Investing Unscripted Podcast 118: Investing Unscripted, Unscripted

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​Jason Hall: Hey friends, welcome back to Investing Unscripted, where we ask and answer the hard questions about investing. I'm Jason Hall joined by my good friend, Jeff Santoro. He, [00:01:00] who is the voice of the people. Hey, Jeff. It's good to, as usual, have you on. How are you? 

Jeff Santoro: You're having me on? I thought we were like on together.

Jason Hall: Hey Jeff, it's good to, as usual, be on here with you. 

Jeff Santoro: There you go. 

Jason Hall: How you doing? 

Jeff Santoro: I'm great. How are you? 

Jason Hall: I'm good. I'm good. Man, I hope we don't edit that out. We have to leave that in. No, we should leave it. It's actually the perfect introduction considering what this episode is going to be. Yes, so we're calling this episode, Investing Unscripted, Unscripted.

Jeff Santoro: I, maybe this could be like a thing we do regularly or semi regularly, I kinda, I kinda like it. I mostly like it because it involved no planning. 

Jason Hall: Well, I don't know that I would say no planning. So compared to, so, yeah, so, all right. So caveat, let's, let's expose the making of the sausage a little bit here.

Our podcast is called Investing Unscripted, but we actually do a lot of planning. and we don't script it out, but we do typically have a pretty tight, [00:02:00] tight, tight, tight outline, of topics and, you know, the things that we're going to kind of go through and the things that we want to make sure we talk about. but this is actually. We have some things that we, we, we talk a lot, and there's different things that we talk about topics that come up, just in our lives that never see the light of day in terms of a podcast episode or videos or any of the other content that we make, and sometimes different little bits and pieces of that actually are interesting.

And we have a lot of those things that we've been talking about recently. So we're going to actually talk through some of them here today, and we're going to let, just let the conversation kind of go where it goes. 

Jeff Santoro: Yeah, we, we typically have an outline mostly to keep Jason from going off on seven minute long tangents.

But kind of like I just did to start this episode. Yeah. Thank you for so wonderfully demonstrating it. but the, the most fun we have, we scripted that part. The most fun we have, honestly, sometimes is when we're on this platform that we use to record to plan the show and [00:03:00] we start to just go off on a tangent with one another.

So we're going to try to recreate some magic here, but yeah, it is not scripted in any way. We have just a couple topics, but neither of us have really prepared for them and they're mostly things I know nothing about. So. It'll be, it'll be like our normal conversations. 

Jason Hall: There you go. 

Jeff Santoro: Yeah, that's I'm glad 

Jason Hall: you said it because I was going to we could almost call these like our hot mic episodes where We're saying things that maybe we wouldn't normally necessarily say with the mic turned on but not like in that way Not in the way that maybe some famous people have had hot mic episode.

Jeff Santoro: Yeah, we don't want to get canceled with our hot hot mic. 

Jason Hall: Yeah No, no. So here's, here's what I want to start. So I've got our, our little list of things here and I'm going to pull kind of from the middle of it, because I think one of the things that I enjoy that we, that we talk about is not necessarily vibes in this case.

But just everything that's going on with the market, how it's been really kind of an odd [00:04:00] year, every year is odd in its own way. But I really just want to kind of talk a little bit about, you know, everything that's going on with interest rates and the market seems as always the markets looking forward and reacting to what it expects is going to happen. and it certainly feels like that's the case. With with interest rates right now. 

Jeff Santoro: But it's weird It's like here's what I don't get that the market's forward looking and the market doesn't like uncertainty and the market doesn't like when The conventional wisdom turns out to be not true, right? Would you think would you say all those statements are fair?

Jason Hall: Yeah, absolutely Yeah. 

Jeff Santoro: But this has been and this is why this year has been weird It's been a whole year of the thing we all expected that was going to happen just keeps Being pushed off right the year starts and either I forget exactly when this sort of entered the zeitgeist But basically they're for this whole year people been anticipating rate cuts.

Jason Hall: Bro. No, this goes back to last year. They're okay fine rate cuts. 

Jeff Santoro: Even still.

Jason Hall: Summer. They were talking about rate cuts last fall. 

Jeff Santoro: Right. So [00:05:00] regardless this year has been dominated in my mind by when will we get this rate cut and then in? Whatever, you know, whatever the inflation and jobs data is sort of the pendulum will swing a little bit closer towards getting them sooner or towards getting them later.

Now it feels like after the last couple reports that it's basically inevitable is what it sounds like from what I'm hearing that we'll get one in September and despite all that, notwithstanding last Monday and Tuesday and the Thursday and Friday before that, the market's just been ripping. It feels like.

The end of 23 when we had those two months of craziness and or all of 2021 and it's just when there's been so much uncertainty and so many things being delayed that were expected, I'm just surprised like this if you had told me these news events and then said predict the market, I would have said down or flat or very volatile, right?

Like up five down, five up, five down, five. [00:06:00] And it's just been up into the right. It's been remarkable. 

Jason Hall: So a couple of things, I'll talk more about interest rates and things that I've said in the past about interest rates and my thoughts on it. But first I just want to give some market data. So we're recording this on August the 20th.

The market's basically closed. It's not going to move enough to really change these numbers that much. So August 20th, we've basically got a week left in the month. So we hit Labor Day holiday. So things are going to be a little calmer for a few days there before we actually get to the very last day of the month.

But the point is that we're, we're essentially about a week's worth of trading days from being two thirds of the way done with the year. Historically, the market we've talked about it before, usually generates an average of 10% in annualized gains a year, we never have an average year. It's, it's exceptionally rare.

Like it's less than 1 percent of years of actually ever actually been up 10 percent or within, you know, rounding up or down to 10%. the Dow is up 9. 8 percent so far, two thirds of the way through the year. The, [00:07:00] uh, S&P 500 is up. Uh, 18.6 percent it's actually outperforming the NASDAQ 100 which is up 18%.

