The Smattering Podcast 76: Stocks That Scare Us

The Smattering Podcast 76: Stocks That Scare Us

Note: Transcripts lightly edited. We may earn commissions via links. Thanks for the scratch.

Jason Hall: Hey, everybody. Welcome back to The Smattering where we ask the scary questions about investing. This is Jason Hall and... plays really well for podcasts; jeff Santoro just glared at me and shook his head. Jeff Santoro. Hey buddy. Did I spook you there?

Jeff Santoro: Oh, you know, it's bad enough that we're doing a Halloween titled episode. You don't have to totally like dad joke it up here.

Jason Hall: Yes, I do. Absolutely do.

So we are being a little bit tongue in cheek, but the title of this week's show is Stocks That Scare Us, and I think you're gonna enjoy it.

It's gonna be a little cheesy, of course, but fear and greed are like the two emotions that drive so many investing actions. So I think this is actually a really, really good toolbox episode, Jeff. But before we get that, before we even do our housekeeping, we have an important announcement that we want to share, right?

Jeff Santoro: We do. Announcement then housekeeping. So here's the announcement. We [00:01:00] are going to try something new. We are going to do a live podcast on the first Friday of November.

We are calling this, if it goes successfully, we will do it each month and we will call it First Fridays. That is going to be the name of our live Friday show. I don't know that we know exactly what it's going to be yet, except an experiment.

So here's how this works. The platform that we record on allows audience members to receive a link and log on and watch the show live and even ask questions in the chat box or actually record themselves or ask permission to actually come on the show.

No promises about which of these features we're gonna try in the first episode, but we're gonna give it a shot. So here's how it works.

If you're interested, step one, subscribe to our newsletter.

You can get the link in the show notes or on our website. Get your name on that list. We will send the link out that day Friday, November 4th to the entire [00:02:00] email list So obviously some people will get it who aren't able to join us, but that's how you do it.

And all you'll have to do is click that link at 4 PM on Friday, November 4th and you should see us live. We will record a podcast about whatever the hell we feel like recording a podcast about. We haven't thought of far that far ahead yet, but we're going to give this a shot. We think it'd be a fun way to interact with the people who listen to the podcast and give a little extra content to our fans here.

So we'll give that a shot. So more information on that, we'll, we will mention it again in this, this week's newsletter, and we'll post it on social media and stuff like that too. So if you're interested, check that out.

I think that's it, right? I didn't miss anything with that.

Jason Hall: Yeah, that's, I mean, that's the big one.

So we're, we're excited to give it a try. And, and my guess is that it's going to be a pretty loose format, free form sort of thing. Where we want people to come on and enjoy it and have, ask questions since it's on Friday, we'll be able to look back at what's happened during the week [00:03:00] in the investing and finance world.

We'll, we'll talk about sports, we'll talk about golf, talk about... no, we won't talk about any of that stuff.

Jeff Santoro: No. We'll talk about the news of the week. Yeah. Usual stuff. Yeah. Plenty of banter. We'll make fun of each other.

All right. Housekeeping. Thank you again to those who have been giving us ratings and reviews on the podcast apps. That's super helpful for us in getting the show out.

We got another one this week from username PresidentsFavorites. So, and it was a pretty lengthy five star review. So if anyone wants to go to the Apple podcasts and read that, that'd be great. So thank you. PresidentsFavorites. We appreciate that.

So again, five star ratings on Spotify, five star ratings on Apple Podcasts, and actually a review on Apple Podcasts. Those are the best ways to help the show. We really appreciate it.

All right. With all of that stuff out of the way let's dive in here, Jason. Stocks that scare us.

So I was thinking a fun way to sort of organize this conversation would be [00:04:00] to categorize the different ways in which a stock might scare us. So the first one I came up with is, what would make a stock scary or what's the stock that is scary to you based on just the position size in your portfolio?

Jason Hall: Yeah, you know, this is one, honestly, that I don't really deal with a lot. Because I do tend to have a lot-

Jeff Santoro: Because you're a terrible investor? Is that why you don't ever have large positions?

Jason Hall: No, I have, I own so many stocks and I tend to take small bets, right. And diversify and add stocks over time.

But I have, like Nvidia is one earlier this year that I was concerned. Because it had been such a huge winner and my concerns about the cyclicality of the industry and just the valuation, even with the immense opportunity in front of it, you know, I was concerned about that one.

And I still think that's one a lot of investors should be mindful of because of the [00:05:00] risk, the downside risk. And I mean, if you, if you've already picked up, you know, the next 10 years worth of returns in NVIDIA, you know, maybe it's time to take that off the table.

The one that I always think about Jeff is GE back in 2000, you know. Jack Welch retired somewhere right around there. And I mean, books have been written about Jack Welch and tons and tons of dissertations had been done by finance grads, management grads, looking at the success that GE had become.

And then the company spent the next 15 years kind of coming apart. The global financial crisis almost bankrupted the business. It became a, was one of the systemically important financial institutions. It's lending business was massive. Consumer lending, right? Just this really huge conglomerate of all these disparate parts that didn't really fit together.

So, and my concern is [00:06:00] that I think a lot of people should think about that, you know, cause the reality, a lot of, you go back then, a lot of people weren't too worried about GE back in 2000, you know. A lot of people worried about tech stocks, people weren't really worried about GE. And then of course, GE is still today worth a lot less than it was at its peak.

