Investing Unscripted Podcast 113: July Mailbag

Note: All transcripts are edited for clarity. We may earn commissions from some (not all) links. Thanks for the scratch.

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​Jason Hall: Hey everybody. Welcome back to Investing Unscripted, where we answer the hard questions about investing. I'm Jason Hall joined as usual by my very good friend. The voice of the people, Jeff Santoro. Hey Jeff. Hey, how are you? I'm good. I'm a, I'm good. This is our second take of this intro. [00:01:00] We're actually doing the thing that we say that we do.

We're literally answering the questions. This is, this is our, uh, our July mailbag. 

Jeff Santoro: Yeah. This is our, our one episode a month where we actually do the thing we say we're going to do at the top of every episode. We're going to answer some questions. 

Jason Hall: We are. And we got some good questions. Appreciate everybody getting them into us.

Some very relevant, relevant ones to some things that are going on right now, like with CrowdStrike. But I, I love the questions that we have. Um, some stock specific ones, some metrics that we're going to talk about. Some different ways to think about investing and looking for better opportunities.

So it's a good mix. So I'm excited to, to talk through these, these questions today. 

Jeff Santoro: Yeah, good variety. And. What I noticed about them as I went back to put them together is people did what we asked them to do, which is they sent them to us all throughout the past month. So, if you're listening to this and you think to yourself, oh, I'd like to ask a question that would get answered on the next month's mailbag anytime email us you can send us an email at [email protected].

You can. DM us on Twitter. If you get our newsletter, you should, you can just reply to the newsletter itself and we'll get, get it that way. Uh, if you don't get our newsletter, you can go to Investing Unscripted. com and sign up right now. You get a transcript of the show and a, and a weekend newsletter posts by either one of us.

But yeah, we got these all throughout the month. Good variety. 

Jason Hall: There's even more, there's more ways to Jeff. You could actually comment. If you read our newsletter on the website, you can comment there. You can give us questions on Spotify. If you use the Spotify app, you can ask us questions there. There are lots of ways you can get us questions.

This is not a live radio call in show. So asynchronous communication, send us the questions when you have them. Everybody that did, like you said, I really appreciate, appreciate that. Before we answer the questions, Jeff, can I, can I put a call out for some, maybe ratings and reviews? Yes. It's been a while. Has been a while. It's been a while since we asked we've, we've been nice. So apparently we have to start asking again. So whether you're on Spotify, you're on Apple [00:03:00] podcasts, one of the other formats out there, I will tell you guys, it's really, it's One of the easiest, simplest ways that you can help us because the better our rating, the more reviews we have, the more likely we are to show up for somebody that's searching for an investing or personal finance podcast.

It actually does make a difference in the algorithm. So you can do your little part to help us out. Without sending us money. You can send us money too. Yeah, that's fine. Money. Yeah, we'll take money. And we've actually made it easier. You can go sign up for, for our portfolio. We haven't talked about it a while, but our savvy trader portfolio, I think it's doing okay.

It's doing decent. We've got another stock pick that. It's my month. I'm going to be picking a stock for that. I'm here probably early next week. I'll make the decision. I've got a couple and we'll make a video that we'll post private video that you'll be able to, to watch about our thought process, other videos as we've picked stocks there, and there's a small community where we engage in.

Uh, we can talk about the stocks in there too. So it's a little more direct stock related kind of way. And if you're feeling [00:04:00] generous and you want to give money to us, it's an easy way to do it. Absolutely. Shall we dive 

Jeff Santoro: in? Let's do it. All right. First. Question we got was from Ryan and he sent this to us on Twitter.

A question for the mailbag. I have been noticing in my five short years of investing in individual stocks that even great companies hit stumbling blocks and see their valuations drop tremendous amounts, but in the long run, recover, Once the dust settles and those turn out to be really excellent buying opportunities, see the recent examples of meta alphabet, Netflix, et cetera, I think we could be witnessing such a scenario with CrowdStrike in the short term due to the recent debacle with the update that caused massive disruptions globally.

I think given that it wasn't an actual virus, but a rather a broken process. Within the push of code to production that maybe wasn't tested or at least not tested. Well, I think they will eventually be forgiven and return to greatness. So my question is, when you see this kind of a downturn and negative sentiment about a company you believe is destined for further greatness, do you typically wait a few [00:05:00] quarters to see if you are correct with your assessment before jumping in?

In, in the case of CrowdStrike, I believe this could impact sales in the near term and potentially cause some turnover. So would you be eyeing metrics around sales, net dollar retention, et cetera, to assess whether you are correct in your assumptions? 

Jason Hall: This is, this is a lot to unpack. We're actually, you may have heard it.

Before this episode comes out, depending on if and when we do it, but Jeff and I've talked about doing a rough cut for this one because we kind of need to go free flowing and stream of consciousness on it. I'll start with the idea of what's, of what Ryan's talking about before I get into any specifics of CrowdStrike, because I think that's really useful as a starting point because we have to differentiate what's happening with CrowdStrike between the sell offs of meta and meta.

And Alphabet and Netflix, for example. So we'll start with Metta, Metta's business results. The revenue especially took a big hit because of a [00:06:00] cyclical shift in the ad market. Ad buyers pulled back. CPM price is the actual per ad price. They fell. Everywhere that has ad based businesses saw that at the same time, Metta was dealing with what a lot of other social media platforms were dealing with, which was the transition back for away from kind of the pandemic mentality to doing more stuff and, you know, meet space in the real world.

And so engagement was lower. Right. And, and what we saw with meta that shift, go ahead, Jeff. And on top 

Jeff Santoro: of that, they were lighting cash on fire at an alarming rate in the pursuit of the metaverse. So that was like, yeah, no, that's exactly right. I was 

Jason Hall: going to say, but I wanted to differentiate those two. So there's the revenue rate that was kind of getting squeezed a little because of the cyclical downturn and their profits were getting hurt.

More than anything because of the, yeah, they were earning less money on their ads, but also the amount of money that they've continued to incinerate that hasn't stopped. They continue to spend lots of money on that. Right? So that [00:07:00] is business was actually completely fine. There was a cyclical turn in the ad market corresponding with everything that was going on with, with the, the world broadly.

