We’re back with live events in 2024 - get your tickets to Equity Mates Live – Ask An Advisor here.

Why are the experts buying Costco & Home Depot?

HOSTS Alec Renehan & Bryce Leske|13 July, 2021

Every quarter, investors large and small write client letters. Reading these can be an incredible source of information, so in today’s episode, Bryce and Alec talk about two letters they’ve read recently. They’ve chosen one big investor (David Einhorn) and one small (Ensemble Fund), and together they discuss some of the big ideas they’ve gleaned from both.

Some of our favourite resources and offers to help you during your journey:

*****

Make sure you don’t miss anything Equity Mates related by signing up to our email list. And visit this page if you love everything Equity Mates and want to support our work.

*****

Equity Mates Investing Podcast is a product of Equity Mates Media. 

All information in this podcast is for education and entertainment purposes only. Equity Mates gives listeners access to information and educational content provided by a range of financial services professionals. It is not intended as a substitute for professional finance, legal or tax advice. 

The hosts of Equity Mates Investing Podcast are not financial professionals and are not aware of your personal financial circumstances. Equity Mates Media does not operate under an Australian financial services licence and relies on the exemption available under the Corporations Act 2001 (Cth) in respect of any information or advice given.

Before making any financial decisions you should read the Product Disclosure Statement and, if necessary, consult a licensed financial professional. 

Do not take financial advice from a podcast. 

For more information head to the disclaimer page on the Equity Mates website where you can find ASIC resources and find a registered financial professional near you. 

In the spirit of reconciliation, Equity Mates Media and the hosts of Equity Mates Investing Podcast acknowledge the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respects to their elders past and present and expend that respect to all Aboriginal and Torres Strait Islander people today. 

*****

Have you just started your investing journey? Head over to Get Started Investing – Equity Mates 12-part series with all the fundamentals you need to feel confident to start your investing journey.

Want more Equity Mates? Subscribe to our social media channels (@equitymates), Thought Starters * Get Started Investing mailing list and more, or check out our Youtube channel.

Equity Mates Investing Podcast is part of the Acast Creator Network. 

BRYCE LESKE: [00:00:40] 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 investing journey from beginning to the dividend. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going? [00:00:56][15.7]

ALEC RENEHAN: [00:00:56] I'm very good, Bryce. Another Monday episode. Happy reporting season. Thank you. Yeah, it's always going. It's that wonderful time of the year that seems to. Yeah. Never stop and always be around the corner. [00:01:09][12.9]

BRYCE LESKE: [00:01:10] Well yeah. In the States particularly every three months. I was thinking about this in preparation for the episode today. How how much time would be spent by these companies doing reporting. And, you know, we're going to be talking about investor letters today and having to think about and write a meaningful letter every three months. [00:01:28][18.8]

ALEC RENEHAN: [00:01:29] Yes, that would be tough for you. It takes you about three months to think it through. Yeah, I agree. I mean, have you read the book The Outsiders and how the for those who haven't read it, it's a story about like eight CEOs who have just had incredible long term track records. And one thing that a lot of them did, they just didn't care about investor relations and don't like by my stock, don't buy my stock. That's not my focus. I'm just going to make a more valuable company, fair or not. But yeah, you're right, for a lot of these bigger companies, the dog and pony show just keeps on rolling. Yeah. [00:02:05][35.8]

BRYCE LESKE: [00:02:06] So today we are going to be looking at two investor letters every quarter. Investors, you know, large and small write to their clients, particularly over in the states is where we're going to be focusing today. And for us and they're a pretty valuable sources of information. You often put them out in the thought starters on a Monday. And we're going to go through today and pick out some of the stocks that they've specifically been talking about. [00:02:29][23.5]

ALEC RENEHAN: [00:02:30] Yeah, yeah. Before we do one note of housekeeping, we have a live show this week. This Thursday, tickets for the in-person event have sold out, but we have tickets available for the online stream. Head to our any of our stations. Really, there's a Facebook event that will take you to the Eventbrite page, free tickets. It's free to sign up for the online stream. And there are prizes to be won. Steak are giving away one hundred and fifty dollars worth of stock in some of the biggest beverage companies in the world. They're giving away some merch. We're giving away some merch. We're giving away some books. So make sure you're on the livestream. Make sure you're participating. And what's it about? Oh, it's about the beverage industry. [00:03:15][44.7]

BRYCE LESKE: [00:03:17] What can we expect? [00:03:17][0.5]

ALEC RENEHAN: [00:03:18] Oh, it's just us chatting, really. [00:03:20][2.5]

BRYCE LESKE: [00:03:21] That is not inspiring. [00:03:22][1.4]

ALEC RENEHAN: [00:03:23] We've got some of the biggest experts in Australia, some from the industry, some investors in the industry. And we're going to be breaking down the beverage industry in Australia and globally and talk about how you can invest in it. [00:03:38][15.8]

BRYCE LESKE: [00:03:39] So don't miss it. Don't miss it. See you there. OK, well, let's crack into it anything you want to kick off with Ren. [00:03:47][7.9]

ALEC RENEHAN: [00:03:47] Yeah. So before we talk about the two particular letters, just I guess a bit of context. So the investor letters come out in the same cadence as US reporting season. So every quarter these letters come out in terms of where you can find them if you want to play along at home. There's a sub-Reddit security analysis, Reddit dot com are security analysis. They aggregate the majority of the letters. So if you're looking for a place where you can find these, you can read days, the two that we're going to talk about today. But just more generally, all of the letters that come out, you can head there and they aggregate them all. You can access them for free. One note about reporting season before we get into it. It feels like it's a real tale of two stories. That doesn't make sense. But I don't know if you've been watching the results, but so many big American companies are beating analyst expectations like that's a great news story. They're doing incredibly well. But a lot of them are saying their share prices fall even though they're beating analyst expectations just shows how high market expectations are around those stocks. [00:04:58][70.6]