Jeff Santoro: Yeah, I'm in the same boat as you in the sense that I don't have any, I have not been investing in individual stocks long enough or have not been lucky enough to have anything grow to a point where it would be anywhere near the size of a position that would make me lose sleep at night.

But I absolutely know that that can happen. You know, if you, if you make a pretty sizable bet on a company and then it goes on a crazy run or maybe you've just owned it for a really long time and all of a sudden it's 5, 10, 15, 20, 25 percent of your invested wealth that could really be scary.

That could be the kind of situation where you're thinking to yourself, if something happens to this company, if it gets cut in half, that's going to be a substantial, [00:07:00] you know, impact on my investable wealth. So I think now that number for every person is different. The largest stock I actually have is just the stock that my wife has gotten with her company. I don't ever think of that as like part of our investments because it's just there and I don't try to buy it. It's just part of her compensation package. So that would be one where I would keep an eye on and consider trimming if it ever got to be like a really big part of our total portfolio.

But thinking about the stocks I have chosen, I just think about the two that are the biggest in my portfolio based on cost basis, which are Ryman Hospitality Properties and Datadog.

And I have confidence in both of those companies. There's no, there's nothing about them that makes me worried necessarily, but just because they're the largest in my portfolio, they're at the point where if they were to get significantly chopped down, I would, I'd feel it. It's a dollar amount [00:08:00] that I would be uncomfortable losing. I also have high confidence that over the very long term, they're going to be good investments. So I would say those are the ones that kind of pop out to me.

Jason Hall: I got two things I want to add to that real quick. One, the first thing is getting back to the, like the percentage of your net worth. I think that's a really valuable way to think about it.

Also I think you have to be careful about thinking about your net worth today versus your net worth in the future. Most 35 year olds, the percentage of their net worth that their largest stock is, is probably still, even if it's pretty big, it's probably still small compared to what their net worth is going to be when they're 55 right?

So a lot of times in those cases, you look at it and you might be afraid because it's getting so big. But then add 10 years of wealth compounding or 20 years of wealth compounding within the context of whether or not you still think that's a great business and can grow more valuable. And the answer that you give yourself may be very different in the way you diversify yourself on that one and reduce that fear [00:09:00] is just invest in other stuff, right?

You just, you know, it doesn't mean you have to sell, right? It means maybe you just need to focus on investing in other things. Make sure you know that company well, so you do avoid the GE failures, right? Those kinds of scenarios. But I think that's the, that's the way I think about it.

The other one I wanted to mention, too, is you're talking about is my wife also has part of her compensation is equity. And I think there's a lot of people out there, I think it's probably far more common than uncommon for people that do have equity incentive as part of their comp plan, that it becomes an outsized portion of their net worth. And what you have to remember is that you become so leveraged to your employer, your income, your net worth for stock. And maybe you're buying stock on, you know, through the purchase plan, and you have stock in your 401k.

So you have all these little pockets that can be dangerous. So I think that's one that, that one [00:10:00] scares me. Honestly, I think for other people, particularly people who aren't necessarily very sophisticated as investors or really thinking broadly about things like diversification beyond like clicking the little buttons in their 401k. They don't think about it broadly. It's like, come on now, you know, you make 50 percent of your family's income comes from this company and 10 percent of your net worth is tied to the company stock.

Jeff Santoro: I've heard a certain certified financial planner who we are going to have on in a couple of weeks, so I won't give it away yet say this. Which is basically it's sort of the double whammy if, if you were to lose your job because the company does poorly, you're going to lose that income and you're going to see that stock really take a hit.

I think it's also really important, the point you just made about, so for example, both of our wives stocks, you know, stock incentives that they get for their jobs as we all get closer to retirement [00:11:00] age. You know, I'll use my wife as an example. If she were to stay at her current company until she retires, that'll be 30 something years of employment with the same company, getting little bits of stock all along the way.

So I, if she, unless she moves jobs or we sell some of it, we will get to a point, I think, where we are in our late 50s, early 60s, whatever, close to retirement age, and all of a sudden, that is an enormous portion of our invested wealth, just because it's been added to for decades, you know. So I think the closer you are to retirement, the longer you've been at a company accumulating stock, You know, equity as part of your compensation plan, you just have to kind of keep an eye on that.

Jason Hall: Yeah, it's a hell of a good problem to have, but it can be a hell of a bad problem if things don't go well.

Jeff Santoro: And you're right. You don't think of it because it's just you, you buy it. Some people just buy stock through their normal retirement account. Automatic, you know, automatic payments, whatever. Investments. That's the word I was looking for, that come out of your paycheck every two weeks.

Jason Hall: Whether it's going into your 401K or [00:12:00] it's going out of your paycheck, you don't-

Jeff Santoro: exactly.

Jason Hall: You don't even think about you, you don't do anything. It just happens.

Jeff Santoro: It just happens.

Jason Hall: Passive investing can be great, but it can be devastating in something like company stock.

All right. What's next?

Jeff Santoro: So related to position size. And maybe we already kind of covered it. I know I have a couple in mind, one of them we already talked about. But what about stocks that scare you that are just on a huge run? Or when you're, when you have a stock in your portfolio that's gone up really fast and really, and really significantly?

