Expert: Mark Lamonica – Are we seeing echoes of 2000 in today’s market?

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 are you going?

Alec: [00:00:31] I'm very good. Bryce very excited for this interview. There's a lot going on in markets at the moment. We've got the potential for a bubble bursting. There was a lot of headlines about that. We've got earnings season kicking off. We've got plenty of things happening and we're joined by a guest who has his finger on the pulse and is going to help us understand what's going on.

Bryce: [00:00:50] Finger on the pulse. And for those that came to our live event last year where we spoke about the alcohol industry, this guest absolutely lit up the floor.

Alec: [00:01:00] Yeah, honestly, Bryce was disappointed afterwards because he was like, This guest stole my thunder. It was a pleasure to welcome

Bryce: [00:01:07] Mark La Monica to the studio. Mark, welcome.

Mark Lamonica: [00:01:10] Thank you. I mean, that's a lot of pressure, by the way. He started off, and I will say that there you gave me beer. So here we're talking about water,

Alec: [00:01:19] but it is 8:30 in the morning, but we can run out and get you a beer.

Mark Lamonica: [00:01:23] I'll be OK. We'll see what happens.

Bryce: [00:01:26] So Mark runs the individual investor business at Morningstar and pumps out plenty of really interesting content, and we're going to cover a lot of that today. We're going to be talking about earnings season and what Mark's saying. They're having a look at the broader market environment as well as Ren just said there's so much happening. And then take a look at a couple of companies that Morningstar have their eyes on as well to unpack what the analysts are thinking around News Corp. and so on. Air Corp. So I mean, we'll close out with bold predictions.

Alec: [00:01:58] Yeah, yes. So let's kick in. All right. Let's do it. So, Mark, are we in the middle of ASX earnings season? Well, at the start of ASX earnings season, we've seen earnings season in the US overseas from the first couple of weeks in Australia. What are you saying? What have you learnt?

Mark Lamonica: [00:02:15] Yeah. So the sector, you know, give a little bit of sort of the Morningstar methodology here. So our analysts are calculating a fair value on every share that we cover. So it's what they believe it's worth. So they create a discounted cash flow model. And, you know, we do have to go through all the detail, but basically they are, like any other analyst, predicting the future. Right. So at the end of the day, as shareholders, we don't really care what happened in the past. It's all about what happens in the future. But of course, the past is the only thing we have to inform what we're going to think about the future. Right. So it's one of those things where like once earnings are released, it's kind of too late, right? That's already happened, but it informs our analyst models. So basically, if they're surprised, they'll change their fair value. If it's kind of just what they expect, then their fair value stays the same. So it's early in earnings season, but I try to go through a couple fair value changes that they've made. So RBA group increase it by seven percent

Alec: [00:03:12] so that that company just can't do anything wrong.

Mark Lamonica: [00:03:16] Right, exactly. And you know, we still think we still think it's overvalued, but obviously pretty impressed with what we saw there, Macquarie. So I know that that's, you know, a stock of the year candidate. Bryce, I'm listening. Yeah. So we increase our fair value eight percent there every day, you know? Yeah. And I think the the biggest one so far and we are early GrainCorp, we actually raise our fair value by 11 percent. So right. Okay. Yeah. So that's that's what we've seen so far. But it is early.

Alec: [00:03:46] Most people will be familiar with RBA and Macquarie. GrainCorp, probably less so. Is that just because food prices are so expensive and they'll benefit?

Mark Lamonica: [00:03:55] Yeah, yeah. I mean, I think, you know, that's part of it. Obviously, we're seeing a lot of inflation, particularly in food. So, you know, and that obviously if they can pass on that pass on those costs that they have. Pass it on in price rises, then of course, yeah, we're going to increase our fair value.

Bryce: [00:04:13] So are well and truly into earnings season overseas. Does this analysis translate to international markets as well? What are you saying of that?

Mark Lamonica: [00:04:21] Yeah, yeah. So, you know, same thing. So we have obviously a team of analysts here in Sydney that cover Australia, New Zealand shares, and then we've got teams around the world. So yeah, I've got a team in the US. US obviously reports quarterly further along. You know, I think the big thing, the interesting thing about the US and I'll talk about a couple of things that we saw. But you know, the interesting thing is, you know, the reaction of the market to our jobs. We we'll talk about that in Amazon. So, you know, we have the biggest drop in market cap and the biggest gain in market cap and you know, more than anything else like to me. And I think we'll talk about this later. To me, it seems like the market's a little bit jumpy, right? Like, you know, there is nothing like if we look at metre, for example, like there is nothing, almost nothing a company can do to report earnings that should cause it to drop close to 25 percent, right? Short of them coming. I am saying we think we're going to go bankrupt, so you're seeing a lot of volatility and I think, you know, if you look at what our analysts did, he lowered his fair value by one percent. Really? Right. So, you know, and we all know like, I'm sure you guys have talked about, we don't know sort of the headlines that Apple's privacy is eating into advertising, that tik-tok is taking away, you know, younger social networkers from from their networks. But yeah, I think, you know, I personally don't own matter. But I think if it's something that you're really interested in and, you know, down 30 percent this year seems like an opportunity, right?

