Searching for the Dogs of FY23 + Ren’s 5 minute valuation

Bryce: [00:00:16] Welcome back to another episode of Equity Mates, a podcast that follows our journey of investing and whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. If you're just getting started or you've just joined the community, welcome. We've got a podcast called Get Started Investing that will get you up to speed. Otherwise, let's get stuck straight in. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you?

Alec: [00:00:39] I'm very good, Bryce. Very excited for this episode. Happy New Financial Year to those that celebrate.

Bryce: [00:00:45] Thank you. Yeah.

Alec: [00:00:46] Did you do anything? 

Bryce: [00:00:46] Yeah. Big night? 

Alec: [00:00:47] really.

Bryce: [00:00:48] No. We're too busy, Ren. And we're too busy.

Alec: [00:00:53] We were speaking to someone who works at a big four accounting firm, and they were so surprised that we didn't do anything for it. 

Bryce: [00:01:01] I know it. Same as Emily, who came. Who works with us now, is partnerships. When she first arrived here, she couldn't believe we didn't do a big end of financial year.

Alec: [00:01:08] It's just never crossed my mind to do anything. 

Bryce: [00:01:11] It's obviously big in finance. Everyone wraps up taxes is a chance to take a breather. We just don't have the time.

Alec: [00:01:17] Or the inclination whether.

Bryce: [00:01:19] I throw a party. 

Alec: [00:01:20] For a financial year. Fair enough.

Bryce: [00:01:24] But like what? Anyway, there's more important things to focus on at the moment. That's the thing. But yeah, we wrapped it. We're into a new year, but in today's episode we're going to cover off some of the conversations I've been having with Henry around the strategy of looking at companies that are in the dog kennel leading into the end of financial year and what happens to those that are all finding the ones that then bounce as as the new year kicks off? We're also going to have a chat with a community member, Elle, and then close out with a five minute evaluation that you've been doing with Andrew Page, Ren. 

Alec: [00:01:58] To be clear, I'm going to have more than 5 minutes for that segment, but the valuation only takes five.

Bryce: [00:02:03] Yeah, yeah, we've got 10 minutes to do that segment, so you better get it done in ten. 

Alec: [00:02:08] But someone's punchy this morning. 

Bryce: [00:02:11] Yeah 10 minutes. 

Alec: [00:02:11] Now, before we get into it, we should just remind you that while we are licensed, we're not aware of your personal financial circumstances. Any advice on this podcast is general only and the stocks that we speak about today, when we do the valuation work at the end, it's not a personal stock recommendation. Do your own work, seek your own advice. But Bryce, before we get into today's episode, one piece of housekeeping. We are very excited about the launch of our second book.

Bryce: [00:02:39] Yeah, Massive. Massive. The the book is launched on the 22nd of August, but it is available for pre-sale now pre-order, I should say. And we know that money is stressful at the moment and if you're investing, it can be hard to know if what you're doing is enough. And that is the concept of this book. 

Alec: [00:02:57] Yeah, it's called Don't Stress, Just Invest. And it is really our effort to explain the simplest way to start investing or to continue investing as well, to set yourself up and then get on with your life. So available wherever books are sold. Going out on the 22nd of August. We hope it helps. We hope you get around it. But Bryce, let's get into today's episode. We've both been working with experts to continue to become better investors. You've been working with Henry Jennings? I've been working with Andrew Page. We both have had homework, things to go away and continue working on. And yours was to answer the question, who let the dogs out of FY 2023. 

Bryce: [00:03:48] Insert who let the dogs out. Click there. Sascha, that would be fun.

Alec: [00:03:52] Mildly fun.

Bryce: [00:03:54] Good old track back in the day anyway. Yes. So the thesis here was that as you come into the end of a financial year, a lot of people do tax loss selling.

Alec: [00:04:07] And that's if a stock has full, if they've lost money on a stock, they can sell it and then claim that loss to offset capital gains. 