Jason Hall: I can't talk about Nvidia again, because this is the one that everybody talks about here.

Jeff Santoro: I had it on my list too, because it went up so ridiculously quick. You know, within months, it was up over 100%. I have another one that we can talk about.

Jason Hall: I do too. You can go ahead first. I've got one.

Jeff Santoro: So another one that I own that I'd actually like to add to, but I haven't yet because it's just been so expensive for such a long time, is Celsius Holdings.

Jason Hall: Yeah. Oh yeah.

Jeff Santoro: So, so they're, they're an energy, workout drink [00:13:00] company that has been growing like triple digits for a pretty good amount of time. They have, they signed a distribution deal with Pepsi, which has already started to and will continue to get their products in, in front of more and more customers.

So. You know, it went up. The position I had that I bought a long time ago at this point is up over 100%. I'd love to add to it. It's just really expensive.

Now it's not scary for me yet. But if that were a stock that I had put a one or 2 percent position cost basis wise into back when I bought it, and then it jumped the way it did, maybe it grows to be a significant portion.

So Nvidia and Celsius are the two in my portfolio that jumped out to me when I thought about stocks on a big run. Do you have any others besides NVIDIA that you can think of?

Jason Hall: Yeah, I don't know the exact dates. I'm kind of punching around right now trying to find some, some numbers. I think it was basically from the beginning of 2020 [00:14:00] to the, I guess really the end of 2020.

It was early 2021 Brookfield Renewable stock went up like 80%. If you go back to the beginning of 2019, it was up 220%. Now, in fairness, the first part of that run up was just kind of some recouping previous declines in the stock and that kind of evaluation resetting a little bit, the stock came up a lot.

But this is a company that builds and invests in renewable energy utility scale, renewable energy projects like wind farms and solar farms and they own hydroelectric dams. This isn't like DataDog, right? Where they're going to, you know, they can triple their customer account in two years and get, there's really high operating leverage. You know, we've talked about the SaaS model and how it's so attractive, right? Because like their fixed costs are [00:15:00] so low and incremental revenue can be so incredibly profitable.

I mean, this is, they buy stuff and they build stuff that takes years to build and all kinds of regulatory approvals. And then they sign like 20 year contracts and the revenue on those assets basically grows inflation plus a little bit. It's, it's not the kind of stock that can do that.

And the yield, I think at the peak, and again, the whole thesis, they call it a yield co, they call it a yield co the yield was over 8 percent in the beginning of 2019. It was below 3% at the peak. This was, it was kind of scary watching the stock do this. And the thing is, this was happening the same time we saw all the tech stocks boom and get bubbly and everything was going on with NFTs and crypto and all that kind of stuff.

So it was kind of all stocks. And I feel like an idiot because I wasn't more aware that I was very hyper aware that with Brookfield Renewable [00:16:00] and a couple of other similar businesses where their stocks kind of diamond handsy went to the moon. But it just, it should have scared me more than it did if I'm being honest.

Jeff Santoro: Well, you, you reminded me of something that I wasn't thinking about when we planned this episode, which is the entire stock market kind of scared me during 2020 and 2021. I remember, and I've said it before on the podcast, I remember looking at my portfolio and just watching everything go up every day, no matter what it was and just thinking, it is not this, it cannot be this easy. I've been investing, you know, not in stocks, but in the stock market long enough to know that this is not normal.

So the whole thing kind of freaked me out. In that sense, when it was just on that crazy bubbly run. So I think it's tied exactly into what you were just talking about.

Jason Hall: Trex is the other one this year. I think from the beginning of the year through midsummer, it was up 80 percent on zero [00:17:00] good news. Part of it was the market just kind of coming back. Cause it got beat up pretty bad. Of course, since it's done what those stocks do when they go on those runs, it's down about 30 percent from the high.

Jeff Santoro: So. Since we're talking about stocks on runs and stocks getting beaten down, let's, let's go to the beaten down side of the thing. What is the stock that scares you that is beaten down? Either in your portfolio or a story you can remember from the past?

Jason Hall: So I would say one that certainly has me worried is Tellurian. This is a company that's trying to build a liquefied natural gas export facility. And the tailwinds are really good for that industry. Huge demand. You've seen Chevron and a lot of the other big oil companies have gone into this business and have looked to build these.

Like they've built, Chevron's built some big ones in Australia. Cheniere Energy [00:18:00] has built a couple in, on the U S Gulf coast. The U S has massive amounts of cheap natural gas. We've seen what happened in Europe with Russia invading Ukraine and Russia is a major energy supplier to, to Europe. There's lots of pockets of the world that don't have enough energy and they're looking to diversify supply. And this is a way to get it into those markets.

But man, it's just been dragging out for years for them to get funding. To get this project off the ground, you know, they have all the approvals and everything are in place. I mean, I, I honestly, it's gotten to a point where I just, I don't even bother looking at the stock price because it had fallen back into dollar territory just because they couldn't get it done.

And this is one that scares me. And here's, here's what really scares me the most, Jeff, is, you know, me, I love a good story. Especially when there's a clear economic case for whatever it is they're selling and there's a pretty clear economic case for [00:19:00] LNG exports. And I'm afraid that they're going to do something and I'm going to get enamored again and I'm going to chasing, chasing this fairy tale.