And, and now their engagement numbers are better and CPM rates are up and they're making massive, massive profits. Netflix, maybe a little bit of the same thing, but also this massive amount of competition that we saw in, in streaming. Everybody was running out to Produce a streaming product. The thing that's really supercharged Netflix though, was they made an active decision with the ad tier, right?

That is a thing that substantially has uplifted their business. So they made a choice to pivot in a way that has materially benefited the bottom line. And in a massive way, right? Massive way. I don't even talk about Alphabet. We can just use those two. Now the difference with CrowdStrike, and I want to use kind of a more extreme example but, but one that.

I think it's still there's a little bit of relevance here is we've seen CrowdStrike's growth rates come [00:08:00] down, but they're still extremely high in the short term with this issue with this debacle around their deployment of this update. They screwed up big, right? Massively and interrupted billions and billions of dollars of their customers commerce.

And a lot of them like Delta airlines and sure there's probably yeah, at the end of the day, Delta is, you know, internal technology team is on the hook here for not being able to have the capacity to get their systems back online. But that's a lot of money that this is going to hit Delta in one of their peak times during the summer, right?

That kind of reputational harm. Could have much bigger implications for crowd strikes. This is a nascent industry, right? There's a lot of companies that aren't even using anybody for like this kind of endpoint protection, like in the same way. And that could be a S that could substantially undercut.

Their, their growth going forward. I mean, I think we're missing that, but the, the comparison that I wanted to make [00:09:00] is something that's in the retail business and it's lumber liquidators. You go back close to a decade ago, they had these issues with Chinese manufactured products, some of their composite flooring, there was concerns that it.

Caused cancer because high levels of, formaldehyde, formaldehyde, like the levels of formaldehyde were supposedly like so high that could potentially cause cancer. Now, a lot of that was more or less debunked, but like the reputate, like the reputational harm to this business was so substantial.

So The stock price is still down like 90 to 95%. They may go bankrupt now for other reasons, but like it all got undermined because of some decisions they made about their buying and not vetting products. And concerns about the health of those products, undermining consumer, uh, confidence in that business that a decade later, the business has not recovered from.

So, I mean, that's an extreme example and I [00:10:00] don't think CrowdStrike is going to be close to that, but I'm just saying we can't conflate this. What seems like a little blip to something that's a non issue that may be much bigger than we think. 

Jeff Santoro: Yeah, I think the, I agree with you. The way that the question's framed in comparing this to other stocks falling for non shoot yourself in the foot kind of reasons, Yeah, yeah.

is not a good comparison. And I think those can be wonderful buying opportunities if you are smart enough slash savvy enough to See through the short term pain. I was never just use meta as an example. I was never a meta fan I don't want to own it I never will own it the sentiment around that company back before they kind of turn things around with Their expenses getting their expenses in line was pretty bad And I that's that's one of the reasons I picked it in the un portfolio in last year's Contest because I really thought they were gonna continue to struggle And it turns out they had the ability to basically flip a switch and [00:11:00] fix a lot of the issues.

And that's what they did. And the stock's up several hundred percent since then, there is a 

Jason Hall: good chance if you listen to this podcast, there's a good chance that you use a Facebook product every day of your life. Right. So that, you know, that to me is like a measure of potential strength for a business.

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Jeff Santoro: So here's kind of what I'm thinking about. Let's continue the conversation as it pertains specifically to CrowdStrike. The comparison I keep coming back to is Chipotle when it had the health issues that got a lot of people sick. Because if you think about it, both of these were self, you know, self imposed challenges.

When you, when it comes down to it. Yeah. You know, if you're going to let CrowdStrike be the singular cybersecurity software that you run, and it has the ability to shut your machine down with a bad update, you have to have an incredible amount of trust in the company. And up until now, I don't know of another breach of that trust.

You can understand why people placed it there. And I think when you're going to go out and get food and you expect to not be sick and there's a [00:14:00] level of trust there, right? And in retrospect, 2020 hindsight, the best time ever to buy Chipotle stock was right when all that, those people were getting sick.

And it looked like that was that like 

Jason Hall: 2016, something like that. 

Jeff Santoro: So part of me thinks. That's a possible scenario that that could that could shake out here I think I think that's more likely than not. I think they'll be fine in the long run Now the question is how long if trust has been lost and therefore so has revenue I I don't know how long it takes to get that back the bigger question I have around is actually, have is around actually the valuation of CrowdStrike currently. Because even after falling 30 percent over the last week or so, it's still an expensive stock. So. Yeah. I. I think that has to be something as an investor that you consider, [00:15:00] because my thought after the first day when it was down 13%, I think, was, oh, this might be a buying opportunity.

I went and looked and I was like, oh, it's as expensive as it was on like June 3rd, like, and then the second day actually did knock it back to kind of I think where it was at like the beginning of the year. I think it's only up like 3%. year to date now. So that's a pretty significant haircut. But still like as of today, because I happen to look again it's trading for, I, I have a, I have it as enterprise value to sales, which is close to price to, uh, price to sales of still 19 times.

So it's not like it's, you know, trading for some low, low multiple. And I just don't know if this will be like a slow bleed where it's less a month from now, it's less three months from now, it's less six months from now. You know, a good slash bad thing is we're heading into earning season and they report near the end of it.

So we'll get updated numbers then. And I'm, I'm sure we'll get more commentary. And the last thing I want to say [00:16:00] One thing I read in an article recent, uh, today or yesterday was they have started to management has started to put out into the world, the things they will do to ensure this doesn't happen again, like, so for one, for example, they said they're not going to push updates out to everyone all at once anymore, which seems so obvious.

I'm not sure why they didn't, why they ever did that. Um, but basically roll it out. They call it actually, um, Something canary something like canary in the coal mine, you know, send it out to some people see if it's okay Send it out to more see if it's okay But that I bring that up because I'm 

Jason Hall: one of the customers that gets them first Do I get a do I get a discount?

I hope so if I'm the canary do I get the special? Well, 

Jeff Santoro: but you would think you know, the people who get it first are not Airlines and hospitals, you know? Yeah. But to me, so I guess the reason I bring that up is I think that's what you want to hear from management. If you're a customer debating whether you want to switch vendors, you know, you want to hear like, okay, you, [00:17:00] you screwed the pooch here.