Bryce: [00:04:15] Yeah. Yeah. So you often say on the on the smaller end of town particularly a lot of those what Henry calls as dog kennel stocks, those that have performed really badly and are in the dog kennel, they they get sold off and that sort of momentum continues into the end of financial year with the idea or the thesis paying that if you keep an eye on a few and have a, you know, I guess a thesis as to why these companies shouldn't be sold down as much, there's an opportunity to, I guess, I guess get them on the other side of when the new financial year kicks in and people start buying back into those stocks because they've been hammered so much. 

Alec: [00:04:53] So the analytical work to do is to distinguish which stocks are actually just bad. And then which stocks have been oversold for tax reasons because they have fallen. Yeah. But actually quality and have become undervalued.

Bryce: [00:05:10] Yes. That's the tricky part. 

Alec: [00:05:13] Yeah. Yeah.

Bryce: [00:05:14] Or you just. Go for stocks that are just oversold, knowing that they could be really bad and will remain bad but might get a bit of an uptick in July.

Alec: [00:05:25] Yep, yep, yep.

Bryce: [00:05:27] So Ren, the good news is that for some of the stocks that were on our list, the thesis is playing out. So let's take a look. The first company we had was Zip, which was down 25%. Now, over the last six days or since the start of the financial year, it's up 10%. 

Alec: [00:05:45] So it was down. It was down 25% in the last financial. 

Bryce: [00:05:48] Year For the financial Year.Yeah. Yeah. If you look at it from its peak, obviously not a lot.

Alec: [00:05:54] No, that is not what we are talking about.

Bryce: [00:05:56] So down 25%, but it is ripping up 10% for the start of the year. Beacon lighting down 30%. It's up to seven. A rural funds group down 27%. It's up at six and a half. Retail we had baby bunting. It was down 70%. Tough year for baby bunting. Yeah, it's up 7% now. And Nero, which is a marketing and comms business, they were down 48%, they're up 8%. Hi Pages which we've had on the show, they were down 39% for the year, they're up 16%, another retail City Chic down 83% for the year. Yeah, it's, it's ripped 13% since the start and pointsbet which was down 71% for the year. It's flat. So those were the companies that Henry and I kind of got together on the list. Not to say any of those are from a thesis point of view in a good position to, you know, knock the lights out but it's shoot the lights out. But it's just interesting.

Alec: [00:06:59] So to unveil the curtain on our friendship group, there's there's a joke that of Leskesms that we call it where Bryce has the habit of mashing two sayings together and he's just in there, knock it out of the park and shoot the lights out. Get Leske together to become. Knock, knock the light.

Bryce: [00:07:20] Knock the lights out. Yeah. Yeah. Anyway, so. So say look, if, if, if you had.

Alec: [00:07:27] No hold on. I got three questions for you. Yeah. And the first one which is I think where you were going, I think you're about to say if you had invested. So my question is, did you invest in any of those? 

Bryce: [00:07:41] No. I made it very clear that I wasn't going to actually put money on this strategy. I think it's fraud and I want to be honest about it. Like, I think I think if you get it, if you get it right. But also, I think to be fair to Henry as well, you're obviously not making the investments. You could make the investments towards the end of the financial year as you're recognising which companies are really smashed and hope that you really do get in towards the bottom. But kind of what Henry is saying is like you develop this list and then you use July as a chance to see which ones are genuinely picking up pace and then match that with what your thesis is, is, you know, the thesis shouldn't be, it should still be some sort of positive thesis.

Alec: [00:08:24] It's like it's, it creates an attractive entry point.. 

Bryce: [00:08:29] Exactly, because otherwise you're like, all right, financial years ended. I've just got to like now shoot darts at one of these companies and hope that they hope that they all rip and then sell out and take the profit like that's just, you know, not not something that I want to be playing in. But I think the whole purpose of this exercise was just to see the strategy. If the strategy plays out and in these instances it is. I think what will be interesting is if we're checking in a month and see where these companies are at.