Bryce: [00:05:51] This is something we spoke about on Monday's episode, and it just shows how jumpy the market is. Media reported one point ninety three billion daily active users, versus one point nine five billion expectation from market two point ninety one billion. So that was daily two point nine one million monthly active users first two point ninety five versus expectation, and they had a guidance of 29 billion in red for Q1 versus 30 billion in rev. So just missing and off the back of that got slammed 20 percent also because of obviously slowing user growth. Alec: [00:06:25] No, no. The first time in the history that users dropped first time ever that daily active users was down metaverse costs, you know more now. Yeah, blowing out. Yeah, Tik-tok taking attention, apple privacy impacting them, impacting them more than Google in particular. There's a lot of reasons, but the context here is Bryce and I have a bet he reckons will break through the trillion dollar mark. I don't think they ever will. So, OK, there's a little bit of vested interest here, and not Mark Lamonica: [00:06:55] every company is now worth more than a trillion dollars. Alec: [00:06:59] Honestly, Equity Mates is rising at a Mark Lamonica: [00:07:01] very, very high. But is this interesting, right? I mean, people are obviously extrapolating these drops like into the future, right? That this is some sort of drop to zero that there the new MySpace or something like that. Like, I don't know. You know, the numbers are not that off. Yeah. Well, that's Alec: [00:07:17] yeah, that's the thing. But it's not just drops on the downside, like MIT, it's also jumps on the upside, like you mentioned Amazon, but Google, Snapchat, Snapchat was up like 60 percent in a day there. Mark Lamonica: [00:07:30] And I think it's the same. I think it's the same thing, right? Like, I think the market's very unsure of what's happening right? And obviously, we know everything going on with inflation, you know what's happened in the past month or during January. And so I think the market is just really jumpy. So I think like anything that they sort of see is good news. They're like piling in. Anything that's perceived as bad news. People are fleeing. So it's it's just it's a strange environment. I think it's yeah, I think it's just a sign that the markets are unsettled. Alec: [00:07:58] I kind of love it. It's I mean, it's good for us in the long goes. Yeah, but it's also just good for us as investors like. This is where opportunity comes. Mark Lamonica: [00:08:05] Oh, absolutely. You know, and you see it. You see this all the time, right? If you go back and you know, I think we'll talk more about the market. But if you go back and look at the market, right, like it's kind of been a passive investing game since at the end of the day since like the GFC, right? Like and now you're starting to see people start coming out saying that this is a stock picking market. Right. And and that's why it like, you know, I know personally when I talk about investing, I'm talking about my own personal investing. Actually, when I talk about analysts, that's Morningstar about, you know, I'm trying to find things that are like, temporarily undervalued, right? And these environments. It happened. So, you know, Facebook or Metro was not on my list, but if it was and it dropped 30 percent in a month, I would be all over that. So yeah, Alec: [00:08:49] yeah. So let's let's take a step back from, I guess, the day to day news the, you know, the price movements, what companies are reporting and look at, I guess, emerging narratives that are coming out of earnings season both here and overseas. What are we learning about, I guess, the environment more generally from from the last couple Mark Lamonica: [00:09:09] of months, something that we look at a lot at Morningstar, we have this thing called a style box. So basically, this is a nine box grid that looks at the market from a market capitalisation perspective. So big shares to small shares and then a value to growth perspective. So basically, if you picture those nine boxes and, you know, look at returns in those boxes, so we go back three months. So small cap growth shares in the US are down 25 percent and that was kind of a first fall and they're down for the year. If you look at that. But also in the third cap in the in the last three months, so mid-cap and large cap are down around eighteen and a half percent. And value's actually up. And so, you know, I think kind of a narrative that we've seen and that people have obviously talked about a lot is, you know, people are moving away, particularly from sort of tech shares that aren't making money. So you sort of see that, you know, small captures smaller companies are newer companies, less they're more risky companies, so they're less stable. Don't have the financial capacity to some larger companies. People are kind of fleeing those, and it'll just be interesting to see if this keeps up rates three months. And, you know, we can't obviously think that this is a trend yet. I think it needs to be a little bit longer. But you know, this is very different from what's happened since the GFC or it's been growth has just outperformed, outperformed, outperformed. And you know, if you think about it once again over a three month period, the fact that value is up and up a little bit means it's outperforming by 20 percent right in the last three months. So I don't know. I think that's kind of interesting and interesting to see what happens with those Bryce: [00:10:47] deep value investors who have had an absolutely miserable time over the last 12 years and now. Mark Lamonica: [00:10:53] Yeah, exactly. Exactly. It's like it's like every once in a while because the same thing happened. The same thing happened right after the dot.com crash. Every once a while, people like bring them out and dust them off. Yeah. All right. I go to town, you know, go find yourself to buy. Alec: [00:11:07] It feels like our Twitter feed. The all the value investors got very quiet, and all the crypto investors got very loud. Hopefully, the crypto investors get a bit quieter and the value investors take. That was, Mark Lamonica: [00:11:17] yeah, yeah. And I always think I always think it's funny, you know, obviously, that's the way the industry works. But, you know, as individual investors, we can do both. Yes. So I don't know. I think people might feel like they need to go into these camps where I'm a passive investor, I'm an active investor in value. I'm just like, just, you can be all of that, right? Just look for different opportunities at different times. Bryce: [00:11:40] Yeah. So before we move on to a bit of a discussion about broader market and the environment, are there any companies that really particularly surprised the Morningstar analysts? Mark Lamonica: [00:11:51] No, I would say, you know, with like if you think about and I know we're going to talk about, know we're going to talk about, you know, sort of our ratings on a couple of different shares later, you know, really what our analysts do is they try to, in