Expert: Roger Montgomery – 5 stocks he’s buying today

Bryce: [00:00:31] Welcome back to Equity Mates Investing, a podcast where we explore what's possible in the world of investing. If you've just joined us for the first time, a huge welcome. My name is Bryce and today we are bringing back our returning guest to the studio, Roger Montgomery, to chat through today's interview. Joining me also in the studio is my equity buddy, Ren. How you going?

Alec: [00:00:50] I'm very good, Bryce. Very excited for this episode. Roger is never one to pull his punches. When he has an opinion. He's happy to share it. And, we wanted to get him back on because he recently wrote a white paper. With part of the heading was just in all caps. It's time to deploy cash. As I said, not wonderful punches. And we wanted to understand why Roger is thinking that way.

Bryce: [00:01:18] Yeah. Why is now the time? So we're gonna start macro, get his view on what's happening across the world with inflation, interest rates, economic growth, you name it. And then dig into some of the stocks that, you know, he's actually deploying cash into at the moment. And, hopefully we get to touch on Bitcoin as well because I know he's written a bit about that too. So plenty to cover in this episode.

Alec: [00:01:38] Nice. Well, look, without further ado, let's get into our conversation with Roger Montgomery. 

Bryce: [00:01:47] Well Roger, welcome to equity mates. 

Roger: [00:01:48] Great to be with you Bryce and Alec. Awesome to be back. 

Bryce: [00:01:51] Really excited for this one because we're going to get straight into it. You've recently written a white paper called Interest Rates, the best it gets its time to deploy cash. Very eye-catching. So we want to break that down a bit. And one of the opening quotes was the current economic backdrop combined with relatively attractive interest rates, presents a variety of investment options greater than we've seen since before the pandemic. So before we get into what those options are, let's start with the macro. How would you sum up where we're currently at at the moment? 

Roger: [00:02:25] I think a lot of investors and a lot of commentators get distracted by the, you know, the monthly data, the unemployment rate, the inflation rate. All sorts of nuanced data that changes month to month. What's really important is the bigger picture. So if we take a step back from that monthly data and we just think about what works for equities and what we know is that perhaps uniquely but without exception, since the 1970s, whenever you've had a combination of disinflation and positive economic growth, in other words, even if the growth is anaemic, as long as it's above zero and inflation is slowing, that's what disinflation is as distinct from deflation. Deflation being declining prices. We don't want that, but we want lower rates of inflation. Whenever we've had the combination of those two things. Innovative growth stocks with pricing power have done extremely well for investors. That's precisely the environment we had last year in 2023. It's also the environment that we've got now. Here's the interesting thing that last year I said I wrote an article in The Australian I write, you know, fortnight in the oil section. Last year, I said it was November 22nd, and then on May 23rd I wrote, we've got this combination of disinflation, positive economic growth. It's going to be great for innovative growth stocks with pricing power and small caps. 100 small caps in Australia. They're replete with innovative companies that are growing at double digit rates. So this is going to be great for small caps. Well I got that bit wrong because innovative growth stocks with pricing power did well in 2023. But only seven of them. Magnificent Seven. And by the way, as an aside, we've got to talk about these labels like Faang and nifty 50. You know and Magnificent seven. It's all garbage by the way, because people just put the ones that are going up the most together. Give them a name. There's no other thing that's common among some other than they've gone up a lot. 

Alec: [00:04:34] Well, we've been talking about the latest one, which is the Granolas. Goldman Sachs labelled 11 European stocks. The granolas. But they've just basically taken the biggest European stocks ex industrials and jammed them together. And it's meaningless. 

Roger: [00:04:50] Well no it's not meaningless if you're a big institution and you want to launch an ETF, you know called the granola ETF. Just get a whole bunch of money in fees. It works for that. Anyway, so what happened last year was that these seven stocks did well. Now they were innovative. They were growing with perhaps the exception of Tesla. And they did have pricing power with the exception of Tesla. And so and I think the reason why the bets were concentrated on those mega cap companies is because people wanted safety. They wanted safety because they want liquidity, they want liquidity. They want to be able to get out quickly because there was still fears about, a recession. Now what's happened is the narratives have changed. So what's happened is we've gone from an environment where rates were rising and there were fears that they could go up more to an acceptance that rates have peaked and they might go down. We've also gone from fear of a recession to acceptance of a soft landing. And we've because of those two things. Previously, everyone was worried about corporate earnings. And we've seen in reporting season that those concerns have been alleviated or allayed. And so the consequence of all that is, on top of all those things the big caps have done well, the small caps have been left behind. And you've now got a gap in terms of performance of about 25%. And that's the biggest gap we've seen between big caps and small caps since before the GFC. And the result of that is, I think that this year people will feel much more comfortable about adopting more risk. And so they'll buy smaller companies because the economic, the macroeconomic backdrop they'll realise is quite benign.

Alec: [00:06:34] So that is I guess, you know, you said don't worry too much about the month to month figures when it comes to, inflation and 

Roger: [00:06:42] You're not investing month to month, right? You're not investing for next month.