Alec: [00:08:58] So second question, looking at that list outside of Pointsbet, the thesis played out for all of them. What are the eight companies here? Did you trim the list? Were there other ones that you had on your wasn't played out and we're just talking about them or has it literally played out in seven out of the eight.

Bryce: [00:09:16] Let's well let's have a look so another one on the list if you if you quickly look at elders another I'll look at Ades and I just didn't do all of them on the list because there were just too many.

Alec: [00:09:26] Elders over the past year, down 44% past five days, up 8%. Okay, full credit.

Bryce: [00:09:35] So I'm looking at Ades. Ades is actually it started ripping just before the end of financial year and it's up 24% after being slammed like a huge sell off coming into the end of the financial year to the tune of a drop of almost 40% in a month leading into the end of financial year. It then flattened out and then ripped 24%. So I guess, yeah, it's kind of playing out in some instances, but it's just such a, it's a game that yeah, it's a game that requires you've got to be in it.

Alec: [00:10:09] I would say investing as a whole, you need to be in it. 

Bryce: [00:10:13] Not with dollar cost averaging. Automated. I like the book that we're about to write.

Alec: [00:10:18] But it's true. Don't stress, just invest if you don't want to be in it, but you want to get the benefits of it to write that book. Interesting. So my third question, Bryce, out of that list weren't two of those stocks, baby bunting down 70% and City Chic down 83%. Well, let's talk about those stocks of the year for you, though.

Bryce: [00:10:38] Yeah, but as we know, it's Stock of the Year, not stocks of the years.

Alec: [00:10:43] Oh, sorry. I've misunderstood the game.

Bryce: [00:10:45] Yeah, yeah, yeah. I'm all about just the short term 12 month play. Baby Bunting did well for me for Stock of the Year. I don't think City Chic did. I just think it was that your stock that year did worse. I think City Chic I ended up down.

Alec: [00:10:58] About right so I jumped on ticker ticker tikr.com/equitymates if you want to jump on as well and just did a stock screener to say this thesis as well is Dog's thesis probably made a less pejorative name for it but I just put in for four filters primary exchange ASX stock price change over the last three months. Because I didn't look at the whole FY 23, I just figured this would be tax loss. Yeah, it was the end of the year. So it's fallen more than 10% in the last three months and then in the last week it's gained.

Bryce: [00:11:36] Doing my homework for me. 

Alec: [00:11:38] Well, I just wanted to say if I could just screen this out right, You have to do individual names. Ask Henry Jennings for a you know, and I also just wanted to make sure that if you hadn't done your homework, we're going to talk about. 

Bryce: [00:11:51] Oh, I heard all over. 

Alec: [00:11:52] It. And there was a hate that came back. So then I just put a market cap market cap over 500 million USD just to, um, so the names are a little bit more well known and there are a few big ones that came up. So Star Entertainment group down 20% over the past three months, up 10% in the past week. Elders You've mentioned. Site. Mundo, bio doors. The company that Bale Adore invested in there like hotel accommodation management, down 14% past three months, up 5% in the past week.

Bryce: [00:12:29] LA visa that's one that a couple of well not a couple but I know a fair few Equity Mates community have been holding it was down 18% it's up seven. 

Alec: [00:12:39] Yeah.

Bryce: [00:12:39] Elders six. 

Alec: [00:12:41] Premier investments down 23% over the past three months, up 3% in the past week. So it is interesting like you do see like there's there's there's definitely it is it's a.

Bryce: [00:12:55] Yeah it's a basis that has worked well Yeah that has played out maybe yeah. The challenge is knowing what to pick and I think to Henry's point it's like just use this not as the sole investment thesis, just as a okay, let's now continue to watch some of these over the next month or so still with the idea that it needs a catalyst, it needs, you know, a broader thesis than just tax loss selling that's ripping.

Alec: [00:13:23] Well, Bryce, we said we were going to do these coaching sessions with these experts to try and become better investors, try and keep learning. And I can certainly say that I've learnt something from your work with Henry and may long continue. 