So it's been a great year now. I think generally the economic results, like the financial results of, of most of the companies that move the needle. Like look at the earnings of the biggest, the biggest companies. They've had great years, right? They're making a ton of money. They're they've earned more money than they did a year ago.

Microsoft meta systems alphabet like all of them. I mean, they're, they're all, they're doing really, really well. Apple maybe is 

Jeff Santoro: the one. Well, and it's not, I know they're the ones that move the market cause they are, they constitute such a large percentage of it, but it's been, The rest of the market to like, I'm not looking at the data of what the non mag seven have doing, but just knowing, just thinking about my portfolio and Q2 results.

Cause I believe all but one or two companies that I own have reported at this point. I can count [00:08:00] on less than five fingers, the amount of companies that I would say put up a bad quarter, 

Jason Hall: right. 

Jeff Santoro: You know what the stock did in relation to it, different story. But so yeah, there's, That, that economic strength and, and strong business results goes beyond just those big companies.

Jason Hall: So I want to look at the, at just the S&P 500, just to kind of clear up the chart a little bit. But back in the spring, the S&P fell, we had about a 5 percent sell off. And then this more recent sell off was only about seven or 8%. We look over the past year and last fall from, from late July, the highs through, I don't know, when was it?

November. Through the low, same thing about a 9% sell off. So over the past year we haven't, we haven't had a correction. Now of course the caveat there is that we had a pretty protracted bear market in 2022. Yeah. That reversed in late 2022. [00:09:00] And we've seen great gains since that bottom really like January 2023.

Like since, since then, we've seen just the market has really ripped since then. The interest rates thing, I want to kind of circle back around to that because like, that's the big thing that the market is betting on right now that large investors are betting on is that the rates are going to get cut.

That's going to provide ballast for stock valuations. That's also going to help companies that need to refinance, you know, cost of capital, all that stuff. And that the idea is that it should. Balance the economy if not necessarily stimulate it some people think you interest like what's 25 basis cut going to do?

It's not going to doesn't matter. People don't think about interest rates. Well, that's bullshit. If you're refinancing or you're buying a car or a big ticket item. Yeah, 25 basis 

Jeff Santoro: points on a. Kind of mortgage 

Jason Hall: is a decent amount of money. It's a lot of money, right? It is. It's a lot of money. So I think that's the bigger thing is it's the round numbers that people are looking at that it could [00:10:00] help.

But this is the thing that I've been consistent on, and maybe it's because I'm old enough that I've been through enough rate cycles and watched what the fed does, what they always say is positive things that the market wants to hear. Yeah. They always say things that the market wants to hear because they know their words move the market.

but what they do is what they think is most important to stimulate the economy and the jobs market. That's the bottom line is they say the things they want that investors want to hear. They do the things that the market wants to eat. So they tell us, here's your strawberry shortcake while they're in the kicking kitchen, Cooking up Brussels sprouts, right?

And I've consistently said that the Fed is not going to start using its only significant tool to Support the economy which is cutting [00:11:00] interest rates In a healthy economy, they're just, they're not going to do it and they haven't done it. We're hearing that it's probably more likely that in September we are going to get that 25 basis point cut.

What have we also seen? We've seen a lot of industries that require a lot of debt for consumers, not just businesses, but for consumers has gotten eviscerated. Look at the EV market. It's been eviscerated, interest rates went up. Look at residential solar. It's gotten eviscerated, interest rates went up.

There's a direct correlation behind those. It's not the only reason for both of the other, there are other factors. That have come into play, but the reality is the feds starting to respond based on seeing some weakness in some segments of the economy that they want to get ahead of before we actually go into like a substantial significant recession.

Jeff Santoro: Yeah. And we're not going to, it doesn't seem like we're going to get any, you know, substantial amount of rate cuts. Like we're not going back [00:12:00] to near zero percent because like you said, that is their, that is their basic. Their only tool really to, to, that they need to reserve it for if we do hit a downturn, right?

Like interest rates went, went low during COVID or lower during COVID because they needed to stimulate the economy. So it's like, we're going to go back to 1 percent in the next year. I don't think, 

Jason Hall: yeah, 

Jeff Santoro: I just think the thing I keep two things I've been thinking about as it pertains to interest rates.

One is in the four years that I've been paying very close attention to all this stuff, I went from not paying any attention to that kind of stuff, mostly out of ignorance. Yeah. to paying a lot of attention because I became interested, learned a lot more, and we have a podcast. And now I'm almost like finding myself heading back towards like, Okay, I'm just going to stop paying attention to it anymore because largely it doesn't impact how I think about investing, but I am still interested in how it could impact the results of the businesses that I follow.

And the other thing that I'm, I keep wondering is, as I said, [00:13:00] when we started. The, the stock market seems to be doing the opposite of what I would expected what I would have expected. So what I'm curious to see is, let's say we do get a rate cut in September and maybe who knows, maybe we get another one in December.

Do, do we then see a downturn like the, the market's been so resilient with higher for longer interest rates like I'm just, it would just be funny to me and ironic, I guess, if we finally get that rate cut in September and then. Thank you. You know, by December early in 2025, we are in, in a downturn again, you know, like we saw in 2022.

I think the other thing that I'm. Curious on your curious for your thoughts on is, do you think we saw as much of the crappy businesses that came public in 21 that probably shouldn't have? Do we? Do you feel like we saw enough of them get shaken out of the market by the higher interest rates? Or are you surprised at the resilience that weaker companies have been able to?

Demonstrate [00:14:00] over the past year and a half and and kind of keeping themselves around.

Jason Hall: No, because I think that cycle just takes longer than maybe. 

Jeff Santoro: Yeah, because a lot of that debt hasn't rolled over yet. 