Alec: [00:06:46] So I guess from a bigger picture perspective, you think what we've sort of experienced over the last six months where disinflation and economic growth, you think that's going to be the trend with longer term. 

Roger: [00:06:58] I do and and and disinflation very long term because I think AI and automation will displace a lot of jobs which will put downward pressure on wages. And you can't have 3% inflation if you don't have 3% wage growth. And I don't think I think longer term we're going to see wage growth is going to slow quite remarkably. And that will put downward pressure on the inflation rate. So you know my view is my view if you don't worry about the month to month. You know I get asked all the time, you know, who do you think's going to win this election? Well I don't really care. Why don't you care who's going to win the election? Because it'll be another 1 in 3 years. You know, are you watching the budget this year? No. Why not? There'll be a budget next year. Yeah, yeah. And we're investing for longer than that. Don't get distracted by all this noise. You know, focus on what's important. We'll talk about that today, I'm sure.

Bryce: [00:07:53] We've got to touch on inflation though. And, and I guess interest rates more recently, I think at the start of the year, we had the fed saying they're going to cut 3 to 6 times. We've had the RBA allude to a cut later in the year. And it feels like in the space of 2 or 3 weeks, that rhetoric is now changing to maybe it's going to be once or twice, maybe not at all. So how are you factoring that into I guess. 

Roger: [00:08:19] You've just answered my point. You know.

Alec: [00:08:21] I'm surprised you asked that question to me. Honest. 

Roger: [00:08:27] It changes. So why invest on that basis? 

Bryce: [00:08:30] Well, I guess it's because you said that you feel that people and now feel like there's more safety but in an environment where it's changed in a matter of a quarter for people investing off on, you know, on rhetoric that is coming out of these.

Roger: [00:08:46] So like, buy a house and borrow money because interest rates rise.

Bryce: [00:08:51] Exactly. People listen to what these guys say, you know. 

Roger: [00:08:54] Yeah. Well that's what I'm saying, Don't. Look, you know, I've done this for 33 years and I've seen lots of people say things and get it wrong, you know? So my view is just ignore all that turn off, you know, the idea. And I wrote about it in my book, valuable years ago. You know, it's now a 12 year old book and it's as relevant today.

Bryce: [00:09:16] Is there a copy here somewhere. 

Roger: [00:09:16] So it's as relevant today as it was then. And that is just turn the noise off, turn the stock market off. Focus on what's important. What's important is buying quality businesses that have a long runway for growth. That might have a tailwind behind them. They're high quality. They've got little debt. You know, they've generated great margins. They've got high rates of return on equity. And you make a lot of money doing that by not listening to the market by taking advantage of it. So what will happen? I'll give you a framework that answers your question. More specifically, at the beginning of this year, everyone was enthused about the fact that we could get three rate cuts this year. Right? The Fed was talking about that, Jerome Powell talked about it, and it was mentioned by the RBA as well, that we could see cuts towards the end of the year. So then what happens is the market gets excited and prices start to go up. Right. Do you get excited and jump on that? Could they be right? Most people are probably wrong. So what you do is you say, you know what? Prices are now expensive or more expensive than they were. I'm going to be disciplined about the process that I pay. I'll wait for the market to be disappointed. Then what happens is, hey, we're not going to raise rates and we're not going to cut rates three times this year. It looks like it might only be once or twice. Market gets disappointed. Market sells off. Guess what? Now you're now you're zigging. When everyone else is zagging, they say, okay, now I can buy these high quality businesses cheaper than they were three months ago. Now I'm going to buy them because what'll happen is people will work out right to only be cut once. But it actually doesn't matter whether they cut once, twice, or three times. That's not why we're investing. We're investing in this business because it's growing its profits at 35% per annum. It's got a 75% margin and it all drops to the bottom line. And shareholders get all of those rewards. And if for you know, if rates are only going to be cut once the PE contracts, you know, the price to earnings multiple goes from 35 to 25. Ship it in. I'll buy heaps of that. And guess what. Because I know within the next five years the PE will go back up to 35 for some reason. You know, somebody that the market doesn't like resigns and then everyone gets excited again. And, you know, as I said, right at the start, I've been around 33 years. I've seen the market get excited and disappointed. And as sure as night follows day or day follows night it'll get exciting again. So by when the market isn't excited by when the market's disappointed by quality. And then just hang on and wait for the market to be excited again. Don't worry about whether the rights are going to be cut three times or once. You know, if actors only cut once in the market's disappointment, that's a gift. 

Bryce: [00:11:53] Love it. 

Alec: [00:11:53] Bryce is going to have to find something else to do with his spare time rather than watching the RBA.

Roger: [00:11:58] I'm commenting all the time, but the background is that. Yeah, it's noise. it's noise and it's potentially a distraction, but I'm writing about it in the context of, you know, in our blog and in the Australia I'm writing about in the context of taking advantage of it. Benjamin Graham once said, it's not the market's wisdom that you want to focus on. It's it's wallet, right? You want to take advantage of its depression, not get sucked in by its optimism. 