BRYCE LESKE: [00:04:59] Not surprising that you see, we had price movements around reporting time versus expectations, but unusual that even though they're beating expectations, we're still seeing price fall. Yeah, well, we speak about it a lot on the show that you can never base an investment around analyst expectations. [00:05:16][17.1]

ALEC RENEHAN: [00:05:17] Yes. Yeah. And I guess that's the context in which we're talking about these letters that the US so they're both from the US, but the US economy is rebounding. Well, Australia's economy is rebounding well. But as a result of that, stock market expectations are incredibly high and it's running at. Really hard since covid, yeah, and so these are the two contexts were these letters have come from. [00:05:41][24.2]

BRYCE LESKE: [00:05:42] So letter number one and we are going to be diving into some specific stocks. So that's an absolute doozy. And this one is David Einhorn, his Q1 investor letter. Yeah. So who is David Einhorn? [00:05:58][15.6]

ALEC RENEHAN: [00:05:59] David Einhorn, perhaps most famous for being taunted online by Elon Musk. and Elon actually sent him a pair of short, shorts. [00:06:10][11.0]

BRYCE LESKE: [00:06:10] Those red ones that he had on sale along. [00:06:12][2.3]

ALEC RENEHAN: [00:06:12] Yeah, yeah, yeah. So there is context there. Elon's not just sending him clothing. [00:06:18][6.2]

BRYCE LESKE: [00:06:21] Well, he was, but they were short shorts targeting short sellers of Tesla's stock. And maybe three years ago or thereabouts. [00:06:28][6.7]

ALEC RENEHAN: [00:06:29] Einhorn was probably the most outspoken Tesla short, claiming fraud, especially around the SolarCity acquisition. Just claiming so much stuff. I mean, I don't know if he was right about a lot of this stuff, but the market has definitely caused him to lose a lot of money. [00:06:47][17.9]

BRYCE LESKE: [00:06:47] Yeah, there's no doubt this guy is pretty cynical. I think all around you read you read this latest letter and he's having a whinge again. But anyway, he's founder of Greenlight Capital, has one point six dollars billion asset under management, started back in 1996 and had a decade of pretty incredible performance, averaging a return of twenty six percent a year. Not bad. Not bad. You would definitely take that. More interesting, though, is that he had 12 billion assets under management. So, you know, quite a fall from grace. [00:07:19][32.1]

ALEC RENEHAN: [00:07:20] Yeah, yeah, yeah. It's actually been a pretty public fall from grace as well. It would be pretty, pretty tough to beat him, but he was riding high and then he has seen, what, over a decade now of underperformance against the market and like institutions and stuff have been pulling their money. So he had 12 billion assets under management. He now has one point six billion assets under management. Tough, tough head. [00:07:45][25.2]

BRYCE LESKE: [00:07:45] You see his face going down? Yeah. [00:07:47][1.5]

ALEC RENEHAN: [00:07:47] I mean, look, I don't have a lot of sympathy for him. He is a billionaire, so he never needs to make another dollar in his life. But, yeah, that would be tough. And it shows just how difficult sustaining and investing over a long period of time is. Yeah, it's very rare that you say Warren Buffett gets twenty percent plus return for forty plus years. Like, that's the exception, not the rule. [00:08:12][25.0]

BRYCE LESKE: [00:08:12] All right, Ren. So let's pick up from the commentary around the macro environment from his letter, and then we can dig into some of the stocks that he's spoken about. So since 2008, growth has massively outperformed value. Yes. However, in the past quarter, we've seen a reverse of that with value outperforming. [00:08:33][20.3]

ALEC RENEHAN: [00:08:34] Yeah, growth. That's it. Largely driven by expectations of inflation. Yeah. And, you know, we all heard in the quarter around bond yields rising, inflation expectations being back. We're not particularly saying in CPI like the consumer price index measure of inflation, but he talks about a number of, I guess, supply bottlenecks, the amount of money being pumped into the economy. There's all there's a lot of leading indicators of inflation. So it's probably going to happen. [00:09:08][34.2]

BRYCE LESKE: [00:09:08] Yeah, you would think so. And there was no doubt that the equity markets community felt the reversal of growth of value when some of their tech positions were hit in the last three months. And that's obviously coming through. [00:09:24][15.7]

ALEC RENEHAN: [00:09:24] Yeah, yeah. I thought when the Suez ship got stuck. Oh yeah. I was thinking if that had got stuck there, therefore not what, four days or but like four weeks, then what would have happened to like inflation with a literal supply bottleneck. Forget semiconductors bottleneck. [00:09:43][18.7]

BRYCE LESKE: [00:09:44] Yeah, that was the Black Swan event that triggered inflation. [00:09:50][5.6]

ALEC RENEHAN: [00:09:51] But yeah, I think a lot of the leaders are focusing on this growth, a value discussion, and partly because it's the industry talking to the industry. And this is something that the industry loves to talk about. And also, we should say so. Einhorn, I think, was flat for the quarter. Again, not no. You want to say it's one of his investors. [00:10:13][21.9]

BRYCE LESKE: [00:10:15] For the quarter and the market was up six point two percent. [00:10:17][2.0]

ALEC RENEHAN: [00:10:20] And I think some of these letters, you can say a little bit of self-justification in defense under underperform performing. I get in my own head about that now, you know, and they're saying values coming back. It's almost here. We're. Out to really hit our stride, and so I think there's a little bit of that from David Einhorn in saying that though he does list six of his best stocks for the quarter. Yeah. Tell me if you've heard any of those names are Brighthouse Financial? [00:10:49][29.5]

BRYCE LESKE: [00:10:50] No. [00:10:50][0.0]

ALEC RENEHAN: [00:10:51] Danimal Scientific. [00:10:52][0.5]