What, what are you going to do to make sure this doesn't happen again? Right. And the last thing I'll say is I did have a conversation with someone I know who works for a competing company. And the first thing This person said to me when I asked him what he thought was, dude, they're the leader.

Like that was the very first thing out of his mouth. And he works for a competitor. He's like, it's not even a question. They are the leader in the industry. Right. And I think that that goes a long way. And I think that's going to make it harder to. You know, damage the company's reputation to a point where it can't come back.

So let's answer the question about what do you do to me? It's about, I think it's all about position sizing and everything with this. So like I could understand, I could see a scenario where you say, I'm just waiting to see what happens. I could see a scenario where you sell. 

Jason Hall: Yeah. I mean, that's exactly right.

Because zero is a position size. 

Jeff Santoro: Yeah. And I could also see a scenario where you go, you know what? I'm not sure. But I'm willing to bet another [00:18:00] half a percent of my portfolio that this is going to turn around, you know, I, so I think it depends like how much of of your portfolio crowd strike is like, if it's like a, if it's already like 10 percent of your invested wealth, you know, I don't know that I'd be adding.

But, you know, as for me, it's, you know, all my stocks are a small percentage. So I was thinking about maybe adding a little bit and just sort of like a hedge in case this really was just a short term blip. That's fine. But not so much that if it drops another 30%, I'm going to be, um, I think that's the way I would approach it.

If I was going to make a decision, it would probably be around like how much of my portfolio is already crowd strike stock. And then also, how much do I want to bet, so to speak on this being A shorter term challenge versus a long term one. 

Jason Hall: Yeah, I think that's exactly right. Broadly with, with a little bit of nuance here too, because I think the easy knee jerk it was, is for anybody that's bullish on the businesses to buy.

Right. And I kind of thought the [00:19:00] same thing too. And then I slowed my process. I put my process in place, right. I went through my framework, which a big part of my framework is If I decide to buy a stock today, I'm not allowed to like, it's, it's one of the fuel. It's not completely hard and fast, but in this sort of scenario, I absolutely throw in that, you know, I've got to wait at least a market day or maybe two before I act because you're never going to beat the smart money, right?

Number one. And as we saw, you know, first day, this was down, I think it closed down maybe right around 10%. And then the second day it was down like 11 or 12 percent from that drop. So it was like a 22 or 23 percent drop in total between those, those two days. And it's down about a third from, from the high this year.

So generally patience is a more valuable approach for us, individual retail investors than trying to beat somebody else to hit the sell or the buy button. And it gives you time to think through the greater implications. And for this one, part of my thought process has been, okay, so what are [00:20:00] the kind of near term threats?

And the near term threats is you'll lose some big customers or you lose some big deals. Um, the longer term implications is that snowballs and, you know, you've eroded customer confidence. In a way that your growth rates get cut down substantially. Because like you said, it's still around 20 times sales.

There's still a ton of growth priced in, even with. The sell off that we've seen. So the expectations are generally still bullish that the business is going to keep growing at a pretty high rate. I'm, I'm willing to, and again, it gets back to position sizing. You know, this was probably 1. 8 percent of my portfolio now on a cost basis.

It's around 1 percent of my cost basis. I'm okay right now to let this play out a little more and to get some business based evidence. Is this impacting? Um, their sales results, [00:21:00] right? Are they going to have to start discounting? Is that going to affect their margins? Because customers, I've got a friend that's in cyber security.

Um, and he's a, you know, he's a decision maker on these sorts of deals and the organization that he works for went with a competitor. They went with Sentinel 1 and price was part of it. And how many customers are going to go to them and say, look, we appreciate the technical advantages, but we're just not convinced that this price that Sentinel one or Microsoft's competing product is not going to be good enough for what we need.

So I want to see some financial evidence. So we're not gonna really get much of that this quarter. They're going to sell a good story. Right? I think their quarter ended at the end of June. Maybe. I don't think it ends. Yeah. I think they're, 

Jeff Santoro: they're a June 30th. I think 

Jason Hall: so. So we won't really even see any of the financial implications won't be any of that period until, you know, another quarter from now.

So, well, it's going to be on, go ahead. 

Jeff Santoro: I was going to say, so I'm, I know [00:22:00] we won't necessarily see the results in what they report cause it'll be at those numbers are static from before this happened, but so let's get to the part of the question where he asks what to look for. So number one, I'm looking for, I want to hear management talk about this a lot.

Okay. 

Jason Hall: Yeah, 

Jeff Santoro: I want to hear and I want to hear a lot of I'm sorry's, you know, I 

Jason Hall: Jeff I'll say this I think it's important because we've seen that I don't know if it was their their CTO or CIO He 

Jeff Santoro: had his statement was better. But George Kurtz was a little bit like hey wasn't a cyber attack Yeah, 

Jason Hall: yeah, but my greater point is he said we screwed up, right?

This was our mistake that that message doesn't get pushed out past their legal review team. If. If they have substantial, like, legal risk by them admitting responsibility. Right? So that reassures me to a certain extent, that 

Jeff Santoro: like [00:23:00] Agreed. But I, I wanna hear more of it, and I wanna hear, I wanna hear some color on like, What phone calls have you been having, you know, like who's, who has called, not who specifically, but like, have, have vendors been calling and that, you know, the analysts are going to ask those questions.

Um, as it pertains to the numbers, I mean, you hit on some of them, but this is what I'm going to be looking for. Like when we do get solid numbers. So that might have to be in that when the next quarter gets reported, not the one that we're going to get in a few weeks. Um, certainly. Yeah. All the normal stuff revenue, but I want to look at net dollar retention rate because you could see a scenario where someone had eight modules with CrowdStrike and maybe they go, you know what, let me, let me roll back to four and I'll get this other stuff covered by someone else just so I have less exposure to one business.

Right? Um, And then, you know, new customer growth, because obviously if someone was considering CrowdStrike at another vendor last week, maybe this helps make them make their decision. 

Jason Hall: I highlighted that on a video that we [00:24:00] put out on our YouTube channel a couple of weeks ago, like it's not just that they're growing existing relationships.