Alec: [00:12:26] Now, I want to move to stocks and talk about, where you're saying innovative growth companies. I also actually want to give a shout out to your book value.able. I think it's one of my favourites. So if people haven't read it, I'm going to second that endorsement. Your white paper was, It's time to deploy cash. It's time to deploy cash into the market. Are you seeing attractive opportunities in other asset classes as well? 

Roger: [00:12:51] Okay, so I'm, I'm particularly excited in equities about small caps. And we'll talk, You know, I've got three or 4 or 5 or 6 or 7. If you want we can mention a few of them. So I'm excited about small caps because they've underperformed and the environment is still very supportive of those innovative growth companies with pricing power that I talked about earlier. And Smalls have underperformed. So I think they'll catch up. People will look down the market cap spectrum and say, hey, you know what? We can deploy a bit more risk because things aren't as dangerous as they were before. We think they're safer. So people will. Well, and that process, by the way, takes a couple of years. So I think the market, the equity market will do well for the next two years, you know, at to 2026 I think we'll see. It'll take it takes time for the inertia, for people's fears, to be to dissipate. And then they that's why markets trend because it takes time for that information to be distributed. And then even after the information is distributed, it takes time for people to be convinced. And so, you know, that's why markets will trend. And it takes a couple of years for people for the risk to be adopted by everybody. We'll have another conversation in early 2026. And I suspect it will be hey look, the market's super expensive at the moment. Everyone's really, really optimistic and I'm not, you know. And I think that you need to be cautious. So in answer to your question no, the other area where I think that there's going to be a lot of interest this year is in private credit. And that's because the returns are really attractive, because interest rates are higher than they were. And a lot of these private credit funds, you know, they're lending money to small and medium corporates in Australia and elsewhere in the world at really attractive rates now compared to the past. And that means you can get on your cash, you can or a push. It shouldn't put all your cash in those things, but you can get on a portion of your cash. You can get nine, ten, 11% per annum paid monthly as cash. So for a lot of retirees and I know that there may not be a lot of them listening to your program because it's a probably a younger audience listening to your program, which is exciting because there's a younger audience of people coming through who we can help, not make the same mistakes that I made when I was young. Like technical analysis, for example. You just don't need that. And I'll explain why that's nonsense later on. But, you know, I think there's an audience of people who are looking for a better return on their cash. If you put money in a term deposit, for example, you're going to get a reasonable return. You know, you might get 5%, but it's going to be paid at the end of the year. There are a lot of retirees at the moment who need the money. They are spending money each week, each month. And so in private credit, they have the ability to earn extraordinarily attractive returns. And as long as they understand the risks, and, and they're getting paid monthly. So I think this year is the year for small caps, and it's also the year for private credit. I think private credit will actually become an asset class. You know, it's its own asset class. And financial planners will start allocating more and more money to private credit. It's been the preserve of high net worth and ultra high net worth and family offices for years. It's big in the United States. It's big in, Europe. You know, it dominates lending in the US and Europe. And it's only just starting here. Now, ten years ago, if you had said to me, Roger, I'm thinking about, you know, Alex, if you said to me, I'm thinking about lending money to a medium sized corporation doing some direct lending. And he said that actually 15 years ago, you know, at the before the GFC, I would have said, you've got rocks in your head because the banks had that market stitched up. They were lending to those businesses. So the only businesses you could lend to were the ones the banks had rejected. They were at higher risk. Banks didn't want them. So they've turned to you. That's changed because post GFC, the bank you know all of the legislation requires. Banks hold more capital. And all the inquiries that we've had and royal commissions that we've had, not just in Australia, by the way, but the regulation, the reregulation of banks in the United States and in Europe after the GFC. It means that it's no longer is profitable for them to lend to small and medium corporates in Australia. And that's left a $200 billion gap, or $220 billion gap between what small and medium corporations want to borrow for growth and what's available to them from the banks. And so non-bank lenders are now stepping in to fill that void. So now it's a legitimate asset class for direct investors. And that's why I think it's going to be an important asset class for people's portfolios. 

Bryce: [00:17:24] How do we get access to it?

Roger: [00:17:26] Well there are a lot of funds and there's a lot you need to know about these funds. They're all different. Some of them have lock ups, for example, some don't. You don't want to be locked into something you want weekly or monthly access. You know, some of them invest in concentrated, concentrated small group of very large loans. Maybe you don't want that. Maybe you'd rather have thousands and thousands of small loans because that's more diversified. Some of them are focussed on individual industries, for example property development. I wouldn't want to lend to a property developer. I think that's a high risk. And so others are lending to, you know, invoice financing or agriculture and so on, and generating really good returns. There's a fund that we support in Australia, we distribute in Australia called the Aura High Yield SME fund. It's a wholesale fund and it's been going for six and a half years even during the pandemic. It's paid monthly income generated a compounded return of about 9.6% per year. Paid interest every month. It's never had a negative month. And there's been no loss of capital at any time in that period. And that 9.6% is the compounded return from reinvesting the distributions. So, you know, there's people scratching their heads going, really? Can I get 9.6% just having my money in a fund? And by the way, no volatility. There's been no loss of capital. The unit price has stayed at a dollar the whole time. You know that's extraordinary. And over that period of time that 9.62% has been better than the ASX 200 accum over the same period of time. And that's been volatile. This has had no volatility. So that's why I mean I'm pitching it to make it sound like I'm pitching a fund. But what I'm doing is pitching the asset class and saying there's a lot of merit in this asset class. The fact that the banks are pulling back has meant that you can now participate in the profits that banks were originally previously earning. 