BRYCE LESKE: [00:10:53] No. [00:10:53][0.0]

ALEC RENEHAN: [00:10:54] Concentric, [00:10:54][0.0]

BRYCE LESKE: [00:10:55] No [00:10:55][0.0]

ALEC RENEHAN: [00:10:56] residuary technologies. [00:10:57][0.7]

BRYCE LESKE: [00:10:57] No. [00:10:57][0.0]

ALEC RENEHAN: [00:10:59] Change Health care or air cap holdings? [00:11:02][3.0]

BRYCE LESKE: [00:11:03] No. [00:11:03][0.0]

BRYCE LESKE: [00:11:03] So and this is why I love investor letters and this is why I think that's such an underrated source of information, is there are six stocks that I hadn't heard of when I read it and that you haven't heard of. But it gives you it gives you six stocks to go on research. All those stocks are up between 18 percent and 60 percent for the quarter. So they were still flat. Yeah, yeah. He had a I mean, they don't they don't list everything. But, um, he had one short position that he lost 40 percent on. And I think his short book in general didn't do too well. [00:11:38][35.7]

BRYCE LESKE: [00:11:39] I'm pretty sure I've seen Brighthouse advertised on like Akao or something here. There life insurance company anyway. Yeah. [00:11:45][6.0]

ALEC RENEHAN: [00:11:45] You go. Yeah. And and so yeah, for me it's like they this is you have people doing the work for you and you can see the companies that they've screen for and then put them on your watch list and then do like the actual stock research. Yeah. Just it helps with the filtering process. [00:12:03][18.1]

BRYCE LESKE: [00:12:03] But caveat as well, if you're looking at Danimal Scientific here, that's up sixty one percent. That is obviously in retrospect in the fact that he has already bought the stock, done the work probably months ago. Great. For months and months ago. And you know, he's maybe in a position that he's going to sell it in a couple of months. So do your own research when you see these sorts of things. [00:12:27][23.2]

ALEC RENEHAN: [00:12:27] Yeah, I mean, people have got in trouble in the past for doing exactly that and then selling into the buying. Like, I'm pretty sure that's how Rene Rivkin got done back in the day. He would pump a stock that had already been bought and then he would sell it as the people who were reading his newsletter bought it. Now, don't quote me on that. But yeah. [00:12:46][19.3]

BRYCE LESKE: [00:12:48] Dodgy! so the biggest theme that I got from his letter, Ren, was actually around his frustration with the regulation in the market. And, you know, the GameStop saga, he had a big whinge about how can, you know, having a big whinge about Elon Musk and how regulators only give him a slap on the wrist for pushing up the share price on Twitter, humpin GameStop on Twitter, having a big whinge about a number of things that he sees as big issues that are with the market in terms of fraudulent behavior and pumping and dumping stocks. [00:13:24][36.3]

ALEC RENEHAN: [00:13:25] You know, it's getting to pretty dire straits when free market capitalists, billionaire investors, some of the people that hate regulation more than anyone else is arguing that. [00:13:38][12.4]

BRYCE LESKE: [00:13:39] That's what I was thinking when I was writing. And I'm just like he's trying to throw as many eyes away from his performance as possible. Let's put it on. [00:13:48][8.6]

ALEC RENEHAN: [00:13:48] No, I well, I think I've tried to hear about this offline. Like, I so wholeheartedly agree with him. Some of the stories coming out of the US about how underfunded their regulators are is just it's disgusting. Like I included an article in thought starters probably back in the last year, sometime last year, where the Department of Justice has so little money for enforcement left that sometimes they have to put out a memo saying the Department of Justice is targeting white collar crime or, you know, insider trading. But they just have to hope that that memo stops people doing anything. They don't have the money to actually target it. Like, how can you get into this situation and expect markets to function efficiently in bad behavior, not to start springing up. And I think that's one thing that we can be really proud of in Australia, but we really have to hold onto is a properly funded regulator. That has to be true. [00:14:49][61.3]

BRYCE LESKE: [00:14:50] But let's get back to the stocks. There's one that we want to call out that was in his letter. That is a classic example of, you know, what he's talking about. Well, it's not a classic example, but it raises a lot of eyebrows. And that is hometown international. The one hundred million dollar deli. Yeah. [00:15:07][17.2]

ALEC RENEHAN: [00:15:08] Yeah. This this is his example of where the hell is the regulator, where the hell is a cop on the beat. But it is a crazy story. I do want to give you an overview. [00:15:16][8.3]

BRYCE LESKE: [00:15:17] The overview is that there is a hometown international is a holding company that owns one single deli in rural New Jersey. [00:15:27][10.0]

ALEC RENEHAN: [00:15:28] publicly listed. [00:15:28][0.5]

BRYCE LESKE: [00:15:29] publicly listed on the stock market. [00:15:30][1.4]

ALEC RENEHAN: [00:15:30] On over the counter. But yeah. Publicly listed. [00:15:33][2.8]

BRYCE LESKE: [00:15:33] Yeah One Deli in rural New Jersey now we jumped on Tica, which is one of our favorite platforms to be using for this sort of information, by the way, if you would like to use it, it is in beta and you can get exclusive access by heading tika.com/equitymates. They have had revenue Ren over the last five or six years of seventy six thousand, fifty thousand, thirty-two thousand, twenty two thousand and fourteen thousand dollars. And yes, that is 14000, not 14 million. So incredibly small revenue. Its profit is it hasn't generated any profit. It's had the loss of one hundred and ninety thousand one hundred and four thousand one hundred and eight thousand one hundred and forty nine thousand. Then out of nowhere last year, loss of six hundred and thirty one thousand. What would you expect its market cap to be? [00:16:30][56.7]