isolation, calculate a fair value per share and then simply, our ratings are just as that price adjusts. Right? So, you know, we talked about obviously met, for example, like we think it's pretty undervalued now. We thought it was undervalued before their earnings came out. So, you know, really, I think that the surprise is that, you know, I think we should have as investors is overreactions. So both on the up and down. There's nothing profound that our analysts so far have changed the fair value. We talked about stuff. Yeah, there's been 10 percent changes and things like that, but nothing crazy. Alec: [00:12:40] Let's touch on the broader market environment because, you know, Bryce and I were on holidays. Hopefully you were on holidays as well early January, and it seemed like the sky was falling. And, you know, we had big investors around the world come out and say that, you know, the super bubble was bursting and, you know, the sky was falling, Mark Lamonica: [00:12:59] which Grantham says, you know, all the time. Yeah, I like I like I like reading his stuff, but he's picked. [00:13:05][6.6] Alec: [00:13:06] He's loved the he's picked a few bubbles. Well, he's picked the last two big bubbles. You can always pick Bryce: [00:13:10] a bubble if you're always. Mark Lamonica: [00:13:11] Yeah, exactly, exactly. Alec: [00:13:14] It feels like the last week or two has been a little bit calmer. But you know, that doesn't mean that everything's okay. So we want to we want to sort of talk, I guess, about what's happening in the broader market. And before this interview, you mentioned you'd been looking at the similarities and differences between today and early 2000s, which was the height of the tech bubble and the subsequent fall. So that obviously piqued our interest. So what have you learnt? Mark Lamonica: [00:13:38] Yeah, yeah. Well, you know, that was my I'm, you know, a lot older than you guys know that that was my first bear market. So I was in uni actually when that happened. So kind of right at the end of that run up. So, you know, it's something that interests me. And, you know, I do think in my lifetime and I've looked back and looked at other bear markets as well. But you know, I do think there are some similarities, as you mentioned and also different stories, which we'll get into. But obviously, you know, the late nineties, as everyone knows, is all about technology. All right. So there was sort of this notion out there that, you know, the internet was going to change everything, which it obviously has. But I think the hype around what technology was going to do is it was going to just make us more productive forever. So people are sort of extrapolating out these huge productivity gains forever, right? And you know, I sit there and look at the internet and half the time it makes me unproductive. But anyway, that's what people thought that there is this brighter future. And once again, like this whole, this time is different type of argument and anything having to do with the internet, right? Like the classic joke, of course, is Pets.com. Or, you know, somehow that if you sell dog food over the internet, it's, you know, 500 times better than selling dog food out of a store. And, you know, we had the same thing, a lot of speculation. So some of the stuff we're seeing now as we sort of cross from 99 to the market start falling in two thousand. So interestingly enough, and I'm not saying anything that interesting enough, we sort of crossed over. The Fed didn't raise interest rates because they were worried about what would happen. Y2K problems. So like, OK, we're not going to rain, so Alec: [00:15:16] funny looking back and then Mark Lamonica: [00:15:19] nothing happens, but they're worried about it, so they weren't going to raise interest rates. And then they started raising in March of 2000 and looks like they're going to start raising in March of this year. And that's you should read anything into vouchers when they meet, right? But but anyway, yeah, that's sort of when the market peaked and right before that, we had this huge surge of IPOs. Right. So like all these companies, that probably wouldn't have gone public in any other environment, but they're trying to take advantage of it. So we have all these IPOs. And you know, at the end of the day, people wanted tech shares and sort of Wall Street and Silicon Valley got together and said, All right, you want to check shares, we'll give you some more companies to invest in. And so all this stuff came out. And yeah, the market peaked March two thousand. And then, yeah, the S&P went down forty nine percent over the next two and a half years. Nasdaq went down 79 percent. And I do like I do think that, you know, when people get very panicked, as you were saying, like in January, like you're looking at your Facebook board, it was like a counselling session, right? You know, and rightfully so. But you know, I sit there, I'm like the Nasdaq down 79 percent. Right? Well, you know, that is a drop in the S&P. It took seven years to hit another high. Nasdaq took it 15 years. And you know, the one other thing that I think is kind of interesting that's happened recently also is there was this huge surge of investor money, individual investor money going into the market. So two thousand the year started dropping. That was when there was this huge surge. So, yeah, you know, 260 billion went into US equity funds that year, and that was up from one hundred and seventy six billion in 1999. And you know, what was this? This was buying the dip, you know, at the end of the day, right, the market started falling in March and the market doesn't fall, you know, it fell for two and a half years. But as it started going down, people started doubling down right like, there's this whole by digit mentality, which I think happened a lot in January as well. And you know, the interesting thing is the insiders, all these new tech companies are gone public. They were all selling, so they sold 23 times more shares than they bought. So, yeah, it was just an interesting environment. And you know, if we look at what's happening right, we've kind of seen the same thing, right? And I'm not saying that this is going to happen, and I certainly don't want it to happen. But we started seeing in the risky parts of the market, small cap technology shares. It's starting to get bigger right up into mid-caps, big large caps. So I think that part is interesting. The other thing that's interesting is in 2002, when markets started following the Wilshire Large Cap Value Index went up 17 percent. And as you guys know, right, the problem is that with a market cap weighted index, after years of certain shares outperforming, they make up a lot of the index, right, so the average share could go up. But the indexes go down, and that's where I'm interested to see if the market continues to go down. What happens now because, you know, 50 percent of the market's passive now, and it was 15 percent back in 1999 2000. And so what are these passive investors going to do? Yeah. And they drive it lower or keep it? Yeah. I