Alec: [00:19:21] Well it's fascinating. Let's turn to the companies that, borrowing from this private credit market, the small and mid-cap companies on the ASX that you think are attractive. Yeah. Now, you said you've got a list of companies. I'm not just going to ask you to read the list, but I guess I'm happy to. I'd love for everybody to go out and buy them because then it push the share price up and that helps us look good. But, you know, you need to do your research or see if you can take personal, professional advice before you can do anything nice. 

Alec: [00:19:58] I love it. I love it when the guest does a disclaimer for us. But, I guess give us your give us like your what your hallmarks of an innovative growth company, what you're looking for. And then maybe if you can wave in some examples. 

Roger: [00:20:11] Sure. Yeah. So we're looking for businesses. We're looking for businesses that are quality. So that generating as I said earlier, you know, they might have manageable debt or little or no debt. They've got high rates of return on equity and or very high margins, gross margins or EBITDA margins. Then they've got tailwinds. They might have a tailwind. So two examples of technology businesses that have tailwinds and that therefore not be beholden to economic conditions. two would be Macquarie Technology or technologies which is the all Macquarie Telecom Group, sorry Macquarie Telecommunications and the other one is Megaport. Now, both of these businesses have the AI and cloud computing tailwind behind them. But the reason why I think they're ideally positioned in Australia is because of the enterprise migration to the cloud and enterprise. When I say enterprise, I mean very, very big businesses, very, very big businesses. Moving to the cloud is where mobile smartphones were ten years ago, 8 or 10 years ago. You know, we're still only probably halfway through that process. And, and so you're going to see more and more demand for cloud computing, as these enterprises switch to the cloud, you're also seeing a lot of small businesses move to the cloud because it's egalitarian. You know, what it does is it levels the playing field. It used to be that big businesses could afford a data room and, you know, a room as big as the one we're in now full of racks and servers. You know, only the companies that could afford that had great websites and only companies that could afford that and install those racks into their offices, into their premises, could produce a great UI and UX, for their customers. And now in the cloud, everyone's the same. You know, it levels the playing field, which is extraordinary. And so that's why the demand is going to keep building, for cloud computing. Now Macquarie Technology Group on Macquarie Technologies, they have a data centre in Macquarie Park, near Epping in Sydney. And they're expanding the capacity. They're building the third centre. It's called IC3 West. They're building the third data centre, but they've also upgraded its capacity by about 41%, and they generate 75% margins. Now they work for, you know, the hyperscalers, you know, the Googles and the Amazons of the world. They work for fortune 500 companies. That's their that's who's who are tenant, tenants in their data centres. And also about 40 to 43% of the federal government's departments. So they're a high quality provider. So they're expanding capacity and eventually they'll be full. And when they're full, they're like a rate. They like a real estate investment trust with class one tenants. And the demand is enormous. And that demand is making limited supply. Now people will say to me, no, will. Supply is not limited, Roger. Supply is increasing. There's billions and billions of dollars being invested in data centres. But a lot of the best sites are already taken. You know, you want a data centre. If you're an enterprise, you want to be data. You want to be with a data centre that's close to where you're located. So you latency is the lowest it can possibly be. And so they ideally located data centres, you know, that real estate's pretty much taken. The other thing is it takes time to build data centres, but the speed with which demand is increasing or accelerating is much greater than the demand can keep up. And so when you meet, when rising demand meets limited supply or supply, that's growing slower, then prices go up. So there's an opportunity to raise prices. And again 75% margins on every dollar of revenue, which is really attractive. Then on top of that you've got AI, you know. And AI will simply be an exponential increase in demand for the use of cloud computing. You know, if I've got Microsoft Word and I'm typing an article for the Australian newspaper, you know, I connect, I connect with the cloud when I open the document and I connect when I save the document. If I've got Grammarly or some other editing software, then I'm connecting a bit more frequently. But if I have Microsoft's Co-Pilot installed, which will be released later this year to everybody, it's been in beta release at the moment. If I have a co-pilot, what co-pilot is going to do? It's going to sit on my shoulder watching me write my word document and say to me, hey, Roger, do you realise that you've said this a bit nicer before? Or you've said this in a way that was more approachable before? Would you like me to show you how you've said it before? That was better than this. And here, for example. So it's gone to my previous documents and looked at all those documents, read all those documents, seen what I'm writing now and said, oh, you've said this. Or if I'm drafting a really short email, it might say, Roger, that's a bit terse, you know, do you, you know, do you want to say that a bit friendly. Here's five ways you could say it friendly. And it still sounds like because I've accessed your previous emails. Think about how many hundreds of times a second. Well, thousands of times a second. I'm now communicating with the cloud. But the consequence of that is that the demand is exponential and companies can charge more for it. That's why we like this company now. We also think it's good value. So we think it's currently trading at 75 or $80 at the moment. Around that round, that price. I haven't looked at it in recent days. We think with a 9%, 9% discount rate, it's probably knowing what we know about the capacity increases that it's got and what it charges for that capacity. We think it's worth between 100 and $115 a share, and it's trading at 75 to $80. Here's the interesting thing, though. Once it's full and it's just throwing off cash like a, like a, like a retail residential property with a tenant in it, but with, you know, class one tenants, we think that there are superannuation funds and pension funds around the world. That will why be using a 9% discount rate to value those things that were using 6% weighted average cost To capital because they're paying their superannuation, you know, their pension investors 3% or 4%. And so they're happy to pay much, much higher prices for these assets. And in that scenario. And that's a hypothetical, of course. But in that scenario, we think Macquarie's worth, you know, $180 a share. Not 75 or $80 where it's trading at the moment. So that's the thesis for a company like that. The other one that I mentioned was Megaport. I won't go into as much detail because I realise we're limited for time, and I do have a few other stocks to talk about, but you look at Megaport. Megaport is Sweden in the world of data centres? right. So if you're an enterprise, you're a big company or pricewaterhouse or you're a, you know, a KPMG or something, you're got an office in Sydney, you've got an office in Hong Kong, you've got offices all around the world. All of those offices want to be close to their own data centres for the latency issue that I described earlier, but it might be that the Hong Kong office is connected to AWS, you know, Amazon Web Services. And here in Australia you're with, you know, you're with, Salesforce or someone else, those data centres, those suppliers, they don't want to talk to each other. And I don't want you talking to their competitors. So that make it easy. What Megaport does is provide the hardware and the software for you to be able to for, for the, Hong Kong office to talk to its data centre and for you to talk to your data centre and those data centres to talk to each other. And you feel like it's completely seamless. That's in essence what they do and they are class leading, you know, that genuinely world leading on this. And so we think, again, they're another business that's worth far more than where they're trading. And, you know, they are the world leaders on that. A third business, that we think is remarkable and other people think is expensive, we don't is Audinate. You guys would know Audinates Dante software. Really?