Bryce: [00:13:38] Now, one thing that I've also learned from that was out. I must give credit to Henry. If you have been listening intently to the conversations we've been having, he's mentioned a company. This is not a buy hold or sell, but kudos to him. The ticker is LRS Latin Resources. It was in our most recent episode with him. He said that they were going to do an announcement and he was very bullish on it. So full credit to Henry Latin Resources, a lithium company. He's hot on lithium. I'm just going to say from June, which was when we probably spoke about it on the show the last six weeks, it's ripped about 105%. And he reckons that it's currently $0.30, that it'll be a dollar within the next year or two.

Alec: [00:14:21] I can.

Bryce: [00:14:22] Not buy hold a so.

Alec: [00:14:23] I cannot stress how much Henry is not aware of your personal circumstances and neither is Bryce. And for every Latin Resources that Bryce talks about on the show, he also talks about a City Chic or a Baby Bunting. So let's just really balance out what we're talking about here. 

Bryce: [00:14:41] Yeah. 

Alec: [00:14:41] So with that clear caveat in mind, full credit and. 

Bryce: [00:14:45] All credit, Henry Ford Credit. Henry was hot on lithium as well. But anyway, Ren. That's my homework. 

Alec: [00:14:51] I love it. Yeah. So, Bryce, let's take a quick break here. And then after the break, I'm going to unpack my homework. I'm going to talk about a quick five minute evaluation method that anyone can do. Even you. 

Bryce: [00:15:04] In 10 minutes. 

Alec: [00:15:05] No, no. It only takes 5 minutes to do the evaluation. So you're saying this segment could only be 10 minutes? I don't know why. Can someone run the clock back on? How long Bryce say it was. 

Bryce: [00:15:17] My segment was entitled Five Minute Valuation. 

Alec: [00:15:21] No, but. 

Bryce: [00:15:23] It shouldn't be more than 5 minutes if it's a five minute valuation. I get it. Let's get going. 

Alec: [00:15:28] I think we got some of this stuff in on us. But before then, we're going to chat to a member of the Equity Mates community. Elle, who is just starting her investing journey, was worried that she'd left a run a little bit too late. And I know that is a feeling for a lot of people in the Equity Mates community. So we're going to chat to Elle after this. 

Elle: [00:15:59] Hello. 

Alec: [00:16:00] Hi, Elle, it's Alec from Equity Mates. 

Elle: [00:16:03] How are you going?

Alec: [00:16:03] Good. Yeah, very good. I've also got Bryce here. 

Bryce: [00:16:07] Hello. How are you? 

Alec: [00:16:08] Now, I think, um, you commented in the Facebook group that you were wondering if you had sort of missed the boat. So how are you feeling now? 

Elle: [00:16:16] Yeah, look, that was the initial question that I. That I posted. And because I'm 42 years old. So my question originally was, have I left my run too late? And I think the general consensus from the community was was no, just get started, which is kind of what I anticipated that I would hear or hoped I would hear.

Alec: [00:16:33] Yeah, it'd be very disappointing if we got the other. 

Bryce: [00:16:35] Yeah, yeah, yeah. Too late. All right. But

Elle: [00:16:39] Uh. But yeah. Then my flow. One question from that was then in relation to what the portfolio should look like, because I've read I've sort of read conflicting information. So some people say you want to, if you're sort of on the back of going towards retirement, you want to be picking safe options, which I guess is because you don't want to lose everything and then have nothing to retire on. But then the flipside of that was, well, you haven't got a lot of time to see your return. So you can't just sort of pick safe stocks that are just going to go up mediocre increments because you sort of you haven't got that time to sit on it. So, yeah, I guess I just wanted to get a better understanding of what the portfolio should look like. Should there be a mix? Should I be more safe? Should there be more growth stocks? Yeah, Where do I agree? 

Bryce: [00:17:23] Well, I think it's obviously something that from a personal situation, you definitely need to, I think, speak to a professional about. But I think there's a general way that you can think about it. I think your time horizon is the first thing that you consider, like whatever your goal is. Like, if you're intending to retire and live off your investment portfolio in the next five years, then your portfolio is going to look different too. If you don't need to touch this money for the next 25 years, for example. 