mean, it'll be interesting as long Alec: [00:18:42] as Apple, Microsoft and Amazon keep going from strength to strength. We're going to have a full regular session because investors are going. Mark Lamonica: [00:18:50] And that's and that's the thing. Like, I think a lot of people, you know, a lot of people are like, Oh, I invest passively. I'm not making any sort of bet on anything. I'm like, Well, you can't r- right now, right? You know, you're betting on, yeah, Apple, a company that has a market cap figure and all the shares in Australia combined. That's what you're betting on. Alec: [00:19:08] I'm surprised I ETF provider hasn't done like an S&P five hundred x same ETF to give you like some exposure to the other four hundred and ninety five companies. Mark Lamonica: [00:19:19] Yeah, no. It's well, there's a there's an equal weighted one. Alec: [00:19:22] So that like in Australia. Mark Lamonica: [00:19:23] Yeah, yeah. I think betashares has an equal weighted product, but. And that's yeah. So there you go, right? You know, the 500 largest shares, the same weighting as Apple. Yeah, it's interesting. So it would just be interesting to see what these passive investors do because I do both. Right. So I own some passive ETF, so I own individual shares. But when you own individual shares like and maybe I'm being naive here, but you know, if you understand the company you can see drops his opportunities, you could hold on because you're thinking of it as a business. I just wonder how maybe some of the newer investors who are investing passively that think the market just shares out? Is there anything to hold on to? Are they going to get spooked at a certain point? Alec: [00:20:05] I think that would be the biggest shame if all of these retail investors got burnt and stopped investing like that. That would be. To make sure that doesn't happen. And just for people who want to learn more about the equal weighted ETF, its ticker is Queue US. Yes, yes, Google out and do their own research. Bryce: [00:20:22] Yeah, yeah, very interesting. I mean, we've experienced the S&P drop 30 percent, but that happened in about six days and back, not two and a half years. So that's the part that I'm really interested in. Hopefully don't have to experience it. But yeah, what happens if it's drawn out over an incredibly long period of time? And that brings us to chatting about psychology, investor psychology. So one of the big similarities between sort of the 2000s and what feels like now is that rampant speculation, which you mentioned a lot of retail investors just throwing cash in, you know, in 2000 it was the internet companies which you spoke about, but now it's that crypto, Web3, everything that Ren is getting into metaverse talking about, you know, combining has no cash. It's all fundamental. So how do you think about the differences and similarities in investor psychology around these times? Mark Lamonica: [00:21:16] Honestly, I think it's it's ultimately the same thing and it has been, you know, every bubble is there. There's a bubble. We'll find out. You can only find out after, right? But like every one of these runs in history, there is the tulip mania sea bubble. Like it's the same, same investor psychology. It's just sort of different tools, right? So you guys named a couple of things. I agree with, but also just the leverage in the market, right, is so easy. So whether it's borrowing money or options or, you know, there's just a lot of other ways that you can speculate. And you know, we're all we all just follow patterns, right? That's how humans so humans act. We just follow patterns. And what have you been taught other than obviously that very quick Covid fall? What have you been taught since the GFC that are gone? So, yeah, there you go. I mean, it's understandable. Alec: [00:22:06] I think the big thing thinking about the 2000 internet bubble was that a lot of the faces weren't wrong. They were just early. Like, I don't know if you guys have read the hard thing about hard things by Ben Horowitz. I haven't. So the Andreessen Horowitz, the VC firm, he was a CEO in the 2000s of a cloud computing company that ultimately got bought for far less than they raised at the cloud computing. Was it wrong? It was just early. And similarly, you know, we mentioned and laugh about Pets.com, but selling pet food and pet supplies online wasn't wrong. It was just too early. Like Pet Circle and stuff, a doing doing it these days, zoo plus over in Germany. And I feel like that's what we're going to learn in this recent thing. Like Web3 Metaverse, there will be some things in there, but the challenge will be like, Are we just too early? Yeah. Is the technology there and is the business models there? Mark Lamonica: [00:23:00] And that's the I think it's the interesting thing about being an investor, right? That like, you know, in my opinion, you go back and you look at certain points in history and you can see that, you know, things that change the world don't necessarily make good investments. And I think people think that there's like this direct correlation between like, you know, hey, electric vehicles are going to take off. So anything having to do with batteries, any carmaker with an electric vehicle is, you know, going to be amazing, but it just hasn't happened. Like, you know, and even if you go back and you look at like the railroads, right? Like at the end of the day. So the railroads change the world and we don't appreciate it as much now. Right? But go back and look at the railroads, they were terrible investments because all this money poured into it. Every single rail or like every one in their mother's, sorry, a railroad company. There is all this capacity and their ability to charge people just, you know, fell through the floor. And it turned out to be a terrible investment, but still change the world. And at some point it made a lot of sense. So, yeah, I think it's early and realising there isn't that direct correlation sometimes when growth and actually being a good investment. Alec: [00:24:09] Well, Buffett has that quote about like if a capitalist had been at Kitty Hawk, he would have shot the Wright brothers down or something like that because like, no one's made money on airlines in the however long I've been around. Mark Lamonica: [00:24:22] Yeah, yeah, no. Exactly, exactly. Some, yeah, some things that are used a lot are just not good investments. Alec: [00:24:27] So Mark, we want to get to stock specific stuff. But one more thing, I guess, on the broader market environment was when we were talking before this interview, you mentioned you had some thoughts on the democratisation of of investing and you know, that whole narrative and what that means. So talk us through this. What are your thoughts? Is it is it all spin or what do you think the result will be? Yeah, I Mark Lamonica: [00:24:53] mean, I don't think it's new, right? I think it's one of those things that people, you know, people keep talking about, like, this is a new thing. Obviously, this an artefact, right? You know, at the end of the day that I can sit