ALEC RENEHAN: [00:16:32] Well, honestly, I wouldn't expect one rural deli to be listed, but a company averaging, well, its revenue, it has gone backward every year from seventy six k five years ago to fourteen K obviously covid interrupted but still. Oh you'd maybe pay like five times the revenue if that [00:16:54][22.5]

BRYCE LESKE: [00:16:55] five times the revenue. So you'd be looking at what you're about seventy five thousand there. [00:17:02][6.6]

ALEC RENEHAN: [00:17:02] Honestly, a company that is going backwards and losing that much money is worth you just wouldn't buy. [00:17:09][6.4]

BRYCE LESKE: [00:17:10] Or Ren you'd be surprised to know that it has a market cap of one hundred million dollars listed on the stock exchange. [00:17:16][6.6]

ALEC RENEHAN: [00:17:17] So those numbers were from Tica. I jumped on simply Wall Street because you know how when we we did the Veolia and Suez episode that had the valuation check, I was like, I wonder what simply Wall Street spits out for this valuation. It's just it's too it's just too it can't do it. Like it was just like massive red crosses on everything in there. Just, um. Yeah, just a sea of red. And it was like it is just significantly like out of the range. So yeah. It's pretty funny that it's got six employees. Yeah. This deli. [00:17:54][37.1]

BRYCE LESKE: [00:17:55] So I guess what Einhorn's calling out here is how is this even possible. [00:17:58][3.1]

ALEC RENEHAN: [00:17:58] Well how is it possible. [00:17:59][0.6]

BRYCE LESKE: [00:17:59] Yeah, well pump and dump what we were talking offline about potential for money laundering. [00:18:06][6.6]

ALEC RENEHAN: [00:18:06] Now we should say that this is all wildly speculative. No, we have no information about what it actually is not. [00:18:14][7.6]

BRYCE LESKE: [00:18:15] We have no idea. [00:18:15][0.5]

ALEC RENEHAN: [00:18:16] What's Wallwork having it like that? Yeah, it's like is could it be money laundering or something? But you would think if someone was money laundering, their revenue would be incredibly high because it's like they're bringing in all this cash business, recognizing it as revenue and then cleaning it through the business. So the fact that it did for ten grand in revenue, like. Yeah, again, doesn't make sense. [00:18:36][20.8]

BRYCE LESKE: [00:18:36] But anyway, that's it's a pretty interesting letter, if you would like to find it, as Alex said, had to readit and the security analysis page in there is a threat there that'll have it in there. Otherwise, you can I'm sure you can just Google it. [00:18:52][15.5]

ALEC RENEHAN: [00:18:52] You can just Google it. And I mean, some of them are private. Some of these letters are only meant to go to the investors, but then people just publish them online. Others are public and you can just get them from these funds website. But yeah, I just use readit. [00:19:07][15.0]

BRYCE LESKE: [00:19:14] Ren, we are back with the second letter, and this time it is from Ensemble Fund, not a billion. [00:19:21][6.6]

ALEC RENEHAN: [00:19:22] Not a fund Unheard of, to be honest, but I really like that letter. I thought there was some really interesting stuff in here, honestly, probably better than Einhorn's letter grade. But I guess, you know, when you're the smaller fund, you're fighting harder. You got to put that where you got to put that work in. So this fund ensemble fund has 53 million assets and 53 million dollars assets under management since starting in November 2015. They've returned seventeen and a half percent annually, which is beats the S&P. Five hundred in a pretty good time for the S&P 500. So full credit to them that after phase. Yeah, it should be if a fund is publishing its returns before the phase. That for me is massive. Wouldn't surprise me. Wouldn't suffer. Yeah, I know, but it's like a return to who then. Yeah. [00:20:11][49.4]

BRYCE LESKE: [00:20:12] Well, for them. All right, well let's keep going for this one. We'll have a chat about what they've been talking about from a reopening point of view. And then we'll have a bit of a case study on one of their stocks a little later on. [00:20:25][13.4]

ALEC RENEHAN: [00:20:25] Yeah, actually, a few good case studies in here. How's this for an opening line, though? If someone fell into a deep sleep on the 19th of February twenty twenty and woke up on the 31st of March, twenty twenty one that say the S&P 500 was up nineteen point seven two percent since they last check that portfolio. How crazy that. Yeah, it's not just that it recovered from the pandemic up twenty. It's had a good deal. [00:20:50][25.0]

BRYCE LESKE: [00:20:51] Yeah. Amazing year considering where it came from. [00:20:53][2.3]

ALEC RENEHAN: [00:20:53] Twenty percent a year is a far better than average. Yeah. [00:20:56][3.2]

BRYCE LESKE: [00:20:57] Well yeah. From the bottom if you even. Well yeah. [00:21:00][3.3]

ALEC RENEHAN: [00:21:01] Yeah, yeah it's crazy. [00:21:02][1.1]

BRYCE LESKE: [00:21:03] All right. So, they start by discussing that the world is, is reopening and I didn't know this but Goldman Sachs actually has a reopened basket. [00:21:11][8.4]

ALEC RENEHAN: [00:21:12] Yeah. Yeah. This is cool. [00:21:13][0.8]

BRYCE LESKE: [00:21:13] Yeah. Which is thirty-five US-listed stocks that they expect they being Goldman expect to benefit most from reopening. That basket was up to twenty-two percent. [00:21:24][11.0]

ALEC RENEHAN: [00:21:25] So it's like an index that tracks sentiment around reopening. Yeah. [00:21:29][3.9]

BRYCE LESKE: [00:21:29] Yeah, yeah. Well yeah. And that led me down a path. This is not to do with the letter but I had a bit of a research. [00:21:35][5.4]

ALEC RENEHAN: [00:21:35] that this is the beauty of letters. [00:21:36][1.2]

BRYCE LESKE: [00:21:38] The MSCI. I have an index that tracks re-opening expansion than the two others that come after that boom and bust. [00:21:47][8.9]