Jason Hall: I mean, that's it. And a couple of things. So number one, we're we're we're we're in this place in life with technology where things can happen really, really rapidly. But those things aren't always necessarily like the virtual things, right?

So, uh, they aren't the tangible things, they're the virtual things that can happen really quickly. Like NVIDIA, for example. Their revenues absolutely exploded.

But they'd already developed the technology. The infrastructure was already in place to manufacture the chips. The capacity was available at TSMC because of weakness in, in other parts of the semiconductor industry. Right? So. It, that happened really, really fast, but they're also charging a really high premium.

So like the actual volume of production wasn't some massive scale up of output. [00:15:00] You know so that's just like one example of where we saw this massive explosion of business. Thinking about other companies, think about meta platforms is rapid growth you know, to a billion dollars to 10 billion.

It's, it's all virtual, right? It's all happening on the internet. So it's not, you know, building factories and then think about Tesla is, is, you know, Successful as Tesla has been, they've always taken longer by far than Musk said that they would even hitting pretty aggressive goals. They always took a lot longer just because it takes longer to do stuff in the real world.

So again, you're talking about things like debt rolling over. A lot of those companies. built out debt profiles that are relatively well, well laddered. So they're only just now it's, it's less companies. I think the biggest thing too, is that like my expectation for a lot of that is less companies failing or having to be acquired because we have seen a ton of startups get acquired.

Stem is one that [00:16:00] went public as a SPAC that I put it in the portfolio contest is one of my kind of bottom feeding this company is going to bounce back. but they're in a lot of financial trouble right now and they could get gobbled up. Pretty quickly. Tellurian is about to be acquired for a dollar a share and it took the company five or six years to get to this point.

And part of it was cost of capital going up, not because of its existing debt, but because now we can't raise debt, right? It's access to capital was limited. But I think what we're going to see is a lot of companies that benefited on the bottom line and got really great profit over the prior decade to 15 years, their profits are going to get squeezed going forward.

And they're still trading at really, really high multiples. So a lot of the impact, a lot of investors are going to feel and maybe not even realize that they're feeling it is watching these stocks [00:17:00] underperform as they refinance at higher interest rates and their cost of capital takes out of their Margin because their operating expense goes up.

Their operating margin gets shrunk, even though maybe their gross margins stay high and they, they still are selling it a pretty good clip growing revenue a little bit. You, your, your interest expense goes up. The money's got to come out of somewhere and it comes out of the bottom line. Yeah. I wasn't even thinking about that part of it.

I 

Jeff Santoro: was, 

Jason Hall: yeah, I think there are bigger for investors than companies that end up having to get acquired because. They took on debt and they can't afford that debt anymore. 

Jeff Santoro: And it puts investors, when those kinds of things happen, I think it puts investors in a sticky spot because you look at the, let's use the scenario you just laid out, right?

Company that you have been following, you own, you have high conviction in you. It's a good business. All of a sudden down the road, you start hitting some quarters where there's, you know margin compression. And they're saying things on the. call. Like the business fundamentals are [00:18:00] fine. This is related to rolling over debt at a higher interest rate, and that's going to impact us in the short term.

And you say to yourself, like, okay, that's like a normal thing that happens when the interest rates go up and the business is humming along. Otherwise, I'm going to hang on. And you. That might, that's probably the right decision or in the longterm. But if that, if you bought that company trading at 40 times earnings, you know, it's, it's priced for not having to deal with that.

And I think that's where you get jammed up as an investor, because you have these two, you have these two things you're looking at simultaneously. One is a business that is. ultimately performing well, and also a stock that's down 30, 40%. And you're saying to yourself, I don't get it. And I think a lot of impatient seller, you know, investors end up selling.

And it's just that it's not that the business was flawed in any way. It's just that You happen to buy it at the wrong price. So I think that's, that's the hard thing that I, that's going to be kind of interesting to watch over the next couple of years. I think [00:19:00] 

Jason Hall: I can give you an example. Next year at energy partners, dividend yield is still incredibly high.

That management has been steadfast that they're going to be able to keep paying their dividend and even continuing to grow it. They were refinancing debt in the twos and low threes. A couple of years ago, one of their more recent tranches of debt 7. 25%, you know, that's going to really start weighing on a lot of these businesses that rely heavily on debt.

Jeff Santoro: And, and by the way, if we get a 25 basis point rate cut in September and you refinance that to seven, that's still high. It's like, it's not like it was 

Jason Hall: right. No, that's, that's the key. That's exactly the key. So a lot of companies, they weren't prepared for, because corporate debt, I've talked about it before.

I want to highlight this because I think it's really important. It's not like a car loan or your mortgage on your property. Corporate debt is interest only [00:20:00] debt. Almost every time you're very rarely amortizing you're just paying interest. And at the end of the term, you, you refinance, you just roll the debt over and you do it again.

So, That's, that's what's 

Jeff Santoro: happening.

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So this is maybe a easy segue into another topic we had on our little list of things to talk about here, which is dividend stocks and then thinking about them versus, or in comparison to quote unquote growth stocks. Cause I do wonder, I've been thinking a lot more about dividend stocks lately.

When we just did an episode about that, I don't have a lot of dividend stocks in my portfolio, in my stock portfolio. I do have a lot of dividend paying. ETFs in my overall investment portfolio. And I think it's funny, like, you know, when I was a new investor, I was excited and I wanted the high growth shiny thing.

And, and, and also when I had such a little capital invested in individual stocks, like even a company with a really high dividend yield was paying me a dollar 30, a quarter, like, cause I had such a small position. And now that I have a couple of dividend stocks that are, that are more sizable. [00:23:00] And I'm starting to see double digit quarterly dividend payments.