there and now what has happened? We've broken down barriers in investing. We've removed friction, which are fees, rights and how you can trade free. And a lot of. Situations, especially in the US and now, you know, you can trade from your phone, so stand in line at the movies and, you know, trade options. Not sure if that's healthy, but I Alec: [00:25:23] think I think one thing I'm thankful for in Australia is that you can't do it. Yeah, well, it's harder to do. Mark Lamonica: [00:25:27] Yeah, yeah. And I think that's a good thing. So. So yeah, that's been democratised democratisation this time. If we go back to 2000, it was online trading. And I don't think people appreciate once again, this is the old man in me. You know, me sitting in my uni dorm room, being able to trade on my computer was a completely revolutionary thing because you used to call broker. And so if you if you think about like the friction involved in that, like I had to call a broker and talk to the broker and then he or she had to put it in the order. And you know, and you paid a lot more for that. So like that was a huge, you know, huge step in democratising investing. And it also removed. And just as you said, sometimes when you remove this friction, it's a bad thing, right? Because if I call my broker and I want to put all of my money in some like call option on some very speculative investment, he or she could talk me out of it. Right. But I don't have to do that anymore. Now, I could do that in 2000. I can do it on my computer now. I can do it on my phone and I can trade options and I can do all this different stuff. And sometimes, you know, not a great thing, right? When I want to sell. There was somebody to stop me. I could call my broker and say, Do you really want to do that? I know, I know you're panicking. The market's going down, but think about it. Call me tomorrow and take some time now. There's nobody right? Like, I can sit there, see the market falling on my phone, just sell everything I have if I get scared. So yeah, I mean, it's interesting. We'll see sort of see how the whole thing plays out. So, mark, Bryce: [00:27:00] before we start jumping into some specific stocks, we're just going to take a quick break to hear from our sponsors. So, Mark, at the top of the show, you mentioned that Morningstar has a pretty comprehensive team of analysts and you pump out a lot of research on ASX listed companies and then companies from around the world. And we've pulled out a few here to go through to really sort of unpack and we start with one of Equity Mates major competitors and that is News Corp and News Corp. You've rated as two stars. No moat. And they're trading at a 30 per cent premium to fair value. So it was a pretty scathing assessment of news. And we want to hear the key reasons for this. Yeah. Mark Lamonica: [00:27:43] You know, we would call it an unbiased look at the underlying value of the company. But listen, at the end of the day, we talked about this earlier. You know what, we are trying to do. So we do have star ratings. So five star shares that we think there's a biggest discount between fair value and what it's trading for. And one star, of course, is the absolute most overvalued. So if we certain News Corp, we're looking at overvalued, right? And as you said, pretty overvalued. But you know, that's just simply a price mechanism, right? So that is we think the market is over valuing it. You know, there are things that we like about it. There are certainly things we don't like about it. I think, you know, News Corp, like so many of these companies, is obviously going through a transition, right? So like, you guys are not going from a transition from the Equity Mates newspaper to to, you know, digital way of engaging with people. And you know, I think there's a lot of risks associated with that and opportunities as well. But yeah, I think that's kind of the take our analysts are are have on it the Alec: [00:28:42] internal disruption at news. It's pretty interesting to watch that definitely light to the streaming party. But going from Foxtel focussed business to a binge and kayo and they have a new streaming flash, I don't think that's going to do well. What's the Morningstar analyst? Take on the internal disruption, the like a News Corp going to be a streaming giant? Mark Lamonica: [00:29:05] Yeah, yeah. You know, streaming everybody, everybody's streaming, right? Like, it's one of it's one of the interesting things. I actually i-, I know it doesn't sound like this, but I prepared for this today by listening to a couple of your latest podcasts. So I listen to your bold predictions. Actually, I might walk over here, so I know you Bryce: [00:29:22] thoughts and feelings. Mark Lamonica: [00:29:22] Well, there's a there is a bold prediction around streaming, right lighting consolidation. So, you know, I think I think it will be interesting, interesting to see what happens. We've gotten into this situation, right? Like and if we talk about moats and obviously we'll spend some more time talking about moats or sustainable competitive advantages. You know, what is it in streaming? Well, it's content, right? It's like, what is the content you actually have? And you know, I don't know about you guys, but I've got two different What do I have? I have Netflix and Stan, and I don't really know why I actually picked those. I think my wife did. But anyway, it's about content. That's why you're making those decisions. And you guys talked about Amazon and MGM and like, how do you get this content? You know, Netflix has spent a ton of money making their own content, and that's not great for business, right? Like if that's the way that all these I think it's an industry that does need to consolidate because, you know, everyone out there spending a ton of money on content is not good for investors, right? That means that there isn't a moat. They don't have a sustainable competitive advantage because they have to go out there and spend all this money. So, yeah, I think the question is, you know, we think that they've made some good gains in streaming, but they've also if you look through their earnings, they've also sort of fallen off slightly, right? Like we've and we've seen this across surprise. We saw this in Netflix, right? We saw this huge drop in Netflix because people are emerging from their homes again, right? And going out and doing actual activities instead of watching TV. So yeah, it'll be interesting. You're going to see who the winners and losers are. Like we we think that they're decently positioned, but that maybe this isn't a great business overall because of all the competition. You need consolidation. Bryce: [00:31:06] You will not then don't even have a narrow moat. You've said No, no, no. Mark Lamonica: [00:31:11] Exactly. Alec: [00:31:11] Exactly is the best thing about News Corp is that they're a majority owner of a good business in ARIA. Mark Lamonica: [00:31:19] Yeah, no, they are. And you know, the interesting thing is, you know, what is that? And so, you know, obviously in our annual report, we sort of