Jeff Santoro: I'm glad you, I'm glad that's how you explained it because that's exactly why, that's exactly my concern. What scares me about the one that I put on the list here, which is and I've talked about it before and I've written about it, which is Outset Medical

Jason Hall: Yeah.

Jeff Santoro: And it's not so much that it has gotten just destroyed and it's down 80 percent or my position is down 70 80 percent from where I bought it. It's more that I don't think the company's dead, and that scares me.

I still think this could end up being just a really rough patch that investors look back at, kind of like people look back at, you know, everyone always cites, oh, remember Amazon was down 90 percent at one point? You know, I mean, I'm not saying Amazon.

But then I'm, I also get scared cause I realize I could be completely wrong. I'm [00:20:00] not a medical expert. I'm a novice investor. I could be completely misreading something. I don't know the industry. Maybe I'm completely misunderstanding. It's not even a competitive advantage. Maybe I'm completely misunderstanding its competitive space because I love the story so much. Cause I'm so interested in the idea that this could revolutionize how people get dialysis, which is this time intensive and kind of life ruining, but life saving treatment you have to get if you end stage renal failure. So.

Jason Hall: It's the worst possible combination as an investor where, you're an investor, but you're also a fan, right?

Jeff Santoro: Yeah. And that's, the more I do this, the more I feel like I'm a investor who wants to be invested in companies that I'm a fan of. You know, you and I joke all the time, you'll tell me about some stock and I'll, if it's anything slightly boring, I'll pretend I'm falling asleep while you're talking about it.

But I'm also smart enough to know that [00:21:00] if it makes you money, it doesn't matter how boring it is. But I just find myself drawn more to the stories, the ones that I can kind of wrap my head around and think, oh, this is, this would be a really cool thing for the world. And I'm just not as interested in the company that makes the plastic that goes around wires or whatever the random boring thing is.

So I don't know. I don't want to talk too much about Outset, I talk about it a lot. But that's, that just jumped out at me. And especially when I heard your reasoning for picking Tellurian, and that was definitely the same reason I I'm scared about Outset.

So here's one that I put on the outline, but I couldn't think of one from my own investing career. So I wanted to see if you had an idea for this one, and if not, we can skip it.

How about a stock that scares you because it's facing either really intense competition or maybe new competition? Someone that's entrenched and is now facing a disruptor or something like that.

Jason Hall: So I've got I've got two examples, Jeff. The first one, the first one is a company that... Confluent, I've [00:22:00] talked about before. They're doing data streaming, right? So helping companies and organizations leverage data in real time instead of like batch reporting after the data has come in wherever it is.

So helping businesses be more nimble, more responsive, more competitive, like all that kind of thing. And the interesting thing is Confluent built on an open source product that the founders of Confluent created back when they were at another company. And then they built a business selling a product that sits on top of that's built on this open source product.

The interesting thing is that we're seeing increased competition from proprietary products doing data streaming. So Microsoft has a data streaming product for Azure. AWS, I'm pretty sure they have a data streaming product that they're, that they're building as well.

So what, well, it's, it's one of those things where we think about, you know, [00:23:00] the thing that's so compelling about open source obviously is data portability, right? Being able to, to take it easily to other platforms, whether you're housing it in house or you're moving it to the cloud, or you're doing a hybrid where it's a little bit of both. And it's a lot of, a lot of companies like something like 70 or 80 percent of the fortune 500, they're building stuff on Apache Kafka, which is the open source product. They're doing something with it already because they have IT people, smart people, programmers, coders that are building stuff internally.

And that's an opportunity for Confluent as these things become more complex where they can do it and companies aren't trying to build it on their own. A lot of companies, they just don't want to build anything on their own anyway. They don't care if it's proprietary, right? So certainly increased competition. And I think this matters a lot for a company like Confluent because Confluent is one of those companies that's still burning cash. That went public to raise a bunch of capital to use, to aggressively spend.

I think they're relatively close to being able to [00:24:00] flip a switch, but they need to grow a lot more. And combine increased competition from this niche that could be really big, particularly I think as artificial intelligence becomes more capable and to become more and more a part of data streaming, I think there's real concerns for a company like that.

The other one I wanted to mention, and a lot of people might not think of a company like Kinsale Capital as being Really facing competition. So Kinsale Capital does specialty insurance, right? They basically ensure like all the, the misfits out there, the businesses that don't really fit in a nice bucket.

Jeff Santoro: Yeah. Like ax throwing and race, you know, race tracks and stuff like that.

Jason Hall: Horse farms, stuff that, yeah, things that maybe there's a weird risk profile and maybe not a lot of data. And, but one thing that we see, so Kinsale Capital has become, I think they're the biggest or second biggest pure play in, in this, these alternative lines that they focus on.

But what we see, I mean, [00:25:00] like every, it seems every decade or so, insurers, somebody at some big insurance company is going to say, we need to go after that. It's, we can make money there. And they go in, and they underprice to take share, right? And Kinsale has had incredibly profitable underwriting for five plus years at this point, incredibly profitable. And that's been really important because interest companies make money two ways.