I'm starting to realize like, Oh, I actually, I do see how over time with enough money put into dividend stocks, like this could end up being a substantial Income driver, you know, in retirement and things like that. So tying it back to interest rates, do you think there's any plus or, or upside or downside to dividend stocks when we see the interest rate drop?

Jason Hall: Yeah. So here's in theory, here's how it works. And historically this is generally true. Bonds and other fixed income investments. You own them for the yield generally. You also own them for the stability of the value of the, of the bond itself. If you buy a bond and you invest a thousand dollars in a bond, a five year bond that pays 5%, that thousand dollars is gonna pay you, what is that, $50 a year?

You're going to get your 50 bucks a year every year for five years, maybe every six months they do. However they pay it [00:24:00] out, depending on the bond. And then at the end of the five years, the bond is going to mature. When it matures, you redeem it, you get your thousand dollars back right now along the way is interest rates go up and down from the day that you.

That bond was issued. If you bought it as a new issue and you paid the face value, the thousand dollars is, is interest rates go up. The value of that bond is going to go down because you have to, if you wanted to sell it to somebody, you'd have to match the going rate, which means you'd have to discount the bond for the yield that they paid to buy.

That bond from you would match the going rate. If interest rates go down, the value of the bond would go up because if you sold it, you could sell that bond at a higher premium, because again, you're matching the going rate when somebody is buying the bond, they're basically buying the yield. That's if you're buying a bond in a stable business and it's highly safe.

It's very, very stable. 

Jeff Santoro: It's not going to, you're not going to default. 

Jason Hall: Investment grade, right? It's an investment grade bond. Uh, when you start moving into some of the junk categories where it's, [00:25:00] maybe there's a higher chance of default on the secondary, you're going to get a higher interest rate, number one.

And sometimes on the secondary market. The bond can get discounted even more if the company is like substantial risk of filing for bankruptcy or, you know, something like that, where you may have to go to the front or the back of the line, depending on what you owned to actually get your money back.

Right. So so those factors kind of come into play with bonds. It's clear when interest rates go down, the value of the bond goes up. Right. If you wanted to sell it on the market right then the yield that you get won't change because you have a contract, you have an agreement. Right. Because you own the debt and the agreements, they're going to pay the paid, whatever they're going to pay on that debt.

Right? So the way it historically has worked is that when interest rates were high and yields were high on debt, valuations for dividend stocks get pushed down. Because, In some more or less amount, dividend stocks do compete with [00:26:00] bonds. Investors that are looking for income are going to look at both, right.

To some, to some degree or less. So you, interest rates move up, valuations get pushed down. So the yield gets pushed up on dividend stocks. The inverse is typically true too. You've seen that over the past 15 years where yields on dividend stocks have been. I was just excessively low on the S and P 500.

By and large has paid some of the lower yields over the past 12 or 15 years than it has historically. So that's. Because there was, you weren't really having to compete with bonds in the ultra low interest rate environment that, that we were in. So valuations went up because investors took on more risk investing in stocks to try to capture some return, right?

Whatever yield you can get, plus the value of the stock's going up, that capital appreciation. So on paper, the math is that. If dividends go down or if, if, if interest rates go down [00:27:00] valuations should adjust up a little bit for dividend stocks. Uh, we'll see, we'll see what happens. I mean, I can tell you this, you look broadly at a lot, especially higher yield stocks.

Like REITs went down for a lot of other reasons because of worries about commercial real estate. But we've certainly seen as interest rates, Shot up valuations did get pushed down and dividend yields to get pushed up on some stocks. Not all there's plenty of dividend stocks that are still trading 

Jeff Santoro: near all time 

Jason Hall: highs.

Jeff Santoro: Yeah Here's another thing I wonder and I could be wrong about this and if I am i'm sure you'll tell me because I you take Pleasure in that so hey jeff, you're wrong. Thanks, man. One of the Arguments i've heard in favor of dividend stocks is that a company that pays a dividend has to be more fiscally responsible Right because if they're paying out 20 or 30 percent of their earnings in a dividend.

They have to make sure they have that cash on the side. They can't, they can't invest it in anything else cause they're paying that dividend. So by that logic, I would think a company [00:28:00] that pays a dividend is less likely to be in the position of really struggling to keep things rolling with higher interest rates.

Do you follow what I'm saying? Like a young speculative company that, you know, like came public when they shouldn't have in 2021 is not the same company that's paying a dividend usually. So do you think there's, do you think in a world where, 

in a world. 

In a world where we might still see a couple of years from now.

Some companies like we were talking about earlier really suffer from interest rates, like, let's say they get cut, but still not back to where they were, right? Do you think dividend companies because of the fact that they have to have a little bit more financial discipline stand to benefit? Does that make sense?

Jason Hall: It does. It's a, as, as, as, as usual, the, the, the reality is more complicated than the answer I'm going to give. But the answer I want to give, I think kind of lays out the implications and explains why historically dividend companies that pay dividends and generally have [00:29:00] a track record of growing the dividend, maybe not every year.

Like, you know, like dividend aristocrats or Kings do, but like they generally grow it most years why those companies generally have been market beating investments. It starts with the fact that a company that pays a dividend. Didn't start that way. They started paying the dividend when they got pretty big and they had like some pretty good competitive advantages.

Maybe their scale, pricing, power, brand power, all that kind of stuff. And they were making more money than they needed. To fund their growth, right? So they had extra money, right? And all of the competitive advantages that come along with it. So number one Like the biggest reason why these dividend stocks and dividend growers beat the market.

It's just the best companies. Yeah That's that's that's simple. They really they're just the best companies where the pay and the dividends kind of comes in is that managers are people and people suck at capital allocation. The reason Jeff, that most investors underperform benchmarks is because they're bad at investing.