Elle: [00:17:48] Yeah, definitely. What a lotta. 

Bryce: [00:17:50] What you're doing at the moment, really. And letting your money compound over 25 years, you're certainly better off than if you started in the next five years or the next ten years. And you don't have to take huge amounts of risk to let that kind of happen. A diverse, diversified portfolio of ETFs is a good enough strategy to let the money compound over a period of time. You don't need to be taking huge risks to try and double your money in the next five years, like your goal is 25 to 30 years. That's heaps of time. Yeah, that's heaps of time. 

Elle: [00:18:17] Because everything a lot of stuff's focussed on like the Millennials and. Yeah, yeah, that ship sailed.

Bryce: [00:18:22] Yeah. I mean, it's different for someone. And I was speaking with someone yesterday and they were saying that their child is looking at investing in ETFs and they're 12 years old. And I was just thinking, God damn it like that kid has, if they're, they are just so set up to reap the real rewards of like Warren Buffett long 90 years of being in the market. 

Elle: [00:18:43] Yeah. And so this is my other question because I've got two kids, seven and nine, and I want to set them up. So I've been sort of teaching them a little bit about what I've learnt because it just helps, it helps consolidate it for me as well. But then I read it to them and you know, I'd love to set them up so that they've got the knowledge right from the start and then they can get good habits while they're young. 

Bryce: [00:19:04] Yeah, I think at that age they're most of the, the brokerage apps and the banks let you set up an account like you're the custodian of it, essentially. I don't think they can have one in their own name. 

Alec: [00:19:15] Yeah, I think I think that's probably two answers to two parts to that. So like the platform side of it, the price was going down, I'm pretty sure sharesies have kids accounts and you know, Vanguard have something similar. The parents set it up. So that's one side. Like there's more and more platforms that are sort of leading into this, you know, first generation of parents that grew up with the Internet and online investing now want to set their kids up to do it. But I think the other side is like the behavioural side. And we often joke that Bryce had sort of the perfect upbringing when it comes to learning about investing. And I'm sure you've heard us banging on about it on the show.

Elle: [00:19:53] Yeah, yeah. 

Alec: [00:19:54] And I reckon just like if I had been exposed to the stock market, how it worked, how you could sort of build wealth passively, essentially through the stock market at a young age, I reckon it would have really changed my outlook about just money in general. And so I reckon what price's parents did, getting the kids to split the pocket money between spending, saving and investing. I'm sure there are a few tantrums for young Bryce at the time because he just wanted all the money. 

Elle: [00:20:25] Yeah, I'm going through that at the moment because I set them up with four money boxes. So they've got spend, save, grow and give and yeah, so you have to divide it up and yeah, just everything's going into this like, no, no, no, no. 

Alec: [00:20:43] Yeah. 

Bryce: [00:20:43] It's definitely the right thing. 

Alec: [00:20:44] Yeah it. 

Elle: [00:20:45] Is. The eldest is a lot more on board with it than the youngest, I must say. So he's got all these ideas, he's going to start his own business and he's going to do all this stuff and the young ones just like, that's too hard. But yeah, we'll give it time. 

Bryce: [00:20:59] It's conceptually difficult to understand the power of compounding at nine years old. Yeah, yeah.

Alec: [00:21:04] Yeah, yeah. You don't quite understand long term. 

Elle: [00:21:06] Yeah, Yeah, I know. I've tried to get them excited about it, but they just want their equity cards and I want now. 

Alec: [00:21:11] Yeah, yeah, yeah, yeah. Instant gratification is the way. The way that Pokemon cards became, like, a really valuable asset. Maybe free cards, the best investment. 

Elle: [00:21:22] Yeah, who knows. 

Bryce: [00:21:24] If you'd like to speak with us on the show. Hit us up at contact at equitymates.com Or join us in the Facebook discussion group. 