Alec: [00:28:45] Roger, this one kills us because back when we were doing our own Aus biz and, you know, you probably spoke to us about Audinate when you came on Aus Biz and neither of us bought. And it's been a few years and it's just wrong.

Roger: [00:28:57] We think it's still got more to go. 

Bryce: [00:29:00] What is it? Isn't it just like digitising cables? 

Alec: [00:29:04] It'sI mean, they're not putting that in their investor presentation.

Roger: [00:29:06] All the audio, all the command, all the, you know, controlling, is migrated from different cables, HDMI and fibre and whatever into an inter reconnect system, you know, and it just simplifies the installation. It simplifies the problem solving. It simplifies everything. And that's why it is now the world's leading solution. And so whether you're Bosh or you're, you know, bang and all of sudden or you, you know, Yamaha, you know, there are literally dozens of OEMs manufacturing audio equipment that now have embedded in their hardware Audinate data solution. Now, where we think the upside is, is not just the rollout globally. 

Alec: [00:29:54] Before you talk about the upside, just to give context for why the market might think it's expensive, it's trading about 20 bucks a share and its PE ratio currently is about 100. So with that context in mind, I might have sold off a bit. 

Roger: [00:30:07] But if you're growing, if you're growing your earnings, if you're growing earnings at double digit rate, high double digit rates, then you know, in theory, just the theory. If you're growing your earnings at 50% a year, then you know you're potentially halving your PE each year, right? So, so I'm less worried about that. Now, what they're doing is they're migrating or they're moving that tech, that anti-technology, they're bringing it to the visual side of a delivery of a concert or a conference or whatever. So it's not just going to be the audio, it's going to be the visual side as well, you know. And that's far bigger than the audio. You know, the opportunity there is sizeable and so we say, you know, we see Audinate as having significantly more upside than what people are currently giving it credit for. We love that people think that it's expensive. 

Bryce: [00:31:00] I think people are giving a lot of credit. It's up 131% in the last year. 

Roger: [00:31:04] Yeah that's right. So it is up a lot. But we still think there's upside right there. Okay I'll give you two more.

Alec: [00:31:10] Actually hold on Roger before you do just to tease the next two stocks you're gonna talk about, we're going to take a quick break. Yeah. And then on the other side, Roger's going to give us two more stocks. And we're also going to squeeze a question in about crypto as well. 

Roger: [00:31:21] Awesome. 

Alec: [00:31:27] Welcome back to equity mates. We're speaking to Roger Montgomery. We are hearing about some of the innovative growth companies that he's excited about right now. We've covered three so far: Macquarie Technology Group, Megaport and Audinate. You said you've got two more. 