ALEC RENEHAN: [00:21:48] contraction. [00:21:48][0.0]

BRYCE LESKE: [00:21:48] contraction and then recession. And it's showing that, yeah, we're well and truly into reopening and just about to move into this expansion stage. And you can see how investors use that as a way to reweight portfolios. Right. And and that makes sense. You know, a lot of investors are now saying, oh, they're opening stocks. It's time to, you know, cyclical. They're Six Sigma. And that's not for us there. [00:22:13][24.8]

ALEC RENEHAN: [00:22:14] Well, I mean, now that you said it was enough for us, [00:22:17][2.1]

BRYCE LESKE: [00:22:17] too much risk for me of overtrading and, you know, my whole thing is just to write all these things out and just keep putting money into the market so I don't have enough time to be sitting down and thinking about whatever my opening stocks. What am I, expansion stocks? What am I recession stocks? Do you ? [00:22:33][16.1]

ALEC RENEHAN: [00:22:34] know? But the reason that I'm. Well, yeah, one is the overtrading thing and that a lot of this chat around, you know, rotate to cyclicals, rotate the defensive, rotate to growth. Now whatever it is, is it's coming from brokers a lot of the time and it's coming from people that have an incentive to get you trading. But more generally, quality shines through cycles. Unlike the best companies in the world over the long term, US like cycle agnostic, you know, they they do well for decades. Yeah. Yeah. [00:23:07][32.6]

BRYCE LESKE: [00:23:08] So yeah, that was interesting. Up twenty two percent. So the reopening is well and truly on. [00:23:12][4.0]

ALEC RENEHAN: [00:23:12] Yeah. And on the flip side, Goldman's stay at home basket, which is a similar index tracking staying at home stocks. I guess the Pelton's in the Zoom's the world was down two point four percent. So you can see that market expectations are really primed around vaccinations happening, the world opening up quickly. Well, the US opening up quickly and those companies to benefit and for the stay at home stocks to do not do as well. So, you know, if that plays out, that plays out. If it doesn't, then some of these companies will be rerated. But what I liked about this letter was there was, I think, three case. There were more than three case studies, but three things, three that we want to touch on here, um, three companies that we add more to this in particular, we admire one that we used to compete against, you know, in our old lives. Yes. Um, and is is an incredibly good company, like is. Knows what it is, knows what it's trying to execute and executes it. So you want to talk us through Costco being the retail whisperer that you are, [00:24:21][68.1]

BRYCE LESKE: [00:24:21] the retail whisperer. So the ensemble guys speak about Costco and I guess the perils of short termism and overestimating what's going to happen in the short term and applying that to your investment. So Costco was down 17 per cent between the 31st of December 2020 and the 8th of March 2021. And that was driven largely by the sell side analysts who saw Costco heading into some headwinds and facing a difficult year of comp sales, which in retail is really where you're comparing your sales this year to the same period last year that you want to see growth in that area. [00:25:04][42.4]

ALEC RENEHAN: [00:25:04] Yes, but I don't even think it was that they were heading into headwinds. I think it was just because of the comps. [00:25:12][7.9]

BRYCE LESKE: [00:25:13] Well, that's what I mean. As in they, the analysts saw Costco heading into comp sales headwind. Yeah, yeah, [00:25:19][6.4]

ALEC RENEHAN: [00:25:20] yeah, yeah. [00:25:20][0.4]

BRYCE LESKE: [00:25:21] But not not operational headwinds. Yeah, yeah. So, you know, and it all comes down to expectations in markets and analysts. So they presume that Costco wouldn't be able to able to compare to last year. So the thing to consider here with that is that the underlying value of Costco didn't change. In fact, it only got better during the pandemic. Their membership base increased by over seven percent, which actually equates to just shy of four million new members. And not only that was that their membership renewal rates were, you know, upwards of 90 percent. So not only were they attracting new customers, their retention rate was incredible. And so there was really no reason to consider or there was really no reason to think that Costco was going to have any issue with comparing. [00:26:14][53.0]

ALEC RENEHAN: [00:26:15] Yeah, you're speaking in the past tense, but this is something that's happening now. We are. Yeah. So the market sold Costco because they wouldn't be able to compare to last year's growth numbers and may even go backwards compared to last year's covid numbers. But I'm just having a look at Tica. Their revenue is up nine percent, which for a big box retailer, that's very huge, very unusual that Abda was up 23 percent. So they just had a cracking year last year and they may not be able to match that, but they're. Nothing's changed about the company, no less valuable, but the market sold them off 17 percent. Yeah, and for us, that's just a great example of where the market how the market looks at things and how you as a retail investor with a long term perspective, look at things can be different and how that can give you an advantage. [00:27:08][53.5]

BRYCE LESKE: [00:27:09] All right. So they spoke about Charles Schwab. Do you want to give us a spill of what happened there? [00:27:15][5.5]

ALEC RENEHAN: [00:27:15] Yeah, well, if if that if the Costco story is a story about short term thinking in markets, I guess the Charles Schwab story is a story about the benefits of long term thinking. So Charles Schwab is one of those big US multi, not multinational, but like multifaceted financial institutions. I guess, you know, they have a wealth management division. They have a bunch of different financial services, and then they also have a trading platform. And they have been incredibly disrupted by Robinhood. But Schwab made the decision to basically just cut phase in brokerage, spread that loss out across their business and really try and compete with Robin Hood. And the market has punish them for it over the years. But quietly working away in the background, despite a lot of market commentary about how Robin Hood's beating them, all this stuff they've used, the fact that they cut their face to just massively grow the assets under management, they now have six point nine dollars trillion dollars. Well, not all under management, but like assets in that business. And now as bond yields have started to increase, as there's talk of interest rates going up the market, like all of a sudden it clicked and Schwab was up over 23 percent in the quarter. And this this fund ensemble held them for a while and could, I guess, could sort of see that story playing out. And it did. But it's just a story of how, again, financial media and the markets have one perspective. But then, you know, attitudes changed. And, you know, the Schwab story is a story now where, you know, it's it's playing out. Yeah. [00:29:05][110.1]