They're growing new customer relationships. Both are growing at very 

Jeff Santoro: high rates. Yeah. And then the last thing is margins. You know, you hit, you mentioned that in terms of. You know, they might have to say to some existing customers who are up for renewal, like, Hey, listen, we screwed up, come back for, you know, 80 cents on the dollar or something like that, um, just to kind of sweeten the pot.

So, all right, we've done about 20 minutes on CrowdStrike, so we can probably have 

Jason Hall: the good news Tuesday, like this basic theme are, I think maybe it's our last question is got some similar things that we'll talk about to, 

Jeff Santoro: uh, let's go to the next question. This came from Beau via email. And he says, uh, why is the stock market compressed into a six and a half hour day?

Yet we have extended hours and some platforms that trade 24 seven. Wouldn't a slightly longer day of eight hours be better and slightly control volatility, especially during the earning season, since most report after hours. What are your [00:25:00] thoughts? 

Jason Hall: No, I don't, I don't think expanded hours would necessarily help a lot with that.

Um, and the reason why is that the people that would benefit from expanded hours are mostly retail individual investors who are looking for the ability to trade when they're not at work. The vast majority of the volume. Is, is, is not coming from us, right? So I think that's important to remember that I don't think it would necessarily, maybe it would a little bit, but I don't know, necessarily know that it would, that it would matter a lot.

I think there'd be 

Jeff Santoro: massive liquidity issues if we had a longer day or, or 24, seven trading, you know, you have to think if you're, you know, and I think it would lead to like, probably there has to be 

Jason Hall: two parties to pull off the trade, right? 

Jeff Santoro: The first thing that jumped out to me is. Um, there's been so many frictions removed from investing and I think largely they've been good.

Not having to pay commissions to trade, being able to buy fractional shares, being able to do it easily on any device, but that has [00:26:00] also made it very easy to gamble in the stock market and, or conflate investing with speculating and gambling. And I think the longer you, you extend the trading probably makes that more likely.

And I also think too, like, you know, there's going to be stories about some, someone who tries to buy, you know, uh, and a liquid stock, even when the market's in its normal hours at like two in the morning, clicks the button, some weird spike happens. They pay six times what they were thinking they were going to pay because they didn't do it.

Jason Hall: That's why, that's why I think every brokerage that supports any sort of after hours or before like non market hours trading, they force you to use. Limit orders. So you don't get hosed by somebody that knows idiots do that and they take advantage. I shouldn't say idiots, but people that just don't have the knowledge of how that can work.

So yeah, I mean, sure. Maybe it might help some, but I don't, I, yeah, I don't, I [00:27:00] don't, I don't know that it would help with volatility or really be as beneficial as most people think. 

Jeff Santoro: Yeah. I would not be surprised if it happened just because that seems to be. Yeah. Um, I would hate to see it personally, like just, uh, again, this is my perspective as someone who spends a lot of time thinking about the stocks in the stock market.

Like I, I like the fact that I don't have to do it from four o'clock on Friday to nine 30 on Monday. And um, you know, it's like, it's, it's nice to be able to turn my brain off and I know that like, all right, everything's exactly where I left it until I come back on Monday. 

Jason Hall: Well, one other thing too, a lot of people don't know is like, you, You're, you're not necessarily just trading when you buy a NASDAQ stock on the NASDAQ exchange or on the New York Stock Exchange.

There are market makers. That these broker dealers that your online brokerage is through often work with, and they're usually hedge funds, um, that that's part of their business is like, you might buy a stock for 10 and they make the market. Right. And maybe you're buying it from their [00:28:00] inventory. Because there's not necessarily a seller lined up on the other side.

But they might have paid 9 and 99. 4 cents for that stock. Right. So that's, even though there's no trading fees. They're profiting from it. So I think every time the market expands a little bit, the market makers are the ones that are going to find a way to profit from it. And I don't necessarily know that it's going to be super beneficial for retail investors.

Jeff Santoro: Yeah. Agreed. All right. Next email comes from Andrew, uh, who sent next question comes from Andrew, who sent it to us via email. And Andrew says you've had a good amount of coverage on SoFi recently. Jason specifically has been pounding the table for a few months now. I'm curious if you have an opinion on Ally also.

Seems like a similar business with a primarily online presence, but not entirely sure. Maybe you could share thoughts on the two businesses and the two stocks. So I don't know much about either of these, so I'm going to let you pontificate on this one, Jason. 

Jason Hall: So, to, to retail bankers, to people looking for [00:29:00] banking products Ally and SoFi might seem really simple.

They're web based. They have high yield savings banking products that they offer. Um, but that's really about where the similarities end. So five courses, a new public business. It's been around maybe a little more than a decade since it was first created. His social financial is kind of a, like a cloud or a crowdfunded lending platform to for student loan refinancing.

And then it got turned into a bank over the past few years. And they're, they're. Student student loans is still like, that's their biggest lending business. And pretty high,

pretty high rates interest rates that they get. They also have a credit card business. That's pretty high rates. They moved into mortgages as they've tried to diversify and kind of expand across different. You know, commercial, traditional banking businesses, their timing for that's been really [00:30:00] good because they've really focused on growing it in recent years when interest rates have moved up.

There's not a lot of volume for it right now because demand for housing is demands high, but supplies week, um, but they get, 7 percent mortgage mortgages instead of 2. 5 percent mortgages. And because of the way their deposit funding works and they're like their funding model with those high yield deposits.

That's kind of how they've begun to evolve, evolve their business. They also issue a lot of stocks, share counts up like 30 percent over the past three years cause it's a tech business too. So they're, you know, they, they pay based on how most tech companies do less like a bank does. Now.

Also, it's just become profitable, right? It's just crossed into that threshold of profitability. Ally Financial's been around, uh, it's corporate history goes back to 1919. When General Motors started a finance arm to lend money to sell cars. It's been around for a very, very long time. And the legacy of its business is still tied to [00:31:00] its core business, which is, Mostly auto lending.

More than half of its loan book is auto loans. It's commercial auto loan book is bigger than its entire mortgage loan book, just as commercial loans. Not even talking about like it's, it's retail auto loans to regular people buying cars has 190 plus billion dollars in assets compared to like 31 billion for auto loans.

So, is there, is there growth potential there? Yeah. I mean, there's still, there's growth potential, but you know, it's six times larger than so far. And still mostly kind of sticks to its own knitting. They have some mortgages and other like traditional banking stuff that they do, but really auto lending is kind of the core.