Roger: [00:31:41] So and if I can give a shameless plug with your permission guys, please. All of these stocks are owned by the Montgomery Small Companies Fund. So if you really want to say the problem is I come on the show and I'll talk to you about the stocks we like, but you don't get me back to talk about when I've sold out. 

Alec: [00:31:57] That's always the challenge.

Roger: [00:31:59] People go in and buy these things themselves and they don't know when to sell. So if you do want exposure to these sorts of stocks and, you know, leave someone else to do the buying in the selling, well, it's through the Montgomery Small Companies Fund. I hope you don't mind me. 

Alec: [00:32:12] Of course, we'll include a link to your website in the show notes.

Roger: [00:32:14] Appreciate that. So the other two that I'm going to mention, both have a similar thematic behind them. And it's probably the easiest way to make money in the stock market, which is to buy a retail concept that is rolling out stores at a rapid rate. So if you can buy a retail concept that's going from, you know, let's say 30 stores to 1000 stores and you can get in when it's only got 30 stores, you don't have to do anything. Just buy the stock and wait for it to get to a thousand stores. It probably, and the share price will go up. It'll be a ten bagger. 

Alec: [00:32:51] As long as it's a store. As long as the store concept has that scale in it. 

Roger: [00:32:54] And it's not going to go, yeah, and it's not going to go to a thousand stores unless it's a successful concept. You know, I think, for example, in, you know, in the next year or two, you know, we'll see GYG come to market. Yeah, yeah. You know, and I own shares in that business and it's unlisted currently. But, you know, that's a business that if it succeeds in the United States, it's got four stores in Chicago at the moment. You know, I think it could go to, you know, it could have 1000 or 2000 stores in the United States if it's successful. Can you imagine how well the shares will do after it lists? If it achieves that? And I'm not saying it will achieve it, but if it did, it would be hugely successful. So these two companies, on that spectrum, in the sense that they've been successful in what they've done so far. But the opportunity for them to be successful is much, much greater in terms of scale. The first one is Lovisa. Lovisa is, you know, I don't want to call it costume jewellery. Fashion jewellery. It's at a low price point, which means, again, not sensitive to the economy and interest rates. Most of its customers live at home with their parents, and most of their customers have a job, but they don't have a mortgage, so they don't care about interest rates going up. They're going to, you know, if they're going to treat themselves, they'll treat themselves to some Lovisa jewellery. You know, it's not going to break the bank for them. And so that concept has been remarkably successful. And so they're growing their stores at a great rate of knots. They've proven, you know, they they open stores on a monthly basis. That are right, I've seen few merchants able to do. And they're doing the same thing overseas. So the upside for them. Yep. Go ahead. 

Alec: [00:34:32] Didn't they expand into Africa. Have I remembered that correctly.?

Roger: [00:34:35] They're expanding. They're expanding in countries that would surprise you. And they roll and the cost of opening a store is so low really. You know, their payback period for a store is incredibly short. And when I talked earlier about high margin and low rates, high rates of return on equity, that's what we're talking about there. So that's one that we really like. Another one is IAB. IAB has always been seen by professional investors in Australia. IAB is the aftermarket for drive parts and accessories manufacturers. IAB has always been seen as being leveraged to the economy. When the economy's going well and people are flush with cash, they go and dig out their four-wheel drives, put a bull bar on, puts, you know, spotlight spotlights on, put a fridge in the back till battery packs, all this sort of stuff. That's what IAB does. And the market is right that while they are Australian only, they are sensitive to the economic cycle. But I think what the market is underestimated is just how valuable its expansion overseas has become. It's opening stores in the United States, and it's gaining a reputation that its reputation is so good that in Thailand, where some of their equipment is manufactured, there are copies of their bull bars and people stick IAB stickers on a fake bull bar so that other people think they're gonna be bull bar. 

Alec: [00:35:58] That's when you know you got a good brand. 

Roger: [00:36:00] People do that. You might think, oh, well, that's a threat now, because the quality of IAB is so much higher than the fakes. And because safety is an issue, when you put a bull bar on the car, you want the real deal. Yeah. You don't want to fake. So the other thing that they're doing is they're lining up deals with Toyota and Ford at an OEM level. What that means is that if you buy a Ford Ranger in the United States or a Toyota Tundra in the US, which is a, you know, they're both SUVs. When you sit down at the dealership to spec out the model, you'll say, okay, I want. I want running boards, I want sideboards on the car. And I want, you know, I want to have the spotlights and the roof rack and everything else. Well, Ford and Toyota have done a deal with IAB that IAB supplies those things. So at the point of purchase, you know you are going to be ordering IAB equipment. And that is highly lucrative for IAB. And in terms of volume, you know, it really sets the stage for a much rapid, much more rapid increases in volume than what we've seen when people have to go to an IAB store to buy it and then leave their car there and have it fitted aftermarket. Aftermarket means you bought the vehicle and it's now an aftermarket addition. It's no longer aftermarket. You're buying Ford equipment from Ford or Toyota equipment from Toyota. But it's supplied by IAB because obviously and by the way, that's a great testament to their reputation, brand and quality that Toyota and Ford want to use their parts. So there's a couple of retail ideas where I think, again, there's value under your nose. You know, there's optionality either in the growth of Lovisa stores or the growth of IAB stores, plus the OEM deals. 