BRYCE LESKE: [00:29:07] So it's a close out Ren another retail stock kind of annoyed about this because I did want to pitch this for the portfolio. But you can now there's going to be enough in here that we can just kind of it on. But anyway, it's our Home Depot. [00:29:21][14.3]

BRYCE LESKE: [00:29:23] however, you want to pronounce it. [00:29:24][1.0]

ALEC RENEHAN: [00:29:24] Look, pronunciation is definitely not something that people come to the show for. I'm pretty sure I just screwed up Charles Schwab. However, you pronounce that a number of times, so I wouldn't worry too much. [00:29:36][11.8]

BRYCE LESKE: [00:29:36] Charles Schwab. So this is a great story for those that are unaware of Home Depot is DPO is the largest home improvement retailer in the United States. Think Bunnings, but over in the US and ensemble take us through why they think it is in an incredibly good position to have a really good next sort of 10 years. They're currently facing some pretty good tailwinds which are supporting housing investment and the day I. Why do it yourself? Renovator, not me. [00:30:17][40.5]

ALEC RENEHAN: [00:30:18] Definitely not. [00:30:19][0.5]

BRYCE LESKE: [00:30:20] So those are the three that they mentioned. You know, there are a lot of millennials now who are getting into the housing market but also starting to get a bit of money and some inheritance in that transfer of wealth from their parents. [00:30:33][13.0]

ALEC RENEHAN: [00:30:33] Millennials are entering prime family formation, I think is the light [00:30:38][4.9]

BRYCE LESKE: [00:30:39] and good salary levels. [00:30:41][1.8]

ALEC RENEHAN: [00:30:41] Well, yeah, yes. It's like buy a house, settles down. And it's like and you're right in that sweet spot. [00:30:47][5.6]

BRYCE LESKE: [00:30:49] obviously very low-interest rate environment. And over in America, we're seeing huge fiscal stimulus from the government as well, pumping one point nine trillion in with potentially a lot more to come. So a lot of tailwinds that are supporting Home Depot when it comes to housing and DIY. But the company itself Ren pretty amazing. It has returned seventeen percent per year for the last 15 years. [00:31:15][26.4]

ALEC RENEHAN: [00:31:16] It's incredible. Wow. [00:31:17][0.7]

BRYCE LESKE: [00:31:17] Yeah. We love a company that is able to give great return on investment, invested capital and compound over a long period of time. We speak about that and this company is certainly one of them. They have had a return on invested capital of forty five percent, which again, pretty phenomenal. [00:31:33][16.0]

ALEC RENEHAN: [00:31:35] If you just invested in Home Depot and Bunnings, well, Wesfarmers, you would have done incredibly well for yourself. [00:31:40][5.9]

BRYCE LESKE: [00:31:41] You would have, yeah. So they go through a little bit about the business and where they're generating these sorts of returns. There are. Two sides to the company, there's that DIY side, which is the majority of their customers, but interestingly, there's another site, I guess, a market that they're servicing. And you think about what happens here at Bunnings. It's very similar. And it's that small contractor market traders who don't have their buying power to go straight to suppliers. However, they go to Home Depot to get all the equipment they need for the small jobs that they're doing. These customers only make up four percent of their market, their customer base, but generate 45 per cent of revenue. So, yeah, it's pretty interesting split there. [00:32:23][42.3]

ALEC RENEHAN: [00:32:24] I mean, yeah, it's pretty crazy. The flip side of that, if I was a competitor to Home Depot, I'd be like, you guys have all the retail mums and dads. They are. I'm just going to target that four percent of your customer base that makes up half your revenue. And if I can peel off even a percentage of them, that's going to have an outsized impact on you. [00:32:45][21.0]

BRYCE LESKE: [00:32:46] Yeah, it's funny you say that these guys on somewhere went out and spoke to a bunch of these small contractors and verbatim from them was that they have one of the big competitors for Home Depot, Lowe's. And they you know, these contractors have said they have they would drive past Lowe's to get to a Home Depot. [00:33:03][17.2]

ALEC RENEHAN: [00:33:03] Yeah. But they didn't say they wouldn't drive past an Alex discount furniture. I mean, I definitely the discount builders, but no, I mean, for me, it's more like do I like do Lowe's and the Home Depot's suppliers are just cut out the retail step and just try and supply the contractors and stuff directly? I'm not saying it's that it's a thing that. Yeah, but I'm saying that it's obviously the most valuable part of their business. [00:33:38][34.6]

BRYCE LESKE: [00:33:38] Yeah. They also talk about the fact that Home Depot has a very strong online capability, which we know is incredibly important. You'd think that would bring in the threat of Amazon. But due to the nature of DIY products and building products, there's a lot that is ordered online and picked up in-store, which is something that Amazon isn't able to really do. So on some, you don't see Amazon as a threat, but look pretty interesting business within one that they see as benefiting from some huge tailwinds that over the next 10 years they think is what I think. They finished the last line saying it's a promising decade ahead. [00:34:14][36.0]

ALEC RENEHAN: [00:34:15] Yeah, and that's the interesting thing, because Home Depot, we keep screwing up the pronunciation of this like Home Depot started as it was like a microcap that not a lot of people covering. And you said, what, average, 17 percent a year over the last 15 years. So I had to look at simply Wall Street, which has at 35 percent overvalued. And it's got an aggregation of a whole bunch of analyst estimates. It's a very heavily covid stock. Twenty nine analysts have put projections on the line for the next couple of years, six point one percent is the forecast annual earnings growth for the next three years. So obviously, as it sort of matures and gets to that scale, you just can't expect that growth rate to continue. But I think it becomes a story of, you know, managing costs and finding strategic opportunities for growth. [00:35:12][56.5]