They make it, ideally, they make an underwriting profit, right? There are, the premiums that they collect are less- or more than the, than the claims they have to pay out, right? That's an, that's your underwriting profit, right? And then you make an investing profit too, because you have a float, right? All of those premiums that have come in, you get to do, you get that money comes in, right, comes in upfront and you can invest it, right?

Interest rates have been, so were so low for so long, they weren't able to make much [00:26:00] yield in safe investments, right? That were easily liquid to, to continue to be able to pay claims. That's changed, right? Interest rates have skyrocketed. So they're just in this position where they can make a ton of money on both sides, but I'm always afraid the cycle is going to change and other insurers are going to jump in and they're going to ruin the business for everybody.

Jeff Santoro: Yeah. That's a really good, that's a really good point. Not so much with Kinsale, but the Confluent got me thinking about some specific companies came to mind. But it really got me thinking about how many of the stocks that got really popular during the 2021 run up are stocks with no real competitive advantage.

Like a lot of these tech stocks that do a thing that honestly anyone could do, you know, like that, that I think is a, an area of risk where, or, or a place where you could be scared about a stock that is related to [00:27:00] competition.

So like, for example, one that came to mind was a stock I used to own and I've covered a little bit for some of the work I've done with The Motley Fool is a company called Docebo, which does like software to train your employees.

So if you're. You know, a cubicle worker at a XYZ company and you have to do a 20 minute online training on your company's sexual harassment policy or something like that. Like they're the company that makes videos. And they do well, they are growing, but I just can't help but think, well, couldn't anyone else do that?

Like it doesn't, I don't know what their competitive advantage is. If I'm a company looking for someone to make a training video. I don't know what keeps me with them versus another company that offers to make a training video for half the price. So that's just one example that popped into my head.

Consulting firms also, I feel the same way about that. Like, you know, I guess they, they have a reputation that goes along with their name, but [00:28:00] you could get advice from anyone, you know. So I, it's just things that popped into my head that, that general lack of competitive advantage or like lack of a moat when it comes to that kind of thing, I think is an overarching way a stock could scare, could scare me even if I wasn't thinking of any specific ones in my own portfolio.

All right, what about, if we turn to like the financial statements for companies? What are some stocks that might scare you? When it comes to the balance sheet or maybe just bad trends, things heading in the wrong direction. I have a couple in mind, but I'm going to see where, where your head went with this one.

Jason Hall: So Tyler Crowe and I've been a little bit preoccupied with, with this lately over on our YouTube channel. Because there's so many dividend stocks that have added a tremendous amount of debt over the past decade at the same time that interest rates have gone up.

And two things have happened as a result of that. And we definitely talked about this a little bit last week[00:29:00] when we were talking about the impact of interest rates on companies, publicly traded companies in particular. One is the obvious one. Cost of cost of capital, right? Whether you're raising more money or you're refinancing debt, rising interest rates are going to create a tremendous burden of additional expense for a lot of companies.

At the same time, it's, investors have other alternatives. But in a lot of cases, safer alternatives to get yield. So the potential investor pool has shrunk.

So one that I think potentially investors are maybe still too optimistic on- some investors. I mean, the market's clearly not. But some investors I think are, is like NextEra Energy Partners. Dividend yield, I haven't looked at it in a day or two, but I know at one point it was 13, 14, 15%. Which is the market clearly saying that [00:30:00] dividend's coming down, right? That's what it says. That's what it says. And the buyers of that stock are saying that dividends looks so good. Looks so good. Disclosure. I own NextEra Energy Partners.

They just announced, they just announced a new like capital plan where they're not going to issue equity for at least the next few years, which is kind of, duh, everybody knew that, you know, because the stock price had fallen a bunch. But they announced it and the stock price fell like 30 percent that day.

So, the challenge for a company like NextEra Energy, Tyler and I did a video, it's going to publish the next day or two, that we looked at their debt maturities. And they have half their debt maturing over the next two and a half years. And a third of it's like less than 1 percent yield.

They're probably going to be paying seven or 8 percent yield on that debt as it matures. And [00:31:00] then, and that's like $1.5, $1.6 billion. They got another one and a half billion dollars in debt. That's at about 4%. Same thing. They're going to be paying six, seven, 8 percent on that debt.

So the money has to come from somewhere, right? And I think a lot of investors looking for safety, Jeff, are looking at stocks like that. For some damn reason, they think it's safe. And you know, that's concerning. That scares me. It really, I'm not scared for myself, but it scares me that investors are thinking about that.

I'm starting to get a little concerned about Dollar General, you know, Dollar General added $3 billion in debt relatively recently. It doesn't have a bunch of cash. And their profits have taken a huge hit. Their CEO left after less than a year. Their old CEOs come back, he retired, went, stayed on the board. Now he's back as a CEO after 11 months.

Bro, you might've caused the problem. Are you really the guy that can fix it? You know, I mean, there's just, there's real concerns I have. About debt, [00:32:00] especially.

Jeff Santoro: Yeah. The, this part of the conversation reminds me of a part of what we talked about in last week's episode about should investors lower their expectations. Which is around, I don't think we're done seeing the fallout of all these high growth, but lack of prof, you know, lack, lacking profitability companies.