Alec: [00:37:45] I've got to say, regardless of what people think about these, stocks, I just love the fact that it's Australian companies taking on the world. IAB pushing into the US? Lovisa pushing into South Africa, in Europe and parts of Asia, Audinate becoming like a global standard? 

Roger: [00:38:02] It is a global standard. 

Alec: [00:38:03] You just love to see the standard. Aussie companies doing good. 

Roger: [00:38:06] Yeah it's it's it's unreal. And people don't realise that. The great thing about small caps in Australia and you know why I'm, you know promoting the Montgomery Small Companies Fund is because you've got exposure to sectors and themes that you don't get in the top 100. You know, the top 100 is really kind of boring compared to what's available in small caps. 

Alec: [00:38:27] Yeah. Well, I mean, and you know, so much of the top 100, well, especially the top 20 is just exposed to economic conditions. And the macro drives. 

Roger: [00:38:34] A very mature business, perhaps with the exception of things like, you know, CSL or cochlear. Macquarie Bank, you know where they're, where they're probably less sensitive. But nevertheless, yeah, there's, you know, you've got limited options in the large cap space compared to small caps. 

Bryce: [00:38:52] Well, Roger, we want to close out with conversation around crypto. 

Roger: [00:38:57] Oh, I love it.

Bryce: [00:38:57] So let's ask the question with is now the time to deploy cash into crypto.

Roger: [00:39:05] Well the short answer is yes. But the caveat is you should have asked me that question last year when I wrote about it. You know, in June last year, I wrote a blog post pointing out that Bitcoin and gold, hedges against what we call monetary inflation. So I just need to explain that for a second. There's the inflation that everyone knows about, which is, you know, the price of your latte going up. So the price of goods and services going up, that's price inflation. But there's something called monetary inflation. Monetary inflation is when central banks increase liquidity by injecting cash into markets, and into the financial system. In June last year, we could see that even though central banks were talking tough on interest rates, they are expanding liquidity. That means that there's more liquidity going into financial markets and economies. And so there will be a group of people who don't like that monetary inflation and they think will fit. You know, and I think some of them, you know, are quite special people, but they think fiat currencies are doomed. You know, and I want to get out of fiat because there's so much of it is increasing. It's all going to go down. And therefore I want to be outside of that. And gold is one way of being outside of it. And so is bitcoin bitcoin or cryptocurrencies in another way. So in June last year I wrote that. Look I can see if you follow liquidity. You can see liquidity is going up. That's going to be really good for gold. It's going to be really good for Bitcoin. And it has been. And then another event happened for bitcoin or cryptocurrencies. And that was in on January 11th this year when the SEC in the United States finally approved after ten years of lobbying, finally approved spot Bitcoin backed ETFs exchange traded funds. Sometimes when I hear myself using the lingo, I just think I sound like an alien lifeform, by the way. But so what does that mean? Spot? Okay, prior to January 11th, you could buy an exchange traded fund that was backed that followed Bitcoin, but it wasn't backed by spot Bitcoin or you know, live Bitcoin. It was backed by futures on bitcoin. So a couple of degrees of separation there. But on January 11th, the SEC approved live bitcoin backed ETFs, exchange traded funds. And that day, about 10 or 11 exchange traded funds launched all at the same time. And one of them, the biggest one is the Blackrock exchange traded fund, which is called the code is IBIT. And, and I own some of that because I think it's a really seamless way, of owning some bitcoin. Now, why would I want to own Bitcoin? I'm a quality value investor, a quality growth investor. And I think growth and value are two sides of the same coin. That's another hour long discussion. We could talk about another time. But what I saw happening was I saw that there was going to be because I've been around long enough to know how bubbles form. Bubbles form because you get lots of buyers and whether their thesis is right or wrong, you just get lots of buyers, you know? And what happens is they're buying pushes the thing up, and when it pushes that thing up, it reinforces their faces. The thesis might be wrong, but hey, it's going up, so it must be right. And what I saw happening is that after January 11th, there was going to be a lot of money sitting on the sidelines where it's just too complicated buying a wallet and then loading up Dex screener and then, you know, and, you know, making sure your wallet's off line and, you know, there's just so many it's so complicated. And my son's in this space, you know, so I know how to do it. But it's complicated transferring money to a wallet then, you know, some wallets are on some blockchains and then they're not on other blockchains and say you can buy Ether, but you can't buy Solana. And you know, oh my gosh, it's just people are already tuning out listening to this Right. And so what I saw with these Bitcoin backed ETFs is it was just a simple, seamless, frictionless way for people to get exposure. What would they do? They would get exposure. And so they would start buying. Now as soon as they start buying these ETFs. The ETFs are spot Bitcoin backed, which means they have to go out and buy immediately. All the money that flows in. They have to go and buy bitcoin which drives the price of bitcoin up. And then people say Bitcoin going up and they go well I got to buy some of this ETF because of Bitcoin's going up. Guess what they buy the ETF. The ETF that has to go buy Bitcoin. Bitcoin goes up. You get this virtuous circle where the Bitcoin price goes up. So more people end up with FOMO. You end up with a fear of missing out. At some point this year we'll see that FOMO emerge where Bitcoin goes up. What I also like about it is that there are a lot of reputable institutions that run stockbroking firms in the US, for example, that are banned from owning these ETFs. They are banned from recommending Bitcoin to their clients because they're too risky. Now, I used to work at Merrill Lynch and I know that, you know, I know that when stockbrokers are banned from buying something and it's going up that eventually the pressure is too great, the clients pressure the brokers to buy it. The brokers say I can't buy it. So the clients then leave the broker and go elsewhere to buy it where they can. Eventually the broker then goes to management. The broker says to management, we're losing clients, we're losing revenue. We've got to get on board. And eventually, you know, the boom gate is opened and the brokers can start buying, and then you get another flood of money flowing into these ETFs, buying Bitcoin, which then have to go and buy Bitcoin and Bitcoin goes up again. That's by the way the point where you sell. 