If you're buying ally, you're looking at it more as a value play because their earnings have come down a lot. Over the past couple of years of interest rates have gone up because their cost of capital has gone up more than what they're getting on loans. Auto loans. So their interest margins have gotten a little bit squeezed.

So if you're buying it [00:32:00] right now, you're, you're buying it on its ability to kind of normalize its earnings and grow its profits and earnings per share. So it's kind of a value play. Also pays a dividend yields like 2. 9%. So it's more of a traditional buying the bank when the stock price is weak based on its ability to grow its earnings.

And so far is more of just, it's a, you're, you're betting that it can grow its earnings per share a lot faster than they're going to be issuing stock to employees. 

Jeff Santoro: Yeah, I don't, I said earlier, I don't know these businesses very well, but something you said got me thinking. If there's anyone listening who's interested in, but not necessarily an expert in investing in banks, like one thing I've noticed.

in my time paying attention to this stuff is banks often get thrown together in the conversation, but some banks do certain things that other banks don't, and they're not all the equal. And I think if you're into investing in banks, it's worth digging into exactly [00:33:00] what they do and where their money comes from.

You know, I own, I, the only, I own a few financial stocks. Like I own Schwab. And they're an interesting one because yes, they have checking accounts and savings accounts and credit cards and things like that. They also have a brokerage and they do a lot of asset management. So they're in like a different, Part of the banking sector than maybe Bank of America is or and then you have all and then there's like the whole branch so to speak of The online banks and some are heavy on loans and some are really checking and savings and they all kind of do different stuff So I hear just 

Jason Hall: this is this is a fun.

This will do a fun little game here Goldman Sachs Truist Financial, Axos Financial Live Oak Bank, SoFi, Ally Financial, all six of them have very different business models. Yeah. And then you have Bank of America, which has a very different business model as well, which is literally doing [00:34:00] all of the things that all of those others do, but those six all do things differently.

Jeff Santoro: Yeah. And that's why you'll see like the banks that are heavily involved in helping companies do IPOs, um, We'll struggle during a time when IPO is dry up, you know, so it's, it's just like a Goldman Sachs, 

Jason Hall: a, a investment bank, right? Yeah.

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Jason Hall: Exactly. So anyway, just my, that's the only thing I can contribute to this, this question.

All right, let's move on to the next one. This comes from Richard who says been following your show for a month now and I love it. Thank you, Richard. Happy to have you here. I just discovered the mailbag concept and I have two questions for you both about Brookfield renewable. The first one is about the difference between BEP And BEPC, which are two Brookfield tickers.

I'm having a hard time figuring out why BEP is cheaper and why I can't buy it with my broker. What is a limited partnership and what makes it different from a corporation? And how does Brookfield Renewable Relate to Brookfield. Furthermore, I am curious what you guys think about [00:36:00] H a sustainable infrastructure, ticker symbol H a S I.

It's very similar to B E P C both in yield and expected growth. It is, however, a lot smaller and could thus grow more easily. What do you think? Which do you prefer, 

Richard? Welcome. Welcome to the club. It's awesome to have you have you listening. So, Those of you that have been around for a while, go ahead and get your glasses.

It's time to do a shot because I'm going to mention Brookfield. So 

Jeff Santoro: my, my investing on scripted bingo card is entirely every box is Brookfield. 

Jason Hall: Yeah. Yeah. Yep. So you're going to fill out the whole thing right here in this one episode. So, so here's, so. Let's start with what the differences between a corporation and a limited partner.

So, because this really matters to the Brookfield group of entities, because whether it's Brookfield Renewable or Brookfield Infrastructure there's a three digit ticker, which is the publicly traded partnership. And then there's the four digit tick [00:37:00] ticker, which is a C corporation. So it's like Coca Cola, you know, it's kind of this structured in that same, that same way.

So the difference is that a publicly traded partnership is more like a REITs, a real estate investment trust. Then it is like a regular corporations. It's a pass through entity. That has lower or no tax corporate income tax that it has to pay. They're largely pass through entities where the unit holders, which is us.

It's like a shareholder, but they trade in units, not shares. The, the tax liabilities are passed along to us. So the, it makes them very, very tax efficient for things like dividends, right? Because you don't pay corporate tax and more cash you can pay out to your shareholders. So sounds like a read. It's kind of the same thing.

The difference. Is that REITs are generally easier to [00:38:00] own in things like retirement accounts, Roth, 401k, if you can buy stocks in it you know, rollover IRAs, all that kind of stuff. Um, we mentioned this on a previous show, UBTI, unrelated business taxable income. Limited partnerships. They're really common in the energy industry, like pipeline companies a lot of times, um, may have a spinoff that's, uh, an MLP, um, which is master limited partnership, or that might be the entire business is structured as an MLP if they own assets or operations or have interest in businesses that are not related to their primary business.

Income derived from those. Um, maybe categorized, classified as UBTI. I'm not an accountant. If you have this, you need to talk to an accountant, not, not listen to a guy on a podcast. But the short answer to your question, Richard, about your brokerage, maybe not allowing you to buy BEP is because of the risk of UBTI inside your [00:39:00] retirement accounts.

If you generate, if the investments you hold in retirement accounts, all of them, it's not just that one account, it could be two or three accounts. Um, even in different brokerages, if, if they generate more than a thousand dollars of UBTI combined it becomes taxable. So there's a risk of tax and complications because of that.

So a lot of brokerages just won't let investors even buy. MLPs or publicly traded partnerships like the Brookfield partnerships inside of retirement accounts, specifically, you might have a taxable brokerage. They let you do it in you're going to get a form, uh, schedule K one come tax season from them.

They're more complicated. The good thing is like all the online tax software just. They have a thing, you just plug it in and it makes it pretty simple. Your accountant has software too, that they just plug it in. So that's the short version, the long version of the reason why, uh, your brokerage probably won't let you buy the partnerships.

That's also the answer to the question [00:40:00] is why is the yield different? The, this stock price tends to be lower pushing the yield. They pay the exact same yield BEP and BPC are not yield. They pay the exact same dividend, but because the owner of the units carries on more of the tax obligation, it's not as valuable.