We're not [00:30:00] wired to be good at investing. And to expect that the CEO of any company is going to be a great capital allocator, I think is a mistake unless they have like a really proven track record of being good at doing that kind of stuff, like. Constellation software, for example, they're really good at buying software companies for cheap integrating them and getting more profit out of those businesses when they integrate them.

Salesforce. com has been a really good acquirer. We've taught, I mean, I don't even have to bring up Buffett, but like the, those people are really, really rare though. The winning companies are the companies that are just really good at what they do. And they have really good people running those companies.

The generally are really good at whatever that company's business is. They're rarely good at actually allocating money. So, so the odds are better when they give some of that back to you and let you screw up with it, but then it gets to count in the total return, right? That, that the business is going to outperform.

And the ones that have a track record of generally [00:31:00] growing the dividend, it demonstrates that those businesses are still growing, right? Hence making them generally better businesses to own, but there's no doubt about it that it's getting that money out of the hands of management when they're going to go do something dumb with it.

Like maybe it's a bagel company and they decide that they're going to, I don't know, buy a coffee company too, because while coffee goes good with bagels, right? So we could run a coffee business. Even though the coffee companies they're buying are all in the same markets and they pay too much for it.

And now they have all this extra operations costs. And then they have to figure out what to do with that operations cost and they don't really gain extra business and there was something really nichey and special about that coffee company that they bought that then they screw that up and the sales don't grow.

Right. So it's when they try to do something that's really not. What they're good at doing which generally is just allocating capital outside of the industries that they know that they screw it up. Companies are usually bad at buying back their own stock too. But if they're buying it back all the time and their [00:32:00] dollar cost averaging with their, um, share buyback program, it's going to work out because they're repurchasing when it's cheap and when it's expensive.

So I guess the best way to think about it is like, they kind of solve a lot of the problems of finding good companies for you already because you're fishing in a pond of really, really delicious fish. 

Jeff Santoro: Yeah, it sounds like you're saying that, yes, they, they might be better off than a non dividend paying company in a longer for a higher for longer entry environment, but it's not necessarily.

Because of any other reason than they're just a better business. Anyway, 

Jason Hall: you're starting exactly. You're just starting off with a really good business and it's a profitable business. That, that means that it's a good business and it's profitable. They probably don't need external capital. They don't need to borrow money, but if they do need to borrow money, they probably are getting more competitive rates because there are really good profitable business, right?

So they're viewed as a safe, a safe 

Jeff Santoro: borrower. So speaking of management teams and capital allocation and whether they're good or bad at it, let's talk about Boston, [00:33:00] Omaha. They're bad. They're bad at it. Next topic. All right. Next topic. Here we go. Moving on. Well, it's, it's funny you say that. Like, yes. Track record wise, more bad than good, but now that they're out of the asset management business.

It feels like there's less capital allocation decisions to make almost, if that makes any sense, like it's just going to be putting money back into like their core businesses, or at least that's what they say they're going to do. So I'm just curious what you think about how their last quarter, their quarter that they just reported was, because this is what we've talked about a lot and it's been a lot of change.

Jason Hall: So I just, this is typical me. I haven't really dug into the results that came out last week, I guess. 

Jeff Santoro: Yeah. Or maybe a week and a half ago. 

Jason Hall: Yeah. Yeah. It hasn't been, it's been less than two weeks ago. It'll be a couple of weeks when this episode comes out, but I haven't really dug in. Like I went through and like I looked at the, each of the three business units they have, the surety insurance, the billboards and the broadband.

I looked at those. And the, like the [00:34:00] latest update, cause they're still in the process of, of exiting all the investments in the asset management business and returning all of the funds back to the investors. So that's still playing out a little bit. But I do think that consistently what I'm continuing to see is the thing that worried me from the beginning.

It's funny because we talk about how, how usually these executives, they, they suck at capital allocation. I think Alex Alex Rozek, is that right? Alex Rozek was actually good at capital allocation and maybe Adam Peterson. I'm sure he was, I'm sure he was part of it. So I don't want to give him short shrift for that too, but they, as they were good at the external stuff.

Dream finder homes the, I can never remember the name of it. The sky Harbor sky Harbor. Some of the, there were a couple of other things that they did. Those were really profitable investments for them. Really, really profitable investments. There's been a lot of focus on the fact that it's still trades at a big discount to book value.

And what I've continued to say is. The discount, the book value is not that far from the amount [00:35:00] of goodwill they have on their books. And my biggest concern is that the internal acquisitions they've made, not the, not the, not the investments they've made but wholly owned acquisitions, buying billboards, buying insurance companies to bring under the same insurance brand, which I think they just combined it under one insurance brand this year.

That's where all the goodwill is. And the operating results continue to be very underwhelming. And that makes me feel more and more like where they were bad at allocating was the assets that they've acquired that they're keeping internally. Now, caveat, they're still spending a lot of money to expand the broadband business ahead of customer acquisition and getting those assets to where they're stable, generating cashflow.

And those should be really high margin. As they stabilize. The jury is still out on, on that. Um, but I can see you to just be very underwhelmed. 

Jeff Santoro: Yeah. [00:36:00] Underwhelmed is the perfect word for it. It's like every. Every quarter, I feel like for the past year plus, I look at the results, I think about them, and I say to myself, good enough to not compel me to sell, but not exciting enough to have it be like a high conviction idea or even add more to my position.

And yeah, I, it's, I think that's like the most frustrating place to be. And I understand why, you know, maybe we all would, you and I both would have been better off to like, The first or second quarter, we saw that been like, forget it, I'm out like this isn't worth my time and effort. But I don't know.

There's something about it that I, I'm still kind of interested to see how it plays out. I mean, here's what I'll say the I will. I will. You 

Jason Hall: know what? Let me say this real quick. And then you can have the last word on it at this point. The only reason I own it is because. Is because I do think it's interesting.