broke that down and so around 20 percent of their earnings. Come from this point. But still, 29 percent come from sort of their print old school, you know, newspapers and all this stuff. Yeah. Twenty nine percent. So and that's obviously not a great business. And so I think the interesting thing will be that transition. Right. So like, you know, they need to make up for that revenue because that will keep dropping. And yeah, I think that's it's hard. I guess I would say these are hard companies to invest in because there's so many moving parts and you're trying to figure out, OK, you know, what's going to happen to this old legacy business? It's the new growth business. And you know, we've seen I know we talked about Netflix and Netflix has done well, but you know, that's that transformation Netflix went through right where, you know, they were still making money. And once again, my old man stories like I used to get the DVD is delivered to me, and they were still making money off of that, and they decided to burn down that part of the business so that they could focus. And yeah, I mean, that obviously worked out pretty well. But you know, we'll see what happens with News Corp.. Alec: [00:32:33] So, Mark, we'll move on from News Corp to the next company we chose was Ansel. And the reason we chose that was it was the most recent company that had been given five stars, only a narrow moat, according to the Morningstar analyst. Twenty six percent discount to fair value. Talk us through what are the reasons for five stars and people may not be familiar with the transformation. And so when we went through the last couple of years, so maybe just explain Bryce: [00:33:01] they also might not be familiar with what they actually do. Mark Lamonica: [00:33:04] Yeah, they make clubs right like Nazi the. Alec: [00:33:08] Yeah, that was transformational. Sorry. Both rubber products, but just different. Yeah. So yeah, they Mark Lamonica: [00:33:16] did globes for like industrial uses and in health care uses. And yeah, leaving all the the jokes aside. So, yeah, once again, you know, what's happened is the share price has dropped a lot. So how have they gotten the five stars that share price has really come off? So it's down 40 percent since July of two thousand twenty one. And really, it's coming down because of margin compression and right. And you know, when we think about great companies, what do we want? We want big margins at the end of the day, right, so that every dollar they sell, they get to keep more. And a couple of things have happened. So no one labour costs have gone up. Freight costs have gone up. And then input costs have gone up. So you made rubber gloves out of a by-product of oil and has guard up a lot. And Ren basically thinks that this is temporary. So, you know, at the end of the day, and that's why the fair value hasn't dropped, right? Because we are looking into the future. So their margins drop from like 40 percent to around 35 36 percent and we think it's going to reverse. So our analyst thinks that, you know, in the next couple of years, we'll get back up to 39 percent. They'll pass on some of those costs to consumers. We'll see the labour market not keep accelerating. So yeah, that's sort of the story. Alec: [00:34:37] It's pretty crazy that a three percentage point drop in margin can translate to a 40 percent drop in share price. Mark Lamonica: [00:34:44] Yeah. Well, hey, I mean, we just talked about Facebook, right? Yeah, it's pretty crazy that losing a couple active users equals whatever billions like coming off. Alec: [00:34:53] Yeah. The other thing about Ansel is like, this should be its moment. Like, the world is in a health care crisis, like the demand for their products will probably never be higher in terms of like the world being focussed on, like getting these products to hospitals and everything. You don't like to see the fact that they're 40 percent down in a moment like, yeah. Mark Lamonica: [00:35:14] And I think the interesting thing is like, you know, in the June quarter or the June June reporting period, they they grew earnings. So the earnings are growing, but their margin dropped. So their earnings before interest and taxes margin EBIT margin dropped 25 percent. Okay. So, you know, we had this big drop and I think investors got spooked, right? Again, margins really important. Bryce: [00:35:39] So sorry to close out, Marc. We've got ARB Corp. A.R. Baker. It's one star narrow moat and an 89 nine percent premium to fair value. And a reminder for those that don't know what ARB Corp. is, they make four wheel drive accessories. Alec: [00:35:56] And one of the most hyped stocks I reckon of last year. So I was surprised to say it got one stars. Mark Lamonica: [00:36:03] Yeah, yeah. So once again, you know, we we think it's a good company. So like I will, I will say that. So, you know, these star ratings, once again, our analyst doesn't set, it's just based. We think it's really overvalued. And but we do think it's we do think it's a good company. Obviously, you know, it gets this narrow moat rating. We do think it is sustainable competitive advantage. We just think it's trading for a lot, right? So it's trading for even if we look 30 times forward earnings, right? And Google's. Twenty four, so, you know, I think and obviously very different industries. We shouldn't compare them, but still just Bryce: [00:36:39] wouldn't be surprised if Google is somehow in four drive accessories. Yeah, exactly, exactly. Alec: [00:36:44] Yeah, part of the self-driving car division. Mark Lamonica: [00:36:47] So yeah, I think that's the only, you know, it's been this market darling. We just think it's overpriced. It's not that we don't think it's a good company. Alec: [00:36:53] So, yeah, I imagine if we had done the work and looked at a lot of the really hyped stocks, they would probably have low star ratings just as the nature of the value. Mark Lamonica: [00:37:02] Yeah, yeah. There's just sort of the approach that we take, right? So like our analysts try to try to ignore price movements. You know, I will say that there are some analysts that obviously keep an eye on what's happening and don't want to sit there and say there are eighty nine somethings, eighty nine percent overvalued and they'll just sort of inch that up. Yeah, we try to keep that completely separate. Alec: [00:37:21] So mark, before we get to the final three questions, we love a bold prediction here at Equity Mates. You said you listen to our bold prediction episode before joining us today, so we want to close out this episode by asking you if you have any bold predictions for the year ahead. Mark Lamonica: [00:37:38] Yeah, you know, it was interesting. I listened to it on the walk over and I was thinking because I already had in my head that you guys were and asked me there. So I was kind of trying to think what mine was and walking on was like, Wow, your bold predictions are a lot bolder than mine. You got to go. No idea. Yeah, yeah. Alec: [00:37:55] So and we never are right. Mark Lamonica: [00:37:58] So maybe it should have been. Maybe