Right. So the price trades lower to offset that tax obligation that you're going to. So it should net out to a similar after tax value to the, to the, the investor. Um, does that make sense? Jeff. 

Jeff Santoro: Yeah. I mean, I, I used to be confused about this too. I used to own B. I. P. C. And I don't anymore. I think the bottom line with, it's good to ask these kinds of questions when you see two versions of what you think are the same company and why they trade differently.

But yeah, the thing that always kind of gave me solace when I was confused by it was there's there are very few like Obvious [00:41:00] inefficiencies in the market, right? So if there was ever a chance where you could get this version of a company for cheaper than that version of the company like Truly cheaper that wouldn't last for more than two years a minute before algorithms for these big trading houses would figure it out and do the arbitrage and, and the prices would come back in line.

Yeah. So it's a good thing to understand and know why, right. Like, but you said, like it nets out in the end as being the same, cause you have to think about the different tax implications. There 

Jason Hall: was this weird period in time. I can't remember if Brookfield infrastructure, but there was one period of time where the corporation, the four digit ticker actually was around the same price or cheaper.

And it just completely didn't make any sense. And I added at that time, because again, if you own the corporation in a taxable account, the dividends are going to be, are going to be lower. So I took advantage of that opportunity when I, when, when I had it. But yeah, generally the market already knows and you're, there's, [00:42:00] there's not a secret that you're, that you're going to be in on.

Um, so, but I will say in a, in a, in a taxable brokerage account, if the prices are very close, buy the corporation generally is the way to think about it. Because your taxes there, it's, it's, it's a qualified dividend. So it qualifies for your, the lower, the lowest tax rate you can pay on a dividend. So that, that matters.

Should we answer the, the, the next question? 

Jeff Santoro: Well, let's let you mean the next part of the same question. Yes. Yeah. Let's talk about ha sustainable infrastructure real quick and then we'll, then we'll move on. 

Jason Hall: Yeah. So formerly, uh, they followed the, the, the route of Dairy Queen and they rebranded to dq, so Ha, sustainable infrastructure.

I'm old enough to remember when it was h and Armstrong. Uh, it was like a year ago. It hadn't really been that long. But so, thinking about it compared to Brookfield Renewable, they're, they're similar and that their core business is investing in renewable energy assets, right? Long term. They do like a lot of like structured [00:43:00] debt deals and that kind of thing.

They're not just necessarily like an operator. Like Brookfield often is with these sorts of assets. So that's a little bit of a difference. There's also a difference in the assets they own. So Brookfield Renewable started off buying hydroelectric dams in Latin America. And then it's only been in the past seven or eight years, they've moved into wind and solar.

As the cost came down a lot and the opportunity to profit became readily apparent. And even more recently than that, they've moved into distributed solar. So utility solar, this is the producers that are selling the power to somebody that needs to use the power. So selling it to a utility. Are a grid operator, or maybe selling it to a large commercial power user, like a manufacturer or alphabet that's running a bunch of data centers.

And Microsoft, you know, there's some Brookfield Renewable and Microsoft actually just did a huge deal for, for power. So, um, so again, they're producing power, feeding it into the grid and somebody's using that power. Distributed solar is, um, [00:44:00] That's like rooftop solar, like on your house or on a business where it's offsetting your use, right?

You're putting that power back in the grid to off, offset the power that you're using. Very recently, Brookfield has moved into like, owning and managing some, some distributed commercial scale solar. Hen and Armstrong, like they do like all kinds of stuff. That they look like rooftop solar that they funded, like, basically the debt on, on, on funding that kind of stuff.

So there are some differences in the business model now where they do. Maybe they're starting to overlap is that Brookfield, uh, renewable is. Part of the Brookfield Corporation family of entities, which includes, uh, Brookfield asset management. It's one of the largest asset management businesses in the world where some of their funds, where they have very high net wealth individuals pension funds, like people that are managing billions and billions of dollars come to them that want to invest in alternatives to stocks and bonds.[00:45:00] 

Some of their funds are focused on renewable energy. So there's like a co investment vehicle that Brookfield Renewable can be used for because they have the experts on acquiring and operating those assets, right? So it's access to capital that Brookfield Renewable has their KKR and HA Sustainable infrastructure recently struck a deal for like a 2 billion dollar fund that they're going to be deploying capital into.

So that's helped increase access to capital for H. A. Um, so that's kind of good. Brookfield Renewable has. I want to push back on 1 thing Richard said here. Uh, said that it could be easier for H. A. to grow because it's smaller. That's not how it always works. Um, particularly in these big, big markets like this, where access to capital and scale can be really, really valuable to be able to grow.

Right? So, you know, Growth rates might seem like H a can grow faster. I don't necessarily know that that's going to be the truth, the case, especially [00:46:00] with like the residential solar markets, a mess right now. So that's one of the things that's really hurt H a because they do a lot of that kind of debt and that market's really down right now, there's a ton of industrial demand, a Tesla just reported earnings and they sold double the amount of utility scale batteries last quarter than they did year over year.

So utility scale, Renewable demand is still really strong. So I prefer, I really do prefer Brookfield just because it's, they have such a great history of executing and proving that they know how to make money. H a stumbled a little bit more. And being smaller and more nimble isn't necessarily a benefit because cost of capital is so important, um, in this sort of business. 

Jeff Santoro: All right, let's move on to the next question from Alex. This is similar to our first one, Jason. So I don't think we have to spend a ton of time diving into it. So Alex writes, what do you think about the idea that high quality companies with stalled growth rates are one of the best areas for potential returns?

And if so, what do you think about it? And if so, how does one improve their ability to [00:47:00] identify business performance pullbacks that are only temporary? He gives two examples. I'm not going to read them just for the sake of time. But he asks, uh, it goes on to say, I'm looking at several companies in my portfolio that are still in the midst of slumping revenues and a stalled share price.

To me, this has been an interesting thing to think about and it gives me hope for some of the laggards in my portfolio. Do you think it's possible to become skilled at finding these opportunities or is there a danger or is this a dangerous game of speculation? So I don't think it's speculation to me.

It's about, it's all the why I was thinking about this recently. You can become a lot better of an investor by simply doing two things, noticing and asking yourself why. And I think if you know the reason you own those businesses and you know what drives their results and then things aren't going well, that's the thing you've noticed.