Jeff Santoro: Yeah, I think I'm in the same boat. I mean, so for the last one, two, three, four, five, five quarters, right? Revenue growth has been okay. [00:37:00] 15 ish, 12, 15 ish percent, with the exception of one quarter where it dipped to nine. Now, before that, it was in the 40, 50 percent range, right? So tough comparison, but I don't know.

Mid teens revenue growth is not awful. That's not a business that is struggling on the top line. Profitability has been a hot mess. Cash generation has been a hot mess. You know, the, the two biggest revenue drivers, broadband and. Billboards have been growing decently. You know, two years ago, the broadband business was still new ish.

It was only 25 percent of revenue. Billboards was 56%. And now it's 36 percent for broadband and 50, 42 percent for billboards. So it seems like by the trajectory that the broadband business is actually going to be bigger than the billboard business in not, not too long from now. And I'd That's part of what's interesting to me, like, kind, kind of seeing two years from now, is this [00:38:00] more of a broadband play than a billboard play?

And I don't know, like, I do wonder if they're if they're done buying different things, right? So, like, maybe the asset, they 

Jason Hall: have to be 

Jeff Santoro: agreed, but I'm saying, like, let's say we hold this for the next five years. Is it still just billboards, broadband and insurance? 

Jason Hall: And some minority 

Jeff Santoro: and some, and some minority investments, or did they do something more interesting than that?

That's kind of what I'm waiting to see. 

Jason Hall: I would say that the vast majority of investors that own this stock right now, if they still own it in five years, it's going to be because they've actually been good at what they've do, what they're doing, regain credibility and earn permission from investors. To go find the next thing that they want to, they want to grow into.

I think the probability is very low of that happening though. 

Jeff Santoro: Yeah, I think I agree with you. 

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Jason Hall: I want to talk about, I want to talk about housing and home builders a little bit because it's, 

Jeff Santoro: Oh, I want to do that too.

Jason Hall: It's such a big part of the market, like the economy broadly. [00:40:00] Housing is such. Hot button issue. We're in an election year, so we're going to constantly be hearing about affordable housing. And let's be honest, if we look broadly at a lot of home builder stocks, they've continued to rip. They've done really, really well.

Even as like we've seen revenues come down a little bit. Margins have come down a little bit. But if it feels like they've adapted to the new playbook of higher interest rates and there's still so much pin up demand because there's no inventory of existing homes for sales, it seems like that's picked up a little, but I just, I want, I want to kind of talk through.

You know, where, where do you think when you think about the home builders market, you think about investing in that space, you think about housing as an investor, kind of, how are you thinking about it? 

Jeff Santoro: I own a home builder and you tease me constantly that it's the worst of them, but whatever, we're not going to go down that road right now.

I guess what I think about is I think it kind of depends on it. I'm kidding. We won't. I think it depends when you buy [00:41:00] home builders. Like, so here's one of the things I'm worried about. I absolutely agree. That is absolutely right. I have not looked at the valuation of. The homebuilders writ large, but let's just assume right now that they're on the higher end of the valuation scale simply because of what you just said.

They've been ripping. They've been doing well. And I do wonder if, if they cut interest rates in September and let's say, who knows, maybe it, maybe it's more than 25 basis points. Maybe they cut by 50 or maybe they do a 25 in September and a 25 in December, but let's just say a year from now. Interest rates are somewhere between 25 basis points and 100 basis points lower, right?

Just to pick a random range. And you bought a basket of home builders today. I do wonder if that loosens the market up enough to take enough pressure off of the new home demand to have those stocks underperform today's valuations. Does that make sense? 

Jason Hall: I'm, I'm going to throw some, I'm not going to throw the exact numbers out here, but like this is the, for me, this is the conundrum with homebuilders.

We've talked [00:42:00] about this before. We, when we've talked about valuation, can't remember which episode it was that we did, but talking about how with cyclical stocks, especially they can look expensive when they're cheap and they can look cheap when they're expensive. And as much as homebuilders like the secular trend is still, I think very, very good because we're still substantially under built.

You have to be thoughtful about and mindful of investing across the cycles. But I can tell you, like, if you look broadly, I'm just pulling it up. Just so I've got it for a frame of reference, but looking at like, so here's the big builders, uh, D.R.. Horton, Lennar, Pulte Group. Those are some of the biggest builders.

I'm not going to bring in NVR because what they do is a little bit, they're a big builder, but they've got the mix with the financing and their business models, a little different stocks for all of those, like every single one of them. Is at or near all time highs. Like you look at them and you think you're looking at like tech stocks, how much they've gone up over the past 10 years, 

Jeff Santoro: right?

Well, that's what I'm getting at. This goes to what we were saying earlier. Like if you buy them [00:43:00] now and over the next two years, they continue to do well. But not price to perfection. Well, because interest rates came down and all, now people are willing to move. And now there's a lot more houses on the market and now there's less, you know, pressure on new home building.

Yeah. Is, is, is an investment from today. A higher likelihood of, you know, being a bad decision for the investor that that's what I worry about right now 

Jason Hall: from a valuation perspective. Yeah, from a valuation perspective, you look at price and this is trailing price to earnings. You can look at their forward estimate the multiple based on that too.

Maritosh homes, Greenbrick homes, Horton, Pulte Group, Lenar. So this is a mix of the biggest. And some that are still pretty big, but really are more focused on like entry level it's like really the sweet spot of where the demand is from a multiple value, every single one of these is cheaper than they were in 2017, 2016, 2017, every [00:44:00] one of them, like even with a massive drop in P E ratio is their earnings skyrocketed over the past few years, stocks that well, but they're like their earnings went up even more, like even factoring in like these, those ultra low multiples.