Alec: [00:44:58] Yeah. So that was all that, was the question that was forming as I was hearing all that. Like if the thesis is the bubble thesis. 

Roger: [00:45:06] Yeah this is the fundamental reason for owning. I don't believe it's going to be an alternative to cash. You know, I don't believe it's going to be no tentative to the US dollar. Right? I don't think that I'm not saying you know and everyone will debate me on this all. No I think it's you know fiat is dead and you know long live fiat, you know and and we're going to own bitcoin and that's going to be the way we transact. I don't think that. 

Alec: [00:45:26] I think a lot of people. 

Roger: [00:45:27] I think it's going up. 

Alec: [00:45:28] I think a lot of people listening probably resonate with that. Like and we've seen it go up. It's above 70,000 USD again today. So the question then becomes what's the sell signal. 

Roger: [00:45:40] Well I don't know. Because here's the problem. When you're buying up not based on fundamental value where you can compare, see everyone says to me, art, you know, everyone says, I think, Bitcoin has a fundamental value. You know, the people who tell me that I'm wrong about it having a so I say, okay, well tell me what the estimated value is. Calculate the estimated value. You can't. Right. So it doesn't have a fundamental value that can be estimated can be calculated to a dollar value. You know it. 

Alec: [00:46:11] It can't. Yeah. Now Bitcoin Maxes who are yelling at the phone. There's some way they calculate it based on like the flow of money supply and stuff like that. 

Roger: [00:46:18] That's popularity that that is that is that is cent. Look I've had so many debates with people and I've, I remember. I own bitcoin, right? You're talking to somebody who owns it. Not somebody who's rejected it and isn't going to touch it. But I think my reason for owning it is that I just think it's going to be more popular. And all of the arguments I've seen for valuing it are based ultimately on its popularity going up. When you boil it down. The person is saying to me, I think more people will buy it. Okay, well, that's that sentiment, that's popularity. And knowing when to sell is very hard, because what you're asking me to do is predict when the popularity is going to change. Now, I know that the popularity is going to increase, and that's why that was my thesis for owning it. Right. And why? Because number one, liquidity was going up. And so people want to get out of it. They want to hedge against monetary inflation. Popularity is going to go up. So that was one reason for buying it back in June last year. Second reason for buy is another reason it was going to become more popular. And that was because the ETFs had just launched. So again, it's all based on popularity, not based on a fundamental value, is just being driven by more people wanting to own it. I don't know when that stops. So it's really hard for me to tell you when to get out. I don't know when that's going to be. I will just literally whip my finger and stick it in the air. And if the breeze blows in a certain direction now, that's it. I'm trying to tell you this is a speculation. It's not an investment. It's entirely different to what we've talked about earlier. You know, with Audinate and Lovisa and IAB and those businesses, you know, Macquarie Technology and Megaport, we can estimate a value based on the cash flow that those businesses will generate. We know when they're going to be extremely expensive because we can compare it to our valuation. We know when they're cheap because we can compare it to our valuation. Can't do that with Bitcoin. And so this is just a folly. It's a speculation. You do it with money you can afford to lose. So far you know I've got a little bit more money that I can afford to lose now because it's gone up. 

Bryce: [00:48:15] Nice. Well, that's a great place to end, Roger. As always, it's a pleasure to chat with you. Took a lot out of the conversation today. We'll put a link to the website for the Small Companies Fund and also to the book in our show notes. But as always, thank you for taking the time with us today. 

Roger: [00:48:30] Delighted. So it's always great to talk with you guys, and thank you for giving me the freedom to talk about so many different things. 

Alec: [00:48:35] Now we appreciate it. Roger. Thank you. 

Roger: [00:48:37] It's a pleasure. So you guys.