech stocks that are hit overseas, but equally, some of the big tech stocks here, I guess you call them tech stocks. They do make up the tech index here in Australia. Stocks that have been spoken about many times on the show before, we've been lucky enough to interview some of the CEOs of these companies. They're also taking a pretty significant hit. REA group. 

Alec: [00:26:20] Yeah, well we get criticised a lot for talking about U.S. tech stocks, so much so we thought we'd talk about Australian tech stocks instead. 

Bryce: [00:26:27] Yes. 

Alec: [00:26:28] The Australian Old Technology Index is down 34% year to date, so it has been a pretty big sell off and a lot of these companies are profitable. That's an important thing to start. But you said RDA group. 

Bryce: [00:26:42] Let's also just quickly put that in context. The Nasdaq's down only 23%. Really? Yeah. So Australian Tech, we've been hit hardest. 

Alec: [00:26:50] Wow. Yeah, that is actually surprising. 

Bryce: [00:26:53] Nasdaq 100. 

Alec: [00:26:54] So ARIA Group, we like to ask ex-pat investors, what's the best company you've ever come across? I think Macquarie and Aria Group are probably sitting on the podium at the moment. People love it. RealEstate.com.au, Tony, you're a real commercial. Accommodate you. They've got some other businesses, but down 38% year to date. 

Bryce: [00:27:16] Brutal, brutal sake down 32%. Another company that is often spoke about, spoken about quite highly zero. We use that here at Equity Mates. That's down 44% and Carsales is also down 25% year to date. So some pretty significant numbers there. A couple of them have worse than the market itself or the index itself and particularly wasn't there the index over in the States. 

Alec: [00:27:40] So then the question becomes are they cheap? Because for a lot of these companies, they have been quite expensive for a long time. And we thought this would be a good opportunity to introduce some some concepts and in particular one that we really like to use. So we haven't spoken about in a while is the reverse discounted cash flow because it is a way to, rather than calculating yourself, what the future of the company looks like, it is a way to sort of think about what expectations are built into the current share price, what the market and what other investors expect for this company. And we should be very clear that all of this valuation work is more art than science, but it gives you some indication of what people expect for these companies. So before we explain a reverse DCF, I guess we need to explain what a DCF is, 25 words or less. How do you explain it?

Bryce: [00:28:35] Discounted cash flow, that's three was one of the most common tools to analyse the valuation of a company based on its future cash flows. Yeah. Brought back to current day what you're willing to pay for that cash flow now? 

Alec: [00:28:51] Perfect. I didn't count how many words, but it sounded just right. I guess the thinking behind this valuation method is if I was to sell you a dollar, or if I wanted to buy a dollar of you today, what would you sell it to me for? 

Bryce: [00:29:07] Two bucks. I try. 

Alec: [00:29:12] So I think, like if I wanted to buy a dollar a few today, the value of that is a dollar. Yeah. A dollar is worth a dollar today. Yeah. Makes sense. What if I wanted to buy $3 of you? 

Bryce: [00:29:23] $3. 

Alec: [00:29:23] $3? That is. This is so far just superb and helpful. Maths. 

Bryce: [00:29:30] Yes. 

Alec: [00:29:31] What if you wanted to sell $3? But it was a dollar today. A dollar next year. A dollar the year after that. So still $3, but spread over three years. With how much my buying that for? 

Bryce: [00:29:42] Well, I'd have to work out what the dollar in year three is worth today. 

Bryce: [00:29:47] Yeah. 

Alec: [00:29:49] Because if I had those all those dollars today, I could do something with it. I could invest it. I could put it in the bank and earn 1% interest in a savings account. Well, I'd probably earn 0.1% interest in a savings account, but for the ease of maths, let's say I could earn 1% interest in a savings account. So if I can earn 1% in a savings account, then the dollar next year is worth a little bit less because there's an opportunity cost. I could have made some money if I had it now, but I didn't have it now I'm getting it next year. So I missed out on making that 1% gain. Yeah, and that's in a nutshell, what's the whole logic behind a discounted cash flow? Is that a dollar? A dollar today is worth more than a dollar in the future. Mm hmm. And so all I want to do is figure out how much money a company is going to make over X period of time. Generally, we sort of talk about ten years, how much money they're going to make, and then what's that worth to me today? Because a company that earns $100 in profit today is worth more than a company that is going to earn $100 in profit in five years. 

Bryce: [00:30:59] Yeah, in theory it sounds easy.

Bryce: [00:31:02] In theory it does sound.

Alec: [00:31:05] So the discounted cash flow is the mathematical formula to figure that out. 

Bryce: [00:31:11] The theory, yeah. Yeah.