They're still every one of these is below their 10 year average price to earnings multiple 

Jeff Santoro: interest 

Jason Hall: every single one of them. Well and they're all bigger than they were because there has been so much demand the answer to that question. So I'm going to repeat your question. Your question was if we see interest rates drop, we see existing inventory start to open up more.

And you can say one of two things, take pressure off of home builders, or you can say, take away from the opportunity. What are, what are the stocks going to do? And, and my response is, since the beginning of the year, existing inventory of homes for sale, according to National Association of Realtors data has increased from less [00:45:00] than a million to 1. 3 million. So we've seen a 30 percent essentially call it a 35 percent increase just since the beginning of the year. Back in 2016 it was over 2 million. It should consistently be between two and 2. 5 million in a healthy market based on household formation The available inventory, relocation rates, like all of those things. We're still call it half, a little more than half of the amount of inventory that we should have in existing homes for sale to meet that part of the market, which is like 80 to 90 percent of the market.

We would need to see a massive increase in supply. To reduce the demand. And the other thing too is that housing is local. Um, it's where the inventory is and looking at migration patterns like in the sunbelt. There's just not enough existing inventory in those 

Jeff Santoro: markets. Well, all right. So that, that brings up a question I've, [00:46:00] I've been wondering, right?

So the, the homeboat, the home builder that I own is. Dream Finder homes, which is smaller than a lot of the ones you just mentioned. You can debate whether their asset light model is really asset light, considering they have a lot more land 

Jason Hall: light, but 

Jeff Santoro: they're debt 

Jason Hall: heavy. 

Jeff Santoro: Yes, that I was just going to say that.

But they build starter homes and second homes in Sunbelt like communities, right? Oh no, they're in 

Jason Hall: the right market. So they're in the right 

Jeff Santoro: places and they're selling the right types of homes. So that's my dream finder too. Right. I just like giving you crap about it. But so here, but here's what I wonder though.

If. In a world, I, I understand your point about even if interest rates drop to 1%, there's still a shortage of homes, right? Like, if even if everyone wants to start to move, we still don't have enough. It's, it's 

Jason Hall: math. We don't have enough houses, right? The right size and price in the markets where people want to buy them.

Jeff Santoro: But here's what I wonder. And this is my question to you as someone who knows this space a lot better than I do. Do the larger home builders have a substantial competitive advantage? Because By virtue of their size, for two reasons, I would imagine a [00:47:00] larger company, a larger home builder can be in more places at once and building in more places at once.

And I would imagine they get better prices on commodities, right? If they're buying wood and nails and shingles and all that kind of stuff, they can buy it in bulk and get better prices. Are they competitively advantaged to a significant degree to a smaller company like Dream Finder Homes? 

Jason Hall: Yes and no.

In some ways they are. One way they are is that they can, they have more relationships. They're connected to more, um, of the supply of land. They can, they can acquire more land. And as much as like the options model that we talked about with NVR and that Dreamfinder like that they're, they're using, um, so again, the way that for anybody that doesn't understand, if you're a homebuilder, uh, you need land to build and you need to plan well in advance.

Historically you've had two ways to go about it. Most of the time it was just, you bought the land, you bought the land and you try to buy it from a land developer. So it's already got. Streets and sewer and like the infrastructure is already in place or there, you, you buy [00:48:00] it and there's a plan to, to have that infrastructure in by the time you're ready to start construction in that market.

Right. The other way to do it is you have an option where it's just like options for stocks where you pay a premium and you hold an option to buy the land. It's by some date at a certain price. NVR kind of. Led with that innovation because they had to coming out of bankruptcy in the nineties they cost of capital was really high for them.

So they had to get creative. So they got a bunch of developers to agree to take an option with them. So they, they've kind of led with that model. Dream Finders, like they, they really market that they use that a lot in their investment material. Meritage uses it too. I think when they were kind of at the peak of it, like 70 percent of their land was through options.

It's been less because there's so much more competition now for land. Um, there's a little bit of advantage for some buyer from for some home builders. That they can just buy the land and they're willing to buy the land. Right. So that's where scale has advantages because you just have more [00:49:00] access to capital, right?

I don't know that any of these builders are getting significant, better pricing on raw materials. The other aspect of it for the bigger builders is most of the labor is contracted labor, right? They don't have. Carpenters on payroll. They just have a lot larger pools of contract labor, uh, because they're generally more guaranteed work, right?

Than some of the smaller builders. So that's another advantage that they can have as well. So I think the biggest thing is cost of capital is an advantage for the bigger builders. Yeah. Whether, whether you're using options or. Or you're buying land and borrowing to do it. Cost of capital is just cheaper.

Jeff Santoro: Yeah, I, I've thought about buying more home builders just to, I, cause I, I agree with what you said. I think it's a, you know, you and I have talked a lot about investing in trends and finding things that are going to be, have secular tailwinds behind them for a while. And it does seem like home building has to be, or just we need more homes.

Just like we've talked about cyber security and things like that being. You know, [00:50:00] areas of the market where we're just going to need more of that moving forward. I just, I don't know. They don't interest me that much. I had a hard time. 

Jason Hall: I completely get that. I do. And, and I will say that as much as I've spent a lot of years pounding the table, on this trend and like really trying to be mindful about the cycles and investing and, and the timing Maritosh homes has done really well for me. It's almost, almost 4 percent of my portfolio. And I've continued to buy a little bit here and there. And I have a few other that have done really well for me, but it's not like 25 percent of my portfolio is in home builders as much as like, I clearly saw everything that's happened directionally, obviously interest rates crashing and then skyrocketing.

I never saw that, but like directionally, the, the clear supply demand aspect of it. And that opportunity has absolutely played out based on what I expected, but I have really still struggled, like looking at the multiples now versus the actual stock price and the actual big earnings dollars amount.