And then the question is why? So. The two companies he mentioned were Netflix and Metta, which we already talked about earlier, which is why I didn't need to bring up the examples, you know, just to pause on Netflix for a second [00:48:00] when they were really struggling. It was pretty obvious why subscriptions were year over year subscriptions fell for the first time in like forever.

And so the question you had to answer for yourself as a potential investor or a current investor is, is this temporary or will they figure this out? And If you said to yourself, they figured every other challenge out, they'll figure this out and held your shares or bought more. You, you did well. I probably would have done the same thing back then as I'm thinking about doing with CrowdStrike is maybe buy a little more in case I'm wrong.

And then add as the confidence, uh, goes higher as results come in. So it's kind of my, my same answer as before. Like it boils down to me, like knowing why you own the business, knowing what drives the business and then making your best decision you can about whether you think it's, it is a short term problem or not.

And I, I'm in the same boat. There's a bunch of companies I own that the stocks kind of, Lagging along and the numbers are not great right now, but I'm holding them because I [00:49:00] truly believe it's just a short term challenge. Like every company goes through those, uh, just as a quick example, old dominion freight lines just reported this morning.

And I remember thinking for the last several quarters, like, man, things are heading in the wrong direction. I know this can be a cyclical industry. And then all, all of a sudden, this is the third quarter in a row where revenue growth has increased. Like it's, so it's kind of starting to tick its way back up.

And I never added to it because even though the numbers were not great, it remained expensive this entire time. So I wasn't really worried that like, you know, the market was seeing something that, that I wasn't seeing. So, uh, that's one example. All right. So what, what do you, what do you want to add on to this similar question?

Jason Hall: Yeah, I think it does. It starts with exactly what you're talking about. You need to know your company's really, really well. That is so, so important to be, to being able to identify these opportunities. The danger is if not, you'll 

Jeff Santoro: cause if not, you'll just [00:50:00] get taken by the share price. 

Jason Hall: A hundred percent.

You, 

Jeff Santoro: that's exactly the reason 

Jason Hall: that is, that is the tail that will wag you. Right. It's absolutely right. The caveat that I want to put in there is that sometimes we bias ourselves too much when we know our companies too well, and it's a sunk cost fallacy, right? Where you, you, you take the, the time that you've invested in that knowledge.

To, to bullish assumptions versus letting the information take you down the path of, of, of finding the more likely answer. Right? So I think that's really, really important. So an, an example that I'll use for me with Netflix, I want to go way back. I'm going to go back to like 2011. Uh, do you remember quick stir Jeff?

Do you remember? 

Jeff Santoro: Yeah. So, I mean, I wasn't paying attention to stocks at that point, but that was a big enough news story that I do remember it. So the short version, 

Jason Hall: this goes to back when, when, um, uh, Netflix was still making a ton of money actually mailing DVDs to people's houses, blu rays at the time.

But that was, that was [00:51:00] still a really important part of the business. And streaming was just starting to become the bigger, more important business and read has Hastings. Pushed too hard with the idea that they were going to split the business apart and they were gonna they were gonna split the mail Off business they were gonna rename it quick stir Um, like I, I think somebody even like already had the, the, somebody had the Twitter handle or like there was social media properties they didn't even own and they announced they were going to do this thing and prices were going to go up and then they reported earnings.

And the membership numbers actually went down. I think that was the last time before this most recent time, a couple of years ago now where membership numbers went down from, I don't think it was year over year, I think it was just from like the prior quarter, like from the third quarter, they went down from the second quarter.

But the market freaked out and the stock fell like 70%, like [00:52:00] crashed. Part of that, because the stock was wildly expensive, like wildly, wildly expensive. Remember that summer, the stock price had gotten to, this was, it's much lower now because like on a split adjusted basis, lower, but the price back then was like 275 a share.

I'm like, I'm not touching that stock. That's no way. And they bought back a bunch of shares that summer. And then the quick stir thing happened and they had a backlash and membership numbers fell and they actually ended up issuing stock when the stock was down like 40 or 50 percent to raise some capital and the stock kept falling when they did that.

But it became obvious to me that this is like, it's just a really high quality business that. Because they stepped back the whole quickster thing quickly. And it's like, look, that was stupid long term. Maybe that's the right thing to do. But right now you've spoken loud and clear. Our customers, you want these things need to be integrated needs to be together.

So they walked all that stuff backwards. I bought, I bought some stock during that period. [00:53:00] And, um, A few, a few years later, the proceeds of that stock funded the majority of the down payment on, on a house for us. So I got lucky with the timing of the stock bouncing back, but it was really a pretty, in hindsight, a pretty obvious opportunity to buy a very, very good business on perceptions about this struggle I'll say that.

And then I, and then what did I do, Jeff, this most recent time with Netflix? 

Jeff Santoro: Uh, there's a, there's a, there's a rough cut video or audio that people can go listen to. Where I may have 

Jason Hall: copied. But a year before we did that rough cut, the short version is that you asked me, like you said, Netflix looks like an opportunity to me right now.

And I'm like, yeah, it's dead. Here's the difference. The difference in that decade was a decade before I knew the business, like the back of my hand. I haven't owned that flick sock in years and I haven't followed the business anywhere near as closely. You have been following the business. 

Jeff Santoro: Well, I, [00:54:00] I don't know.

I, I, I think the biggest difference there, and honestly, I did see opportunity where you didn't, but I think you can't really fault people back when that happened from questioning, like, is this finally the end or, or not the end, but is this finally, because I think the point you made in that text conversation that led to that infamous call of them being toast, I believe was your exact quote.

Jason Hall: Yeah. Yeah. It's toast. It's toast. 

Jeff Santoro: Was basically that. I think you wrote back to me like, dude, they've never had competition and now they do. Yeah, and I think that's a perfectly valid that, you know, in, again, it's hard to look back and, and see it, it's valid, but if 

Jason Hall: you don't do the work, it's lazy analysis and it was valid analysis, but 

Jeff Santoro: it's, it's not an unle now, I think.

You didn't sell it at that time. I don't think you owned it anymore. So it wasn't like I didn't own it at the time and I didn't either. I was just, I was still kind of tracking it after I had sold it. I think probably cause I was writing about it. And I was like, I don't know if I see what everyone else is seeing here, but that's again, easy to say [00:55:00] what I'm not, I don't have any skin in the game.