Alec: [00:31:12] To figure out that what the $3 paid over the next three years is worth paying for. Today, for a company, you take what they're earning, how much profit they're making today, you predict how that's going to grow in the future, how much profit they're going to make into the future. And then you say, what was the discount rate or what was the return I could have made if I had that today? What's the opportunity cost? That is how much you discount the future earnings by. And then you let the calculator do its thing. 

Bryce: [00:31:42] Let the calculator do its thing. If you're an Excel whiz, you could probably do it in Excel massive formula. 

Alec: [00:31:49] If you're a finance, finance, calculating theta. Yeah, yeah. Average cost of capital. But let's keep it high level here. And basically what that gets to is a fair value. So the $3 that I'm going to get, $1 this year, $1 next year, $1 the year after, if we discount that by 10% a year, then we say in next year that dollar is worth $0.90 to me today. And then the year after that, 10% off 90, it's worth $0.81. Yeah. So then you roll that up. A dollar this year is worth dollar. A dollar next year is worth $0.90 a dollar. The year after is worth $0.81. So we're talking 2.71. So I would be will at fair value for the $3 I'm going to get over the next three years is $2.71. Yes, quick maths. 

Bryce: [00:32:35] That's the stock price. 

Alec: [00:32:37] And then then you say, all right, well on the share market, that share is trading for $2. And I think the fair value for it is $2.71. So back up the truck. 

Bryce: [00:32:48] Your. 

Alec: [00:32:49] Beauty. But if if the share price is $4, I think fair value, the value of that is actually $2.71. Yeah. Too expensive. Yeah. Find another.

Bryce: [00:32:58] Opportunity to change the inputs until it looks here. That. 

Alec: [00:33:01] Is investing. 

Bryce: [00:33:03] Right. Yeah. I mean yeah in theory it's and it's such a common method for valuation with so many assumptions that go into it, you need to make sure that you've done the work to set to. It all comes down to if you're predicting the cash flow over or the future earnings over $1 next year, $1 a year after one over the year after, you need to make assumptions on how accurate that is going to be. And that's incredibly difficult. 

Alec: [00:33:31] And a lot of people get caught up in the maths overall. But like the I think where the what we've learnt is the best investors, the maths isn't that complicated once you understand it, but it's accurately projecting, projecting and predicting what's going to happen with a company which separates the best investors from those that can do them. 

Bryce: [00:33:51] Absolutely, yeah. So that's a DCF when we then need to flip it all around. And now we understand what the discounted cash flow model is, the reverse discounted cash flow model, which as you said. Flip it around. And rather than putting in the assumptions of growth, it's going to actually tell us what is required. So for this company to. 

Alec: [00:34:13] Grow, so with a discounted cash flow, we're trying to figure out what the right share price is, trying to figure out what's fair value is, what we think the share price should be or what we're willing to pay is. But what if we flipped the assumption and said the current share price, what it's trading at on the market today, that's all good. That's the right share price. That's fair value. Then we can say, well, what we actually want to understand is what the market expects as a growth rate. Yeah. What are the growth assumptions built in if the current share price is fair value? Yeah. And so then we can see what the expectations are for the company and we can say, well, you know, Equity Mates based on its current share price, based on a standard discount rate, the market expects it to grow at 4% a year over the next ten years to justify the share price it's trading at now. But I know that it's going to go thermonuclear, so I think the growth rate will actually be 10% and fair value is a lot higher. Yeah. Yeah. So you can just give you a chance to sort of say this is what the market is expecting to I think the company would be better or worse. Yeah, it's just another way to approach the same thinking. 

Bryce: [00:35:25] Yeah, which one requires less work. That's no, that's the right cut. All right. So let's take a look at some of the companies on the ASX with this in mind. So let's start with big, bad, boring company, Commonwealth Bank. 

Alec: [00:35:40] Okay. 

Bryce: [00:35:40] Current share price is $102. Its earnings per share is $5.32 if we use the 10% discount right in our discounted cash flow. 

Alec: [00:35:51] So do we want to explain why we use 10%? 

Bryce: [00:35:54] That's the average market return over.

Alec: [00:35:56] And next.

Bryce: [00:35:57] Period of time. And if I was to put my money in the market, that's what I could expect to get if I was to put it in there versus another investment opportunity. Yeah. 

Alec: [00:36:07] The idea is if that if you're not going to get that return from your stock market investment, but you could get that from a stock market index fund. Why would you do it? Yeah. Yeah. And it's also Warren Buffett just says he always uses 10%. And if it's good enough for Warren Buffett, it's good enough for us. Yeah.