BRYCE LESKE: [00:35:12] So, yeah. And these guys talk about that in that, you know, they're getting a lot of growth from within. They're not building a whole bunch of new stores. They're investing in existing stores, investing in technology, investing in their supply chain. And for a company that's giving a return on invested capital of forty five per cent, I mean, you take that, you [00:35:30][18.3]

ALEC RENEHAN: [00:35:30] would definitely take that. And I think that's the same in the story of Bunnings. You know, Bunnings continues to find ways to just become a more valuable company without having to open up hate small stores or I mean, it did try to go to the UK. [00:35:44][13.8]

BRYCE LESKE: [00:35:48] Well Yeah, that brings us to the end of our investor letter conversation. But stick around because we are just about to have a new segment called Crypto Corner. We know there's a lot going on in the space at the moment. We're not going to talk price as usual. We're not going to talk speculation. We want to be unpacking a bit more about what's actually going on in the blockchain space. And we're going to be bringing in some experts to help us do that. It's just a five-minute segment. [00:36:14][25.8]

ALEC RENEHAN: [00:36:15] So we're not we did the week. We're not going to do a full episode on it. We're not that into it. But we are curious. Yes or crypto curious. And we do we are fascinated to hear about it. So rather than us talking about it, we've got Tracey, who's going to talk to us about the Coinbase IPO and what that means. Yes. [00:36:33][17.9]

BRYCE LESKE: [00:36:33] So this is Crypto Corner brought to you by Bamboo and Micro Investing App that allows you to invest in precious metals, gold and silver, as well as digital assets like Bitcoin and Ethereum. But let's give Tracy a calll to, as Ren said here. [00:36:49][16.5]

ALEC RENEHAN: [00:36:52] So we're now joined by Tracy from Bamboo. Tracy, thanks for joining us. [00:36:57][4.1]

TRACY: [00:36:57] No problem. Happy to be here. [00:36:58][1.2]

ALEC RENEHAN: [00:36:59] Now, Tracy. We've seen a big story come out of the US around Coinbase, so they recently went public. Can you explain to us, I guess, you know, what happened and maybe the significance of the IPO? [00:37:14][14.7]

TRACY: [00:37:15] Yeah, look, this has been described as a watershed moment for the crypto industry. You know, crypto arrives mainstream. So, yeah, Coinbase, they've gained notoriety in the last few weeks as the biggest platform in exchange in the US. So they have gone public on the Nasdaq and that has been some pretty big, big news. So they are a crypto exchange, but they are centralized. And I think the point here to make is that in crypto, we're very focused on decentralization. So we look towards what you'd call adex. So a Coinbase is a centralized exchange and a lot of us crypto nerds look to use ADEX, which is a decentralized exchange. [00:37:57][41.1]

BRYCE LESKE: [00:37:58] So what we'll cover in the next five minutes is really what is ADEX DEX or decentralized exchange that a lot of us noncrypto nerds are hearing about how it differs from traditional exchanges such as Coinbase and then what are perhaps some popular decs exchanges. So what is ADEX, Tracy? [00:38:19][20.5]

TRACY: [00:38:19] As as I mentioned and as you pointed out, there is a decentralized exchange. So this kind of decentralized exchange removes that third party and allows users to send cryptocurrency directly to each other. So this market's built directly onto the blockchain. And that way traders can independently manage their funds, including the storage and the operation. So it's important to note here that it's managed by not a centralized exchange. So no longer need for that middleman, I guess, as you'd say. And most of these decentralized exchanges are built on a theory. So going back to a centralized exchange, it's worth noting that these exchanges are managed by a company or a private person kind of focused on generating profit for the company. So in that in that sense, I guess you're receiving a lot of fees and these can vary wildly from platform to platform. So they have got complete control of the centralized exchange, has complete control of this operation. So they also keep your coins there. So ADEX is completely independent from that. And if I just jump into a couple of pros for these debt is security of your assets because it's decentralized. The exchanges don't hold your assets. You're kind of moving those yourself. There's also no need for personal identification for the accounts here. So you don't need to worry about someone stealing your information then there's no KYC involved. Another point is centralized exchanges can charge higher fees on the decks. You've kind of got lower fees there, so there's no centralized hub. [00:40:00][100.4]

ALEC RENEHAN: [00:40:01] So I'm just trying to think of the analogy to stocks where, you know, brokers take your buy or sell order to to the market and then, you know, the market matches up with a buy or sell order if it's just price and trading crypto on a Ethereum based decentralized exchange, like how a buy and sell orders, like how does the market actually function? [00:40:23][22.1]

TRACY: [00:40:24] Yeah, it's quite similar. And I think we kind of depending on how far down the rabbit hole some of the listeners have been, but they don't. I'm sure you swap Souci Swap Kaleeba, those bigger ones, pancake, which kind of sounds silly, as I'm saying them out loud. But I mean, Yuni swaps massively swap is the biggest and kind of the first one that follows that path along. So just to explain what I would do then, so you jump onto one of these exchanges, you would then connect your wallet or you'll have minimums, for example. So you connect your wallet and whatever you've got on there, it's the very easy interface. You pick the coin that you want to swap with the other coin and you move those around that way. So it's really easy. And I think the user experience and on all of these is very different from traditional exchanges. It's kind of, for lack of a better word, is dumbed down a little bit. And there are a lot easier to use [00:41:20][55.7]

BRYCE LESKE: [00:41:20] If the benefits are there compared to a traditional exchange, particularly for those who are, I guess, nutting out a bit on crypto. Why are these not as big as the centralized exchanges that were that we're seeing? [00:41:32][12.0]