So, 

Jason Hall: but I, but I think again, it's to summarize all this, it starts with understanding those businesses extremely well and being willing to quickly, quickly acknowledge when the thesis has changed and it's not an opportunity to buy and it's a yellow flag, or maybe even a red flag with the business. I think you have to start there because that's where the skill is going to live.

Being able to discern those two things and back to what you're talking about earlier, because it's not always binary being able to make a judgment on the risk reward continuum and think about position sizing to manage if you think it's an opportunity without exposing yourself to permanent financial harm.

Jeff Santoro: Yeah. And the way that I'll wrap my part of this last question is, or this question is just simply 99 percent of the time, there is no reason to make a decision immediately in terms of what you're going to do. Just using CrowdStrike, going back to that as an example, down 10 ish percent the first [00:56:00] day.

Down 14 percent the next day, then it was up like 1 percent yesterday, and now it's down another three or four today. Now, today's the day where the whole market crapped the bed, so that's part of it, too. And so unless you were like, I need to sell immediately and get out, maybe you saved yourself some cash by doing that on that first day.

But in terms of people who are thinking of adding or holding, There's plenty of time to let the dust settle and kind of think about it. All right, we're nearing an hour here. So let's wrap up with our last question. I think it can be a fun kind of quick one to wrap up at the end. This comes from Andrew via email.

Hope summer is going well for you both. Thank you, Andrew. Same to you. Could you give your thoughts on the PEG ratio. P E G. Does it have a place in your analysis of a company? I've personally never used it, but just got sucked into a rabbit hole of articles and videos so curious about your thoughts. So I want to start with this one and then you can wrap us up.

I learned if Do you want me to define the PEG ratio or do you want to do it? So it's basically, if I have it right, I'll have in front of me, it's, it's price to earnings [00:57:00] divided by the future growth, 

Jason Hall: price to earnings growth. That's what it stands for. Yeah. 

Jeff Santoro: And when I was a new investor and I was obsessed with like learning all these little uh, ratios, right.

I came across the peg and I read articles about it probably just like Andrew is. And everyone gets very excited. Like it's like a cheat code, like, It's, it's better than the price to earnings because it factors in growth and it'll, and it's like, if it's under this number, that means it's undervalued and it's like the articles you're going to read about it, present it like it's a magic formula that you can just apply and then make a 

Jason Hall: decision.

Jeff Santoro: Right. 

Jason Hall: So the short, like a peg of one, for example, means that it's priced at a fair value based on its growth rates. That's essentially what it means. More 

Jeff Santoro: than one is expensive, under one is undervalued. But here's the big thing. This is why I don't ever look at it. Every forward projection. Whether it's from the company or an analyst or your own discounted cash flow model is an estimate.

Yeah. And yeah, it, this entire [00:58:00] ratio is, is based on someone's best guess about what these are. 

Jason Hall: Consensus analyst estimates. That's what the peg ratios that you see are based on. Right. 

Jeff Santoro: But how often, what's the first thing that comes out when a company reports earnings? Company X, or whatever, reported beat analyst estimates.

Company Y reported missed analyst estimates. It's never company reported and hit the analyst estimates exactly right. I mean, that does happen, but you know, so it's all a guess. So I think it's fine to look at it. I think it's fine to consider it. It's an input. It is an input. Yeah. It is certainly not. I don't know.

I'm a big, um, I stay away from anything that's, that's a forward looking estimate because it's just a guess. Um, I just don't, I don't, I don't care. I don't, I'd much rather, I stole this from Jason Moser, who we had on the podcast a few weeks ago. I'd much rather just hear what the company says they're going to do and then see if they're gonna do it, [00:59:00] rather than the consensus estimates.

So, all right. So, yeah, I 

Jason Hall: never use it. I'm going to build on a little bit of what you're saying there too. So it's, it's, it's a number 1 there, there, it's, it's a future estimate, right? And is it a peg ratio based on 3 year, 5 year, 12 months? All of those things kind of come into play too, right? So you're normalizing based on those estimates, those estimates.

Come from the analysts that cover the businesses like we talked about, and these are useful people in there. The reports they put out and that kind of thing are, are helpful and handy to building your knowledge of a business or an industry. But like I said, they're just their estimates and they change them all the time.

And guess what? They're adjusted. They're not, they're not gap. So if you're thinking about a PE ratio, that's their gap earnings, right? So these are adjusted and chances are, if you're using it, you're using it for a growth stock, growth stocks. Generally, you don't want to come very few of them. Are you, are you basing buying it or selling it on a PE [01:00:00] ratio anyway?

Maybe price to operating cashflow or with some mix of like price to revenue and looking at gross margins and other things too, to like figure out like the monetary value of the business. So it's, it's nearly useless to me. So I don't use it, but thank you for getting us that question because that question was useful.

Thank you, Andrew. 

Jeff Santoro: Yeah. I mean, yeah, all these. A lot of these ratios get presented in articles you read as like a cheat code for figuring out what to buy and the reality is, if, again, if anything was that easy, we'd all be losing the computers. 

Jason Hall: There's a very good chance if you're reading an article and they use the peg ratio, they're using it because it justifies what they were trying to tell you.

Jeff Santoro: Yep. That's it. That's the end of the mailbag. Once again, as a reminder, if you have a question that you'd like to hear us answer, Go ahead and send it to us anytime if we if we get it right after we record a mailbag, I keep it in a folder in our email account and we save it for the next one. So it doesn't matter when doesn't matter how get us your questions.

Jason Hall: [01:01:00] I print them out. I mail them to Jeff to his house. 

Jeff Santoro: Yeah, Jason's a boomer. So he has to print every email we get. Yeah, 

Jason Hall: I do. I really do. . All right, Jeff, we have done it. We have answered the hard questions about investing from our listeners, but guess what? As always, these are our answers. We answered because you asked, not necessarily because we really know. Now, we know our answers, but we don't know your answers. It's up to you to figure that out.

But you know what, friend? You can do it. I believe in you. All right, Jeff. We'll see you next time, buddy.

Jeff Santoro: See you next time. 

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