Bryce: [00:36:23] Yeah, maybe for you. Not for me. So the current share price at the current share price of $102 using discounted cash flow, 10% discount rate, the market is expecting it to grow at 4% a year over the next ten years. To justify a $102 share price seems seems reasonable. So 4% growth year on year? Yeah. However. 

Alec: [00:36:47] The main 4% growth at this rate would be slower than inflation. 

Bryce: [00:36:50] Slower than inflation. And I just yeah. You're not seeing any stocks in my portfolio with five cent growth year on year. But over the past ten years though, Commonwealth has had pretty flat revenue and earnings per share has only grown at 0.4% a year. So it's actually the expectations are far beyond what it has delivered in over the past ten years and prior performance. No indication of future, of course, but that just goes to show the lofty expectations of the market that have baked into today's price. 

Alec: [00:37:26] Now, we should be clear that a lot of it we didn't do this maths on Excel. There are calculators. 

Bryce: [00:37:32] Online which is. 

Alec: [00:37:34] Free, and there's one platform that we have used for this that is way too expensive to use, but you can sign up for a free seven day trial. It's called Gurufocus and we signed up for a free seven day trial. Again, I don't know how many emails I've used for that.

Bryce: [00:37:53] So I think. If you want to know what about ticker, it doesn't do anything. 

Alec: [00:37:58] But I am going to email them and tell them to build it. 

Bryce: [00:38:02] And Tikr is one of our favourite, if not what we think is the best platform for sort of financial information on and filtering on global stocks. [00:38:12][9.7]

Alec: [00:38:13] Transcripts, information. 

Bryce: [00:38:15] You name it. 

Alec: [00:38:15] Yeah, it's a fraction of the price of gurufocus as well. 

Bryce: [00:38:18] And do we have a code? 

Alec: [00:38:19] Take it out. 

Bryce: [00:38:20] Contact@equitymates.com slash Equity Mates. Yeah. Yeah. Nice. Check it out. It's awesome. 

Alec: [00:38:24] But. 

Bryce: [00:38:25] Tikr. 

Alec: [00:38:26] I tried it. Okay, but don't feel like you feel like where are these boys pulling these numbers from? We used an online calculator to do the work for us. So basically you can you can get the current share price, you can get earnings per share, you can get historic growth rates, all of that stuff you can get from ticker. So all of these inputs you can just get from, you know, a information service and we use ticker. But then and then there's plenty of online calculators as well. We said we're going to talk about market darlings, aria groups. So this is where will come full circle. We can say that ARIA group. Is down 38% year to date. It has been what it is. And then you ask, Will, is it cheap? And this is where this DCF and reverse DCF methodology can help us answer that question. So let's do the do the maths again. ARIA Group its current share price even after being whacked 38% is $106 a share. Earnings per share of $2.80. 

Bryce: [00:39:32] Nice.

Alec: [00:39:33] Okay. So we're using that 10% discount rate. We can see that the market expects it to grow at 21% a year, expects it to grow its profit at 21% a year over the next ten years. 

Bryce: [00:39:48] Yeah, I think that's a key call out as well. The profit. 

Alec: [00:39:50] Yeah, yeah. 

Bryce: [00:39:51] 29% a year. Next ten years you. 

Alec: [00:39:53] Can grow your profit 21% a year over the next ten years. 

Bryce: [00:39:56] That would be epic. It's a pretty epic company. Yeah. No, I don't think it's possible. 

Alec: [00:40:01] Well, over the past ten years, it's revenue has grown at 16% a year. Jason Not bad. Yeah, but its profit per share, its earnings per share has grown at 8% a year. Okay. So you say, look, this is an amazing company, incredibly well managed. It's exposed to the Australian housing market. That just seems to be an unstoppable force. But the expectations for the stock perhaps don't align with its past performance at this current share price. So if you're looking at that, you have to say, alright, well the next ten years you have to be better than the last ten years and then you have to say, all right, well how's that going to happen? You know, it's pushing into India hard. It's got some other it's got some other international expansion plans, I think even in the States. 

Bryce: [00:40:51] Yeah, yes. 

Alec: [00:40:53] It's got an exposure through one of the platforms over there. Yeah. So you'd have to or you'd say you know it'll push into an adjacency, you know, like it's got a mortgage broking business. Perhaps that mortgage broking business will be the next real leg of growth. But that's that's sort of how you say, all right, well, what is the market expect? What does this current share price imply in terms of future growth? And then do I have a thesis? Does my thesis for this stock align with the expectations at the current share price?