And we're going to see over the next several quarters which companies really can become profitable and which are not going to be able to. Though I looked for one in my portfolio to use as an example That I hadn't talked about yet, because I didn't want to keep going back to the same ones. And I found I own a company called Sprout Social which is, they do social media management for companies.

And I looked at all the- the spreadsheet I keep with all the data and it they're like consistently not profitable. They're not really getting any worse, but they're not also making any moves towards profitability. And at [00:33:00] the same time their year over year revenue growth is just slowly eroding and their customers are slowly eroding. So not so much a balance sheet issue for this company, although I didn't look at that to to see if there that's a concern as well.

But it was more about trends for me. It's the stock I own. It's not a big position at all. It's just sort of a speculative, let's see where this goes from several years ago. So it's down pretty big because I bought it way overvalued when I didn't know what I was as much about what I was doing. But, when I look at trends, when I look at where things are headed, that's one that sticks out to me as I'm not so sure their position to turn this around, but we'll see.

Jason Hall: I'm a little, I'm a little leery, not scared yet, but I'm a little leery of M&T Bank's balance sheet. People don't think of balance sheets for banks, but it's the most important thing with a bank to think about because they're so leveraged. You know, for every ten dollars in capital they have nine of it they give to [00:34:00] somebody else. They lend it out, right? So incredibly, incredibly, incredibly leveraged businesses.

With M&T, you've got a decent amount of of their commercial portfolio, commercial loan portfolio is ,or their real estate portfolio is commercial real estate. I don't think it's a major concern, but I think it could really put some serious dampers on its go forward profitability.

And then on the flip side, you look at Truist Financial, I'm a little bit scared of their residential portfolio. Most of it's mortgage backed securities. Most of the part that I'm worried about is mortgage backed securities yielding like 2%. You know, you can get double that on online savings. And you're not a good business if you're, you know, earning 2 percent yields and you're paying 4 percent yields. So...

Jeff Santoro: Yeah, I think banks is an obvious statement to say that you have to keep an eye on the balance sheet for them. But there's been so [00:35:00] much attention paid to balance sheets of banks ever since March when we had our little mini banking issue. Not a crisis. And so I'm not surprised that that's been on your mind.

Okay, so let's, to wrap up the conversation here, because we've been spending 35 40 minutes-ish talking about stocks that scare us. Let's be positive, Jason, to finish things out. What is a scary good stock that you have in mind?

Jason Hall: I'm going to stick with banks. I'm going to say Live Oak Bancshares.

Jeff Santoro: Ooh, I'm happy you said that because I also own... Own stock in Live Oak Bancshares. Tell us why Jason.

Jason Hall: The business model and the management, and they built this business model that on the surface, you wouldn't think it's necessarily that attractive, that appealing. Cause their, their capital, their, their deposit capital cash is mostly like online savers.

And that's, you know, the most expensive depositor you're going to find. Again, [00:36:00] online savings and CD yields, you know, 4% plus, 5%, maybe some cases. That's expensive money if you're a bank. Particularly if you're one of those banks that's done a lot of mortgage lending or any kind of fixed rate lending back in 2020, 2021. Or really the whole decade before that if we're being honest, and you've got a bunch of low yielding fixed rate loans on your books. They don't. They lend- essentially all of their lending is to small businesses.

Number one, those are adjustable rate. So that means that the pressures that a lot of other banks are dealing with, with depositors asking for more yield while they're not earning any more yield on their loan book, they're not dealing with that. I mean, it takes time, right? Those loans, they just annually, right, and you're seeing monthly and quarterly increases in deposits. So, it's not a smooth, easy thing, but again, they're built for it.

And they're really, really good at originating. They've built a really smart business focusing [00:37:00] on industries where there's opportunity and there's profit and there's growth.

Jeff Santoro: And they're careful about which industries they lend in, right? They specialize in only certain types of small businesses.

Jason Hall: When I say there's industries where there's profit, I don't mean that, I don't mean that Live Oak's looking for profit for themselves. They find industries that are profitable.

Jeff Santoro: Right. Started with veterinarians, right? Yeah. Wasn't that their first?

Jason Hall: Yeah. So they've, and they don't go crazy and add a bunch of new industries. They take their time and build out their business and get it stable and make sure they have the right people running it. Really good origination, really good loan quality.

And then, as the capital and the cashflow of the business supports it, they add additional lines and grow and grow and grow. And they're starting to try to expand banking relationships with those borrowers too, right? They want to be the full bank for small businesses. But they've been, again, they've been slow and methodical about it.

I'm just a big fan of their founder. Still the CEO, not a young man, but man, they're scary-good at what they do.

Jeff Santoro: He's a great, [00:38:00] yeah. And he's, he's so great to listen to on the earnings calls. He had a great quote. The last one, I believe, where he just basically called out the entire financial industry. Was like, yeah, don't do that. So he's entertaining.

Jason Hall: Actually, that might've been our first rough cut. We might've talked about that.

Jeff Santoro: Yeah. Yeah. Yeah. That's a good one.

All right. So we're going to take a quick break and we have a totally different conversation to have after the break. But it is related to last week's episode about lowered expectations for stock investors.

So stick around. We'll be right back.

Jason Hall: Hey everybody. Welcome back. Jeff. You're back too. That's great.