I should've been more creative, but we do this on our podcast, investing in companies. We do this like twice yearly shining. I are down to this twice yearly like portfolio check-up, right? You know, we kind of want to be transparent about what we are doing. And I will say that, you know, over the past couple of years, I have been building up cash and I haven't been selling anything, but I turned off dividend reinvestment plans. Once again, these are my personal investments. I turned off dividend reinvestment plans. I knew contributions I make into my accounts are just sitting in cash. And so I'm up to the point now where I'm at twenty five percent cash. I mean, I've also there's also been a lot of things I've owned have been bought out. So all the stuff that we hear about in Australia, seemingly I own everything that's been bought. So but yeah, so I've built up this cash and kind of every time we do one of these episodes, I say the same thing. I'm still looking for opportunities and I think this year. So my bold prediction, which is really about me, is that I'm going to exit the year at less than five percent cash. So I think not necessarily that the market will crater, although I think that could happen. But I think that this volatility that we talked about is going to create a lot of opportunities, which I'm excited about. So yeah, that's my that's my bold predictions. Not it's not Twitter's getting acquired and things like that. I do like that one. Yeah, yeah, I do. But but yeah, that was my not so bold, bold prediction. Bryce: [00:39:28] So a prediction that's entirely in your control. Yeah, exactly. Alec: [00:39:32] Yeah. But we get mark on at the end of the year, the day before he goes on a shopping spree. Mark Lamonica: [00:39:39] Exactly, exactly. I'm trying. I'm trying to assume that I will do something rational, but you know, you never know. Yeah. Alec: [00:39:45] So before we move to the final three, you mentioned there that everything you are in seems to get acquired. You're the acquisition whisperer. We need to come up with a better nickname than that. But do your own Peloton. I do not think I do know that. So no acquisition on the horizon. Mark Lamonica: [00:40:02] It's mainly interesting because, you know, as you can tell from my accent, I am American and you know, most of my assets are still in the US. But you know, it's really there's Australia might have started investing in Australia. I've been here seven and a half years. I'm a citizen. I'm not going anywhere. But it seems seemingly everything in Australia that I own has been born, you know, bingo and Sydney Airport and Afterpay, not Afterpay, Bryce, not Afterpay. But yeah, it's just, I don't know, it's just been this weird situation, right? We're seeing all this stuff get purchased, which I guess it's good. What do you do with the money? Keep it. Yeah, yeah, I'm not giving it away, Alec: [00:40:40] but Bryce: [00:40:42] it's been an absolute pleasure having you on. This episode hasn't been sponsored by Morningstar, but if people are interested in what you're talking about and getting access to the analysts and the coverage that you do or want to follow you, what's the best place to do so? Mark Lamonica: [00:40:56] We do have a paid subscription product called Morningstar Investor. We just rebranded that used to be Morningstar Premium. And yeah, that gives you access to our research. So it's six hundred shares globally that are in West cover, around 200 in Australia, New Zealand and 450 ETFs, funds and a bunch of tools. So you get a free subscription to share their investor plan. So there's a lot, there's a lot involved in that, but also we have a bunch of free stuff too. So you know, I will say that, you know, I'm pretty passionate about financial literacy, investor education as I know you guys are as well. And so, yeah, we've got a podcast investing campus. Do two webinars a week that are free. Tuesday, Thursday, we're going to Bryce: [00:41:38] follow Mark and Monica. Yeah. Mark Lamonica: [00:41:41] So yeah, I do two webinars a week, so we've got a bunch of great content that we put out on our website as well so that our editorial team puts together. So yeah, for anyone. Hopefully, we have resources to help you be a better investor. Nice. Alec: [00:41:54] We really appreciate you taking the time today. I think Bryce put the challenge up early by saying you were the star of the the live show we did last year, and I think you've well and truly delivered. So that's good. Yeah. So we'll have to get you back before the end of the year to figure out how much cash you holding. Yes, but before then, we'll get into the final three questions. The first one is, do you have any books that you consider? Must read? Mark Lamonica: [00:42:20] Yeah. You know, there's obviously a lot of them, but the one that probably struck me tomorrow. So Jeremy Siegel is a professor at the University of Pennsylvania, the Wharton School in in the US, and he wrote this book called The Future for Investors. And it's funny like I and I'm not that big of a nerd, but I remember where I read the book that I was sitting on this lake in Maine up on vacation. And for some reason, like what he was talking about, just clicked, right? You know, I think the thing with investing is there's lots of different ways to do it successfully. There's lots of different ways to make money like you need to find what works for you, right? Because that's the only way you'll keep at it. Like when there's volatility. What resonated with me is he was just talking about expectations and that investing is in the results that companies deliver from an investment standpoint are really just compared to what those expectations are. And so this concept that things are priced into shares, right? And you know, if you've got a company, if you are Tesla right and the expectations of the investors in Tesla are at this point, potentially they're going to sell half the cars in the world in my 10 years, right? Like the expectations are so high that the way they'll be judged in the way that share price will perform will be based on how it goes compared to those expectations. Not in an absolute basis. Right. So it's one of those things where like, you can do very well on an absolute basis, but if it's priced into the share, you're not going to do well from an investing perspective. And so I don't know that really resonated with me. And so you know what, I always try to do when I look at a share, I'm like, What does the market think's going to happen? And sometimes it's a company that the market thinks is going to do terrible, and it just does a little less terrible, and it's actually a decent investment. So yeah, I just think that that's interesting as well. Alec: [00:44:07] Yeah, you like that recommendation? Second question, what is the best company you've ever come across? Mark Lamonica: [00:44:13] OK, I feel like I have a good one for you guys here. So, you know, I didn't want to do anything, you know, didn't want to do anything too boring here. But but I am going to go with Philip Morris International. Alec: [00:44:25] Okay. All right. Controversial. But yeah, Mark Lamonica: [00:44:28] yeah. So like the ESG crowd is probably gathering with torches. I don't know if there's a back entrance to your studio, but. So Philip Morris International makes and sells cigarettes. And you know, the question you asked was not what is the most ethical company in the world, but what is the best company? And I just I just want to talk about it because I think that to me, this is what we should look at in shares. So, you know, number one, what is the company or what do we want to look for in a company? There's obviously they sell goods, right? Every company sells a good or service that's important and they want to grow those. There's the margin, right? How much should they get to keep? So that's really important. And then finally, we have money that's invested in the company, not your money, the company's money, right? So money that they generate through free cash flow money, they borrow, money they raise in equity markets. What return do they get on that? And Philip Morris is off the charts, right? So like if we look at margin and there's all sorts of different margins we can use, but if we just use, you know, gross margin rates or that's sales and cost of goods sold, right, so there is a 65 percent so right, the S&P 500 is at 40 percent. Google, which is outstanding, is at 56 percent. So it's just crazy, right, that they keep a lot of money. Then there's this return on invested capital. Right. So what return are they getting on what they invested in the company? It's over 50 percent, which is like unheard of, right? And like the S&P 500 is eight percent and Google sixteen percent. And you know, we've got a wide moat rating on it. And you know, why is it a wide moat while number one, you know, their products are A.. That helps. But also just like they've got this brand Marlboro that nobody can do anything about now because there's no advertising, nobody starting new cigarette companies, and they've got really great cost like so they have driven down costs so much that, you know, and I don't even know what that package of cigarette costs right now to buy, but they make a package of cigarettes for forty seven cents, US Alec: [00:46:30] Bryce, you know? What a decade does, so I Bryce: [00:46:35] actually have no idea. Mark Lamonica: [00:46:37] Yeah, so you may not listen from industry perspective, you may not want to invest in it, but yeah, it's a great company, right? From an operations standpoint, isn't Phil Alec: [00:46:44] Morris also known as like the best investment of the last hundred years or something? It is. Mark Lamonica: [00:46:49] I don't want to mention it twice, but you know, it's in that Jeremy Siegel archive, and he's talking about low expectations because of obviously everything going on in tobacco. They just didn't want to keep talking about it. I think people are as obsessed with Earth. So Mars. Alec: [00:47:01] Well, everyone should go and read that book and not buy cigarettes. But look at the story of Philip Morris because it is a fascinating one. But final question mark, if you think back to your younger self, maybe sitting out on that lake in May try to learn about investing. What advice would you have for your younger self? Mark Lamonica: [00:47:21] Yeah. So, you know, kind of quickly I was thinking, you guys are going to ask me, like, what was my first investment ever? Alec: [00:47:27] We normally do, but we had so much to go. So you can tell us what now Mark Lamonica: [00:47:31] it's kind of it's kind of part of that. So it's two different investments. So no one during the dotcom bubble. Me sitting in my uni dorm room, I bought global crossing, right? A global crossing is a company that went bankrupt, so that's the end of the story. But but basically, you know, the internet's blowing up and everyone's going to use the internet. It's going to change the world. So this is a theme and narrative and what a global crossing do. They built the infrastructure for that right, that they laid all the cables and everything else that supported it or not. So I thought, this is a perfect investment, right? Like, this is the best thing to do. Well, what I didn't do was any homework to realise that a ton of money flowed into that space. They had all these competitors and they laid all of this cable. And you know, I think when the company went out of business, like of all the cable that was laid in the world, like five, six percent of it was being used. And this glut, this glut actually led to a lot of the companies that have done really well now, right? The fact that you could deliver ultimately you could deliver content over the internet cheaply was because there was this glut, right? So we think about YouTube and Facebook and Netflix and all of these companies. It is because of all this investment is a terrible, terrible decision from an investment perspective because it went out of business. And then my wife was given shares when she was two years old. So the oldest thing that we own was purchased not obviously by her, but in 1981. So, you know, it's, you know, 40 years old, 41 years old, and I'm forty two years old, so it's almost as old as me. And so it's ADP. So ADP is a company where basically you outsource, you know, payroll and things like that. And so, you know, I went and looked in my account to see what their shares. So yeah, we've got a cost basis on their shares of a dollar 12. It was trading at two hundred eight dollars yesterday, and it's paying four dollars and 16 cents in dividends per year. So like four times with the cost basis. And so I think, you know, the lesson is that being an investor, think long term and, you know, let those and we have a wide moat on it or let those you know your investments accrue over time and compound over time. And that sometimes the story out there, there's a narrative that makes it easier that makes a lot of sense. Maybe on the surface isn't a great investments or dig a little deeper. Alec: [00:49:58] Yeah, wow. I think that's great advice. Yeah, I love that. Bryce: [00:50:01] Great way to finish and mark. As Ren said, you've absolutely delivered on the high expectations that we set as investors. We set really high expectations for your future performance on our podcast. Mark Lamonica: [00:50:12] So, well, that's good. That's. Bryce: [00:50:15] No, I loved it. And I think our audience would have taken a lot of value from that. And, you know, certainly we'll be helping them understand what's happening in markets at the moment and hopefully make them feel a little bit more comfortable about the volatility that we're seeing. So. Thank you very much. Mark Lamonica: [00:50:30] Awesome. Thank you, guys. And it's been fun. Bryce: [00:50:33] Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at contact@equitymates.com or even better, go to your podcast player and leave a five star review. Also, a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group where on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. Well, that's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time.