Alec: [00:21:32] So Bryce investing for kids, which l was asking about there certainly something that more and more people in the Equity Mates community are asking about that might just be an indication that we're getting older. 

Bryce: [00:21:42] Maybe. But I think it's also becoming more and more of a I know, more and more accessible for Yeah, for people. We're at an event last night and spoke to a couple of people about, you know, parents who are interested in how they can set up for their kids. So yeah, it's definitely I'd love to be a kid at. 

Alec: [00:22:01] I would love to be a kid as well. 

Bryce: [00:22:03] Carefree 

Alec: [00:22:04] Like people. 

Bryce: [00:22:05] Cooking vessels like fire. Anyway. Anyway, so Ren. 

Alec: [00:22:09] Having hair.

Bryce: [00:22:14] Ren, now I started with my homework. It's now time for yours. Last time you sat down with Andrew Page, who was your mentor? You've been really working through the valuation method or a valuation method, I should say. That is not a quick and dirty, but a 

Alec: [00:22:30] It is quick and dirty. 

Bryce: [00:22:30] Quick and dirty.

Alec: [00:22:31] Yeah, yeah, yeah. I think, you know, if we're on the journey to find great long term investments, individual stocks, that will compound over time, There's two parts to it. One is how, what's the quality of the business and can it generate profits and reinvest that profit at a high rate of return. But then the second part of it is what's the price you're paying today? Because great businesses can be terrible investments if you overpay for them. And so that's kind of the conversation that Andrew and I have been having in some of the work I've been doing between our chats. Now, in our last conversation, we did, I guess a bit of a worked example. We took Net wealth, the wealth platform here in Australia, and looked at it. So as a refresher, this five minute valuation exercise really starts with the premise that share price is a function of two things: the profit per share or earnings per share a company is generating. And then the multiple that the market is willing to give it the price to earnings multiple. So if a company has earnings per share of $1 and the company is willing to give it a price to earnings ratio of ten, then the share price is $10. And fundamentally, what. 

Bryce: [00:23:46] If I'm trying to do this and it's not profitable? 

Alec: [00:23:49] We'll get to that. And so the valuation method is then you start with that as a starting point. You project forward what you think profit per share will be in the future and what multiple the market will be willing to pay for that profit in the future, and that you can estimate what the future share price will be. And then you say, I know what the share price is today of estimated, what the share price will be in the future. And then is that return worth it for me? Like is that something that I want, let's say Equity Mates, media generating a dollar of profit per share? And because we're just a a growth company that everyone is so excited about, the market is giving us a multiple of 50 a price to earnings ratio of 50. So a dollar of profit, a multiple of 50 means our share price is $50 a share. And let's say we crush it, we grow our podcast, we figure out YouTube and blow up on Tok and we double our profit per share to $2 next year. But the market sours on podcasting as a business and they say, We don't want to value you as a growth company anymore. We want to value you as a media company. So I had a look at media companies. Nine Entertainment is trading on a multiple of 12 at the moment. 

Bryce: [00:25:12] That's that's good. 

Alec: [00:25:14] That's bad.

Bryce: [00:25:15] Nah, last time I looked at listed media it's in the fours and five is four. 

Alec: [00:25:19] Sorry. So we've doubled our profit to $2 a share, but the market is willing to give us less of a multiple and we get 12. So that means two times 12 are multiple, share price is 24. So in that scenario, the profit for the business has doubled $1 to $2 a share, but the share price has more than halved from $50 a share to $24 a share. And so that is conceptually this valuation method. 

Bryce: [00:25:51] I mean, it's like how do you determine what the market is going to be willing to pay for these crazy growth companies and how far out of you projecting?

Alec: [00:26:01] Well, let's start with Novo Nordisk, because I think that this will go some way to answer your question. I think there's some like general rules of thumb you can use. And Novo Nordisk is probably an example that illustrates that. So maybe let's start with that. But to answer your question, you know, growth companies where the market expects a lot of growth, you generally say price to earnings in the range of 30 to 60 days days depending on how much growth they're expecting. And then slower growing companies, you see that multiple come down into the twenties. And then when people are sort of questioning the business model and the sustainability of it, maybe like some legacy media, you start to see it in the tens or the single digits these days. I think that that's probably a general rule of thumb. 