Jeff Santoro: We're both back. So last week we talked about lowered expectations for stock investors. And one of the wrap up points that we made at the end of the episode was, may not be a bad idea to think about diversification, not within your portfolio, but asset diversification. Where, what you own, stocks versus [00:39:00] bonds versus cash versus whatever.

The one thing we didn't mention, and we hardly have ever talked about is gold. And I know next to nothing about investing in gold. I know enough that I, or at least I think I know you don't actually physically get gold. Unless you're a senator from New Jersey.

So you should explain to me as if I am five years old, how does one invest in gold? Is it smart to invest in gold? What does it mean to invest in gold? Give me the, give me the 101 here on gold is an investment.

Jason Hall: By the way, this segment is sponsored by SuperShares Gold ETF. Nah. I'm kidding. It's not sponsored by anyone. I just, I...

So gold is interesting because gold is something that has functional use. It has industrial applications because it doesn't corrode very [00:40:00] much. It's really useful for as, like as a coating and like transmitting electricity and that kind of stuff. It has really neat, practical... that's a really small market though, like in terms of like the total market.

And then of course there's jewelry, which is a pretty good sized, pretty good sized market as well. And then you have a lot of gold that's sitting in vaults that are held by some countries still hold a little bit of gold. But the most interesting thing to me about gold is that the pricing of gold is still heavily affected by investor speculation because gold is often, again, it's considered with other precious metals, an investable asset class.

And generally, people look at holding gold for one of kind of two reasons, really. One is it's kind of a hedge against [00:41:00] uncertainty in a lot of cases. Like inflationary environments, gold is considered an asset that can be attractive. And like, if you look at if you look at gold pricing, daily spot prices against inflation over the past year and a half or so, gold prices started kind of going up a little bit before inflation became a thing

. But they started going up when stocks started going down, again, the uncertainty thing. And then once inflation was rampant, gold prices continued to move higher and higher and higher. And They've still stayed relatively elevated. They've come down a little bit. But again, kind of that hedge against uncertainty and hedge against inflation is kind of, that's, I mean, that's the thesis for holding gold.

Jeff Santoro: I've heard the hedge against inflation thing. But I usually, like, I've heard it said in the last couple of years before inflation really flared up. Like it was something as I became [00:42:00] a more aware investor and paid more attention to investing topics. This is like, you know, early 2020, 2021. Anytime gold came up, it was like oh, some people think it's a hedge against inflation, but the stock market was kind of going to the moon at the time. So no one really talked about gold too much.

Is it really a hedge against inflation historically? Has it been?

Jason Hall: Yes. Sometimes, but not always. I mean, I guess that's the best way to put it. But, I mean, here's the funny thing about, like, if you go back to-

Jeff Santoro: Cause I feel like if it really was. Like, if it was like proven fact that it is, wouldn't gold prices be skyrocketing right now because people would be piling into gold as a hedge against inflation?

Jason Hall: Yeah. I mean, that's, that's kind of it. I mean, gold prices this year are up around 21%. If you go back to, or over the past year is up around 21%. If you go back the beginning of the year, it's kind of been up and down.

And it's come [00:43:00] down since late spring as inflation became less and less of a concern. You started hearing hard landing turn into soft landing, get turned into no landing. And then here more recently over the past month, a few weeks, since the beginning of October, really, I guess is, is when it happened. Gold prices are, you know, heading back up again.

Jeff Santoro: No, I just, so here's one of the things I'm thinking as I hear you explain gold. You say that there's a very small market for its practical applications, right? Helping with, you know, it's in materials that, you know, electronics and things like that. Very small part. There's also like jewelry and people wanting it for that sort of thing.

Jason Hall: All right. So here's roughly, this is gold. org, which is the world gold councils website, Jeff. And this is how they break it down. It's just through the end of 2022. And they described this as total above ground stocks. So this is the gold that's been removed from the ground already.

About half of it, 46 percent [00:44:00] roughly is in jewelry. So again, pretty reasonably large size of the market.

Jeff Santoro: Yeah. It's bigger than I was expecting.

Jason Hall: Yeah. Central banks hold around 17 percent of the world's gold. And then you have bars and coins, which is a good large amount of this is going to be held by investors like ETFs. And of course gold coins, that's something people can possess and hold.

But a lot of like these gold ETFs and gold trusts, like they own the gold. They put it in a safe, pay for armed security, and then you invest in that ETF or that trust, and you pay an expense ratio that covers all of those fees, right? So you own a share, you own a position in the trust, and then the trust owns the gold. That's about 22%.

And then there's a 15% bucket that they call [00:45:00] other, which is just, just that. Other gold. So again, the key thing is that roughly a quarter of it is the, and kind of the, the goal that's mostly investment related, speculation related gold, and it moves the market, right? It sets, it basically sets the price.

Jeff Santoro: So if you're listening to this and you're interested in buying gold, is it is the easiest way to do it just to buy into one of these ETFs? It sounds like it is.

Jason Hall: Yeah. So if you- There are people that purport physical possession of gold. A lot of times it comes to things like economic collapse and you know, all that, that sort of thing. If you want to physically possess gold, you have to buy it. The downside of that typically is you're going to pay a retail markup, right?

If you go to the, you know, We Buy Gold. Seems like every town's got a [00:46:00] place like that, does that, right? They're gonna give you a wholesale price for the gold and then they're gonna sell it at a premium.