Bryce: [00:41:21] Yeah, it's an interesting one because there's no way that RGA group are coming out and saying our forward guidance for the next 12 months is that we're going to be growing profit by 21% a year. You know what I mean? This is the expectation that the market has baked into the current price. So you could then also make the argument that if their previous sort of ten years on average, they've been growing earnings at 8% and next year they come out and deliver a 10% or 12%, then it's already above average for the last ten years in the stock market we'd be like, Yo, here we go. 

Alec: [00:41:54] And I think when we were pulling companies out for this, it is important to note that the last couple of years have skewed a lot of these long term averages. There are a couple of companies that are just sacked entirely just because the last few years have been such aberrations with COVID and all of that stuff. So, you know, we spoke about where the rubber hits the road and what separates great investors from good mathematicians is not doing this, these formulas, but getting the numbers right, like getting your projections right and accurately forecasting what the future of a company holds. But it's also looking back and knowing what numbers have like weird aberrations in them and what don't. Because sometimes the averages obscure two years of pandemic related lockdowns where they made no money or something like that. That's just an important call out generally as well. 

Bryce: [00:42:48] So one more stock in this one was pretty amazing and it's Fortescue Metal. 

Alec: [00:42:53] Yeah. So current share price, 21 bucks earnings per share of 3.90. Now basically when you do the reverse discounted cash flow, the market doesn't really expect any growth over the next ten years. But over the past ten years, revenue has grown at 13% a year and earnings per share have grown at 22% a year. What's going on here? 

Bryce: [00:43:15] What is going on in. 

Alec: [00:43:17] This is where commodity businesses, it's difficult to just take long term trends and just project them forward. It's crazy because Fortescue is in a great moment. At the moment iron ore prices are incredibly high and anything it can dig out of the ground, it can sell for almost six times the cost it takes to dig it out of the ground, maybe more than six times the cost at this point. It's a good business to be in now. Today. 

Bryce: [00:43:41] Yeah.

Alec: [00:43:42] But if China slows down, does that slow down demand for iron ore? If Albo can't fix our relationship with China, can we replace China as a customer with other steel manufacturing hubs? Because there's not a lot out there these days. That's, I guess, the problem when you try and apply this to a business like Fortescue because if. I can keep growing the earnings per share and stuff and revenue at the rate they have over the past few years. Right. 

Bryce: [00:44:10] Yeah. 

Alec: [00:44:11] But that's the. 

Bryce: [00:44:12] Question. Yeah. Yeah. 

Alec: [00:44:14] And that's why your thesis might be like Fortescue. Future Industries and hydrogen. Just like that. Yeah. That is incredibly unproven. So again, that's where the rubber hits the road about great investors making a space that is accurate. About the.

Bryce: [00:44:29] Future. Yeah. Future. Future Teller's future. Storytellers. Yeah. Got crystal ball. Yeah. 

Alec: [00:44:35] Future storytellers. Or that's where concepts like a margin of safety come in, where even if you were wrong about it, if you're wrong about the future, you've bought something at such a discount that you're okay. You're okay. 

Bryce: [00:44:48] Supposedly. So make sure you check that out if you're interested. But look, it's always great to chat stocks. There's plenty going on in the markets at the moment. Make sure you head to Equity Mates dot com slash fin fest to buy a fin fest ticket. They are running out the door. Spots are limited. It's going to be huge. We're really excited for it. 15th of October. Plenty of information is on the website as well. There is so much going on here at Equity Mates Media across our network ran. Did you have a favourite episode from the last week? 

Alec: [00:45:18] So I want to. We've been having a lot of fun with the dive and I think we should shout out. So this is our business news podcast, a little bit broader than just investing. And two weeks ago now when this is released, we covered Mike Cannon-Brookes and AGL, Justin Timberlake's hundred million dollars payday and Glencore's bribery cases. Pretty broad spread of of topics. We're having a lot of fun doing it. Come join us because it's it's worth a listen. 

Bryce: [00:45:47] Yeah, it is worth a listen. And one of my favourite from last week was from comedian V, economist Ren Adam and Thomas. They're brothers, one's a Canadian, one's an ex RBA economist, unpacking the big macro stories. And we've seen that Lithium was hit over the last couple of weeks. A lot of people in lithium have been hurting and so they're addressing it with the lithium market meltdown. Is the future cancelled is what they unpacked. So it's such an entertaining show, it does incredibly well. And if you haven't started listening to it, make sure you do yourself a favour and go and give it a listen. 

Alec: [00:46:23] I Bryce Well, that does it for today. Let's go. 

Bryce: [00:46:29] Make some money. Let's go. 

Alec: [00:46:30] Douse that dumpster. 

Bryce: [00:46:30] Fire. It sounds. Good. Catch up next week.