TRACY: [00:41:34] Well, the centralized exchanges, I guess you can trade. I mean, you can do you can trade on those and they are more traditional in effect, that bigger as more liquidity, I guess. Yeah, liquidity is a big drawback for the decks. And then I think liquidity probably be the. Biggest one there. [00:41:52][17.8]

ALEC RENEHAN: [00:41:52] So you mentioned that central centralized exchanges have a profit motive and they obviously do. The Coinbase founder is now a billionaire. So full credit [00:42:03][10.9]

TRACY: [00:42:05] done very well. [00:42:05][0.6]

ALEC RENEHAN: [00:42:06] But, you know, there are a number of Dex's, but surely they like but they're not set up as not for profits or charities like these. These companies must have a profit motive as well. So unless I'm wrong, then please tell me. But I guess, how do they make money? [00:42:21][14.4]

TRACY: [00:42:21] Yeah, absolutely. And look, I think something I heard the other day, a unique swap, which I mentioned, I mean, their annual business hit six point five billion and they've got 12 staff. So, yeah, that's pretty amazing. And I think that's why if you looked at this world of Dex's 12, 18 months ago, there's maybe three and there's literally hundreds now. You know, there's so many. So it's lucrative business. Otherwise they wouldn't be popping up like they are. And I think a lot of them, too, put the onus back on the community. I think that's why they are allowed. A lot of that goes back into market. A lot of it goes back into keeping fees, lowering transaction fees lower. So it really plays into that whole ethos of why cryptocurrency and bitcoin is around. [00:43:03][41.9]

ALEC RENEHAN: [00:43:04] Tracy, We really appreciate your time. It's definitely something that I hadn't heard of before. I'm not sure if you had Bryce Dex's final question for, you know, right now we're talking about Dex's in the crypto space. Should we expect to see a conversation about Dex's in like other assets, like in the share market? [00:43:04][0.0]

TRACY: [00:43:28] Not in the near term? I wouldn't think so. I mean, look, this is all come along because of the huge interest in this DFI sector and how it's growing so quickly. But I wouldn't see that happening in the near term. [00:43:38][10.0]

BRYCE LESKE: [00:43:39] Yeah, well, Tracy, we do appreciate your time. The first crypto corner on equity markets. If you would be so willing as to come back on in a couple of weeks, we would very much appreciate that to give us another update on what is going on in the crypto space, because there's certainly a lot to keep up with. And Ren and I are by no means an expert in or don't even keep up with it. [00:44:03][23.9]

ALEC RENEHAN: [00:44:03] Yeah, that's why we've got you trust, right? [00:44:06][2.5]

TRACY: [00:44:06] No, not at all. Looking forward to it. I mean, look at so many things to cover. Who knows what I'll do in five minutes. Something interesting, that's for sure. [00:44:14][7.9]

ALEC RENEHAN: [00:44:15] But until then, if you are interested in getting started on your own crypto journey, head to getbamboo.io or download the bamboo app. Yep, it's a micro-investing app for crypto and precious metals. [00:44:29][14.0]

BRYCE LESKE: [00:44:29] Nice. Well, thank you, Tracy. Have a great day and we'll catch up in a couple of weeks. We'll Ren. That brings us to the end of the episode. As always, it is fun to chat stocks and a tiny, tiny, tiny bit of crypto. [00:44:41][11.8]

ALEC RENEHAN: [00:44:42] That's just like Bryce. 99 percent stocks, one percent crypto. That's it. [00:44:47][5.0]

BRYCE LESKE: [00:44:48] So we'll pick it up next week, as always. But until then, I'll probably see you in a couple of minutes. [00:44:55][7.2]

ALEC RENEHAN: [00:44:56] with sitting together. You know that cave in a few minutes. [00:45:04][7.4]

Speaker 4: [00:45:04] Investing podcast is a product of equity, makes media pull information in. This podcast is for education and entertainment purposes only. [00:45:11][6.8]

ALEC RENEHAN: [00:46:03] Bryce, we three policies here at equity mates, what's number one, we hate fees and we love brands that are finding ways to reduce fees for everyday customers. And that's why we're here today to talk about after pay, who in 2020 saved Australian customers saved 110 million dollars in consumer fees and interests by using after pay rather than traditional credit cards. [00:46:28][25.3]

BRYCE LESKE: [00:46:29] That is right, Ren. It's been a great investment for me. And after pay is changing the way we pay for the better by helping us all manage our money and to take back control. [00:46:38][8.8]

ALEC RENEHAN: [00:46:38] you just had to slip the investment thing in. [00:46:40][2.1]

BRYCE LESKE: [00:46:42] Everyone knows I love afterpay. [00:46:42][0.7]

ALEC RENEHAN: [00:46:44] Yeah, well, look, you may not be able to love afterpay as much as Bryce, but you may love to pay because you can use it online or in-store. And it's really easy to get started. Just head to afterpay.com to sign up or download the afterpay app from your app store or pay better choose afterpay. [00:47:03][19.3]

BRYCE LESKE: [00:47:03] Late fees, transaction limits, and eligibility criteria apply. Visit aftepay.com for more details. [00:47:03][0.0]

[2603.6]

More About

Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

Get the latest

Receive regular updates from our podcast teams, straight to your inbox.

The Equity Mates email keeps you informed and entertained with what's going on in business and markets
The perfect compliment to our Get Started Investing podcast series. Every week we’ll break down one key component of the world of finance to help you get started on your investing journey. This email is perfect for beginner investors or for those that want a refresher on some key investing terms and concepts.
The world of cryptocurrencies is a fascinating part of the investing universe these days. Questions abound about the future of the currencies themselves – Bitcoin, Ethereum etc. – and the use cases of the underlying blockchain technology. For those investing in crypto or interested in learning more about this corner of the market, we’re featuring some of the most interesting content we’ve come across in this weekly email.