Bryce: [00:26:52] The one that always surprises me every time I look at Amazon Pay of 316. 

Alec: [00:27:00] It's crazy. Anyway, yeah. So. Novo Nordisk, for people who are unfamiliar, they are making these crazy weight loss drugs. Ozempic is the one that's captured headlines. But then there's another one that they've made with Govee that apparently is even more effective than as epic. We're entering like a strange new world with those drugs. The Eli Lilly have created one that is potentially even more effective than Novo Nordisk, and we can get into that some other time. But I think it is a fascinating story, actually. You know what will do an episode on it on the Dive. So if you want to hear more about this story, head over to the Dive, our business news show. We'll unpack it there. Novo Nordisk, earnings per share this 2022 3.53, a share price of about $160, which means the multiple the markets giving them is 45, a 45 price to earnings. Now, you would expect with these guys with their crazy new weight loss treatments, they're going to grow and they're going to grow pretty quickly. So 45 the market, you can tell that the market expects them to grow as well. I did some research looking at third party pharmaceutical publications, the company's own projections to get an idea of what they're projecting in terms of sales and profit growth. They expect sales to increase 83% between 2022 and 2029 and profit to grow at about 13 to 16% a year, seven years. So to 20, 29, 13% a year. Profit growth is a bit more than double, let's say, for Asian markets, profit doubles over the next seven years. So in 2029 we've gone from 3.53 earnings per share to $7 earnings per share, doubling our profit. It's pretty good. But at that point, sales of this drug have probably slowed the heights probably out of it. So the market doesn't expect as much growth anymore. And in that case, then the multiple that the markets would be paying is less. They wouldn't be getting a 45 price to earnings anymore. So I took three big pharmaceutical companies to compare Pfizer to them. They're trading on a seven price to earnings at the moment, Johnson and Johnson at a 34. And then I figured Merck is probably the middle ground at 22. If the market is willing to give them Pfizer's price to earnings a seven, there'll be a share price of $49. So you'd lose about two thirds of your money even if they double their profit. Johnson Johnson bit more generous price to earnings 34. That would get you to a share price of about 240 bucks. So you'd make about 50%. Not that the middle ground Merck 22 price to earnings would get you $154 share price it's 160 now. So basically we're saying profit doubles, but share price stays flat. 

Bryce: [00:29:59] At the current PE rates. 

Alec: [00:30:02] No. At these.

Bryce: [00:30:04] Yeah. That what the market's paying. Yeah. 

Alec: [00:30:07] Well, because I've taken them. Because they're like the three biggest pharmaceutical companies. So I figured, like, slower growing, more established, you know, a lot of different drugs that are in the market. 

Bryce: [00:30:18] I guess my point, though, is, isn't the second half of this to also anticipate what those PE could be. 

Alec: [00:30:25] That's exactly what I'm doing. 

Bryce: [00:30:26] But like that's that's based on now the pay that the market's paying for Johnson Johnson now I'm set. 

Alec: [00:30:35] Yes. So I think Novo Nordisk in 2029 is going to be in a similar position to Johnson and Johnson. Now that's what we're saying. 

Bryce: [00:30:45] Yeah. Okay. 

Alec: [00:30:45] Yeah, yeah, yeah. The other way I could have said it is just I think right now they're getting a pay of 45 because they're in the growth phase in 2029. They'll be less growing and the market will give them 20. So to just pull to like a here's where we're about. 

Bryce: [00:31:04] Yeah. That's what I thought what you're going to do as well because you could go the other way with these growth companies, you could say, you know, historically companies that are in a similar position have had raise go from X to X in this the same business lifecycle. 

Alec: [00:31:18] That's essentially what we're doing because these more established players. 

Bryce: [00:31:21] Are done that. 