And [00:51:00] thinking about how is this going to really play out over the next two to three to five years? Um, I do, I do think that broadly if your time horizon for these is five plus years, I think even, even these prices. Are still going to work out very well. There's just still so many houses that are going to need to get built.

Jeff Santoro: All right, I want to end our Investing Unscripted unscripted episode with an unscripted question for you. So if I were a successful investor with a multi decade track record of beating the market. 

Jason Hall: So if you were, you were me is what you're, I'm sorry. 

Jeff Santoro: So if I were that person much like someone who is not on this podcast, um, why, I don't think I'd be the kind of person who would just constantly crap On younger, newer investors and the decisions they make and the companies they like, especially when said younger, newer investors, [00:52:00] maybe might be, it might be a decade or two before they're proven wrong.

Or maybe they're just learning. Maybe there's at the beginning of their journey. So I'm curious as someone who's at least older than me and doing this longer than I have. Why do you think that is about me that are true? Why do you think it is that some people feel the need? To like constantly denigrate other investors.

It's a piece, a piece of investing psychology that I find fascinating. 

Jason Hall: You know, I've, I've actually thought about this too. And I guess the better answer to that is maybe instead of trying to think about why other people act the way that they do or, or take that approach is this is a hard game, right? It's, it's hard. If you're going to pick stocks, it's very difficult. And once you figure out something that works for you, especially if it's a very disciplined specific approach

sometimes it can get really hard to see. Especially if you've invested in other [00:53:00] ways that have not worked out for you, you see other people taking different approaches. They look like failure to not just have a very visceral reaction to that. Right. So I think that's a big, I think that's a big part of it.

And it can also just be hard to, to, to once you know, like what, what, once you know, what works for you can be just Jesus people, it's just do this. That it works. This works. Just do this. Stop. You're stupid. Stop doing this other stupid thing. Right. I'm s you're smart. Be smart. I'm right. Just follow me. Maybe there's Schadenfreude too.

I don't, you know, I don't know, but if there's any one thing I've learned. So again, let's make this about me. It's a lot more fun when it's about me, Jeff. There's, there's a lot of ways to be successful in this. Peter Lynch bought thousands of stocks. Which is interesting because the words that you wrote last weekend talked about how the evidence is actually pretty overwhelming that for individual investors, [00:54:00] uh, having a more concentrated portfolio.

Generally generates better returns, right, than being too diversified. Peter Lynch was, blew all that conventional wisdom out the window. There was one Peter Lynch though, right? Don't try to be Peter Lynch. I think maybe is the answer there. 

Jeff Santoro: Well, all right, wait, hold on, but let me, I hear what you're saying.

I don't, and I don't mean to cut you off, but I'm going to anyway, I guess what I'm, I guess what I'm saying is this, and I'm going to give you a compliment here, right? So you push back on things that I want to do all the time. 

Jason Hall: And you have some really dumb ideas. 

Jeff Santoro: I, fair enough. I'm not saying I don't my, my, my, uh, portfolio of shame that I keep track of all my sold investments would would, uh, indicate that. But what I appreciate is you stop short of like mockery, right?

And it and it's more like, here's something I learned. Here's something to think about. But in the end, you're like, all right, man, you, you got to go do you. So And I just, you know, like on, on Twitter and, and out there in the world, you just, there's so [00:55:00] much not that, and I don't know, maybe it's just the teacher in me, like the, yeah, you got to find a way to encourage and help people who haven't been through what you have yet in a way that doesn't, right.

You know, like crap all over them that I just, I don't get it. Like if I were Peter Lynch or someone of that caliber and some newer investor was like really excited about some idea I would, I might be like, well, I wouldn't do that. Here's why something to think about here's a risk, but I wouldn't just call it a.

A shit co and mock the person. 

Jason Hall: There is, I mean, there's a ton of that on social, right? You see that. And I think a lot of people like the, because of the incentives of social media, especially for, for FinTwit there's, there's there's positive feedback to that, right? You can grow a following, uh, when you dunk on other people.

So I think that's part of it. I want to circle back to Buffett a little bit, because I will say my, my favorite thing about Warren Buffett. Is [00:56:00] that he's written thousands and thousands of words about his mistakes. He has gone into painful detail about mistakes far more than he's gone into detail about individual investing successes.

And I think the most valuable thing that any successful investor can do to help investors that are investing in shit co's is not tell them they're investing in shit co's is to tell them about the time that they invested in a shit co. Right. That's how you help people help people do better. Agreed. It's a good place to leave it.

We'll leave it there. All right, Jeff. We'll, uh, we'll wrap up this unscripted episode with our relatively scripted ending. 

Jeff Santoro: Before you do it, I wanna, I wanna just, real quick, if anyone enjoyed this, if you thought this completely unscripted, unscripted episode was enjoyable, if it had a different vibe and you liked it, let us know, give us some feedback, either email, social media.

Give [00:57:00] us a review. The review has to be five stars, but you can say something critical in it.

Jason Hall: That's a good rule. That's a good rule. 

Jeff Santoro: Tell us how terrible we are with your five star review. 

Jason Hall: We take critical feedback with five star reviews only. 

Jeff Santoro: That's right. Yeah. If you really want your, your feedback heard, please accommodate with five stars.

Jason Hall: Yes. Yes. No, yeah, please. In Spotify. You can comment, ask questions there. Give us feedback there, email us [email protected] all the ways you can reach out to us.

It's pretty easy. Asynchronous communication is the best. Use it. All right. Time to give the scripted ending Jeff to the unscripted Investing Unscripted show.

As always, Jeff and I love to give our answers to these hard investing questions. But you know what? They remain our answers. Try them on. See if they fit, but you got to walk around in them long enough to make them your own answers. And you know what? Do it even better. Find your own answers to these questions.[00:58:00] 

You can do it. I believe in you. Alright Jeff, we'll see you next time. 

Jeff Santoro: See you next time.​