Jeff Santoro: Right. So right off the bat that's eating into any potential return you might get by selling it at a higher price down the road.

Jason Hall: Right. Right, and if you, but if you want to physically possess it, that's kind of the way it goes I think there's still some laws about how much gold you can physically possess and own in your home. So it's another concern to have.

But for most people the easy way to do is to own it virtually, right, by investing in one of these assets and you own the asset, the asset owns owns the gold. Flip side of that, Jeff, is you get, you know, we talked about it a lot with index funds you know, really the impact of fees is an enormous impact over the long term on returns.

You can pay one or 2% in fees on an annual basis for these gold funds pretty quickly, right? [00:47:00] So it can be a pretty significant impact to your returns.

Go ahead.

Jeff Santoro: So here's, here's my question. If, does higher interest rates and the resulting Improved yield you can get on your cash in a high yield savings account. Do you think that makes gold more or less attractive as an investment vehicle? Like was it more attractive back when there weren't as many quote unquote safe places for your money that could get yield? Or do you think it's the opposite of that? Is it more or less attractive now than it was a year ago?

Jason Hall: So I'm going to go even further back than that. If you look at gold from basically 2010, 2011, 2012, probably 2012. For the next, most of a decade, right? Kind of heading into the pandemic.

Gold went sideways for an enormous portion of that time. Interest rates and inflation, especially, like it really went up early [00:48:00] after the financial crisis, the global financial crisis. Because the Fed's money printing, all of that, there was the idea that that was going to be massively wealth destructive and gold was going to be a huge win because inflation was going to run rampant.

We never saw that, right? So gold never really turned into this huge winner as a result. If you go back to 2000 to 2009 or 2010, gold was up like 500%. It had just this huge run where it was far better than the market. Looking at gold right now, again, it's come down, I don't know, eight or 9 percent over the past month or so.

I've never really been a fan of gold as an investment category. I understand the idea of that diversification. But to me. If you're thinking about again, beyond societal collapse, I really struggle with the idea of gold being [00:49:00] substantially worthwhile outside of a worst case scenario, you know. We're saying a worst case scenario where you still have internet access and your broker still works, right?

Where you gain substantial value against against inflation, right? I just, I really struggle with, with that. I don't see that being the scenario that, that makes sense for, for most people.

Jeff Santoro: I've always felt the same way about it. I'm not that I've devoted a lot of time thinking about gold, but I have a friend who is obsessed with silver and feels like that's the precious metal to own, and collects silver coins. And he's a little bit of a conspiracy theorist. So I think this is his hedge against society falling.

Jason Hall: Yeah.

Jeff Santoro: But I just can't. Putting value on something like gold or silver in the year 2023 just seems kind of silly to me. Because we're not really anywhere close to, you know, hundreds of years ago when gold was literally, you know, something that everyone sought after for whatever [00:50:00] reason. And we had, you know, the gold standard and all that kind of stuff obviously makes a lot more sense.

But I don't know. I just feel like there's other places to put your money to get yield, to get... To keep it safe to hedge against other things. It just to me, it seems like a, an older version of what crypto is now.

I know it's not exactly the same, but-

Jason Hall: No, I think you're-

Jeff Santoro: You're essentially hoping that someone will just give you more money for it later. There's no underlying value to it beyond, like you said, Yeah, it being in electronics and making jewelry.

Jason Hall: It's a store of value. I mean, I think that's, that's kind of the key. And that's, and-

Jeff Santoro: That's, the store of value is only based on people thinking it has value. Like that's what I can't wrap my head around.

Jason Hall: Well, I mean, it's the same way with the U S dollar and the euro and every other currency as far as that goes. But it's just easier to predict a dollar holding its value because you have all of the natural resources and all of the economic productivity of the United States.

With gold you just have a shiny yellow thing with a minimal amount of industrial value, a premium price that people pay for it for jewelry, and a [00:51:00] massive amount of influence that is entirely driven by speculation, fear and greed, right?

So that's, I mean, that's it. That's it. I do. I honestly continue to believe that something like Bitcoin 10 years from now could easily be a preferred store of value against gold. Because once there's a little bit of a more of established like economic value of something like Bitcoin. Or Ethereum, whatever, pick your useful crypto here. Once there's like, there's some value that's underpinned by, okay, it's use as a tool, right? A financial tool.

Then those can become digital stores of value that you're not paying somebody 2 percent a year to have armed guards, you know, keep an eye on. And I do think we're going to see more and more of that. Like that use case is going to move to crypto.

I know people may not believe it now, but I think it could be. I think, yeah, I think it's a very realistic possibility.

Jeff Santoro: Well, that's a, [00:52:00] that's a show for another time.

Jason Hall: Ain't it though? Ain't it though? Hey, Jeff, we did it, pal.

Jeff Santoro: We did it once again.

Jason Hall: Words about things. All right. Hope we didn't scare anybody as we gave our answers to these hard, scary investing questions.

But you know what? It doesn't matter if we did anyway, because our answers ain't your answers. You've got to come up with your own answers out there. Don't scare yourself too much while you're looking for them. You can find them, even if it's in a graveyard, at 2 AM. Okay Jeff, we'll see you next time, pal.

Jeff Santoro: See you next time.