Alec: [00:31:22] Yeah, I'm just I'm just trying to bring some colour to the numbers. 

Bryce: [00:31:27] I'm just asking the questions that people are going to be wanting to know.

Alec: [00:31:30] So yeah, let's say if we just did hypothetically, as a company moves from a growth phase to a slower, more steady phase, more established business phase, they would go from a multiple of 45 to a multiple of 20. In that case. They're going from 160 share price, doubling their profits, but less multiple and about the same.

Bryce: [00:31:55] And so if you were to use that example, very back of the envelope, but it you'd need to be getting a Johnson and Johnson level of pay to make the investment worth it. 

Alec: [00:32:05] Or profit would need to grow faster than what we projected. 

Bryce: [00:32:10] Nice. 

Alec: [00:32:11] Yeah. So a lot of numbers which I recognise probably not the best on a podcast, but hopefully conceptually that makes sense that like with just a couple of key numbers, you can start to sort of think about valuation in a way that doesn't require a full discounted cash flow. 

Bryce: [00:32:30] Yeah. Yeah. Yeah. Very simple way to just ground the start of your decision making. 

Alec: [00:32:36] Yeah. Just a sense check like what has to be true for this company to make more money. And I think for me, answering that question for Novo Nordisk, it's what has to be true. Um, because like, what will be true is that that multiple will come down. Yeah. Just like history tells us that over time companies don't grow forever and that multiple comes down. So what has to be true for this company to be a good investment is it has to more than double its profits. Hmm. So that's sort of what I've taken from this for it to grow into the valuation it's got now. 

Bryce: [00:33:13] It's one of those one. Yeah. I mean, or it goes the other way and it just goes to PE just goes through the roof. 

Alec: [00:33:20] Yep. But like, the market's always forward looking. So if the PE goes through the roof, that means the market doesn't just expect Ozempic to go well, but it expects like the next thing to be even bigger and even better. 

Bryce: [00:33:34] Yeah, but your. Yeah, your theory. This new world of obesity is going to be a choice. 

Alec: [00:33:40] Obesity will be a choice like that.

Bryce: [00:33:42] I mean, that.

Alec: [00:33:42] That's pretty crazy. 

Bryce: [00:33:43] This could mean exactly that if you think about that on a global scale like that's massive. 

Alec: [00:33:50] Yeah, massive. I think the challenge is going to be like so many things in the pharmaceutical space. Someone pioneers it and everyone else jumps. And so Eli Lilly, as we said earlier, that they're clinical trials. So as epic, the clinical trial over 68 weeks, the average weight loss was 15 kilos over 68 weeks. Eli Lilly Over 48 weeks. So 20 less weeks. The average weight loss, 24 kilos. Like these are crazy numbers. Yeah. I feel like, you know. 

Bryce: [00:34:30] Well, I was just doing the best. What was it? 24 kilos of what. 

Alec: [00:34:33] 24 kilos over 48 weeks. 

Bryce: [00:34:35] And what was the other one? 

Alec: [00:34:36] 15 kilos over 65 kilos. 

Bryce: [00:34:40] Wow. Anyway, I tune in to The Dive for more info on that as we unpack it, but we will leave it there. That does bring us to the end of our episode. We'll continue the discussions and learning with our our mentors as we go. Jump into the Facebook discussion group. If you have any questions for Ren on the formula here. He'll be again, I'm assuming you're going to be happy to ask some questions. 

Alec: [00:35:04] Yeah. 

Bryce: [00:35:05] So yeah, if you're interested in, I guess the back of the envelope valuation, then this is certainly one that is very achievable. You don't need to be cracking out spreadsheets and discounted cash flows. So yeah, we'll leave it there. A reminder that the book is available for pre-sale link will be in the show notes. We would really appreciate its support and if there's anyone in your life that is looking to get into the markets and start their investing journey, but feeling a little bit unsure as to how, then this is definitely the book for them. But we'll leave it there. Pick it up next week. 

Alec: [00:35:35] Sounds good.